##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 28, 2003
    
    Commission File Number 0-19840
 SHOLODGE, INC. (Exact name of registrant as specified in its charter)
 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 Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value
Rights to Acquire Series A Subordinated Preferred Stock(Title of Class) Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]
 No [   ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [   ]
 No [X] Aggregate market value of the voting stock held by non-affiliates of the
registrant on July 11, 2003, was approximately $6,400,000. The market value
calculation was determined using the last sale price of registrants common
stock on July 11, 2003, as reported on The Nasdaq Stock Market, and assumes
that all shares beneficially held by executive officers and directors of the
registrant are shares owned by affiliates, a status which each of the
officers and directors individually disclaims. Shares of common stock, no par value, outstanding on April 1, 2004, were
5,006,611.




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##### Table of Contents



DOCUMENTS INCORPORATED BY REFERENCE Documents from which portions arePart of Form 10-K
    
    incorporated by referencePart III
    
    Proxy Statement for registrants annual meeting of shareholders
to be held during the second quarter of fiscal 2004.Part IV
    
    Registration Statement on Form S-1, Commission File No. 33-44504.Part IV
    
    Registration Statement on Form S-3, Commission File No. 33-77910.Part IV
    
    Registration Statement on Form S-8, filed with the Commission on
June 24, 1997Part IV
    
    Registration Statement on
Form S-4/A, Commission File No. 333-98789




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TABLE OF CONTENTS  PART IITEM 1. BUSINESS.ITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERSPART IIITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESReport of Independent AuditorsConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Shareholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsEX-21 SUBSIDIARIES OF THE REGISTRANTEX-23.1 CONSENT OF ERNST & YOUNGEX-31.1 SECTION 302 CERTIFICATIONSEX-32.1 SECTION 906 CERTIFICATIONS    Table of Contents  
 PART I 
 ITEM 1. BUSINESS. General 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 December 28, 2003, the Shoneys Inn /GuestHouse
lodging system consisted of 91 properties containing 7,108 rooms of which one
containing 98 rooms is owned by the Company. Shoneys Inns and GuestHouse Inns
& Suites are currently located in 20 states. As of December 28, 2003, 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 December 28, 2003. 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. 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 third parties, including developments for
related 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. The Company was incorporated under the laws of the State of Tennessee in
1976. Growth Strategy The Companys strategy is to increase cash flow and earnings by (i)
continuing its current strategy of selling most of its remaining Company-owned
hotels and other - 1 -




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real estate, (ii) expanding the GuestHouse Inn & Suites system through the
addition of new franchised units, (iii) utilizing the Companys experience in
developing all-suite hotels to construct and develop hotels for others, and
(iv) expanding the number of lodging facilities served by the Companys
proprietary central reservation center (InnLink). Expansion of GuestHouse Inns & Suites Franchise System. In 2003, the
Company has focused on expanding the GuestHouse Inns & Suites system
principally through the addition of new franchises and the conversion of
franchised Shoneys Inns to GuestHouse. As of 2003 fiscal year-end, there were
91 Shoneys Inns and GuestHouse Inns (of which one is Company owned) with a
total of 7,108 rooms. The Company targets existing Shoneys Inn and GuestHouse
franchisees, other hotel brand developers and contacts within the industry as
potential franchisees for additional GuestHouse Inns & Suites. Development of Additional All-Suite Hotels. Except for the two owned
all-suite hotel properties which the Company intends to continue to operate at
present, the Companys remaining owned all-suite hotel properties are held for
sale at December 28, 2003. The Companys present strategy does not include the
ownership of additional all-suite hotel properties. The Company plans to
continue to develop all-suite hotels for third parties in the future as the
opportunities arise. Reservation Services. The Company provides reservation services to its
Shoneys Inn and GuestHouse franchisees and to other hotel chains and
independent hotel operators. This call center (InnLink) continues to expand
its customer base, serving approximately 949 hotels as of December 28, 2003, as
compared with approximately 680 hotels a year ago. The Company is continuing
to aggressively market this service, capitalizing on its state of the art
technology. In addition to the strategies described above, the Company may from time
to time investigate 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 shares of the Companys common stock or outstanding
debt securities, or any combination of these or other strategies. Shoneys Inns/GuestHouse Franchisor Concept Shoneys Inns and GuestHouse Inns & Suites that are owned by franchisees
are primarily limited-service hotels positioned in the economy segment to
appeal to both business and leisure travelers and are located in 19 states in
markets ranging from small towns to larger metropolitan areas. Shoneys Inns
and GuestHouse Inns & Suites that are owned by franchisees are generally
located in proximity to interstate highways, major streets and highways
providing convenient access to business establishments. Daily room rates range
from $45 to $85 and vary depending upon a number of factors, including
location, competition, type of room and property designator (hotel, inn, inn &
suites, etc.). Historically, the typical property that is owned by a franchisee has been
a two story, exterior corridor, brick veneer building with plate glass fronts,
containing 100 to 125 rooms. Newer inns include a four story, interior
corridor, brick or stucco building containing 100 to 120 rooms as well as
smaller prototype buildings containing - 2 -




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80 rooms. In some cases franchisees construct smaller properties. Each
room is professionally decorated and is generally furnished with two double
beds, a dresser, table and chairs, color television and coffeemaker. Many
conversion properties reflect the architecture and personality of its locale. Amenities featured at the properties of most franchisees include swimming
pools, meeting rooms, facsimile machine service, high-speed internet access,
and continental breakfast. The Company believes that the properties provide
their guests with quality accommodations at an attractive price/value
relationship within the economy segment. Sales and Marketing The Company directs marketing efforts on behalf of its Company-owned inns
primarily to business travelers, whom management believes have represented the
largest segment of its customers in recent years. Key to the success of the franchised Shoneys Inn and GuestHouse Inn &
Suites chains is the Franchise Service Manager Program. Currently three
Franchise Service Managers (FSM) provide sales direction and hands-on
assistance to all inns with the goal of helping them achieve their properties
financial, guest service and operational goals. Each FSM takes personal
ownership of the properties in his/her region and provides assistance through
regular property visits and constant phone communications. The Vice President of Marketing directs the FSM program and oversees
management of the national advertising fund, into which all Shoneys Inns pay
1% of revenue to support national marketing efforts such as the FSM program,
the publications of the annual Vacation and Travel Directory, participation in
travel shows and targeted niche advertising. GuestHouse Inns & Suites pay up to
$0.50 per available room per day for these services. Programs designed to target the primary markets of business travelers and
mature leisure travelers provide brand recognition. The Company attempts to
capitalize on the brand name recognition in the over 50-age group with the Any
Senior program which provides a minimum 10% discount on the standard room rate
to any traveler age 55 or older. The Company annually publishes a GuestHouse system directory showing for
each owned and franchised inn, its address and telephone number, location as
indicated on a locator map, a brief description of the facilities, services and
amenities provided and other relevant information such as proximity to area
attractions, businesses and restaurants. These directories are distributed in
each inn and state travel centers and are provided directly to travel agents,
sponsors of group tours, corporate travel departments and other selected
potential customers. The Company also maintains comprehensive on line directories with
reservations booking capabilities at www.shoneysinn.com and
www.guesthouseintl.com. Travel Agents. The Company has a policy of paying travel agents a
commission, standard in the hotel industry, on all rack rate revenue booked by
them. The Company, with respect to both owned and franchised inns, has joined
the TACS-Classic Program administered by Perot Systems. TACS-Classic (Travel
Agent Commission Settlement) is a - 3 -




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program where each hotel property reports by electronic transmission to Perot
Systems all of its commissionable room sales generated through travel agents.
Perot Systems automatically generates checks each month to travel agents across
the country for the total commissions earned. The Company believes that travel
agents are more likely to book guests into a property knowing that their
commissions will be paid by Perot Systems without the travel agent having to go
to the trouble and expense of billing each separate location. Construction and Development The Companys construction subsidiary has a full time staff who manage,
supervise, control and perform the construction of hotels and other real estate
projects being developed by the Company or for third parties, including
construction and development of non-hotel projects for related parties.
Subcontractors are employed by the Company for most of the major construction
components of hotels and other buildings, including electrical and mechanical
work. The Company intends to continue to build hotels and other structures for
third parties. The Company believes that its construction experience and its
relationship with many subcontractors will facilitate the effective development
of additional real estate projects. The Company is structured to devote significant resources to the
identification and evaluation of potential sites for hotels when the
opportunities arise. The Company has typically targeted markets with
populations of 500,000 or more that have high levels of business development
and multiple sources of room demand. The site selection process focuses on the
competitive environment, including room and occupancy rates and proximity to
business parks, office buildings, and other demand generators. The Companys
franchisees focus on sites for their inns in proximity to interstate highway
access roads and major streets and highways providing convenient access to
local business establishments and tourist attractions. The construction phase of a hotel generally requires six months after the
selection and acquisition of the site and all approvals and permits have been
obtained. The Companys experience in selection and acquisition of sites has
varied and generally averages six months. The approval and permitting phase can
occur simultaneously with site acquisition and generally requires three months.
The entire development process generally ranges from 10 to 12 months, but may
take longer. The Company constructed no new hotels in 2003 and currently has no
contracts to construct any hotels for itself or for third parties, but will
pursue any future opportunities to do so in the future. Lodging Operations Hotel Management.Overall hotel operations are the responsibility of the
Director of Hotel Operations. The hotels are further managed by regional
managers, who directly supervise the general manager of each property. The
general manager of each hotel is fully responsible for day-to-day operations
and is compensated by salary and bonus systems which reward revenue and
operating margin performance. Each general manager, in conjunction with senior
management, develops the propertys operating budget and is held accountable
for meeting the goals and objectives of the hotel. Reservation System.The Companys proprietary central reservation system, - 4 -




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InnLink, provides important support for the room reservation process for
Shoneys Inns and GuestHouse Inns & Suites and is marketed to other chains as
well. Other chains that contract with the Company for the service include
Baymont Inns & Suites, Key West Inns and Americinns International. InnLink
operates 24 hours a day, 7 days a week. The InnLink system may be accessed by
individual travelers as well as by travel agents, tour and group booking agents
at 1-800-552-4667. Electronically, InnLink is accessed through numerous global
distribution systems (e.g., SABRE Travel Information Network, Galileo
International, Amadeus and WorldSpan). The reservation system includes
specially designed hotel reservation software, with adequate capacity, and
state of the art hardware and telecommunications devices. Quality Control.To ensure quality and consistency, the Company regularly
inspects each of its company owned and/or operated hotels and each hotel in the
Shoneys Inn and GuestHouse Inn franchise systems for compliance with facility
and service standards. Generally, in addition to its ongoing refurbishment
activities, the Company fully renovates each of the Company-owned inns after
approximately seven years of operation. In addition, the quality assurance
consultants provide on-site housekeeping and maintenance training, utilizing a
combination of classroom and hands-on training. Training.The Company utilizes the services of an opening team to assist
with hiring and training new staff and opening new hotels. The opening team
trains local hotel personnel in front desk operations, operational policies,
hotel accounting and cash handling procedures, record-keeping, housekeeping and
laundry, maintenance and repair, marketing, personnel management, purchasing,
quality assurance and sales. Sales training includes a team of direct sales
personnel that assists the local staff in the actual pre-selling of rooms. An
opening team generally remains on site for one to four weeks depending on the
prior experience of the local general manager. The Company currently has no
plans to open any new Company-owned hotels. Franchise Operations Franchise Sales.The Company markets the GuestHouse franchise principally
to existing Shoneys Inn and GuestHouse franchisees, other hotel brand
developers and other prospects known through managements contacts in the
lodging industry. The Company employs three full-time licensed franchise
salesmen. The Company also markets franchises through advertisements in trade
publications and participation in trade shows and franchising conventions. The
Company no longer markets the Shoneys Inns franchises. Management believes that the Company attracts potential new franchisees by
offering a superior level of franchisee support services at a lower price than
its competitors. Management periodically monitors the initial fee, royalty fee,
advertising fee, reservation fee and other charges imposed by other franchisors
with whom the Company competes and believes that the fees charged by the
Company are competitive and, in most cases, lower than such other franchisors. Fees.Under the standard GuestHouse franchise arrangement offered to
prospective franchisees, a potential franchisee pays a $2,500 application fee.
Upon approval of the application, the Company and the franchisee enter into a
5-year license agreement, and the franchisee generally pays a license fee equal
to the greater of $250 per room or - 5 -




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$15,000. The application fee is applied against the license fee. Under the standard GuestHouse franchise arrangement offered to prospective
franchisees, the franchisee pays monthly royalties of $1.25 per available room
per day during the term of the license agreement. Additionally, a marketing
fund fee of $0.30 per available room per day and a fee for participation in the
central reservation system are charged at 8% of revenue generated by voice
communications and 5% of revenue generated by electronic communication plus
$5.00 per reservation to cover GDS and electronic pass through fees. Franchisee Services.Management believes that the support the Company
offers to franchisees is a significant factor in determining its success as a
franchisor and that the Companys successful record as a builder, owner and
operator evidences valuable experience and abilities which can enhance the
franchisee support function. As franchisor, the Company draws on its own
operational experience to assist franchisees. Once an inn is constructed, the Company requires the franchisee to send
the site general manager to a management training class conducted by the
Company covering topics including human resources, sales and marketing, yield
management and cost controls. Currently, the Company does not charge for the
training program but reserves the right to do so in the future. The Company inspects every franchised inn at least three times a year, at
least two of which are unannounced, through its Quality Standards and
Compliance program, using trained field representatives. The Company encourages
franchisees to renovate each of the properties after approximately seven years
of operations, in the same manner that the Company renovates its own hotels. The Company offers to provide management services to franchisees pursuant
to contractual arrangements. The Companys fee for these services is a
percentage of the managed hotels gross revenues. As of December 28, 2003, the
Company managed six hotels under contract arrangement. Lodging Industry Smith Travel Research divides lodging chains into various segments based
on price. Shoneys Inns and GuestHouse Inns & Suites are included in the
economy segment. The following tables illustrate certain comparative information regarding
REVPAR and its components for the years indicated: Average
    
    Average DailyREVPAR
    
    
    
    
    
    Occupancy Rate
    
    Room Rate (1)2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003Industry-wide
    
    $
    50.99
    
    
    $
    49.24
    
    
    $
    49.34
    
    
    
    60.1
    %
    
    
    59.2
    %
    
    
    59.2
    %
    
    $
    84.85
    
    
    $
    83.15
    
    
    $
    83.28Economy segment
    
    
    30.47
    
    
    
    25.65
    
    
    
    25.19
    
    
    
    56.2
    
    
    
    54.2
    
    
    
    53.4
    
    
    
    54.22
    
    
    
    47.83
    
    
    
    47.17All Shoneys Inns
    
    
    24.56
    
    
    
    23.53
    
    
    
    20.26
    
    
    
    49.9
    
    
    
    48.4
    
    
    
    42.3
    
    
    
    49.26
    
    
    
    48.65
    
    
    
    47.86Company-owned GuestHouse (2)
    
    
    37.17
    
    
    
    36.37
    
    
    
    32.40
    
    
    
    70.5
    
    
    
    64.6
    
    
    
    61.7
    
    
    
    52.74
    
    
    
    56.34
    
    
    
    52.54
   (1)
    
    Room revenues divided by the number of rented rooms.(2)
    
    Many GuestHouse franchisees do not report to either Smith Travel Research
or the Company since the fees are not based upon room revenues; therefore,
GuestHouse - 6 -




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chain statistics would not be meaningful. The Company statistics include only
one GuestHouse and no Shoneys Inns in continuing operations, Source:
    
    Smith Travel Research, Standard Historical Trend Report for years ended
2001, 2002 and 2003, for industry wide and the economy segment, and the
Companys internal data for all Shoneys Inns and GuestHouse Inns & Suites
statistics.
 Competition The lodging industry is highly competitive. In franchising the GuestHouse
brand and managing its own lodging facilities, the Company encounters
competition from numerous lodging companies, many of which have greater
industry experience, name recognition, and financial and marketing resources
than the Company. While the actual competition for individual lodging
facilities varies by location, the primary competition for GuestHouse Inns &
Suites includes lodging chains such as Holiday Inn Express, La Quinta, Comfort
Inns, Drury Inns, Fairfield Inns and Travelodge. Each of the Companys hotels
is located in a developed area that includes competing lodging facilities, and
the Company expects that most of any future hotels which it constructs will be
located in similar areas. Management believes that the principal competitive
factors in its lodging operations are room rates, quality of accommodations,
name recognition, supply and availability of alternative lodging facilities,
service levels, reputation, reservation systems and convenience of location. In
its franchising operations, the principal competitive factors are fee structure
and support services. Management further believes that the Company is presently
competitive in all these respects. Government Regulation The Company is subject to various federal, state and local laws,
regulations and administrative practices affecting its business. The Companys
lodging operations must comply with provisions relating to health, sanitation
and safety standards, equal employment, minimum wages, building codes and
zoning ordinances, and licenses to operate lodging facilities. The sale of
franchises is regulated by various state laws as well as by the Federal Trade
Commission (FTC) Rules on Franchising. The FTC requires that franchisors make
extensive disclosure to prospective franchisees but does not require
registration. A number of states require registration or disclosure in
connection with franchise offers and sales. In addition, several states have
franchise relationship laws that limit the ability of franchisors to
terminate franchise agreements or to withhold consent to the renewal or
transfer of these agreements. Federal and state environmental regulations are not expected to have a
material effect on the Companys operations, but more stringent and varied
requirements of local governmental bodies with respect to zoning, land use and
environmental factors could delay construction of lodging facilities and add to
their cost. A significant portion of the Companys personnel are paid at rates
related to federal minimum wages and, accordingly, increases in the minimum
wage could adversely affect the Companys operating results. The Americans with Disabilities Act prohibits discrimination on the basis
of disability in public accommodations and employment. The Company currently
designs its lodging facilities to be accessible to the disabled and believes
that it is in substantial compliance with all current applicable regulations
relating to - 7 -




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accommodations for the disabled. The Company intends to comply with future
regulations relating to accommodating the needs of the disabled. Service Marks The Company owns the right to use the GuestHouse Inns & Suites service marks
in its lodging operations. The Company believes that its ability to use the
GuestHouse mark is material to its business. The Company has registered the
service mark InnLink, which it uses in connection with its reservation
system, with the United States Patent and Trademark Office. The Company has
registered the service mark Raylogic which it uses in connection with
computer game software, with the United States Patent and Trademark Office. Insurance The Company maintains general liability insurance and property insurance
for all its locations and operations, as well as specialized coverage,
including guest property and liquor liability insurance, in connection with its
lodging business. The costs of insurance coverage and the availability of
liability insurance coverage have varied widely in recent years. While the
Company believes that its present insurance coverage is adequate for its
current operations, there can be no assurance that the coverage is sufficient
for all future claims or will continue to be available in adequate amounts or
at a reasonable cost. Employees As of December 28, 2003 the Company had approximately 491 employees,
including approximately 136 in the Companys corporate headquarters. The
Companys employees are not represented by a labor union. The Company considers
its relationships with employees to be good. 
 ITEM 2. PROPERTIES. The Companys corporate headquarters, owned by the Company, is located in
Hendersonville, Tennessee and contains approximately 42,000 square feet of
space including storage and employee cafeteria. Management believes that its
corporate headquarters building contains sufficient space to accommodate the
Companys currently anticipated needs. The two Company-owned and operated AmeriSuites hotels at December 28,
2003, are located on sites owned by the Company either directly or through
subsidiaries. One of the Company-owned and operated AmeriSuites hotels is
located in Alpharetta, Georgia and the other one is located in Grand Prairie,
Texas. The remaining GuestHouse Inn & Suites is located on a site that is
leased pursuant to a long-term lease involving both the land and improvements. 
 ITEM 3. LEGAL PROCEEDINGS. The Company is subject to litigation from time to time in the ordinary
course of its business. The Company is not aware of any legal action pending or
threatened against it that would have a material impact on the consolidated
financial position or results of operations of the Company. - 8 -




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS. No matters were submitted to a vote of security holders in the fourth quarter
of 2003. - 9 -




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PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER
MATTERS. The Companys Common Stock is traded in the over-the-counter market and is
quoted on The Nasdaq Stock Market (NASDAQ) under the symbol LODG. The
prices set forth below reflect the high and low closing sales prices for the
Companys Common Stock as reported by NASDAQ for the periods indicated. Fiscal 2002
    
    High
    
    LowFirst Quarter
    
    $
    5.98
    
    
    $
    5.32Second Quarter
    
    
    6.00
    
    
    
    4.10Third Quarter
    
    
    5.29
    
    
    
    4.10Fourth Quarter
    
    
    4.75
    
    
    
    3.30
 Fiscal 2003
    
    High
    
    LowFirst Quarter
    
    $
    4.40
    
    
    $
    2.57Second Quarter
    
    
    3.79
    
    
    
    3.10Third Quarter
    
    
    3.76
    
    
    
    3.10Fourth Quarter
    
    
    4.69
    
    
    
    3.81
 Fiscal 2004
    
    High
    
    LowFirst Quarter (through April 1, 2004)
    
    $
    5.60
    
    
    $
    4.37
 On April 1, 2004, the last reported sale price for the Companys Common
Stock as reported by NASDAQ was $5.31 per share. As of April 1, 2004, there
were approximately 43 holders of record of the Companys Common Stock and
approximately 600 beneficial owners. The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its earnings to finance future
development of its business, and therefore does not anticipate paying any cash
dividends in the foreseeable future. The following table sets forth certain information as of the end of the most
recently completed fiscal year with respect to compensation plans (including
individual compensation arrangements) under which equity securities of the
registrant are authorized for issuance. - 10 -




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Equity Compensation Plan Information Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    under equityissued upon
    
    Weighted-average
    
    compensation plansexercise of
    
    exercise price of
    
    (excludingoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    reflected in ColumnPlan category
    
    and rights
    
    and rights
    
    (a))Equity compensation
plans approved by
security holders
    
    
    142,500
    
    
    $
    3.75
    
    
    
    -0-Equity compensation
plans not approved
by security holders
    
    
    -0-
    
    
    
    N/A
    
    
    
    -0-Total
    
    
    142,500
    
    
    $
    3.75
    
    
    
    -0-
 
 ITEM 6. SELECTED FINANCIAL DATA. The selected financial data set forth on the following page as of and for
each of the five fiscal years in the period ended December 28, 2003 have been
derived from the Companys audited Consolidated Financial Statements. The
Consolidated Financial Statements for each of the three fiscal years in the
period ended December 28, 2003, which have been audited by independent
auditors, are included elsewhere in this Report. The information set forth on
the following page should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations and the
Companys Consolidated Financial Statements and the related notes thereto
included elsewhere in this Report. SHOLODGE, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(amounts in thousands except for per share data) Fiscal Year EndedDec. 26,
    
    Dec. 31,
    
    Dec. 30,
    
    Dec. 29,
    
    Dec. 28,1999
    
    2000
    
    2001
    
    2002
    
    2003Revenues:Hotel(A)
    
    $
    51,015
    
    
    $
    32,933
    
    
    $
    1,985
    
    
    $
    2,160
    
    
    $
    3,842Franchising, reservation and management
    
    
    4,152
    
    
    
    3,606
    
    
    
    3,971
    
    
    
    6,084
    
    
    
    7,675Construction
and development  related parties (B)
    
    
    
    
    
    
    115
    
    
    
    35
    
    
    
    5,688
    
    
    
    21,978Construction
and development  other (B)
    
    
    11,234
    
    
    
    11,922
    
    
    
    27,445
    
    
    
    4,224
    
    
    
    2,007Rent income (C)
    
    
    483
    
    
    
    1,009
    
    
    
    1,486
    
    
    
    1,431
    
    
    
    400Other income
    
    
    351
    
    
    
    49
    
    
    
    227
    
    
    
    177
    
    
    
    153Total revenues
    
    
    67,235
    
    
    
    49,634
    
    
    
    35,149
    
    
    
    19,764
    
    
    
    36,055
 - 11 -




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##### Table of Contents



Fiscal Year EndedDec. 26,
    
    Dec. 31,
    
    Dec. 30,
    
    Dec. 29,
    
    Dec. 28,1999
    
    2000
    
    2001
    
    2002
    
    2003Costs and expenses:Hotel (A)
    
    
    34,946
    
    
    
    23,280
    
    
    
    1,250
    
    
    
    1,443
    
    
    
    3,014Franchising, reservation and management
    
    
    2,420
    
    
    
    2,460
    
    
    
    2,192
    
    
    
    4,276
    
    
    
    6,477Construction and development (B)
    
    
    9,826
    
    
    
    12,571
    
    
    
    25,692
    
    
    
    12,119
    
    
    
    20,334Rent expense (D)
    
    
    12,322
    
    
    
    9,678
    
    
    
    582
    
    
    
    584
    
    
    
    518General and administrative
    
    
    6,297
    
    
    
    4,928
    
    
    
    5,858
    
    
    
    7,987
    
    
    
    4,978Depreciation and amortization (A)
    
    
    4,245
    
    
    
    2,675
    
    
    
    1,643
    
    
    
    1,570
    
    
    
    1,741Write-off of pre-development costs (H)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,864
    
    
    
    6Write-off of construction contracts receivable (H)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,631
    
    
    
    61Write-off of accounts receivable (H)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,297
    
    
    
    650Write-off of goodwill (H)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,387
    
    
    
    Write-off of trademarks and franchise rights (H)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,421
    
    
    
    Write-down of notes receivable (H)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,167
    
    
    
    1,015Impairment of real estate (H)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    Total cost and expenses
    
    
    70,056
    
    
    
    55,592
    
    
    
    37,217
    
    
    
    62,823
    
    
    
    38,794Operating loss
    
    
    (2,821
    )
    
    
    (5,958
    )
    
    
    (2,068
    )
    
    
    (43,059
    )
    
    
    (2,739
    )Gain on sale of property and leasehold interests (E)
    
    
    15,017
    
    
    
    5,058
    
    
    
    3,791
    
    
    
    677
    
    
    
    1,251Gain on sale of available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    315
    
    
    
    Gain on early extinguishments of debt (F) (G)
    
    
    3,860
    
    
    
    7,306
    
    
    
    913
    
    
    
    2,592
    
    
    
    1,345Interest expense
    
    
    (12,024
    )
    
    
    (10,063
    )
    
    
    (8,220
    )
    
    
    (8,780
    )
    
    
    (7,775
    )Interest income
    
    
    6,010
    
    
    
    6,245
    
    
    
    6,262
    
    
    
    4,990
    
    
    
    2,249Lease abandonment income (H)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,330Arbitration award (H)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,900
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interests
    
    
    10,042
    
    
    
    2,588
    
    
    
    678
    
    
    
    (34,365
    )
    
    
    (339
    )Income tax (expense) benefit
    
    
    (3,459
    )
    
    
    (1,347
    )
    
    
    (194
    )
    
    
    9,167
    
    
    
    2,256Minority interests in (earnings) loss of consolidated
subsidiaries and partnerships
    
    
    (1,909
    )
    
    
    (57
    )
    
    
    (58
    )
    
    
    179
    
    
    
    (106
    )Earnings (loss) from continuing operations
    
    
    4,674
    
    
    
    1,184
    
    
    
    426
    
    
    
    (25,019
    )
    
    
    1,811Discontinued operations (I):Operations of hotels disposed of and transferred
    
    
    (135
    )
    
    
    (606
    )
    
    
    486
    
    
    
    67
    
    
    
    430Loss on disposal and transfer of discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,296
    )
    
    
    (1,942
    )Net earnings (loss)
    
    $
    4,539
    
    
    $
    578
    
    
    $
    912
    
    
    $
    (28,248
    )
    
    $
    299Net earnings (loss) per common share:Basic:Earnings (loss) from continuing operations
    
    $
    0.72
    
    
    $
    0.22
    
    
    $
    0.08
    
    
    $
    (4.89
    )
    
    $
    0.36Net earnings (loss)
    
    $
    0.70
    
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    (5.52
    )
    
    $
    0.06Diluted:Earnings (loss) from continuing operations
    
    $
    0.69
    
    
    $
    0.21
    
    
    $
    0.08
    
    
    $
    (4.89
    )
    
    $
    0.36Net earnings (loss)
    
    $
    0.67
    
    
    $
    0.10
    
    
    $
    0.16
    
    
    $
    (5.52
    )
    
    $
    0.06
 - 12 -




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##### Table of Contents



Fiscal Year EndedDec. 26,
    
    Dec. 31,
    
    Dec. 30,
    
    Dec. 29,
    
    Dec. 28,1999
    
    2000
    
    2001
    
    2002
    
    2003Weighted average common shares outstanding:Basic
    
    
    6,518
    
    
    
    5,472
    
    
    
    5,465
    
    
    
    5,114
    
    
    
    5,071Diluted
    
    
    6,745
    
    
    
    5,554
    
    
    
    5,530
    
    
    
    5,114
    
    
    
    5,071Balance sheet data:Working capital
    
    $
    68,723
    
    
    $
    60,612
    
    
    $
    67,852
    
    
    $
    28,339
    
    
    $
    52,488Total assets
    
    
    270,314
    
    
    
    204,631
    
    
    
    206,587
    
    
    
    167,279
    
    
    
    122,020Long-term debt and capitalized leases
    
    
    122,233
    
    
    
    90,762
    
    
    
    86,293
    
    
    
    24,381
    
    
    
    41,373Shareholders equity
    
    
    90,878
    
    
    
    90,322
    
    
    
    89,273
    
    
    
    61,194
    
    
    
    62,182
 Notes to Selected Financial Data  (A)
    
    Fluctuations in hotel revenues, hotel costs and expenses, and
depreciation and amortization expense are due primarily to fluctuations
in the number of hotels operated by the Company. At the end of 1999,
2000, 2001, 2002 and 2003, there were 29, 1, 1, 2, and 3 hotels,
respectively, being owned and operated and included in continuing
operations by the Company. In July of 2000, the Company sold its
operating interest in 27 hotels to Prime Hospitality Corp. (Prime) by
selling its leasehold interest in 24 of them and leasing the remaining
three to them. The three hotels leased to Prime in 2000 were taken back
in April of 2003 due to the lease abandonment by Prime, and are
currently operated by the Company. One of these three hotels is
included in continuing operations, while the other two are classified as
held for sale and are included in discontinued operations.(B)
    
    Construction and development revenues and cost and expenses vary
widely from year to year depending upon the number of third party
construction contracts in progress. Prior to 1999, construction and
development was done primarily on the Companys own hotels. In 2002 and
2003 construction and development included a significant amount earned
from related parties.(C)
    
    Rental revenues increased significantly in 2000 due to the lease of
the three hotels to Prime as discussed in (A) above, increasing rent
income beginning in July of 2000 and ending in April of 2003. In April
of 2003, Prime abandoned the lease and the Company resumed operating the
hotels, one of which is included in continuing operations and the other
two are included in discontinued operations since these two are
classified as held for sale as of fiscal year-end 2003.(D)
    
    Rent expense fluctuations are due primarily to rent paid to the
landlord on 24 hotels sold and leased back in 1997, 1999, and 2000,
prior to the sale of these leasehold interests to Prime in July of 2000.
Fourteen hotels were sold and leased back in November of 1997; six
hotels were sold and leased back in June of 1999; and four hotels were
sold and leased back in May of 2000.(E)
    
    The unusually high gain on sales of property and leasehold interests
in 1999 was due to the sale of the sixteen hotels in July of 1998, a
portion of which was recognized in 1998 and the remainder in 1999 due to
the installment method - 13 -




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##### Table of Contents



of accounting required on four of the hotels sold due to insufficient
down payments in 1998.(F)
    
    The gains on early extinguishments of debt were due primarily to the
Companys repurchases of its outstanding public debt at a discount.(G)
    
    The gains from early extinguishments of debt previously classified as
extraordinary items have been reclassified to conform with the
provisions of SFAS No. 145, which was early adopted by the Company at
the beginning of fiscal 2002.(H)
    
    See the Results of Operations section of Item 7.(I)
    
    This table reclassifies the operations of 16 hotels sold,
transferred, or held for sale in 2002 and 2003 to discontinued
operations for all periods presented. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. Overview The Company derives revenue from hotel room sales at its Company-owned
GuestHouse Inn & Suites hotel. The Company also receives management fees for
services it performs for eighteen franchised Shoneys Inns and GuestHouse Inns
& Suites hotels. The Company derives additional revenue from franchise fees it
receives as the exclusive franchiser of Shoneys Inns and GuestHouse Inns &
Suites hotels. On May 2, 2002, the Company became the exclusive franchiser of
the GuestHouse Inns & Suites brand (GuestHouse). GuestHouse operates in the
mid-market limited service segment, with rooms typically priced between $45 and
$85 per night. The properties range in size from 21 to 180 rooms, and in most
cases, contain meeting rooms. They are designed to appeal to both business and
leisure travelers. The Company is in the process of converting all Shoneys
Inns to the GuestHouse brand. No additional Shoneys Inns will be developed or
franchised in the future. The Shoneys and GuestHouse brands will be discussed
as a combined brand due to these factors and due to the fact than many of the
Shoneys Inns (both Company-owned and operated and franchised) have already
been converted to GuestHouse. The Companys hotel operations have historically been seasonal in nature,
reflecting higher occupancy rates during spring and summer months, which may be
expected to cause fluctuations in the Companys quarterly revenues and earnings
from hotel operations. The Companys fiscal year ends on the last Sunday of the
calendar year. 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 third parties, including related 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. - 14 -




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##### Table of Contents



Certain Discontinued Operations 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 December 28, 2003. The Companys present
strategy does not include the ownership of additional hotel properties. The Company transferred five of its company-owned hotels on December 27,
2002, at an after-tax charge of approximately $2.9 million. The Company
transferred the five hotels for notes receivable with a maturity of six months.
Accordingly, the transaction did not qualify as a sale and the properties have
been carried on the Companys balance sheet as assets of hotels transferred
under contractual agreements (notes receivable) pending their sale. The buyer
intended to resell the hotels. The operations and gains or losses on disposal
of these hotels have been reported in discontinued operations. Three of the
properties were resold by the buyer in 2003 and the net proceeds were used to
pay the notes. The proceeds from the sales approximated the balance of the
notes. One of the remaining two hotels was resold by the buyer in the first
quarter of 2004, with net proceeds to be used to apply to the note. The note
was written down by $528,000 in the fourth quarter of 2003 based upon the net
proceeds received subsequent to December 28, 2003. The proceeds from the sale
of the remaining property are expected to approximate the balance of the note. Contracts for the sale of two of the Companys AmeriSuites hotels owned
and operated at December 28, 2003, at estimated net proceeds in excess of their
carrying values, resulted in the reclassification of these properties to held
for sale, and their operations for all periods presented have been
reclassified to discontinued operations. These hotels had been included in
continuing operations prior to the fourth quarter. Related Party Transactions On July 5, 2000, the Board of Directors accelerated the vesting of certain
options held by the Companys president and chief executive officer to purchase
40,000 shares of common stock. He was expected to become fully vested under the
original terms of the options; the options had no intrinsic value on the date
of acceleration and, therefore, additional compensation expense was not
incurred as a result of the accelerated vesting. Immediately thereafter, the
president and chief executive officer of the Company exercised vested employee
stock options for 408,333 shares of the Companys common stock, at the exercise
price of $3.75 per share. He executed non-interest bearing, unsecured,
full-recourse promissory notes totaling $1,531,249 with maturity dates
coinciding with the expiration dates of each option grant, ranging from
February 11, 2002, to May 30, 2007. The closing market price of the Companys
common stock on July 5, 2000, was $3.31 per share. The Company recorded the
notes receivable of $1,531,249, net of unearned discount of $331,000, assuming
a market interest rate of 8.50%. During 2000, compensation expense was
recorded in the amount of $152,000 (the fair value of shares received less the
present value of the notes receivable using an 8.50% discount rate). The fair
value of shares issued of $1,352,603 has been recorded as paid-in capital, and
the notes receivable are recorded as a deduction from shareholders equity.
The Company has accreted $102,055, $40,611 and $140,833 of discount on these
notes as interest income in 2001, 2002, and 2003 respectively. The president
and chief executive officer renewed his non-interest bearing, unsecured, - 15 -




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##### Table of Contents



full-recourse promissory note in the amount of $937,500 that came due February
11, 2002 with the Company for one year at an interest rate of prime plus 250
basis points. He paid the note and all accrued interest in full in December of
2002 and January of 2003 prior to its maturity date of February 11, 2003.
Another of the notes in the amount of $124,999 matured on December 7, 2003 and
was paid at that time. He paid the remaining notes in full in 2003 prior to
their scheduled maturity dates. During 2002 the Company purchased three vehicles from a corporation owned by
the
president and chief executive officer and a director of the Company, for an
aggregate purchase price of approximately $74,000. During 2001 the Company
purchased five vehicles for an aggregate purchase price of $120,000 from the
same corporation. The Companys chief executive officer sold that corporation
in November of 2002. Construction and development revenue for the years ended December 28, 2003 and
December 29, 2002 includes $21,978,398 and $5,687,874, respectively, on
contracts with outside businesses controlled by the Companys chairman and
chief executive officer. Construction contracts receivable at December 28,
2003, include $22,668,784 due on these contracts. Of this amount, $20,730,495
was incurred on one development, of which $3,001,230 has been collected by the
Company subsequent to the balance sheet date. Results of Operations The following table sets forth, for the periods indicated, the percentage
relationship of certain items of revenue and expense to the total revenues of
the Company. Fiscal Year EndedDec. 30,
    
    Dec. 29,
    
    Dec. 28,2001
    
    2002
    
    2003Revenues:Hotel
    
    
    5.7
    %
    
    
    10.9
    %
    
    
    10.7
    %Franchising, reservation and management
    
    
    11.3
    %
    
    
    30.8
    %
    
    
    21.2
    %Construction and development  related parties
    
    
    0.1
    %
    
    
    28.8
    %
    
    
    61.0
    %Construction
and development  other
    
    
    78.1
    %
    
    
    21.4
    %
    
    
    5.6
    %Rent income
    
    
    4.2
    %
    
    
    7.2
    %
    
    
    1.1
    %Other income
    
    
    0.6
    %
    
    
    0.9
    %
    
    
    0.4
    %Total revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost and expenses:Hotel
    
    
    3.5
    %
    
    
    7.3
    %
    
    
    8.4
    %Franchising, reservation and management
    
    
    6.2
    %
    
    
    21.6
    %
    
    
    18.0
    %Construction and development
    
    
    73.1
    %
    
    
    61.3
    %
    
    
    56.4
    %Rent expense
    
    
    1.7
    %
    
    
    3.0
    %
    
    
    1.4
    %General and administrative
    
    
    16.7
    %
    
    
    40.4
    %
    
    
    13.8
    %Depreciation and amortization
    
    
    4.7
    %
    
    
    7.9
    %
    
    
    4.8
    %Write-off of pre-development costs
    
    
    0.0
    %
    
    
    9.4
    %
    
    
    0.0
    %Write-off of construction contracts
    
    
    0.0
    %
    
    
    18.4
    %
    
    
    0.2
    %Write-off of accounts receivable
    
    
    0.0
    %
    
    
    6.6
    %
    
    
    1.8
    %Write-off of goodwill
    
    
    0.0
    %
    
    
    12.1
    %
    
    
    0.0
    %Write-off of trademarks and franchise rights
    
    
    0.0
    %
    
    
    22.4
    %
    
    
    0.0
    %Write-down of notes receivable
    
    
    0.0
    %
    
    
    107.1
    %
    
    
    2.8
    %Impairment of real estate
    
    
    0.0
    %
    
    
    0.4
    %
    
    
    0.0
    %
 - 16 -




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##### Table of Contents



Fiscal Year EndedDec. 30,
    
    Dec. 29,
    
    Dec. 28,2001
    
    2002
    
    2003Total cost and expenses
    
    
    105.9
    %
    
    
    317.9
    %
    
    
    107.6
    %Operating loss
    
    
    (5.9
    )%
    
    
    (217.9
    )%
    
    
    (7.6
    )%Gain on sale of property and leasehold interests
    
    
    10.8
    %
    
    
    3.4
    %
    
    
    3.5
    %Gain on sale of available-for-sale securities
    
    
    0.0
    %
    
    
    1.6
    %
    
    
    0.0
    %Gain on early extinguishments of debt
    
    
    2.6
    %
    
    
    13.1
    %
    
    
    3.7
    %Interest expense
    
    
    (23.4
    )%
    
    
    (44.4
    )%
    
    
    (21.5
    )%Interest income
    
    
    17.8
    %
    
    
    25.3
    %
    
    
    6.2
    %Lease abandonment income
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    14.8
    %Arbitration award
    
    
    0.0
    %
    
    
    45.0
    %
    
    
    0.0
    %Earnings (loss) before income taxes and minority interests
    
    
    1.9
    %
    
    
    (173.9
    )%
    
    
    (0.9
    )%Income tax (expense) benefit
    
    
    (0.5
    )%
    
    
    46.4
    %
    
    
    6.2
    %Minority interests in (earnings) loss of consolidated
subsidiaries and partnerships
    
    
    (0.2
    %)
    
    
    0.9
    %
    
    
    (0.3
    )%Earnings (loss) from continuing operations
    
    
    1.2
    %
    
    
    (126.6
    )%
    
    
    5.0
    %Discontinued operations:Operations of hotels disposed of and transferred
    
    
    1.4
    %
    
    
    0.3
    %
    
    
    1.2
    %Loss on disposal and transfer of discontinued operations
    
    
    0.0
    %
    
    
    (16.6
    )%
    
    
    (5.4
    )%Net earnings (loss)
    
    
    2.6
    %
    
    
    (142.9
    )%
    
    
    0.8
    %
 For the Fiscal Years Ended December 28, 2003 and December 29, 2002 For the fiscal year ended December 28, 2003, total revenues increased
82.4% to $36.1 million from $19.8 million for the fiscal year ended December
29, 2002. For the first quarter of 2002, the Company owned and operated Shoneys
Inns. Beginning in the second quarter of 2002, the Company owned and operated
two hotel brands (Shoneys Inns and GuestHouse). The Company operated one
hotel as either a Shoneys Inn or GuestHouse for fiscal years 2003 and 2002.
The Company owned and operated one AmeriSuites hotel throughout most of 2002
and two AmeriSuites hotels throughout most of 2003. Revenues from hotel
operations in fiscal 2003 increased by 77.8% to $3.8 million from $2.2 million
for fiscal year 2002. For the one hotel (GuestHouse) opened for all of both
years (same hotel), average daily room rates in 2003 decreased 6.8% to $52.54
from $56.34 in 2002, and average occupancy rates decreased from 64.6% in 2002
to 61.7% in 2003, resulting in a decrease in same hotel revenues per available
room (RevPAR) of 10.9%, from $36.37 in 2002 to $32.40 in 2003. The remaining
(non-same) hotels contributed $2.7 million to hotel revenues in 2003 compared
with $854,000 in 2002. The $2.7 million revenues from non-same hotels in 2003
were from two AmeriSuites hotels which the Company operated for most of the
year and continued to operate as of December 28, 2003. The $854,000 revenues
from non-same hotels in 2002 were from one AmeriSuites hotel operated beginning
in April of 2002. Franchising, reservation and management revenues in fiscal 2003 increased
by 26.2% from 2002, to $7.7 million in 2003 from $6.1 million in 2002. In
fiscal 2003 and 2002, initial franchise and franchise termination fees totaled
$227,000 and $185,000, respectively. The remaining franchising, reservation and
management revenues increased - 17 -




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by $1.5 million, or 26.3%, from 2002 to 2003,
including an increase in royalty fee revenues of $83,000, a decrease in
management fees of $31,000, and an increase in reservation fee revenues of $1.5
million. At the end of fiscal 2003 there were 90 franchised Shoneys Inns /
GuestHouse in operation compared with 112 at the end of fiscal 2002; this
decrease was due primarily to the termination of franchises in excess of new
franchises since the acquisition of GuestHouse International Franchise Systems,
Inc. on May 2, 2002. Reservation fee revenues increased dramatically due to
the addition of GuestHouse in mid-2002 and additional significant contracts
with other lodging chains and independent lodging facilities. Revenues from construction and development activities in 2003 were $24.0
million compared with $9.9 million in fiscal 2002. The 2003 and 2002 revenues
earned were primarily from various construction contracts being performed for
third parties of which several non-hotel projects for related parties were
still in progress at year-end 2003. Revenues from construction and development
activities earned from related parties in 2003 and 2002 totaled $22.0 million
and $5.7 million, respectively. Revenues from construction and development can
vary widely from period to period depending upon the volume of outside contract
work and the timing of those projects. The events of September 11, 2001, have
had a significantly negative impact on the
Companys construction and development opportunities. Rent revenue was $400,000 in 2003, compared with $1.4 million in 2002.
The decrease was due primarily to the abandonment of the lease of three
AmeriSuites hotels by Prime Hospitality Corp. (Prime) in April of 2003. The
Company took back the operations of these hotels and on June 13, 2003, filed a
lawsuit against Prime for an amount in excess of $10.0 million for its
violation of the lease agreement. Two of these hotels were classified as held
for sale as of December 28, 2003, and the rent revenue relative to these two
hotels has been reclassified to discontinued operations for all periods
presented. Rent income in the future is not expected to be material. Other income decreased by $24,000, or 13.6%, in 2003 from 2002. Other
income can vary widely from period to period due to the nature of this income
and its varied sources. Hotel operating expenses for fiscal 2003 increased by $1.6 million, or
108.9%, to $3.0 million from $1.4 million in 2002. Hotel operating expenses on
the non-same hotels operated in 2003 were $2.2 million in 2003 and $620,000 in
2002. Hotel operating expenses on the one same-hotel decreased by $23,000, or
2.7%, to $800,000 in 2003 from $823,000 in 2002. The operating expenses as a
percentage of operating revenues for this activity increased from 66.8% in 2002
to 78.5% in 2003. Operating expenses as a percentage of operating revenues on
the one same-hotel increased from 63.0% to 68.9% from 2002 to 2003. Franchising, reservation and management operating expenses increased by
$2.2 million, or 51.5%, from 2002 to 2003. This was due to increased
reservation expenses, principally payroll and payroll-related, to support the
increased reservation revenues earned and increased franchise activity due to
the acquisition of the GuestHouse franchising rights. Construction and development costs in 2003 were $20.3 million compared
with $12.1 million in 2002. The costs incurred were directly related to the
revenues earned from - 18 -




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the third party construction contracts in progress in
2003, including contracts with related parties, compared with the third party
construction contracts in progress in 2002. Rent expense decreased by $66,000, or 11.3%, in 2003 from 2002. As of
December 28, 2003, and December 29, 2002, the Company was obligated on only one
hotel lease. General and administrative expenses decreased by $3.0 million, or 37.7%,
from 2002 to 2003. The decrease was due primarily to reduced administrative
costs as a result of the sale of hotels during 2003. Depreciation and amortization expense increased by $170,000, or 10.9%,
from 2002 to 2003, due primarily to additions to the reservation centers
capitalized computer hardware and software to accommodate its expanded customer
base. The Company incurred development costs related to several sites upon which
hotel development for third parties was planned. Due to the failure of an
upturn in the hotel development industry in 2002, as had been previously
anticipated, these previously capitalized development costs were charged off in
2002 since they did not improve the value of the land upon which they were
incurred. The impact of these development cost charge-offs was approximately
$1.9 million in 2002. An additional $6,000 of such expenditures was charged
off in 2003. Additionally, in 2002 approximately $3.0 million of contracts receivable
on two third party construction contracts were written off as uncollectible.
One of the contracts receivable was for approximately $2.0 million, and the
Company received an arbitration award for substantially all of its claim, but
the owner of the hotel filed Chapter 11 bankruptcy on January 3, 2003. The
bankruptcy was overturned by the court, but the owner of the hotel still did
not pay the award. The Company purchased the first mortgage in 2003,
foreclosed on the property, and acquired the hotel at a
foreclosure sale, operating it with the intent to resell it. The Company
expects to resell it in 2004 at a price that is expected to recover a portion
of the amount charged off in 2002. The other contract receivable was for
approximately $1.0 million, and arbitration proceedings were initiated on
January 15, 2003; the owner of the hotel claims damages in excess of the amount
owed. Any recovery from this contract will also be recorded as earned when and
if received. Various other construction contracts receivable totaling
approximately $600,000 were also written off in 2002. Miscellaneous
construction contracts receivable totaling $61,000 were written off in 2003. Unsecured accounts receivable from the 15 hotels securing 15 first
mortgage notes discussed below and various other accounts receivable were
written off as uncollectible in the amount of approximately $650,000 and $1.3
million in 2003 and 2002, respectively. The Company sold its interests in 27 Sumner Suites hotels in 2000 to Prime
Hospitality Corp., who subsequently converted all of them to their AmeriSuites
hotel brand. The Company continued to hold the Sumner Suites trademark with
the possibility of using it to brand future hotels it might develop or acquire.
In the second quarter of 2002, management made the decision to abandon the
trademark since the use of the name by the Company in the future is highly
unlikely. Consequently, the - 19 -




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remaining balance of $376,000 for the Sumner
Suites trademark was written off in the second quarter of 2002. The Company
carried intangible assets (deferred charges and goodwill) related to the
acquisition and modifications of the franchising rights for Shoneys Inns and
Shoneys Inns & Suites at $6.4 million. The Company had been unsuccessful in
its efforts to sell new franchises for at least a year, and existing
franchisees have exited the Shoneys Inn system for the past several years. In
the second quarter of 2002, the Company acquired the exclusive franchising
rights for the GuestHouse International Inns & Suites brand. The Company
decided to convert all existing Shoneys Inns to the GuestHouse brand and to
franchise only the GuestHouse brand in the future. No more attempts will be
made to franchise the Shoneys Inn brand. As a result, the value of the
Shoneys Inn franchising rights and related goodwill had been determined to be
worthless. Consequently, the balance of $6.4 million was written off in the
second quarter of 2002. The Company held 18 first mortgage notes receivable totaling $67.8 million
resulting from the sale of hotels in 1998, 2000 and 2001, providing seller
financing for a portion of the selling price at the time of the sale. The
owners of 15 of the properties were affiliated with each other. The 15 mortgage
notes were cross-collateralized and cross-defaulted and matured July 30, 2003.
Even though all first mortgage payments on these 15 hotels were timely received
through the end of 2002, the common owner had notified the Company that it was
unlikely that it would be able to refinance the properties by the notes
maturity dates. The Company did not desire to extend the maturity dates and,
therefore, anticipated that it would be necessary to resume title to the
properties. The owner of the properties agreed in late December of 2002 to
transfer the hotels back to the Company by deeds in lieu of foreclosure. In
anticipation of this, the Company began midway through the fourth quarter to
find cash purchasers of the properties in the event the Company re-acquired
ownership. Offers received had been disappointing, but the Company did not
desire to take back ownership and operate the properties. Therefore, it has
been selling the properties at values significantly below the balances of the
notes receivable and as of December 29, 2002, wrote down the notes receivable
by $18.1 million to the estimated net selling price of the properties. During
2003, the Company negotiated contracts to sell 13 of the 15 hotels, took deeds
in lieu of foreclosure on these properties, and sold them at the negotiated
prices. Two of these notes receivable remained outstanding at the end of 2003,
and the Company intends to find buyers, take the hotels by deed in lieu of
foreclosure, and sell them in 2004. The Company negotiated with the common
owner of the other three hotels secured by first mortgage notes receivable held
by the Company, and agreed to discount the notes in order to accelerate payment
by its refinancing of the hotels. The Company wrote these notes down to their
estimated collectible balances as of December 29, 2002. Two of these three
notes receivable were refinanced by the owner in 2003 and paid the Company the
proceeds; the third note was still outstanding
at the end of 2003, and the owner was continuing to seek refinancing to pay the
Company the proceeds. On January 30, 2004, this hotel was refinanced and the
proceeds from the refinancing were paid to the Company resulting in no
additional gain or loss. The total write-downs of all 18 notes receivable at
the end of the Companys 2002 fiscal year were $21.2 million. An additional
$738,000 was written off in 2003 on these notes due to the insufficient net
proceeds from the resale of the properties to cover the carrying value of the
notes. Additionally, the Company wrote down $143,000 of other notes receivable
in 2003 due from the three hotels with common ownership discussed above.
Various other notes receivable totaling approximately $134,000 were written off
in 2003. - 20 -




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The Company tested its real estate owned as of December 28, 2003 and
December 29, 2002, for impairment in accordance with SFAS No. 144. The Company
sold a parcel of undeveloped land which it owned in early 2003 at net proceeds
of less than the carrying value at the end of 2002. The carrying value of this
land parcel was written down in 2002 to the net proceeds subsequently realized,
thus reporting an impairment loss of $77,000 on this parcel. No additional
impairment of real estate was recorded in 2003. Due to the current condition
of the economy and of the lodging industry, it is reasonably possible that a
change in the estimate of the fair value of other real estate, particularly
hotels, owned by the Company may occur in the near future, resulting in
additional impairment charges. The gain recognized on the sale of property in 2003 was $1.3 million
compared with $677,000 in 2002. The gain of $1.3 million in 2003 included
$657,000 from the sale of undeveloped land, $537,000 from the sale of one hotel
and two restaurants previously deferred and reported on the installment method
of accounting, and $58,000 from the sale of a restaurant to the lessee in 2003.
The net gain recognized in 2002 included gains of $447,000 on the sale of two
restaurants to the operator/lessees, and gains of $395,000 on the sale of
excess land, partially offset by a loss of $232,000 due to costs incurred on
the disposal of two hotels. In the third quarter of 2002, the Company sold all of its
available-for-sale securities, recognizing a gain of $315,000. 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 $5.7 million of its 7.50%
subordinated debentures in 2003 at a discount, recognizing a gain of $1.1
million. The Company also repurchased $6.6 million of its senior subordinated
notes in 2003, recognizing a gain of $942,000. The Company terminated its
credit facility with a financial institution in 2003, resulting in the
write-off of $472,000 in unamortized deferred financing costs. The Company
also paid off its outstanding industrial revenue bonds in 2003, resulting in
the write-off of $176,000 in unamortized deferred financing costs. In 2002, the Company repurchased $1.6 million of its 7.50% subordinated
debentures at a discount, recognizing a gain of $375,000. Additionally, in
2002, the Company, in a negotiated transaction, exchanged $8.2 million face
value of its senior subordinated notes previously purchased for $5.3 million,
for $7.5 million of its outstanding 7.50% subordinated debentures, recognizing
a gain of $2.2 million. See the further discussion in Liquidity and Capital
Resources below. Interest expense in 2003 decreased from 2002 by $1.0 million, or 11.4%,
while interest income decreased by $2.7 million, or 54.9%. The decrease in
interest expense was due primarily to the reductions in outstanding debt from
debt repurchases, debt payoffs, and other debt reductions. Interest income
decreased due to decreases in the interest rates charged on notes receivable
due to the general decline in interest rates and the interest rate terms of
those notes, to the collections of notes receivable from the proceeds of the
sales of the underlying collateral, and to the collection of two
seller-financed notes receivable which were refinanced by the borrowers in the
first quarter of 2003. - 21 -




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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. On June
13, 2003, the Company filed a complaint against Prime for its default under the
lease, claiming damages to the Company in excess of $10.0 million. The Company had filed an arbitration claim against Prime in June of 2001
seeking monetary damages related to the non-use of the Companys reservation
center as agreed. In June of 2002, the Arbitrator ruled that Primes material
breach of contract caused the Company to lose $8.9 million in anticipated
profit under the terms of the agreement, and accordingly awarded the Company
its full damages of $8.9 million. Prime paid the award to the Company on
August 1, 2002. A zero effective tax rate for 2003 is due to utilization of net operating
loss carryforwards that had a full valuation reserve; however, the tax benefit
of $2.3 million is primarily due to additional taxes receivable recorded from
an amendment of income tax returns for taxes previously paid. Discontinued operations resulted from the sale of one hotel in the second
quarter of 2002, the sale of one and transfer of five hotels in the fourth
quarter of 2002, the reclassification of five hotels to assets of hotels held
for sale in the first quarter of 2003 (of which four have been sold), the
acquisition of one hotel in the second quarter of 2003 with the intention to
resell it, the sale of one hotel in the fourth quarter of 2003, and the
reclassification of two hotels to assets of hotels held for sale in the fourth
quarter of 2003 which are expected to be sold in the first half of 2004. The
effects of these 16 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 and assets of hotels transferred, 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. For the Fiscal Years Ended December 29, 2002 and December 30, 2001 For the fiscal year ended December 29, 2002, total revenues decreased
43.8% to $19.8 million from $35.1 million for the fiscal year ended December
30, 2001. The Company owned and operated two hotel brands (Shoneys Inns and
GuestHouse) beginning in the second quarter of fiscal 2002, and Shoneys Inns
during 2001 and the first quarter of 2002. The Company owned and operated one
AmeriSuites hotel throughout most of 2002. Revenues from hotel operations in
fiscal 2002 increased by 8.8% to $2.2 million from $2.0 million for fiscal year
2001. For the one hotel opened for all of both years (same hotel), average
daily room rates in 2002 increased 6.8% to $56.34 from $52.74 in 2001, and
average occupancy rates decreased from 70.5% in 2001 to 64.6% in 2002,
resulting in a decrease in same hotel revenues per available room (RevPAR) of
2.2%, from $37.17 in 2001 to $36.37 in 2002. RevPAR for all Company-owned
Shoneys Inns - 22 -




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/ GuestHouse increased by 11.4% in 2002 from 2001, from $32.66 to
$36.37. The increases in the Shoneys Inns / GuestHouse RevPAR were due
primarily to the sale of two of the hotels in June of 2001 which had lower
RevPAR than the one remaining hotel. The remaining (non-same) hotels
contributed $854,000 to hotel revenues in 2002 compared with $638,000 in 2001.
The $854,000 revenues from non-same (AmeriSuites) hotels in 2002 were from one
AmeriSuites hotel which the Company operated for most of the year and continues
to operate currently. The $638,000 revenues from non-same hotels in 2001 were
from two Shoneys Inns which were sold in the second quarter of 2001. Franchising, reservation and management revenues in fiscal 2002 increased
by 53.2% from 2001, to $6.1 million in 2002 from $4.0 million in 2001. In
fiscal 2002 and 2001, initial franchise and franchise termination fees totaled
$185,000 and $314,000,
respectively. The remaining franchising, management and reservation revenues
increased by $2.2 million, or 61.3%, from 2001 to 2002, including an increase
in royalty fee revenues of $369,000, a decrease in management fees of $946,000,
and an increase in reservation fee revenues of $2.8 million. At the end of
fiscal 2002 there were 112 franchised Shoneys Inns / GuestHouse in operation
compared with 58 at the end of fiscal 2001; this increase was due primarily to
the acquisition of GuestHouse International Franchise Systems, Inc. on May 2,
2002. Reservation fee revenues increased dramatically due to the addition of
GuestHouse in mid-2002 and additional significant contracts with other lodging
chains and independent lodging facilities. Revenues from construction and development activities in 2002 were $9.9
million compared with $27.5 million in fiscal 2001. The 2002 revenues earned
were primarily from various construction contracts being performed for third
parties of which several non-hotel projects for related parties were still in
progress at year-end 2002, while 2001 revenues earned were from four hotel
construction contracts being performed for third parties, two of which were
still in progress at year-end 2001. Revenues from construction and development
activities earned from related parties in 2002 totaled $5.7 million of the
total of $9.9 million earned in 2002. Revenues from construction and
development can vary widely from period to period depending upon the volume of
outside contract work and the timing of those projects. The events of
September 11, 2001, have had a significantly negative impact on the Companys
construction and development opportunities. Rent revenue was $1.4 million in 2002 and $1.5 million in 2001. Other
income decreased by $50,000 in 2002 from 2001. Other income can vary widely
from period to period due to the nature of this income and its varied sources. Hotel operating expenses for fiscal 2002 increased by $193,000, or 15.4%,
to $1.4 million from $1.2 million in 2001. Hotel operating expenses on the
non-same hotel operated in 2002 were $620,000 in 2002. Hotel operating
expenses on the two non-same hotels sold in early 2001 were $498,000 in 2001.
Hotel operating expenses on the one same-hotel increased by $71,000, or 9.5%,
to $823,000 in 2002 from $752,000 in 2001. The operating expenses as a
percentage of operating revenues for this activity increased from 63.0% in 2001
to 66.8% in 2002. Operating expenses as a percentage of operating revenues on
the one same-hotel increased from 55.8% to 63.0% from 2001 to 2002. Hotel
operating expenses on the same-hotel were not reduced as much as the decline in
hotel revenues and maintenance and repair costs increased significantly in 2002
over 2001, thus reducing gross operating profit margin on this hotel. - 23 -




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Franchising, reservation and management operating expenses increased by
$2.1 million, or 95.1%, from 2001 to 2002. This was due to increased
reservation expenses, principally payroll and payroll-related, to support the
increased reservation revenues earned and increased franchise activity due to
the acquisition of the GuestHouse franchising rights. Construction and development costs in 2002 were $12.1 million compared
with $25.7 million in 2001. The costs incurred were directly related to the
revenues earned from the third party construction contracts in progress in
2002, including contracts with related parties, compared with the third party
construction contracts in progress in 2001. The Company was unable to reduce
its construction and development overhead expenses in 2002 in relation to its
significant decrease in construction and development revenues from 2001. Rent expense increased by $2,000, or 0.3%, in 2002 from 2001. As of
December 29, 2002, and December 30, 2001, the Company was obligated on only one
hotel lease. General and administrative expenses increased by $2.1 million, or 36.2%,
from 2001 to 2002. The increase was due primarily to increased insurance costs,
professional fees and litigation expenses. The increase in professional fees
was due primarily to legal fees incurred in the arbitration proceeding against
Prime (see discussion of arbitration award below), a litigation settlement of
$625,000, and state tax planning services for recovery of taxes paid. Depreciation and amortization expenses decreased by $73,000, or 4.4%, from
2001 to 2002. The Company sold two hotels in April of 2001. A reduction of
$421,000 was due to the adoption of Statement of Financial Accounting Standard
No. 142, Goodwill and Other Intangible Assetseffective with the 2002 fiscal
year. The Company has incurred development costs related to several sites upon
which hotel development for third parties was planned. Due to the failure of
an upturn in the hotel development industry in 2002, as had been previously
anticipated, these previously capitalized development costs were charged off
since they did not improve the value of the land upon which they were incurred.
The impact of these development cost charge-offs was approximately $1.9
million in 2002. Additionally, in 2002 approximately $3.0 million of contracts receivable
on two third party construction contracts were written off as uncollectible.
One of the contracts receivable was for approximately $2.0 million, and the
Company received an arbitration award for substantially all of its claim, but
the owner of the hotel filed Chapter 11 bankruptcy on January 3, 2003 (See
further discussion above for 2003 compared with 2002). The other contract
receivable is for approximately $1.0 million, and arbitration proceedings were
initiated on January 15, 2003; the owner of the hotel claims damages in excess
of the amount owed. Any recovery from these two contracts will be recorded as
earned when received. Various other construction contracts receivable totaling
approximately $600,000 were also written off in 2002. Unsecured accounts receivable from the 15 hotels securing the 15 first
mortgage notes discussed below and various other accounts receivable were
written off as uncollectible in the amount of approximately $1.3 million in
2002. - 24 -




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The Company sold its interests in 27 Sumner Suites hotels in 2000 to Prime
Hospitality Corp., who subsequently converted all of them to their AmeriSuites
hotel brand. The Company continued to hold the Sumner Suites trademark with
the possibility of using it to brand future hotels it might develop or acquire.
In the second quarter of 2002, management made the decision to abandon the
trademark since the use of the name by the Company in the future is highly
unlikely. Consequently, the remaining balance of $376,000 for the Sumner
Suites trademark was written off in the second quarter. The Company carried
intangible assets (deferred charges and goodwill) related to the acquisition
and modifications of the franchising rights for Shoneys Inns and Shoneys Inns
& Suites at $6.4 million. The Company has been unsuccessful in its efforts to
sell new franchises for at least a year, and existing franchisees have exited
the Shoneys Inn system for the past several years. In the second quarter of
2002, the Company acquired the exclusive franchising rights for the GuestHouse
International Inns & Suites brand. The Company has decided to convert all
existing Shoneys Inns to the GuestHouse brand and to franchise only the
GuestHouse brand in the future. No more attempts will be made to franchise the
Shoneys Inn brand. As a result, the value of the Shoneys Inn franchising
rights and related goodwill has been determined to be worthless. Consequently,
the balance of $6.4 million was written off in the second quarter of 2002. The Company held 18 first mortgage notes receivable totaling $67.8 million
resulting from the sale of hotels in 1998, 2000 and 2001, providing seller
financing for a portion of the selling price at the time of the sale. The
owners of 15 of the properties were affiliated with each other. The 15 mortgage
notes were cross-collateralized and cross-defaulted and matured July 30, 2003.
Even though all first mortgage payments on these 15 hotels were timely received
through the end of 2002, the common owner notified the Company that it was
unlikely that it would be able to refinance the properties by the notes
maturity dates. The Company did not desire to extend the maturity dates and,
therefore, anticipated that it would be necessary to resume title to the
properties. The owner of the properties agreed in late December of 2002 to
transfer the hotels back to the Company by deeds in lieu of foreclosure. In
anticipation of this, the Company began midway through the fourth quarter to
find cash purchasers of the properties in the event the Company re-acquired
ownership. Offers received were disappointing, but the Company did not desire
to take back ownership and
operate the properties. Therefore, it was likely to sell the properties at
values significantly below the balances of the notes receivable and as of
December 29, 2002, wrote down the notes receivable to the estimated net selling
price of the properties. The Company was negotiating with the common owner of
the other three hotels secured by first mortgage notes receivable held by the
Company, and had agreed to discount the notes in order to accelerate payment by
its refinancing of at least two of the hotels. The Company wrote these notes
down to their estimated collectible balances as of December 29, 2002. The
total write-downs of all 18 notes receivable at the end of the Companys 2002
fiscal year were $21.2 million. The Company tested its real estate owned as of December 29, 2002, for
impairment in accordance with SFAS No. 144. The Company sold a parcel of
undeveloped land which it owned in early 2003 at net proceeds of less than the
carrying value at the end of 2002. The carrying value of this land parcel was
written down in 2002 to the net proceeds subsequently realized, thus reporting
an impairment loss of $77,000 on this parcel. The gain recognized on the sale of property in 2002 was $677,000 compared
with - 25 -




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$3.8 million in 2001. The net gain recognized in 2002 included gains of
$447,000 on the sale of two restaurants to the operator/lessees, and gains of
$395,000 on the sale of excess land, partially offset by a loss of $232,000 due
to costs incurred on the disposal of two hotels. Other miscellaneous gains on
sales of properties recognized in 2002 totaled $67,000, including gains
deferred from previous years being recognized under the installment method of
accounting. The gain of $3.8 million in 2001 included $3.6 million from the
Companys sale of one hotel and three restaurants. Another hotel was sold in
2001, but the gain was deferred and is being recognized under the installment
method of accounting until full accrual accounting is warranted. Approximately
$175,000 of the gain on the sale of two of the restaurants was also deferred
and is being recognized under the installment method of accounting, including
approximately $15,000 recognized in 2002. In the third quarter of 2002, the Company sold all of its
available-for-sale securities, recognizing a gain of $315,000. 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 2002 at a discount, recognizing a gain of $375,000.
In 2001, the Company repurchased $3.4 million of its 7.50% subordinated
debentures at a discount, recognizing a gain of $913,000. Additionally, in
2002, the Company, in a negotiated transaction, exchanged $8.2 million face
value of its senior subordinated notes previously purchased for $5.3 million,
for $7.5 million of its outstanding 7.50% subordinated debentures, recognizing
a gain of $2.2 million. The Company adopted Statement of Financial Accounting
Standards No. 145 at the beginning of fiscal 2002. Accordingly, gains and
losses from debt extinguishments are no longer classified in the statement of
earnings as extraordinary items. See the further discussion in Liquidity and
Capital Resources below. Interest expense in 2002 increased from 2001 by $560,000, or 6.8%, while
interest income decreased by $1.3 million, or 20.3%. The increase in interest
expense was due primarily to higher levels of borrowing on the Companys bank
credit facilities in 2002 than in 2001, partially offset by the effects of the
continuing repurchases of the Companys public debt. Interest income increased
due to seller financing of a portion of the sales price of two Shoneys Inns
sold to franchisees in April of 2001, and one Shoneys Inn sold in June of
2002, but was more than offset by decreases in the interest rates charged on
other notes receivable due to the general decline in interest rates and the
interest rate terms of those notes. The Company had filed an arbitration claim against Prime in June of 2001
seeking monetary damages related to the non-use of the Companys reservation
center as agreed. In June of 2002, the Arbitrator ruled that Primes material
breach of contract caused the Company to lose $8.9 million in anticipated
profit under the terms of the agreement, and accordingly awarded the Company
its full damages of $8.9 million. Prime paid the award to the Company on
August 1, 2002. The effective tax rate differs from the federal and state statutory rates
as a result of interest on deferred gains and the non-deductibility of the
write-off of certain intangible assets in 2002. Discontinued operations resulted from 16 hotels sold, transferred, and/or - 26 -




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reclassified to hotels held for sale in 2002 and 2003. The effect of these
hotels operations and the losses on the sales and transfer of the hotels have
been removed from operating earnings and from the gain or loss on sale of
property and leasehold interests in accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Critical Accounting Policies and Practices The Company has prepared its financial statements in conformity with
accounting principles generally accepted in the United States, and these
statements necessarily include some amounts that are based upon informed
judgments and estimates of management. The Companys significant accounting
policies are discussed in Note 1 of the Notes to Consolidated Financial
Statements. The Companys critical accounting policies are subject to
judgments and uncertainties which affect the application of such policies. The
Companys financial position or results of operations may be materially
different when reported under different conditions or when using different
assumptions in the application of such policies. In the event estimates or
assumptions prove to be different from reported amounts, adjustments are made
in subsequent periods to reflect more current information. The Companys
critical accounting policies and practices include impairment of long-lived
assets, collectibility of accounts and notes receivable, percentage of
completion accounting for construction contracts, profit recognition on sale
transactions, nonmonetary transactions, and income taxes. The following is a
brief discussion of these more significant accounting policies and practices
used by the Company. Impairment of Long-Lived Assets: The Company records impairment losses on
long-lived assets used in operations and finite-lived intangibles when
indicators of impairment are present and the undiscounted cash flows related to
those assets are less than their carrying amounts. The Company records
impairment losses on long-lived assets under development or held for sale when
indications of impairment are present and the estimated fair value less costs
to sell is less than the carrying amount. The Companys impairment review
process relies on managements judgment regarding the indicators of impairment,
the remaining lives of assets used to generate assets undiscounted cash flows,
and the fair value of assets at a particular point in time. Under different
assumptions or conditions, the asset impairment analysis may yield a different
result, which would alter the gain or loss on the eventual disposition of the
asset. Collectibility of Accounts and Notes Receivable: The Company continuously
monitors collections from its customers and debtors under notes receivable and
maintains allowances for doubtful accounts based upon historical experience and
any specific customer collection issues that are identified. Notes receivable
are generally secured by first mortgages on the underlying assets. The
majority of these are from a group of companies that are affiliated with one
another, creating a concentration of credit risk. The Company determined in
the fourth quarter of 2002 that the fair values of the underlying assets were
less than the balances of the first mortgage notes and that the notes
receivable were under-collateralized. The Company, accordingly, recorded a
write-down of $21.2 million in 2002 and $881,000 in 2003, as previously
discussed. Percentage of Completion Accounting for Construction Contracts:
Construction and - 27 -




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development revenues earned on fixed price contracts are
recognized based upon the percentage of completion method, measured by the
percentage of cost incurred to total estimated cost for each contract. The
total estimated cost of each contract involves the use of various estimating
techniques to project costs of completion. These percentage of completion and
cost estimates involve various assumptions and projections
relative to the outcome of future events, such as price and timing of
construction materials, labor costs, and overhead costs. The Company
reevaluates its contract cost estimates periodically and reflects changes in
estimates in the current and future periods. Profit Recognition on Sale Transactions: As prescribed by Financial
Accounting Standards Board (FASB) Statement No. 66, Accounting for Sales of
Real Estate, profit from the sale of land and hotel properties is recognized at
the time the sale is consummated, the minimum down payment is received, and
there is no significant continuing involvement. When the sale involves a
leaseback, and otherwise qualifies for sale-leaseback accounting, as defined by
FASB Statement No. 98, Accounting for Leases, the profit is then accounted for
in accordance with FASB Statements No. 13, Accounting for Leasesand No. 28,
Accounting for Sales with Leasebacks, which generally require deferral and
amortization of profits ratably over the related lease terms. Nonmonetary Transactions: The Company accounts for nonmonetary
transactions involving its hotels in accordance with Accounting Principles
Board (APB)Opinion No. 29, Accounting for Nonmonetary Transactions, FASB
Statement No. 141, Business Combinations, and Emerging Issues Task Force
(EITF)Issues No. 98-3, Determining Whether a Nonmonetary Transaction Involves
Receipt of Productive Assets or a Businessand No. 01-2, Interpretations of
APB Opinion No. 29. If the hotel received in a nonmonetary exchange of hotels
meets the definition of a business, it is accounted for as a purchase at fair
value. If the hotel received does not meet the definition of a business, the
guidance of APB No. 29, as interpreted by EITF 01-2, is followed. Under the
general guidelines of APB No. 29, an exchange of nonmonetary assets is
accounted for at fair value, unless the assets are similar and the other
conditions of APB No. 29 and EITF 01-2 are met, whereby the transaction is
accounted for at historical cost, resulting in no gain recognition. Income Taxes: The Company uses the liability method to account for income
taxes. The preparation of consolidated financial statements involves estimating
the Companys current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities,
which are included within the consolidated balance sheet. An assessment of the
recoverability of the deferred tax assets is made, and a valuation allowance
may be established based upon this assessment. Liquidity and Capital Resources The
Companys cash flows used in operating activities were $12.8 million
in 2003, compared with cash flows used in operating activities of $8.7 million
in 2002 and cash flows provided by operating activities of $8.0 million in
2001. Earnings from continuing operations were $1.8 million in 2003 and
$426,000 in 2001, while losses from continuing operations were $25.0 million in
2002. Depreciation and amortization was $1.7 million, $1.6 million, and $1.6
million in 2003, 2002, and 2001, respectively. The Company recognized $1.3
million, $677,000, and $3.8 million from gains on sale of - 28 -




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property during 2003,
2002 and 2001, respectively. The gain of $3.8 million in 2001 included $3.6
million from the Companys sale of one hotel and three restaurants. Another
hotel was sold in 2001, but the gain was deferred and is being recognized under
the installment method of accounting until full accrual accounting is
warranted. Approximately $175,000 of the gain on the sale of two of the
restaurants was also deferred and is being recognized under the installment
method of accounting. The gains on early extinguishment of debt were all due to
the repurchase by the Company of its outstanding public debt at a discount from
face value. Decreases in accounts payable and accrued expenses used $1.8
million cash in 2003 and $3.5 million in 2002, respectively, as compared with
cash provided of $6.7 million in 2001. An increase in trade receivables of
$893,000 and $926,000 in 2003 and 2001, respectively, used cash, whereas a
decrease in trade receivables of $162,000 provided cash in 2002. Construction
contracts receivable used cash of $17.8 million, $5.4 million, and $1.6
million, in 2003, 2002 and 2001, respectively. The
Companys cash flows provided by investing activities were $61.1
million in
2003 and $3.9 million in 2002 in contrast to $4.7 million used in investing
activities in 2001. Payments received on notes receivable were $39.5 million,
$971,000, and $681,000 in 2003, 2002 and 2001, respectively. Proceeds from the
sale of properties were $29.9 million, $6.4 million and $2.9 million in 2003,
2002 and 2001, respectively; these properties include hotels, restaurants and
land. The Company has required capital principally for the construction and
acquisition of lodging facilities and the purchase of equipment and leasehold
improvements. Capital expenditures for such purposes were $7.8 million, $3.9
million, and $20.9 million in 2003, 2002, and 2001, respectively. As of the
end of 2003, no hotels were under construction. The Company sold all of its
available-for-sale securities in 2002 for $428,000, and invested $1.8 million
in the acquisition of GuestHouse International Franchise Systems, Inc. and two
hotel exchange transactions. Net cash used in financing activities was $37.4 million in 2003, compared
with $3.7 million provided by financing activities in 2002 and $6.0 million
used in financing activities 2001. The Company collected notes receivable from
its chief executive officer in the amounts of $1.3 million and $250,000 in 2003
and 2002, respectively, representing all of these notes receivable. In 1999,
the Company adopted a plan to repurchase up to $12.5 million of the Companys
outstanding common stock. In July of 1999 the Company increased the authorized
amount to repurchase an additional $7.5 million of common stock pursuant to the
plan, increasing the total amount authorized to $20.0 million. In 2000,
238,000 shares were repurchased for $1.2 million. In November of 2001 the
Company increased the authorized amount to repurchase an additional $3.0
million of common stock pursuant to the plan, increasing the total amount
authorized to $23.0 million. In 2003, 125,500 shares were repurchased for
$452,000, in 2002, 25,000 shares were repurchased for $148,000, and in 2001,
457,000 shares were repurchased for $1.9 million. In the second quarter of
1999 the Company announced its plan to use up to $12.0 million of its Company
funds to repurchase a portion of its $54.0 million outstanding convertible
subordinated debentures. In the third quarter of 2000 the Company increased
the total amount authorized to $20.0 million, and repurchased $21.0 million of
this debt for $15.4 million in 2000. The Company increased the total amount
authorized to $25.0 million in November of 2001. An additional $5.7 million of
this debt was repurchased for $4.7 million in 2003, $1.6 million of this debt
was repurchased for $1.2 million in 2002, and $3.4 million of this debt was
repurchased for $2.3 million in 2001. In the third quarter of 1999 the - 29 -




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Company
announced its plan to use up to $15 million of its Company funds to repurchase
a portion of its outstanding $67.7 million senior subordinated notes. In 2003,
the Company repurchased $6.6 million of these debt securities at a cost of $5.5
million. 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 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 $5.3 million as of December 28, 2003. This loan currently bears
interest at 8.19% per annum and is amortized to its maturity of December 29,
2010. The interest rate was fixed for the first five years ending January 1,
2006, and is adjustable to a new rate for the second five years of the 10-year
term equal to 325 basis points over 5-year Treasury rates. The Companys outstanding 7.50% Convertible Subordinated Debentures in the
face amount of $10.8 million mature in May of 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. - 30 -




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The Company is evaluating 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, the
liquidation of notes receivable, the sale of hotel properties, and net cash
provided by operations, will be sufficient to fund its capital expenditures,
debt repayments and operations for at least the next twelve months. The following table represents the Companys outstanding contractual
obligations as of December 28, 2003 excluding standby letters of credit of
$625,000 outstanding at December 28, 2003. The letters of credit are
maintained primarily to support the Companys workers compensation insurance
program. Payments due by period (in thousands of dollars)Less than
    
    1 to 2
    
    2 to 4
    
    4 to 5
    
    More thanTotal
    
    1 year
    
    years
    
    years
    
    years
    
    5 years7.50% convertible
subordinated debentures
    
    $
    10,772
    
    
    $
    10,772
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9.75% Series A and 10.15%
Series A-1 senior
subordinated notes
    
    
    20,403
    
    
    
    
    
    
    
    
    
    
    
    20,403
    
    
    
    
    
    
    
    9.55% Series B and 9.95%
Series B-1 senior
subordinated notes
    
    
    16,270
    
    
    
    
    
    
    
    
    
    
    
    16,270
    
    
    
    
    
    
    
    Notes
payable - other
    
    
    5,273
    
    
    
    
    
    
    
    573
    
    
    
    1,296
    
    
    
    1,526
    
    
    
    1,878Operating lease obligations
    
    
    642
    
    
    
    350
    
    
    
    292
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    53,360
    
    
    $
    11,122
    
    
    $
    865
    
    
    $
    37,969
    
    
    $
    1,526
    
    
    $
    1,878
 Recently Issued Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51(FIN No. 46). FIN No.
46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46
required the Company to apply the provisions of FIN No. 46 immediately to any
special purpose entities and variable interest entities created after January
31, 2003. Application of the provisions will be required for all other
variable interest entities in financial statements for periods ending after
March 15, 2004. The adoption of FIN No. 46 is not expected to have a material
impact on the Companys financial position or results of operations. - 31 -




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In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument within its scope as a liability
though many of these instruments were previously classified as equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 did not
have a material impact on the Companys financial position or results of
operations. 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, collectibility of notes receivable,
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. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company has not entered into any transactions using derivative
financial instruments. The Company is exposed to market risk from changes in interest rates. The
Company holds notes receivable that earn interest at variable rates. A
hypothetical one-percentage point change in interest rates would change annual
interest income by $90,000 based on the balances of these variable-rate notes
receivable at December 28, 2003. Changes in interest rates would not impact
interest expense since there was no long-term variable-rate debt at December
28, 2003. Management believes that market risk as a result of interest rate changes
would have a minimal effect on the fair value of the Companys fixed-rate debt
because the fair value of the Companys debt is traded based more on the
publics perception of the nature of the debt than on any fundamental changes
in the debt markets. There were no significant changes in the Companys market risk in the
fiscal year ended December 28, 2003, and management foresees no significant
changes in the Companys exposure to fluctuations in interest rates in the near
future. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Financial Statements required by Item 8 are filed as a separate
section of this Report. - 32 -




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 
 ITEM 9A. CONTROLS AND PROCEDURES (a) As of December 28, 2003, 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 December 28, 2003. (b) There were no significant changes in our internal controls over
financial reporting during the fourth quarter of 2003. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning the directors and officers of the Company under
the heading Election of Director to be contained in the Companys Proxy
Statement with respect to the next Annual Meeting of Shareholders is
incorporated herein by reference. 
 ITEM 11. EXECUTIVE COMPENSATION. The information under the heading Executive Compensation and the
information under the heading Performance Graph to be contained in the
Companys Proxy Statement with respect to the next Annual Meeting of
Shareholders are incorporated herein by reference. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the heading Security Ownership of Certain
Beneficial Owners and Management to be contained in the Companys Proxy
Statement with respect to the next Annual Meeting of Shareholders is
incorporated herein by reference. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the heading Certain Transactions to be contained
in the Companys Proxy Statement with respect to the next Annual Meeting of
Shareholders is incorporated herein by reference. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information under the heading 2003 Auditor Fees with respect to
principal accountant fees and services, to be contained in the Companys Proxy
Statement with respect to the next Annual Meeting of Shareholders is
incorporated herein by reference. - 33 -




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. Page(a
    )
    
    
    1.
    
    
    Financial Statements:The following Financial Statements are included herein:Report of Independent Auditors
    
    
    F-1Consolidated Balance Sheets at December 28, 2003 and
December 29, 2002
    
    
    F-2 - F-3Consolidated Statements of Operations for each of the
three years in the period ended December 28, 2003
    
    
    F-4 - F-5Consolidated Statements of Shareholders Equity for
each of the three years in the period ended
December 28, 2003
    
    
    F-6 - F-7Consolidated Statements of Cash Flows for each of the
three years in the period ended December 28, 2003
    
    
    F-8 - F-9Notes to Consolidated Financial Statements
    
    
    F-10 - F-392.
    
    
    Financial Statement Schedules:Report of Independent Auditors
    
    
    F-1Schedule II - Valuation and Qualifying Accounts
    
    
    S-1All other schedules required by Regulation S-X
are omitted as the required information is
inapplicable or the information requested thereby
is set forth in the financial statements or the
notes thereto.3.
    
    
    Exhibits:The exhibits required by Item 601 of Regulation
S-K and paragraph (c) of this Item 15 are listed
below. Management contracts and compensatory plans
and arrangements required to be filed as exhibits
to this form are:10(9)   1991 Stock Option Plan10(10)  First Amendment to 1991 Stock Option Plan10(11)  Second Amendment to 1991 Stock Option Plan10(12)  Key Employee Supplemental Income Plan
 - 34 -




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ExhibitNumber
    
    Exhibit3(1)
    
    
    
    Amended and Restated Charter. Incorporated by
reference to the Companys Registration statement on
Form S-1, Commission File No. 33-44504, filed with the
Commission on December 12, 19913(2)
    
    
    
    Articles of Amendment to Charter creating Series A
Subordinated Preferred Stock. Incorporated by
reference to the Companys Registration Statement on
Form 8-A filed with the Commission on July 3, 19973(3)
    
    
    
    Articles of Amendment to Amended and Restated Charter
dated September 8, 1997. Incorporated by reference to
the Companys Annual Report on Form 10-K, filed with
the Commission on April 13, 19983(4)
    
    
    
    Amended and Restated Bylaws. Incorporated by reference
to the Companys Registration statement on Form S-1,
Commission File No. 33-44504, filed with the
Commission on December 12, 19913(5)
    
    
    
    Amendment to the Amended and Restated Bylaws adopted
on July 31, 1996. Incorporated by reference to the
Companys Annual Report on Form 10-K, filed with the
Commission on April 13, 19984(1)
    
    
    
    Amended and Restated Charter. Section 6 of the Amended
and Restated Charter is included in Exhibit 3(1)4(2)
    
    
    
    Indenture dated as of June 6, 1994, by and between the
Registrant and Third National Bank in Nashville,
Tennessee, Trustee, relating to $54,000,000 in 7 1/2
Convertible Subordinated Debentures due 2004.
Incorporated by reference to the Companys
Registration Statement on Form S-3, Commission File
No. 33-77910, filed with the Commission on April 19,
19944(3)
    
    
    
    Indenture dated as of November 15, 1996, by and
between the Registrant and Bankers Trust Company,
Trustee, relating to Senior Subordinated Notes.
Incorporated by reference to the Companys Quarterly
Report on Form 10-Q, filed with the Commission on
November 20, 19964(4)
    
    
    
    First Supplemental Indenture dated as of November 15,
1996 by and between the Registrant and Bankers Trust
Company, Trustee, relating to 9 3/4% Senior
Subordinated Notes due 2006, Series A. Incorporated by
reference to the Companys Quarterly Report on Form
10-Q, filed with the Commission on November 20, 19964(5)
    
    
    
    Second Supplemental Indenture dated as of September
25, 1997 by and between the Registrant and Bankers
Trust Company, Trustee, relating to 9.55% Senior
Subordinated Notes due 2007, Series B. Incorporated by
reference to the Companys Current Report on Form 8-K,
filed with the Commission on September 30, 19974(6)
    
    
    
    Third Supplemental Indenture dated
July
1, 2003 between Registrant and Deutsche Bank
Trust Company Americas (formerly Bankers Trust Company), as Trustee,
relating to 10.15% Senior
Subordinated Notes due 2006, Series A-1. Incorporated
by reference to the Companys Registration Statement on Form
S-4/A, Commission File No. 333-98789, filed with the Commission on
May 30, 2003.4(7)
    
    
    
    Fourth Supplemental Indenture dated
July
1, 2003 between Registrant and Deutsche Bank
Trust Company Americas (formerly Bankers Trust Company), as Trustee,
relating to 9.95% Senior
Subordinated Notes due 2007, Series B-1. Incorporated
by reference to the Companys Registration Statement on Form
S-4/A, Commission File No. 333-98789, filed with the Commission on
May 30, 2003.4(8)
    
    
    
    Fifth Supplemental Indenture dated
July
1, 2003 between Registrant and Deutsche Bank
Trust Company Americas (formerly Bankers Trust Company). Incorporated
by reference to the Companys Registration Statement on Form
S-4/A, Commission File No. 333-98789, filed with the Commission on
May 30, 2003.
 The Registrant agrees to furnish to the Securities and Exchange Commission,
upon request, any and all instruments defining the rights of holders of
long-term debt of the Registrant and its subsidiaries, the total amount of
which does not exceed 10% of the total assets of the Registrant and its
subsidiaries on a consolidated basis. - 35 -




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ExhibitNumber
    
    Exhibit10(1)
    
    
    
    Amended and Restated Partnership Agreement of
Demonbreun Hotel Associates, Ltd., dated October 22,
1991. Incorporated by reference to the Companys
Registration statement on Form S-1, Commission File
No. 33-44504, filed with the Commission on December
12, 199110(2)
    
    
    
    Agreement of Limited Partnership of Shoneys Inn
North, Ltd., dated December 31, 1987. Incorporated by
reference to the Companys Registration statement on
Form S-1, Commission File No. 33-44504, filed with
the Commission on December 12, 199110(3)
    
    
    
    Partnership Agreement of Shoneys Inn of Atlanta,
N.E., dated December 26, 1988. Incorporated by
reference to the Companys Registration statement on
Form S-1, Commission File No. 33-44504, filed with
the Commission on December 12, 199110(4)
    
    
    
    Partnership Agreement of Shoneys Inn of Stockbridge,
dated December 26, 1988. Incorporated by reference to
the Companys Registration statement on Form S-1,
Commission File No. 33-44504, filed with the
Commission on December 12, 199110(5)
    
    
    
    Joint Venture Agreement of Atlanta Shoneys Inns
Joint Venture, dated May 4, 1988. Incorporated by
reference to the Companys Registration statement on
Form S-1, Commission File No. 33-44504, filed with
the Commission on December 12, 199110(6)
    
    
    
    Amended and Restated Limited Partnership Agreement of
Shoneys Inn of Gulfport, Ltd., dated January 1,
1987. Incorporated by reference to the Companys
Registration statement on Form S-1, Commission File
No. 33-44504, filed with the Commission on December
12, 199110(7)
    
    
    
    Second Amended and Restated Limited Partnership
Agreement of Shoneys Inn of Bossier City, Ltd.,
dated January 1, 1987. Incorporated by reference to
the Companys Registration statement on Form S-1,
Commission File No. 33-44504, filed with the
Commission on December 12, 199110(8)
    
    
    
    Second Amended and Restated Limited Partnership
Agreement of Shoneys Inns of New Orleans, Ltd.,
dated January 1, 1987. Incorporated by reference to
the Companys Registration statement on Form S-1,
Commission File No. 33-44504, filed with the
Commission on December 12, 199110(9)
    
    
    
    1991 Stock Option Plan. Incorporated by reference to
the Companys Registration statement on Form S-8,
filed with the Commission on June 24, 199710(10)
    
    
    
    First Amendment to 1991 Stock Option Plan. Incorporated by
reference to the Companys Registration statement on Form S-8, filed
with the Commission on June 24, 199710(11)
    
    
    
    Second Amendment to 1991 Stock Option Plan. Incorporated by
reference to the Companys Registration statement on Form S-8, filed
with the Commission on June 24, 199710(12)
    
    
    
    Key Employee Supplemental Income Plan. Incorporated by reference to
the Companys Registration statement on Form S-1, Commission File No.
33-44504, filed with the Commission on December 12, 1991
 - 36 -




---



##### Table of Contents



ExhibitNumber
    
    Exhibit10(13)
    
    
    
    Rights Agreement between the Registrant and SunTrust, Atlanta, as
Rights Agent, dated as of June 27, 1997. Incorporated by reference to
the Companys Registration Statement on Form 8-A filed with the
Commission on July 3, 199710(14)
    
    
    
    Loan and Security Agreement by and among The Hotel Group, Inc., as
Borrower, the Registrant, as Holdings, and the financial institutions
that are signatories thereto, the Lenders, and Foothill Capital
Corporation, as Agent, dated as of August 27, 1999. Incorporated by
reference to the Companys Current Report on Form 8-K dated September
15, 1999, filed with the Commission on September 28, 1999.10(15)
    
    
    
    Amendment Number One to Loan and Security Agreement between and
among The Hotel Group, Inc., as Borrower, the Registrant, as Holdings,
and the financial institutions that are signatories thereto, the
Lenders, and Foothill Capital Corporation, as Agent, dated as of October
3, 2001. Incorporated by reference to the Companys Annual Report on
Form 10-K, filed with the Commission on April 1, 2002.10(16)
    
    
    
    Amendment Number Two to Loan and Security Agreement between and
among The Hotel Group, Inc., as Borrower, the Registrant, as Holdings,
and the financial institutions that are signatories thereto, the
Lenders, and Foothill Capital Corporation, as Agent, dated as of
November 26, 2002. Incorporated by reference to the
Companys Annual Report on Form 10-K, filed with the Commission
on April 14, 2003.10(17)
    
    
    
    Lease Agreement by and between Southeast Texas Inns, Inc., ad
landlord, and May-Ridge, L.P., as tenant, dated as of July 9, 2000.
Incorporated by reference to the Companys Current Report on Form 8-K
filed with the Commission on July 24, 2000.10(18)
    
    
    
    Amended and Restated License Agreement entered into September 27,
2000 by and between Shoneys Inc., ShoLodge Franchise Systems, Inc and
the Company. Incorporated by reference to the Companys Quarterly
Report on Form 10-Q, filed with the Commission on November 15, 2000.10(19)
    
    
    
    Purchase and Sale Agreement dated as of April 30, 2002, by and
among ShoLodge, Inc., GuestHouse Franchise Systems, LLC and Surburban
Franchise Holding Company LLC. Incorporated by reference to the
Companys Current Report on Form 8-K/A filed with the Commission on
July 16, 2002.21
    
    
    
    Subsidiaries of the Registrant*23(1)
    
    
    
    Consent of Ernst & Young LLP*31.1
    
    
    
    Certifications required by Section 404 of the Sarbanes-Oxley
Act of 2002.*32.1
    
    
    
    Certifications required by Section 906 of the Sarbanes-Oxley
Act of 2002.*
 * Filed herewith - 37 -




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##### Table of Contents



(b)
    
    The following reports on Form 8-K were filed during the fourth quarter
ended December 28, 2003:Current report on Form 8-K filed with the Commission on November 4,
2003 relating to a press release announcing the completion of the
Companys tender offer relating to the purchase of the Companys Senior
Subordinated Notes.Current report on Form 8-K filed with the Commission on November 10,
2003 relating to a press release announcing the first joint franchise
owners council meeting involving the GuestHouse International Franchise
Advisory Committee and the former Shoneys Inn Franchise Owners
Council.Current report on Form 8-K filed with the Commission on November 19,
2003 relating to a press release announcing financial results for the
third quarter ended October 5, 2003.(c)
    
    Exhibits required by Item 601 of Regulation S-K are listed above.(d)
    
    All financial statement schedules required by Regulation S-X are filed
following the Financial Statements listed above.
 - 38 -




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: April 5, 2004
    
    /s/ Leon MooreLeon MooreChief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ Leon Moore
Leon Moore
    
    Chairman, Chief Executive
Officer, Principal Executive
Officer, Director
    
    April 5, 2004/s/ Bob Marlowe
Bob Marlowe
    
    Secretary, Treasurer, Chief
Financial Officer, Chief
Accounting Officer, Principal
Accounting Officer, Director
    
    April 5, 2004/s/ Richard L. Johnson

Richard L. Johnson
    
    Executive Vice President,
Director
    
    April 5, 2004/s/ Earl H. Sadler

Earl H. Sadler
    
    Director
    
    April 5, 2004/s/ Helen L. Moskovitz

Helen L. Moskovitz
    
    Director
    
    April 5, 2004/s/ David M. Resha

David M. Resha
    
    Director
    
    April 5, 2004
 - 39 -




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##### Table of Contents



Report of Independent Auditors Shareholders and Board of Directors
ShoLodge, Inc. We have audited the accompanying consolidated balance sheets of ShoLodge, Inc.
and subsidiaries as of December 28, 2003 and December 29, 2002, and the related
consolidated statements of operations, shareholders equity and cash flows for
each of the three years in the period ended December 28, 2003. Our audits also
included the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ShoLodge, Inc.
and subsidiaries at December 28, 2003 and December 29, 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 28, 2003, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein. As discussed in Note l to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets. /s/ Ernst & Young LLP Nashville, Tennessee
March 31, 2004 F-1




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries 
 Consolidated Balance Sheets December 28,
    
    December 29,2003
    
    2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    12,491,736
    
    
    $
    1,534,942Restricted cash
    
    
    
    
    
    
    100,000Accounts receivable :Trade, net of allowance for doubtful accounts
of $653,632 and $394,480 for 2003 and 2002,
respectively
    
    
    2,188,312
    
    
    
    1,944,357Construction contracts
    
    
    837,714
    
    
    
    136,865Construction contracts due from related parties
    
    
    22,668,784
    
    
    
    5,671,892Costs and estimated earnings in excess of
billings on construction contracts
    
    
    39,832
    
    
    
    Income taxes receivable
    
    
    3,908,041
    
    
    
    9,900,782Prepaid expenses
    
    
    314,967
    
    
    
    319,595Notes receivable, net
    
    
    6,641,598
    
    
    
    44,823,055Assets of
hotels transferred under contractual agreements (notes receivable)
    
    
    4,352,000
    
    
    
    11,571,564Assets of hotels held for sale
    
    
    16,139,477
    
    
    
    9,485,357Assets of other hotels in discontinued operations
    
    
    
    
    
    
    21,563,804Other current assets
    
    
    45,352
    
    
    
    68,302Total current assets
    
    
    69,627,813
    
    
    
    107,120,515Notes receivable, net
    
    
    4,702,058
    
    
    
    7,065,318Property and equipment
    
    
    40,369,304
    
    
    
    41,123,778Less accumulated depreciation and amortization
    
    
    (6,922,065
    )
    
    
    (6,387,327
    )33,447,239
    
    
    
    34,736,451Land under development or held for sale
    
    
    10,644,991
    
    
    
    14,114,353Deferred charges, net
    
    
    437,353
    
    
    
    1,790,320Goodwill
    
    
    765,711
    
    
    
    765,711Trademarks and franchise rights, net
    
    
    473,366
    
    
    
    703,366Other assets
    
    
    1,921,596
    
    
    
    983,124$
    122,020,127
    
    
    $
    167,279,158
 F-2




---



##### Table of Contents



ShoLodge, Inc. and Subsidiaries Consolidated Balance Sheets (continued) December 28,
    
    December 29,2003
    
    2002LiabilitiesCurrent liabilities:Accounts payable and accrued expenses
    
    $
    5,450,275
    
    
    $
    10,623,527Taxes payable other than on income
    
    
    344,179
    
    
    
    609,259Current portion of long-term debt
    
    
    11,344,902
    
    
    
    67,548,511Total current liabilities
    
    
    17,139,356
    
    
    
    78,781,297Long-term debt, less current portion
    
    
    41,373,383
    
    
    
    24,381,276Deferred tax liability
    
    
    783,485
    
    
    
    Deferred credits
    
    
    153,106
    
    
    
    2,314,922Minority interests in equity of
consolidated subsidiaries and
partnerships
    
    
    388,699
    
    
    
    607,493Total liabilities
    
    
    59,838,029
    
    
    
    106,084,988Shareholders 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,
4,993,278 and 5,118,778 shares
issued and outstanding as of
December 28, 2003 and December 29,
2002, respectively)
    
    
    1,000
    
    
    
    1,000Additional paid-in capital
    
    
    23,127,821
    
    
    
    23,579,621Retained earnings
    
    
    39,053,277
    
    
    
    38,753,965Notes receivable from officer, net
of discount of $140,833 as of
December 29, 2002
    
    
    
    
    
    
    (1,140,416
    )Total shareholders equity
    
    
    62,182,098
    
    
    
    61,194,170$
    122,020,127
    
    
    $
    167,279,158
 See accompanying notes. F-3




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries 
 Consolidated Statements of Operations Year endedDecember 28,
    
    December 29,
    
    December 30,2003
    
    2002
    
    2001Revenues:Hotel
    
    $
    3,841,825
    
    
    $
    2,160,261
    
    
    $
    1,985,551Franchising, reservation and management
    
    
    7,674,896
    
    
    
    6,083,606
    
    
    
    3,970,821Construction and development  related parties
    
    
    21,978,398
    
    
    
    5,687,874
    
    
    
    34,992Construction
and development  other
    
    
    2,007,192
    
    
    
    4,224,408
    
    
    
    27,444,893Rent
    
    
    399,969
    
    
    
    1,431,443
    
    
    
    1,485,759Other income
    
    
    152,508
    
    
    
    176,454
    
    
    
    227,134Total revenues
    
    
    36,054,788
    
    
    
    19,764,046
    
    
    
    35,149,150Costs and expenses:Hotel
    
    
    3,014,318
    
    
    
    1,442,757
    
    
    
    1,250,107Franchising, reservation and management
    
    
    6,476,765
    
    
    
    4,275,949
    
    
    
    2,191,659Construction and development
    
    
    20,333,598
    
    
    
    12,119,271
    
    
    
    25,691,829Rent expense
    
    
    518,022
    
    
    
    583,904
    
    
    
    581,900General and administrative
    
    
    4,978,228
    
    
    
    7,987,192
    
    
    
    5,858,623Depreciation and amortization
    
    
    1,740,793
    
    
    
    1,570,360
    
    
    
    1,643,273Write-off of pre-development costs
    
    
    5,993
    
    
    
    1,863,628
    
    
    
    Write-off of construction contracts receivable
    
    
    61,475
    
    
    
    3,631,267
    
    
    
    Write-off of trade receivables
    
    
    649,543
    
    
    
    1,296,558
    
    
    
    Write-off of goodwill
    
    
    
    
    
    
    2,387,100
    
    
    
    Write-off of trademarks and franchise rights
    
    
    
    
    
    
    4,421,535
    
    
    
    Write-down of notes receivable
    
    
    1,014,890
    
    
    
    21,167,013
    
    
    
    Impairment of real estate
    
    
    
    
    
    
    76,903
    
    
    
    Total expenses
    
    
    38,793,625
    
    
    
    62,823,437
    
    
    
    37,217,391Operating loss
    
    
    (2,738,837
    )
    
    
    (43,059,391
    )
    
    
    (2,068,241
    )Gain on sale of properties
    
    
    1,251,371
    
    
    
    676,653
    
    
    
    3,791,288Gain on sale of available-for-sale securities
    
    
    
    
    
    
    314,988
    
    
    
    Gain on early extinguishments of debt
    
    
    1,344,474
    
    
    
    2,592,038
    
    
    
    912,719Interest expense
    
    
    (7,775,244
    )
    
    
    (8,780,185
    )
    
    
    (8,219,985
    )Interest income
    
    
    2,249,343
    
    
    
    4,990,654
    
    
    
    6,262,572Lease abandonment income
    
    
    5,329,504
    
    
    
    
    
    
    
    Arbitration award
    
    
    
    
    
    
    8,900,000
    
    
    
    Earnings (loss) from continuing operations
before income taxes and minority interests
    
    
    (339,389
    )
    
    
    (34,365,243
    )
    
    
    678,353Income tax benefit (expense)
    
    
    2,256,352
    
    
    
    9,167,859
    
    
    
    (194,000
    )Minority interests in (earnings) loss of
consolidated subsidiaries and partnerships
    
    
    (106,206
    )
    
    
    178,986
    
    
    
    (58,255
    )Earnings (loss) from continuing operations
    
    
    1,810,757
    
    
    
    (25,018,398
    )
    
    
    426,098
 F-4




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Consolidated Statements of Operations (continued) Year endedDecember 28,
    
    December 29,
    
    December 30,2003
    
    2002
    
    2001Discontinued operations:Operations of hotels disposed of and
transferred, net of income tax effect of
$263,000, $41,000, and $298,000 for 2003,
2002 and 2001, respectively
    
    $
    430,376
    
    
    $
    67,019
    
    
    $
    485,447Loss on disposal and transfer of discontinued
operations, net of income tax benefit of
$1,190,000 and $2,020,000 for 2003
and 2002, respectively
    
    
    (1,941,821
    )
    
    
    (3,296,185
    )
    
    
    Net earnings (loss)
    
    $
    299,312
    
    
    $
    (28,247,564
    )
    
    $
    911,545Net earnings (loss) per common share:Basic:Continuing operations
    
    $
    0.36
    
    
    $
    (4.89
    )
    
    $
    0.08Discontinued operations:Operations of hotels disposed of and
transferred
    
    
    0.08
    
    
    
    0.01
    
    
    
    0.08Loss on disposal and transfer of
discontinued
operations
    
    
    (0.38
    )
    
    
    (0.64
    )
    
    
    Net earnings (loss)
    
    $
    0.06
    
    
    $
    (5.52
    )
    
    $
    0.16Diluted:Continuing operations
    
    $
    0.36
    
    
    $
    (4.89
    )
    
    $
    0.08Discontinued operations:Operations of hotels disposed of and
transferred
    
    
    0.08
    
    
    
    0.01
    
    
    
    0.08Loss on disposal and transfer of
discontinued
operations
    
    
    (0.38
    )
    
    
    (0.64
    )
    
    
    Net (loss) earnings
    
    $
    0.06
    
    
    $
    (5.52
    )
    
    $
    0.16Weighted average common shares outstanding:Basic
    
    
    5,071,198
    
    
    
    5,113,953
    
    
    
    5,464,533Diluted
    
    
    5,071,198
    
    
    
    5,113,953
    
    
    
    5,529,825
 See accompanying notes F-5




---



##### Table of Contents



ShoLodge, Inc. and Subsidiaries 
 Consolidated Statements of Shareholders Equity Years ended December 28, 2003, December 29, 2002 and December 30, 2001 Notes
    
    AdditionalCommon Stock
    
    Receivable From
    
    Paid-InShares
    
    Amount
    
    Officer
    
    CapitalBalance, December 31, 2000
    
    
    5,544,211
    
    
    $
    1,000
    
    
    $
    (1,247,750
    )
    
    $
    25,425,175Exercise of stock options, net
    
    
    1,067
    
    
    
    
    
    
    
    
    
    
    
    4,001Interest accreted on notes
receivable from officer for
exercise of options to
purchase common stock
    
    
    
    
    
    
    
    
    
    
    (102,055
    )
    
    
    Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in unrealized gain on
securities
available-for-sale, net of
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive earningsCommon stock repurchased
    
    
    (457,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,909,670
    )Balance, December 30, 2001
    
    
    5,088,278
    
    
    
    1,000
    
    
    
    (1,349,805
    )
    
    
    23,519,506Exercise of stock options, net
    
    
    55,500
    
    
    
    
    
    
    
    
    
    
    
    208,125Payment received on notes
receivable from officer
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    Interest accreted on notes
receivable from officer for
exercise of options to
purchase common stock
    
    
    
    
    
    
    
    
    
    
    (40,611
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in unrealized gain on
securities
available-for-sale, net of
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive
lossCommon stock repurchased
    
    
    (25,000
    )
    
    
    
    
    
    
    
    
    
    
    (148,010
    )Balance, December 29, 2002
    
    
    5,118,778
    
    
    
    1,000
    
    
    
    (1,140,416
    )
    
    
    23,579,621Payment received on notes
receivable from officer
    
    
    
    
    
    
    
    
    
    
    1,281,249
    
    
    
    Interest accreted on notes
receivable from officer for
exercise of options to
purchase
common stock
    
    
    
    
    
    
    
    
    
    
    (140,833
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock repurchased
    
    
    (125,500
    )
    
    
    
    
    
    
    
    
    
    
    (451,800
    )Balance, December 28, 2003
    
    
    4,993,278
    
    
    $
    1,000
    
    
    $
    
    
    
    $
    23,127,821
 F-6




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Consolidated Statements of Shareholders Equity (continued) Years ended December 28, 2003, December 29, 2002, and December 30, 2001 AccumulatedOtherRetained
    
    ComprehensiveEarnings
    
    Income
    
    TotalBalance, December 31, 2000
    
    $
    66,089,984
    
    
    $
    53,231
    
    
    $
    90,321,640Exercise of stock options, net
    
    
    
    
    
    
    
    
    
    
    4,001Interest accreted on notes
receivable from officer for
exercise of options to
purchase common stock
    
    
    
    
    
    
    
    
    
    
    (102,055
    )Net earnings
    
    
    911,545
    
    
    
    
    
    
    
    911,545Change in unrealized gain on
securities available-for-sale,
net of income taxes
    
    
    
    
    
    
    47,076
    
    
    
    47,076Comprehensive earnings
    
    
    
    
    
    
    
    
    
    
    958,621Common stock repurchased
    
    
    
    
    
    
    
    
    
    
    (1,909,670
    )Balance, December 30, 2001
    
    
    67,001,529
    
    
    
    100,307
    
    
    
    89,272,537Exercise of stock options, net
    
    
    
    
    
    
    
    
    
    
    208,125Payment received on notes
receivable from officer
    
    
    
    
    
    
    
    
    
    
    250,000Interest accreted on notes
receivable from officer for
exercise of options to
purchase common stock
    
    
    
    
    
    
    
    
    
    
    (40,611
    )Net loss
    
    
    (28,247,564
    )
    
    
    
    
    
    
    (28,247,564
    )Change in unrealized gain on
securities available-for-sale,
net of income taxes
    
    
    
    
    
    
    (100,307
    )
    
    
    (100,307
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (28,347,871
    )Common stock repurchased
    
    
    
    
    
    
    
    
    
    
    (148,010
    )Balance, December 29, 2002
    
    
    38,753,965
    
    
    
    
    
    
    
    61,194,170Payment received on notes
receivable from officer
    
    
    
    
    
    
    
    
    
    
    1,281,249Interest accreted on notes
receivable from officer for
exercise of options to
purchase common stock
    
    
    
    
    
    
    
    
    
    
    (140,833
    )Net earnings
    
    
    299,312
    
    
    
    
    
    
    
    299,312Common stock repurchased
    
    
    
    
    
    
    
    
    
    
    (451,800
    )Balance, December 28, 2003
    
    $
    39,053,277
    
    
    $
    
    
    
    $
    62,182,098
 See accompanying notes. F-7




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ShoLodge, Inc. and Subsidiaries 
 Consolidated Statements of Cash Flows Year endedDecember 28,
    
    December 29,
    
    December 30,2003
    
    2002
    
    2001Cash flows from operating activitiesNet earnings (loss)
    
    $
    299,312
    
    
    $
    (28,247,564
    )
    
    $
    911,545Adjustments to reconcile net (loss) earnings to
net cash (used in) provided by operating
activities:Discontinued operations, net of tax
    
    
    1,511,445
    
    
    
    3,229,166
    
    
    
    (485,447
    )Depreciation and amortization
    
    
    1,740,793
    
    
    
    1,570,360
    
    
    
    1,643,273Write-off of pre-development costs
    
    
    5,993
    
    
    
    1,863,628
    
    
    
    Write-off of construction contracts
receivable
    
    
    61,475
    
    
    
    3,631,267
    
    
    
    Write-off of trade receivables
    
    
    649,543
    
    
    
    1,296,558
    
    
    
    Write-off of goodwill and other intangible
assets
    
    
    
    
    
    
    6,808,635
    
    
    
    Write-down of notes receivable
    
    
    1,014,890
    
    
    
    21,167,013
    
    
    
    Impairment of real estate
    
    
    
    
    
    
    76,903
    
    
    
    Amortization of deferred charges recorded as
interest expense
    
    
    715,347
    
    
    
    567,800
    
    
    
    603,385Accretion of debt recorded as interest
expense
    
    
    656,019
    
    
    
    353,241
    
    
    
    Recognition of previously deferred gains
    
    
    (63,268
    )
    
    
    (230,082
    )
    
    
    (305,391
    )Gain on sale of properties
    
    
    (1,251,371
    )
    
    
    (676,653
    )
    
    
    (3,791,288
    )Gain on sale of available-for-sale securities
    
    
    
    
    
    
    (314,988
    )
    
    
    Gain on early extinguishments of debt
    
    
    (1,344,474
    )
    
    
    (2,592,038
    )
    
    
    (912,719
    )Lease abandonment income
    
    
    (5,329,504
    )
    
    
    
    
    
    
    Deferred income tax expense (benefit)
    
    
    783,485
    
    
    
    (992,275
    )
    
    
    (3,298,148
    )Minority interest in earnings (loss) of
consolidated subsidiaries and partnerships
    
    
    106,206
    
    
    
    (178,984
    )
    
    
    58,255Changes in assets and liabilities:Trade receivables
    
    
    (893,498
    )
    
    
    162,140
    
    
    
    (926,097
    )Construction contracts receivable
    
    
    (762,324
    )
    
    
    248,370
    
    
    
    (1,610,873
    )Construction contracts receivable from
related parties
    
    
    (16,996,892
    )
    
    
    (5,671,892
    )
    
    
    Costs and estimated earnings in
excess of billings on construction
contracts
    
    
    (39,832
    )
    
    
    3,063,747
    
    
    
    (3,020,903
    )Income taxes receivable and payable and
taxes payable other than on income
    
    
    8,174,077
    
    
    
    (10,503,463
    )
    
    
    12,222,557Prepaid expenses
    
    
    4,628
    
    
    
    46,254
    
    
    
    (54,336
    )Other assets
    
    
    17,255
    
    
    
    92,185
    
    
    
    361,395Accounts payable and accrued expenses
    
    
    (1,829,896
    )
    
    
    (3,508,831
    )
    
    
    6,653,310Net cash (used in) provided by operating activities
    
    
    (12,770,591
    )
    
    
    (8,739,503
    )
    
    
    8,048,518
 F-8




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued) Year endedDecember 28,
    
    December 29,
    
    December 30,2003
    
    2002
    
    2001Cash flows from investing activitiesRestricted cash
    
    $
    100,000
    
    
    $
    1,881,747
    
    
    $
    12,624,732Payments received on notes receivable
    
    
    39,529,827
    
    
    
    971,074
    
    
    
    681,433Capital expenditures
    
    
    (807,815
    )
    
    
    (3,946,415
    )
    
    
    (20,931,949
    )Purchase of assets of hotel held for sale
    
    
    (6,981,432
    )
    
    
    
    
    
    
    Purchase of other assets
    
    
    (1,050,000
    )
    
    
    
    
    
    
    Proceeds from sale of properties
    
    
    29,949,612
    
    
    
    6,364,023
    
    
    
    2,907,258Proceeds from sale of available-for-sale
securities
    
    
    
    
    
    
    428,415
    
    
    
    Proceeds from lease abandonment
    
    
    415,668
    
    
    
    
    
    
    
    Acquisitions
    
    
    (20,000
    )
    
    
    (1,839,491
    )
    
    
    Net cash provided by (used in) investing
activities
    
    
    61,135,860
    
    
    
    3,859,353
    
    
    
    (4,718,526
    )Cash flows from financing activitiesPayments received on notes receivable from
officer
    
    
    1,281,249
    
    
    
    250,000
    
    
    
    Deferred loan costs
    
    
    (225,623
    )
    
    
    (415,687
    )
    
    
    (474,068
    )Proceeds from long-term debt
    
    
    6,726,904
    
    
    
    32,093,000
    
    
    
    7,500,000Payments on long-term debt
    
    
    (44,414,205
    )
    
    
    (28,276,497
    )
    
    
    (11,085,783
    )Distributions to minority interests
    
    
    (325,000
    )
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    208,125
    
    
    
    4,001Purchases of treasury stock
    
    
    (451,800
    )
    
    
    (148,010
    )
    
    
    (1,909,670
    )Net cash (used in) provided by financing
activities
    
    
    (37,408,475
    )
    
    
    3,710,931
    
    
    
    (5,965,520
    )Net increase (decrease) in cash and cash
equivalents
    
    
    10,956,794
    
    
    
    (1,169,219
    )
    
    
    (2,635,528
    )Cash and
cash equivalents   beginning of year
    
    
    1,534,942
    
    
    
    2,704,161
    
    
    
    5,339,689Cash and
cash equivalents   end of year
    
    $
    12,491,736
    
    
    $
    1,534,942
    
    
    $
    2,704,161
 See accompanying notes. F-9




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries 
 Notes to Consolidated Financial Statements Years ended December 28, 2003, December 29, 2002 and December 30, 2001 1. Summary of Significant Accounting Policies The business activities of ShoLodge, Inc. and subsidiaries (the Company) are
composed primarily of owning, franchising, operating, and leasing lodging
facilities, providing reservation services to franchisees and other hotel
chains, and commercial construction. Presently, the Company operates three
hotel brands: Shoneys Inns, GuestHouse Inns & Suites, and AmeriSuites. As of
December 28, 2003, the Company derived its hotel revenues from three owned
properties located in three states across the United States. Of these three
properties, one is located in Texas, one in Georgia, and one in Virginia. One
of the properties is a GuestHouse Inn & Suites and the other two are
AmeriSuites hotels. The Consolidated Financial Statementsinclude the accounts of the Company and
its majority-owned subsidiaries and partnerships. All significant intercompany
items and transactions have been eliminated. The Company is the managing
general partner in the partnership entities. The Fiscal Yearof the Company consists of 52/53 weeks ending the last Sunday
of the calendar year. Accounting Estimates.The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. Estimates also affect the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. Risks and Uncertainties.As discussed in Note 10, the Company derived
significant amounts of its construction and development revenues in 2002 and
2003 from related parties. The Companys operations would be significantly
impacted by a decline in services provided to these related parties.
Consequently, any such decline could have a detrimental effect on the financial
position and results of operations of the Company. Cash and Cash Equivalentsinclude highly liquid investments with original
maturities of three months or less. F-10




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements Accounts Receivable from Construction Contractsincludes billed amounts earned
on construction contracts open at the date of the balance sheet. Costs and
estimated earnings in excess of billings on construction contracts represent
amounts earned, but not billed to customers at the balance sheet date. Property and Equipmentis recorded at cost and is evaluated for impairment as
described below. Depreciation is computed primarily on the straight-line method
over the estimated useful lives of the related assets, generally forty years
for buildings and improvements and seven years for furniture, fixtures and
equipment. Significant improvements are capitalized while maintenance and
repairs are expensed as incurred. The Company capitalizes direct and indirect
costs of construction and interest during the construction period. Interest
costs capitalized during the years ended December 30, 2001, December 29, 2002
and December 28, 2003 were approximately $858,000, $80,000 and $0,
respectively. Pre-opening costs are expensed as incurred. The Company
recognized no impairment losses in 2001, 2002, nor 2003 on hotels owned and
operated by the Company included in continuing operations. Land Under Development or Held For Saleconsists of land adjacent to hotels
developed by the Company, land adjoining the Companys corporate headquarters
and other commercial tracts which are being developed for sale or are held for
sale. Such amounts are recorded at cost and are evaluated for impairment as
described below. The Company recognized approximately $77,000 of impairment
losses on land under development or held for sale parcels in 2002. There were
no impairment losses on land under development or held for sale in 2001 nor
2003. The Company capitalizes direct costs related to specific future projects
(pre-development costs) when they are deemed probable. Such amounts are
expensed to operations when the related project is no longer considered
probable. The Company expensed approximately $0, $1,864,000, and $6,000 of
pre-development costs in 2001, 2002 and 2003, respectively. Deferred Chargesrepresent loan costs incurred in obtaining financing and are
amortized using the interest method over the respective terms of the related
debt. Accumulated amortization totaled approximately $2,637,000 and $1,405,000
as of December 29, 2002 and December 28, 2003, respectively. Investments.The Companys investment securities were classified as
available-for-sale and were included in other assets in the accompanying
balance sheets. Available-for-sale securities were carried at fair value with
unrealized holding gains and losses, net of tax effects, reported as a separate
component of shareholders equity. The Company disposed of its investment in
these securities in 2002 and, accordingly, recognized a gain F-11




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements of approximately
$315,000 in that year. Goodwillincludes excess of cost over fair value of net assets acquired in the
amount of approximately $766,000 at December 29, 2002 and December 28, 2003. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinationsand SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 was effective July 1, 2001, and SFAS No. 142 was
effective January 1, 2002. Under the new rules in SFAS No. 142, goodwill and
indefinite lived intangible assets are no longer amortized effective January 1,
2002, but are subject to annual impairment tests. Other intangible assets
continue to be amortized over their useful lives. The Company has applied the
new rules on accounting for goodwill and intangible assets beginning in the
first quarter of 2002. Application of the non-amortization provisions of SFAS
No. 142 resulted in an increase in net income of approximately $261,000 ($0.05
per share) per year. A reconciliation of previously reported net income to the
pro forma amounts adjusted for the exclusion of goodwill and indefinite lived
intangible assets amortization, net of income tax effect, follows: Year endedDecember 28,
    
    December 29,
    
    December 30,2003
    
    2002
    
    2001Reported net earnings (loss)
    
    $
    299,312
    
    
    $
    (28,247,564
    )
    
    $
    911,545Add: Goodwill and indefinite lived assets
amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    260,840Pro forma adjusted net earnings (loss)
    
    $
    299,312
    
    
    $
    (28,247,564
    )
    
    $
    1,172,385Pro forma adjusted earnings per share basic
    
    $
    0.06
    
    
    $
    (5.52
    )
    
    $
    0.21Pro forma adjusted earnings per share
diluted
    
    $
    0.06
    
    
    $
    (5.52
    )
    
    $
    0.21
 Trademark, Franchise Costs and Reservation Rightsinclude costs of GuestHouse
International Franchise Systems, Inc., franchise rights acquired on May 3,
2002, for $750,000. These franchise rights are being amortized on a
straight-line basis over a period of three years. As of December 28, 2003, the
franchise rights on GuestHouse were approximately $333,000 net of accumulated
amortization of approximately $417,000. At December 28, 2003, trademark and
franchise costs also include costs in the amount of approximately $120,000
incurred on June 3, 2002 in the acquisition of USInns license rights and
$20,000 incurred on January 22, 2003 in the acquisition of travel portal domain
Itravel.com. The life of these rights are indefinite. All franchise rights
are included in the franchising, reservation, and management segment. Other Assetsinclude cash surrender value of life insurance, non-current
portion of direct F-12




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements financing leases, and base linens stock. Impairment.The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows related to those assets are less than their carrying amounts. The
Company records impairment losses on long-lived assets under development or
held for sale when indicators of impairment are present and the estimated fair
value less costs to sell is less than their carrying amount. Subsequent to the
date that an asset is held for sale, depreciation expense is not recorded. Advertising.The Company charges the costs of advertising to expense as
incurred. Advertising expense was approximately $486,000, $520,000 and
$611,000 for the years ended December 30, 2001, December 29, 2002 and December
28, 2003, respectively. Income Taxes.The Company uses the liability method to account for income
taxes. Hotel Revenuesare recognized as services are rendered. Construction and Development Revenuesfrom fixed-price and cost-plus
construction contracts are recognized based on the percentage of completion
method, measured by the percentage of cost incurred to total estimated cost for
each contract. This method is used because management considers costs incurred
to be the best available measure of progress on these contracts. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions and
estimated profitability (including those arising from contract penalty
provisions) and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
No material amounts were recognized due to revisions in 2001, 2002 or 2003. Claims are amounts in excess of the agreed contract price that a contractor
seeks to collect from customers or others for customer-caused delays, errors in
specifications and designs, contract terminations, change orders in dispute or
unapproved as to both scope and price, or other causes of unanticipated
additional costs. An amount equal to contract costs attributable to claims is
included in revenues when realization is probable and the amount can be
reliably estimated. Those two requirements are satisfied by managements
determination of the existence of all of the following conditions: the contract
or other evidence provides a legal basis for the claim; additional costs are
caused by circumstances that were unforeseen at the contract date and are not
the result of deficiencies in the contractors performance; costs associated
with the claim are identifiable or otherwise determinable and are reasonable in
view of the work performed; F-13




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements and the evidence supporting the claim is
objective and verifiable. If such requirements are met, revenue from a claim
is recorded to the extent that contract costs relating to the claim have been
incurred. Costs attributable to claims are treated as costs of contract
performance as incurred. No material amounts were recognized due to claims in
2001, 2002, or 2003. Franchising, Reservation and Management Revenuesare recognized as earned. Gains from the Sale of Land and Hotel Propertiesis recognized at the time the
sale is consummated, the minimum down payment is received, and there is no
significant continuing involvement. Losses on the sale or transfer of land and
hotel properties are recognized at the time the sale or transfer occurs to the
extent that such losses have not already been recognized through impairment or
otherwise. Earnings Per Common Sharefor all periods has been computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share. Basic earnings per share is computed by dividing earnings by the
weighted average number of common shares outstanding during the year. Diluted
earnings per common
share is computed by dividing earnings by the weighted average number of common
shares outstanding during the year plus incremental shares that would have been
outstanding upon the assumed exercise of dilutive options and the assumed
conversion of dilutive debentures. See Note 5 for a reconciliation of basic and
diluted earnings per share. 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. 123, Accounting
for Stock-Based Compensationand SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure.The following table presents a summary
of the pro forma effects to reported net earnings (loss) as if the Company had
elected to recognize compensation costs based on the fair value of the options
granted as prescribed by SFAS No. 123. F-14




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements Year endedDecember 28,
    
    December 29,
    
    December 30,2003
    
    2002
    
    2001Net earnings (loss)
    
    $
    299,312
    
    
    $
    (28,247,564
    )
    
    $
    911,545Less: total stock-based employee
compensation expense determined under
fair value based method for all awards
granted since January 1, 1995
    
    
    
    
    
    
    (18,732
    )
    
    
    (95,685
    )Pro forma net earnings (loss)
    
    $
    299,312
    
    
    $
    (28,266,296
    )
    
    $
    815,860Pro forma earnings (loss) per share-basic
    
    $
    0.06
    
    
    $
    (5.53
    )
    
    $
    .15Pro forma earnings (loss) per share-diluted
    
    
    0.06
    
    
    
    (5.53
    )
    
    
    .15
 There were no grants of stock-based compensation in 2001, 2002 or 2003. The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options and shares that have no vesting restrictions
and are fully transferable. In addition, valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Companys stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options. Concentrations of Credit Risk.Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
investments, trade receivables, construction contracts receivable, and notes
receivable. The Company places its cash investments with high credit quality
financial institutions which are members of the FDIC thus reducing any
potential risk. Concentrations of credit risk with respect to trade receivables
are limited due to the Companys large number of customers and their dispersion
across many geographic areas. Concentrations of credit risk with respect to
construction contracts receivable and notes receivable are increased due to the
smaller number of contracts and notes and their higher dollar amounts. The
Company performs credit evaluations of its customers and generally does not
require collateral or other security to support customer receivables. As of December 29, 2002, approximately $58,762,000 of notes receivable were
from a group of companies affiliated with one another, which acquired and
operated 16 of the hotels described in Note 13. Although notes receivable
generally consist of first mortgage notes that are cross-collateralized and
cross-defaulted, in the event the fair values of the underlying assets were to
be less than balances of the first mortgage notes, the notes receivable could
be under-collateralized; as of December 29, 2002, these notes receivable
totaling approximately $58,762,000 were written down to approximately
$40,564,000 based upon the estimated fair values of the underlying properties
and the Companys anticipation of taking ownership of the properties by deeds
in lieu of F-15




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements foreclosure due to the notes maturity in July of 2003 and the
owners indicated inability to pay the notes at maturity. During 2003, the
Company took ownership of all but two of the underlying properties by deeds in
lieu of foreclosure and immediately resold them, writing down the carrying
value of the notes by an additional $867,000 since the net
proceeds were insufficient by that amount to pay the then carrying value of the
notes in full. As of December 28, 2003, the two remaining first mortgage notes
were carried at $3,493,000, representing the estimate fair value of the two
underlying hotel properties. Reclassifications.Certain reclassifications have been made in the 2001 and
2002 consolidated financial statements to conform to the classifications used
in 2003. These reclassifications had no impact on net income (loss) as
previously reported. Recently Issued Accounting Pronouncements.In January 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research
Bulletin No. 51(FIN No. 46). FIN No. 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN No. 46 required the Company to apply the provisions of FIN
No. 46 immediately to any special purpose entities and variable interest
entities created after January 31, 2003. Application of the provisions will be
required for all other variable interest entities in financial statements for
periods ending after March 15, 2004. The adoption of FIN No. 46 is not
expected to have a material impact on the Companys financial position or
results of operations. In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument within its scope as a liability
though many of these instruments were previously classified as equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 did not
have a material impact on the Companys financial position or results of
operations. F-16




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ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements 2. Property and Equipment Property and equipment consists of: December 28,
    
    December 29,2003
    
    2002Land and improvements
    
    $
    3,679,677
    
    
    $
    3,690,864Buildings and improvements
    
    
    21,693,326
    
    
    
    22,589,633Furniture, fixtures, equipment and software
    
    
    14,996,301
    
    
    
    14,843,28140,369,304
    
    
    
    41,123,778Less accumulated depreciation and
amortization
    
    
    (6,922,065
    )
    
    
    (6,387,327
    )$
    33,447,239
    
    
    $
    34,736,451
 3. Long-Term Debt Long-term debt consists of: December 28,
    
    December 29,2003
    
    2002Industrial revenue bonds, due in varying
amounts through 2017
    
    $
    
    
    
    $
    2,820,0007.50% Convertible subordinated debentures
    
    
    10,772,000
    
    
    
    16,520,0009.75% Series A senior subordinated notes
    
    
    7,323,260
    
    
    
    23,657,41910.15% Series A-1 senior subordinated notes
    
    
    13,080,000
    
    
    
    9.55% Series B senior subordinated notes
    
    
    7,744,120
    
    
    
    19,064,9429.95% Series B-1 senior subordinated notes
    
    
    8,526,000
    
    
    
    Bank credit facilities
    
    
    
    
    
    
    22,156,276Note payable  bank, bearing interest at
8.19%, due in varying amounts through 2010
    
    
    5,272,905
    
    
    
    7,711,15052,718,285
    
    
    
    91,929,787Less current portion
    
    
    (11,344,902
    )
    
    
    (67,548,511
    )$
    41,373,383
    
    
    $
    24,381,276
 The bank note payable is collateralized by equipment with a net book value of
approximately $7.5 million at December 28, 2003. F-17




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ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements The Companys 7.50% convertible subordinated debentures mature in May 2004 with
interest payable in semi-annual installments. The debentures are convertible
at any time before maturity, unless previously redeemed, into common stock of
the Company at a conversion price of $23.31 per share, subject to adjustment.
The debentures are unsecured and subordinated in right of payment to the prior
payment in full of all existing
and future senior indebtedness, as defined in the debentures. The Company, at
its option, can redeem the bonds beginning in May 1997 at 105.25% of par,
declining .75% each year thereafter to par in May 2004. During November 1996, the Company issued $33,150,000 of 9.75% senior
subordinated notes, Series A, under an aggregate $125,000,000 senior
subordinated indenture agreement. The notes mature in November 2006, with
interest payable quarterly. The notes are unsecured and subordinated in right
of payment to the prior payment in full of all existing and future senior
indebtedness of the Company. Additionally, in September 1997, the Company
issued $35,000,000 of 9.55% senior subordinated notes, Series B, also under the
aggregate $125,000,000 senior subordinated indenture agreement. The notes
mature in September 2007, with interest payable quarterly. The notes are
unsecured and subordinated in right of payment to the prior payment in full of
all other senior indebtedness of the Company and will be senior in right of
payment to, or pari passu with all other subordinated indebtedness of the
Company, including the Series A notes. Both Series A and Series B of the
senior subordinated notes were subject to annual redemptions at the option of
the holder of the notes in the amount of 5% of the original aggregate amount
issued under the indenture, which is $3,407,500 per year beginning December 1,
1999. The note holders exercised this option in each of the years through
2002. Accordingly, the annual redemption amount has been included in current
portion of long-term debt in these financial statements through 2002. In 2003,
the Company completed an Exchange Offer and Consent Solicitation (Exchange
Offer), which contained modifications of the financial covenants, including
the elimination of the annual redemption rights. Additionally, the Exchange
Offer resulted in the Companys exchanging Series A-1 and Series B-1 notes for
a portion of the Series A and Series B notes, respectively. The only
difference between the Series A-1 and Series B-1 notes from the Series A and
Series B notes is that they bear a 40 basis point higher interest rate. 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 F-18




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ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements Company received in connection with the sale of 16 of the
Companys lodging facilities in the third quarter of 1998 (Note 13) and the
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 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 basis 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 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. The Company wrote
off related unamortized deferred financing costs of $472,000 in 2003. 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 since it was determined that it was not needed in the foreseeable
future. In the years ended December 30, 2001, December 29, 2002, and December 28, 2003,
the Company repurchased $3,412,000, $1,590,000, and $12,301,000, respectively,
of the Companys previously issued subordinated debt at a discount from face
value. These repurchases resulted in pretax gains, net of the write-off of
related unamortized deferred financing costs of $913,000, $375,000, and
$1,993,000 in 2001, 2002, and 2003, respectively. Additionally in 2002, the
Company, in a negotiated transaction, exchanged $8,233,000 face value of its
senior subordinated notes previously purchased for $5,269,000, for $7,486,000
of its outstanding 7.50% subordinated debentures, resulting in a net pretax
gain of $2,217,000. The Company paid off the industrial revenue bonds in 2003 prior to their
maturity and wrote off the related unamortized deferred financing costs of
$176,000 in 2003. F-19




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements Maturities of long-term debt are as follows: 2004
    
    $
    11,344,9022005
    
    
    621,6242006
    
    
    21,077,7512007
    
    
    17,001,9732008
    
    
    794,094Thereafter
    
    
    1,877,941$
    52,718,285
 4. Commitments and Contingencies The Company and its subsidiaries lease certain property and equipment under
non-cancelable operating lease agreements. Total rental expense under
operating leases for the years ended December 30, 2001, December 29, 2002 and
December 28, 2003 was approximately $582,000, $584,000 and $518,000,
respectively. Future minimum rental payments are as follows: 2004
    
    $
    350,0002005
    
    
    291,667Thereafter
    
    
    -$
    641,667
 The Company is self-insured for workers compensation benefits up to $500,000
annually in the aggregate and $250,000 per occurrence and has recorded an
accrual for all expected and outstanding claims at December 28, 2003. While
the Companys ultimate liability may exceed or be less than the amount accrued,
the Company believes that it is unlikely that it would experience losses that
would be materially in excess of such estimated amounts. In addition to the
recorded accruals, the Company had outstanding letters of credit in the amount
of $512,000 as of December 29, 2002 and December 28, 2003 to satisfy workers
compensation self-insurance security deposit requirements. The Company is or has been a party to legal proceedings incidental to its
business. In the opinion of management, any ultimate liability with respect to
these actions will not materially affect the consolidated financial position or
results of operations of the Company. The construction of a hotel was completed for a third party during 2001, and a
balance of approximately $2,000,000 remained uncollected as of December 29,
2002. The F-20




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ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements Company had a lien against the property and filed an arbitration
claim against the owner. The Company received an arbitration award of
substantially all of its claim in the fourth quarter of 2002 to be paid within
30 days of the October 30, 2002 award date. The owner
of the hotel failed to pay the award when due, and on January 3, 2003 filed
Chapter 11 bankruptcy. As a result, the Company charged the entire balance off
in the fourth quarter of 2002. The bankruptcy was subsequently deemed by the
court to be in bad faith and was set aside. The Company acquired the first
mortgage on this hotel in 2003 and foreclosed on the mortgage, acquiring the
hotel at a foreclosure sale, with the intent to operate the hotel until a
purchaser was found. A prospective buyer has been located to purchase the
hotel. The Company expects to recover all or a portion of the 2002 write-off
in 2004 when the sale is consummated. Another contract receivable is for approximately $1,000,000, and arbitration
proceedings were initiated on January 15, 2003. The owner of the hotel claims
damages in excess of the amount owed. Consequently, the Company charged the
entire amount off in its fourth quarter of 2002. Any recovery from this
contract will be recorded as earned when received. Approximately $600,000 of
other construction contracts receivable was also charged off as uncollectible
in the fourth quarter of 2002. Charge-offs of construction contracts
receivable then totaled $3.6 million in 2002. 5. Earnings (Loss) Per Share The following table reconciles earnings and weighted average shares used in the
earnings (loss) per share (EPS) calculations for fiscal years 2003, 2002 and
2001. Year endedDecember 28,
    
    December 29,
    
    December 30,2003
    
    2002
    
    2001Numerator:Earnings (loss) from continuing operations
    
    $
    1,810,757
    
    
    $
    (25,018,398
    )
    
    $
    426,098(Loss) earnings from discontinued operations
    
    
    (1,511,445
    )
    
    
    (3,229,166
    )
    
    
    485,447Net earnings (loss)
    
    $
    299,312
    
    
    $
    (28,247,564
    )
    
    $
    911,545Denominator:Denominator for basic earnings (loss) per
share  weighted-average shares
    
    
    5,071,198
    
    
    
    5,113,953
    
    
    
    5,464,533Effect of dilutive securities:Options
    
    
    
    
    
    
    
    
    
    
    65,292Denominator for diluted (loss) earnings per
share  adjusted weighted-average shares
    
    
    5,071,198
    
    
    
    5,113,953
    
    
    
    5,529,825Basic earnings (loss) per share:Earnings (loss) from continuing operations
    
    $
    0.36
    
    
    $
    (4.89
    )
    
    $
    0.08
 F-21




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ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements Year endedDecember 28,
    
    December 29,
    
    December 30,2003
    
    2002
    
    2001(Loss) earnings from discontinued operations
    
    
    (0.30
    )
    
    
    (0.63
    )
    
    
    0.08Net earnings (loss)
    
    $
    0.06
    
    
    $
    (5.52
    )
    
    $
    0.16Diluted earnings (loss) per share:Earnings (loss) from continuing operations
    
    $
    0.36
    
    
    $
    (4.89
    )
    
    $
    0.08(Loss) earnings from discontinued operations
    
    
    (0.30
    )
    
    
    (0.63
    )
    
    
    0.08Net earnings (loss)
    
    $
    0.06
    
    
    $
    (5.52
    )
    
    $
    0.16
 The Companys 7.5% debentures were convertible into 1,098,069, 708,709, and
462,119 shares of common stock at December 30, 2001, December 29, 2002 and
December 28, 2003, respectively, but were not included in the computation of
diluted EPS, as such securities were anti-dilutive. 6. Fair Value of Financial Instruments The carrying value of cash and cash equivalents, accounts receivable, and
borrowings under lines of credit approximates fair values due to the short-term
maturities of these instruments. The carrying value of notes receivable
approximates fair value due to the write-down to net realizable value at
December 29, 2002 (see Note 13), and the annual adjustment to market interest
rates. Notes payable carrying value approximates fair value due to the recent
borrowing. The convertible subordinated debentures and senior subordinated
notes have the following estimated fair values based upon quoted market prices
as of December 28, 2003 and December 29, 2002: 2003
    
    2002Fair Value
    
    Carrying Value
    
    Fair Value
    
    Carrying ValueConvertible subordinated
debentures
    
    $
    10,125,680
    
    
    $
    10,772,000
    
    
    $
    11,440,100
    
    
    $
    16,520,000Senior subordinated
notes
    
    
    35,537,760
    
    
    
    36,673,380
    
    
    
    29,466,450
    
    
    
    42,722,361$
    45,663,440
    
    
    $
    47,445,380
    
    
    $
    40,906,550
    
    
    $
    59,242,361
 7. Stock Option Plan The Companys 1991 Stock Option Plan, as amended, (the Plan), authorizes the
grant to key employees of options to purchase up to an aggregate of 900,000
shares of common stock. The exercise price of options granted under the terms
of the Plan must not be less than 100% of the fair market value of the shares
as of the date of grant, or 110% of the fair market value for incentive stock
options granted to option holders possessing more than 10% of the total
combined voting power of all classes of stock of the Company. F-22




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements Under the Plan,
the options are exercisable at various periods from one to five years after the
date of grant and expire ten years after the date of grant. The Plan has now
expired, and no more options will be granted under this Plan. A summary of the status of the Plan for the years ended December 30, 2001,
December 29, 2002 and December 28, 2003, follows: Shares Subject to OptionAvailable for
    
    
    
    
    
    Weighted AverageGrant
    
    Outstanding
    
    Exercise PriceDecember 31, 2000
    
    
    149,645
    
    
    
    283,034
    
    
    $
    3.78Exercised
    
    
    
    
    
    
    (1,067
    )
    
    
    3.75Plan expired for grants
    
    
    (149,645
    )
    
    
    
    
    
    
    -December 30, 2001
    
    
    
    
    
    
    281,967
    
    
    
    3.78Exercised
    
    
    
    
    
    
    (55,500
    )
    
    
    3.75Canceled
    
    
    
    
    
    
    (5,000
    )
    
    
    5.50December 29, 2002
    
    
    
    
    
    
    221,467
    
    
    
    3.75Exercised
    
    
    
    
    
    
    (13,333
    )
    
    
    3.75Canceled
    
    
    
    
    
    
    (65,634
    )
    
    
    3.75December 28, 2003
    
    
    
    
    
    
    142,500
    
    
    
    3.75
 The 13,333 options exercised in 2003 occurred on December 11, 2003, but the
shares were not issued until January of 2004 when payment was made for the
shares in accordance with the provisions of the Plan; therefore, the increase
in outstanding shares and the resulting increase in shareholders equity did
not occur until the Companys 2004 fiscal year. F-23




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table summarizes information relating to the stock options
outstanding as of December 28, 2003: Options Outstanding
    
    Options ExercisableNumber
    
    Weighted-
    
    
    
    
    
    NumberOutstanding
    
    Average
    
    Weighted-
    
    Exercisable
    
    Weighted-at
    
    Remaining
    
    Average
    
    at
    
    AverageExercise
    
    December 28,
    
    Contractual
    
    Exercise
    
    December 28,
    
    ExercisePrice
    
    2003
    
    Life
    
    Price
    
    2003
    
    Price$
    3.75
    
    
    
    32,500
    
    
    
    1.33
    
    
    $
    3.75
    
    
    
    32,500
    
    
    $
    3.753.75
    
    
    
    50,000
    
    
    
    2.59
    
    
    
    3.75
    
    
    
    50,000
    
    
    
    3.753.75
    
    
    
    60,000
    
    
    
    3.42
    
    
    
    3.75
    
    
    
    60,000
    
    
    
    3.75142,500
    
    
    
    
    
    
    
    
    
    
    
    142,500
 8. Shareholders Equity In 2001 and prior years, the Companys Board of Directors authorized the
repurchase of various amounts of its common stock, so that through December 28,
2003, the total authorized amount of common stock repurchases was $23,000,000.
The cumulative number of shares repurchased as of December 28, 2003, was
3,742,567 shares at a cost of $20,925,184. 9. Income Taxes The provision for income taxes from continuing operations consists of the
following: 2003
    
    2002
    
    2001Current expense (benefit):Federal
    
    $
    (4,033,797
    )
    
    $
    (7,225,546
    )
    
    $
    3,247,760State
    
    
    993,960
    
    
    
    (950,038
    )
    
    
    244,388(3,039,837
    )
    
    
    (8,175,584
    )
    
    
    3,492,148Deferred expense (benefit)
    
    
    783,485
    
    
    
    (992,275
    )
    
    
    (3,298,148
    )$
    (2,256,352
    )
    
    $
    (9,167,859
    )
    
    $
    194,000
 F-24




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements The difference between income taxes using the effective income tax rate and
the statutory federal income tax rate is as follows: 2003
    
    2002
    
    2001Federal income tax based
on the statutory rate
    
    $
    (115,392
    )
    
    $
    (11,684,183
    )
    
    $
    230,640State income taxes, less
federal income tax
benefit
    
    
    1,327,455
    
    
    
    (1,926,826
    )
    
    
    7,829Minority interest
    
    
    36,110
    
    
    
    (60,855
    )
    
    
    (19,807
    )Interest on deferred gain
    
    
    (682,513
    )
    
    
    99,000
    
    
    
    373,560Previously accrued
income taxes
    
    
    (445,787
    )
    
    
    
    
    
    
    (451,465
    )Change in valuation
allowance
    
    
    (3,500,000
    )
    
    
    3,812,000
    
    
    
    Permanent differences &
other
    
    
    1,123,775
    
    
    
    593,005
    
    
    
    53,243$
    (2,256,352
    )
    
    $
    (9,167,859
    )
    
    $
    194,000
 The Company reevaluated its
tax exposure during the quarters ended December 28, 2003 and December 30,
2001 and, as a result of the resolution of certain tax issues, reduced
previously accrued income tax liabilities by $445,787 and $451,465,
respectively. F-25




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements Deferred tax (liabilities) assets are comprised of the following: 2003
    
    2002Deferred tax liabilities:Differences between book and tax
basis of property
    
    $
    (2,447,000
    )
    
    $
    (2,407,000
    )Profits on installment sales
    
    
    (474,000
    )
    
    
    (3,354,000
    )Other
    
    
    (499,000
    )
    
    
    (465,000
    )Total deferred tax liabilities
    
    
    (3,420,000
    )
    
    
    (6,226,000
    )Deferred tax assets:Deferred profit on sales of hotels
    
    
    
    
    
    
    3,703,000Direct financing leases
    
    
    
    
    
    
    88,000Differences between book and tax
losses recognized by minority
interests
    
    
    
    
    
    
    339,000Allowance for doubtful accounts
    
    
    312,000
    
    
    
    149,000Alternative minimum tax credits
    
    
    420,000
    
    
    
    281,000Net operating losses
    
    
    5,188,000
    
    
    
    8,352,000Other
    
    
    114,515
    
    
    
    212,000Total deferred tax assets
    
    
    6,034,515
    
    
    
    13,124,000Valuation allowance
    
    
    (3,398,000
    )
    
    
    (6,898,000
    )Deferred tax assets, net
    
    
    2,636,515
    
    
    
    6,226,000Net deferred tax liability
    
    $
    (783,485
    )
    
    $
    
 During September 2000, the Internal Revenue Service (the Service) issued a
Revenue Agents Report to the Company asserting income tax deficiencies and
additions to tax relating to the tax year ended December 28, 1997. The Company
filed a protest to the Services asserted deficiencies and additions to tax.
The amounts of the income tax deficiencies and additions to tax asserted does
not include interest which accrues from the dates the taxes were due until the
date of the payment. The asserted deficiencies are related solely to the
timing of taxable income between the four years from fiscal 1997 through fiscal
2000, in which year the Company provided taxes thereon. The Service submitted
a proposed agreement on August 6, 2001, and the Company accepted the agreement
on September 20, 2001. On March 22, 2002, the Company received a notice from
the Service of tax due for fiscal 1997 in the amount of $2,493,807 plus
statutory interest of $724,812 (no penalties). Both the income tax due and the
statutory interest F-26




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements were accrued at December 30, 2001 and were paid in 2002. The Company has federal net operating loss carryforwards of approximately
$4,496,000 and $12,831,000 as of December 28, 2003 and December 29, 2002,
respectively. In addition, the Company has state net operating loss
carryforwards of approximately
$99,000,000 and $109,000,000 at December 28, 2003 and December 29, 2002,
respectively. These losses expire from tax years 2004 through 2023. The
Company also has available alternative minimum tax credit carryforwards of
$420,000 that can be used to offset future taxes in years in which the
alternative minimum tax credit does not apply. The credit can be carried
forward indefinitely. The Company has evaluated the need for a valuation allowance on its net
deferred tax assets. Because of the uncertainty of the ultimate
realization of its net state deferred tax assets, the Company has
provided a valuation allowance of $3,398,000. In 2002, the Company had
established a valuation allowance for its entire net deferred tax
asset of $6,898,000. The valuation allowance decreased by $3,500,000
during 2003 and increased by $3,812,000 during 2002. 10. Related Party Transactions On July 5, 2000, the Board of Directors accelerated the vesting of certain
options held by the Companys chief executive officer to purchase 40,000 shares
of common stock. He was expected to become fully vested under the original
terms of the options; the options had no intrinsic value on the date of
acceleration and, therefore, additional compensation expense was not incurred
as a result of the accelerated vesting. Immediately thereafter, the chief
executive officer of the Company exercised vested employee stock options for
408,333 shares of the Companys common stock, at the exercise price of $3.75
per share. He executed non-interest bearing, unsecured, full-recourse
promissory notes totaling $1,531,249 with maturity dates coinciding with the
expiration dates of each option grant, ranging from February 11, 2002, to May
30, 2007. The closing market price of the Companys common stock on July 5,
2000, was $3.31 per share. The Company recorded the notes receivable of
$1,531,249, net of unearned discount of $331,000, assuming a market interest
rate of 8.50%. During 2000, compensation expense was recorded in the amount of
$152,000 (the fair value of shares received less the present value of the notes
receivable using an 8.50% discount rate). The fair value of shares issued of
$1,352,603 has been recorded as paid-in capital, and the notes receivable are
recorded as a deduction from shareholders equity. The Company has accreted
$102,055, $40,611 and $140,833 of discount on these notes as interest income in
2001, 2002, and 2003, respectively. The chief executive officer renewed his
non-interest bearing, unsecured, full-recourse promissory note in the amount of
$937,500 that came due February 11, 2002 with the Company for one year at an
interest rate of prime plus 250 basis points. He paid the note and all accrued
interest in full in December of 2002 and January of 2003 prior to its F-27




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements maturity
date of February 11, 2003. Another of the notes in the amount of $124,999
matured on December 7, 2003 and was paid at that time. The remaining notes
totaling $468,750 were scheduled to mature subsequent to 2003, but the chief
executive officer paid them in full on December 26, 2003. As of December 28,
2003, all of these notes due from the chief executive officer had been paid in
full. During 2002 the Company purchased three vehicles from a corporation owned by
the president and chief executive officer and a director of the Company, for an
aggregate purchase price of approximately $74,000. During 2001 the Company
purchased five vehicles for an aggregate purchase price of $120,000 from the
same corporation. The Companys chief executive officer sold that corporation
in November of 2002. Construction and development revenue for the years ended December 28, 2003 and
December 29, 2002 includes $21,978,398 and $5,687,874, respectively, on
contracts with outside businesses controlled by the Companys president and
chief executive officer. Construction contracts receivable at December 28, 2003
and December 29, 2002, include $22,668,784 and $5,671,892, respectively, due on
these contracts. Of these amounts, $20,730,495 was incurred on one development
in 2003 and $5,506,002 on that development in 2002, of which $3,001,230 was
collected by the Company in March of 2004 and $4,982,000 was collected by the
Company in 2003. 11. Acquisitions On May 3, 2002, the Company acquired all of the common stock of GuestHouse
International Franchise Systems, Inc. (GuestHouse) for $1.6 million of cash and
incurred $100,000 transaction costs. The estimated fair values of assets
acquired were $184,000 for accounts receivable, $750,000 for franchise rights
with an estimated useful life of three years, and $766,000 for goodwill. The
gross carrying amount of franchise rights was $750,000 as of December 28, 2003,
and accumulated amortization was $417,000. Amortization expense for the fiscal
year ended December 28, 2003, was $250,000. Franchise rights will be amortized
in the amounts of $250,000 in 2004 and $83,000 in 2005. All goodwill is in the
franchising, reservation and management segment. The results of operations of
GuestHouse are included in the consolidated statement of earnings from the
acquisition date forward. The only material intangible assets held by the Company are the intangible
assets acquired in the GuestHouse acquisition, as all other material intangible
assets were written off as discussed in Note 1. GuestHouse is the exclusive franchisor of the GuestHouse Inns & Suites hotel
brand, F-28




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements consisting of 73 properties open and operating (including 25 converted
from Shoneys Inns). As a result of the acquisition, the Company will now be
in charge of the operation
and growth of the GuestHouse brand. On May 21, 2002, the Company announced its
plan to convert the name of the Shoneys Inns and Shoneys Inns & Suites hotel
chain to GuestHouse International Inns & Suites as soon as practical. All of
the Company-owned Shoneys Inns have been converted to the GuestHouse brand.
All but 18 franchised Shoneys Inns have been converted to the GuestHouse brand
by the end of 2003. As discussed in Note 12, on July 9, 2000, the Company completed a transaction
with Prime Hospitality Corp. (Prime) in which it sold to Prime all of its
leasehold interests in 24 Sumner Suites hotels. Also as discussed in Note 12,
the Company agreed with Hospitality Properties Trust (HPT), the owner of the
24 Sumner Suites whose leasehold rights were assigned to Prime, to construct
two hotels on sites owned by the Company. One of these construction projects
was completed in October 2001, and the hotel opened on October 3, 2001. The
other project was completed, and the hotel opened on February 7, 2002. The
Company gave HPT the right to exchange one or both of two specific hotels
included in the leasehold group for these two new properties, upon completion
of their construction. As of December 30, 2001, the completed hotel was being
operated by the Company as an AmeriSuites hotel, subject to HPTs exchange
option being exercised and consummated. The exchange subsequently occurred on
March 14, 2002. The other hotel was completed and opened by the Company as an
AmeriSuites hotel on February 7, 2002, and was operated by the Company pending
the exchange, which occurred April 9, 2002. The exchanges were accounted for
as the acquisition of businesses, and the hotels received in the exchange were
recorded at their fair value in the first fiscal quarter of 2002. The fair
value of the property and equipment of the two hotels received totaled $17.7
million and approximated the net book value of the two hotels exchanged;
accordingly, no goodwill or other intangible assets arose from the acquisition.
The results of operations of the two hotels exchanged are included in the
consolidated statement of operations from their opening to the exchange date.
The results of operations of the two hotels received in the exchanges are
included in the consolidated statement of operations from the exchange date
forward. The following pro forma information reflects the operations of GuestHouse and
the two hotels received in the exchange, as if the transactions had occurred as
of the first day of the period reported on (in thousands, except per share
data): F-29




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ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Year EndedDec. 29,
    
    Dec. 30,2002
    
    2001Net operating revenue
    
    $
    20,560
    
    
    $
    38,247Earnings (loss) from continuing operations
    
    
    (25,139
    )
    
    
    (627
    )Net income (loss)
    
    
    (28,264
    )
    
    
    150Earnings (loss) per share:Basic
    
    $
    (5.53
    )
    
    $
    0.03Diluted
    
    
    (5.53
    )
    
    
    0.03
 The pro forma results of operations do not purport to represent what the
Companys results would have been had such transactions, in fact, occurred at
the beginning of the periods presented or to project the Companys results of
operations in any future period. 12. Sale of Leasehold Interests On July 9, 2000, the Company completed a transaction with Prime Hospitality
Corp. (Prime) in which it sold to Prime all of its leasehold interests in 24
Sumner Suites hotels, for a total of $15.6 million. The Company received
$14.0 million in cash, and retired its debt securities held by Prime with a
face value of $2.6 million and a fair value of $1.6 million. As a part of the
transaction, the Company assigned its interest to Prime in two deposits related
to the lease: a $14.0 million guaranty deposit and $25.6 million in lease
security deposits and the related supplies inventory at each hotel. The Company also agreed, on July 9, 2000, with Hospitality Properties
Trust (HPT), the landlord whose consent was required to assign the lease to
Prime, to construct two hotels on sites owned by the Company. One of these
construction projects was completed in October 2001, and the hotel opened on
October 3, 2001. The other project was completed in February 2002 and the hotel
opened on February 7, 2002. These projects were funded by $13.9 million that
was escrowed from the cash proceeds from the sale of the leasehold interests to
Prime. The escrowed funds were owned by the Company and drawn down from the
escrow agent to finish the construction and furnishing of these hotels. The
Company, by an exchange option agreement dated July 9, 2000, also gave HPT the
right to exchange one or both of two specific hotels included in the leasehold
group for these two new hotels, upon completion of their construction. If the
Company had not consented to the property exchange, then HPT could have
required the Company to purchase the two specific hotels. Even though Prime
was not concerned, HPT was concerned about the two specific hotels in the
24-hotel lease being in close F-30




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements proximity to two existing AmeriSuites hotels
owned and operated by Prime. Since the Company was selling its interests in
all of its existing Sumner Suites hotels, it had no need to complete the
development of the two Sumner Suites hotels on the two sites. The exchange
option, therefore, served a business purpose for both HPT and the Company with no
objection from Prime. The exchanges were to be even exchanges with no
additional compensation involved. The sale of the leasehold interests to Prime
was not contingent upon the exchange option agreement between the Company and
HPT. The Company believes that Prime was aware of the existence of the
exchange option agreements at the time of the sale of the leasehold interests,
but Prime did not condition its willingness to complete the transaction on the
exchange option agreements being present. The $13.9 million was escrowed by
the Company to insure that the two new hotels would be completed to HPTs
satisfaction so that its exchange options would be executable. The Company had
already started development and construction of the two new hotels and needed a
source of funds to complete construction. The escrow of the funds to complete
hotels that were already under development was considered a non-event by the
Company, and from the Companys perspective, did not represent a restriction on
the use of its cash, but rather, represented a source of funds to complete
projects that had already been undertaken. The exchange option was between HPT
and the Company. Prime was aware of the exchange option, but had no agreement
with HPT concerning the exchange rights of HPT. HPT elected in the first
quarter of 2002 to exercise its exchange options on both hotels. As discussed
in Note 11, the exchanges of the two hotels occurred on March 14, 2002 and
April 9, 2002. The Company further agreed to lease to Prime three other Sumner Suites hotels,
which the Company owns. The 11-year lease provides for initial minimum annual
rental payments of $2.9 million, increasing to $3.1 million if the lease is
extended, and also provides for percentage rents based on hotel sales, as
defined. The Company has not earned any contingency rental income to date.
Prime has converted all 27 of the Sumner Suites hotels to the AmeriSuites
brand. The Company agreed to not operate any other all-suites hotels in
competition with Prime within a defined geographic radius of each of the hotels
being sold. This restriction will not prevent the Company from developing
hotels for others in the restricted area or operating or franchising any of its
proprietary brands of hotels in the restricted area. 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, and has since operated them as
AmeriSuites hotels. Two of the hotels were classified as held for sale as of
December 28, 2003, and are expected to be sold in the first half of 2004 for a
net selling price of $9,312,000, approximating the net carrying value of these
two hotels. 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 F-31




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ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements $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. In 2000, the Company recognized a gain of $3.6 million, continued to defer
gains of $4.1 million from previous sale/leaseback transactions on the two
hotels subject to possible exchange, and recognized gains related to the early extinguishment of the debt
securities received from Prime of $855,000, all before income tax. In
addition, the Company agreed to construct one 124-room AmeriSuites hotel for
Prime on a site owned by Prime at a construction and development price of
$76,500 per room, less Primes cost of the land. This construction was
completed in 2001. The Company also agreed to provide reservation services to
Prime for all of its existing hotels, for a fee based on a percentage of room
revenue. Reservation service fees are now included in franchising, management
and reservation services revenues. The reservation system technology was
enhanced in order to accommodate Primes requirements, and was ready to add
these additional hotel properties in early 2001. However, Prime failed to
commence use of the Companys reservation services as agreed, and on June 25,
2001, the Company filed an arbitration proceeding against Prime, seeking $20
million in monetary damages. The parties selected an arbitrator, and the
arbitration hearing was held during the week of April 15, 2002. The results of
the arbitration proceeding were released on June 28, 2002. The Arbitrator
ruled that Primes material breach of contract caused the Company to lose $8.9
million in anticipated profit under the terms of the Agreement. The Arbitrator
accordingly awarded the Company its full damages of $8.9 million, to be paid
within 30 days of the award. Prime paid the award by wire transfer on August
1, 2002. The Company recorded the $8.9 million receivable and earnings in its
second fiscal quarter of 2002. 13. Sale of Hotels During 1998, the Company sold 16 of its company-owned Shoneys Inn hotels for
$90 million. The sales price consisted of $22.5 million in cash with the
balance of $67.5 million in the form of interest-bearing promissory notes that
were collateralized by 15 of the Shoneys Inn hotels that were sold. These
notes contain cross-collateralization and cross-default provisions. The notes
were being amortized on a 23-year amortization period at a 6.50% interest rate
and matured on July 30, 2003. Annually, on July 30, the then principal balance
of the notes were being amortized over one less year and at an interest rate
adjusted based upon a formula tied to 5-year U. S. Treasury rates. Profit was
recognized on twelve of the sales under the full accrual method of accounting.
Profit of approximately $12 million on the other four hotels sold was accounted
for under the installment method as the minimum initial cash down payment
specified by SFAS No. 66, Accounting for Sales of Real Estate, was not
satisfied at the purchase date. Of the F-32




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ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements $12 million profit, $77,000 was
recognized in 1998, with the remaining $11.9 million recognized in 1999 as the
required minimum cash down payment for each of the four hotels was received. The common owner of the 15 hotels notified the Company in 2002 that it was
unlikely that it would be able to repay or refinance the 15 first mortgage
notes payable to the Company by their maturity dates. The Company did not
desire to extend the maturity dates and, therefore, anticipated that it would be necessary to resume title to
the properties. The owner of the properties agreed in late December of 2002 to
transfer the hotels back to the Company by deeds in lieu of foreclosure. In
anticipation of this, the Company began in the fourth quarter of 2002 to seek
cash purchasers of the properties in the event the Company re-acquired
ownership, since the Company did not desire to take back ownership and operate
the hotels. The owner of the properties is carried on the Companys payroll
system as a non-officer employee; his services are considered necessary to
assist the Company in its efforts to locate cash purchasers for the properties.
Based upon offers received in 2002, it appeared likely that the Company would
sell the properties at values significantly below the balances of the notes
receivable. Consequently, the balances of the 15 notes receivable were written
down to the estimated net selling prices of the 15 hotels, resulting in a
write-down of $18.1 million in the fourth quarter of 2002. In addition to the
write-down of these 15 notes receivable, notes receivable on three other hotels
were written down $3.1 million, based on the borrowers credit worthiness and
ability to refinance in the open market. Also, unsecured accounts receivable
which related to the 15 properties were deemed to be uncollectible and were
written off in the amount of approximately $1.3 million in the fourth quarter
of 2002. During 2003, the Company negotiated contracts to sell 13 of the 15
hotels, took deeds in lieu of foreclosure on these properties, and sold them at
the negotiated prices. The Company incurred additional losses of $867,000 in
2003 by writing the carrying values of the notes receivable down to the actual
net proceeds from the sales. As of December 28, 2003, there were no contracts
for the sale of the remaining two hotels. The Company anticipates that it will
be able to sell these two hotels in 2004 at prices approximating the current
carrying values of the notes receivable totaling $3,493,000 as of December 28,
2003. 14. Transfer of Hotels The Company transferred five of its company-owned hotels on December 27, 2002
for non-amortizing notes receivable totaling $11.6 million that had a maturity
of six months and accrue interest at the prime rate plus 300 basis points.
Accordingly, the transaction did not qualify as a sale for accounting purposes,
and the properties have continued to be carried on the Companys consolidated
balance sheet as assets of hotels transferred under F-33




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements contractual agreements
(notes receivable). The transaction did, however, qualify as a sale for
federal income tax purposes, allowing the Company to accelerate tax deductions
to carry back a greater net operating loss to 1997, resulting in a larger
refund of federal income taxes in 2003. The buyer, who is also the common
owner of the 15 hotels discussed in Note 13, intended to resell the hotels;
however, if unsuccessful and the hotels ultimately have to be taken back by the
Company, the Company intends to pursue other potential buyers. The notes
receivable totaling $11.6 million represented the estimated fair values of the
five hotels as of December 27, 2002. Three of the properties were resold by
the buyer in 2003 and the net proceeds were used to pay the notes. The
proceeds from the sales approximated the balance of the notes. One of the
remaining two hotels was resold by the buyer in the first quarter of 2004, with
net proceeds to be used to apply to the note. The note was written down by
$528,000 in the fourth quarter of 2003 based upon the net proceeds received
subsequent to December 28, 2003. The proceeds from the sale of the remaining
property are expected to approximate the balance of the note. The net book
value of the assets transferred was $17.0 million at the time of transfer. The
related historical results of operations, the loss of $5.5 million on the
transfer of the five hotels transferred in 2002, and the write-down of $528,000
in 2003, are reported in discontinued operations in the Companys consolidated
statements of operations. Also, in 2003 the Company classified three hotels as
held for sale; the historical results of operations of these hotels are also
included in results of discontinued operations. In addition, the Company sold
eight other hotels to outside parties for which the historical results of
operations and gains or losses on disposals are also included in results of
discontinued operations. F-34




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements 15. Supplemental Cash Flow Information 2003
    
    2002
    
    2001Cash paid during the year for
interest
    
    $
    8,309,353
    
    
    $
    8,704,198
    
    
    $
    8,776,470Cash (received) paid during the
year (from) for income taxes
    
    $
    (9,947,297
    )
    
    $
    120,201
    
    
    $
    (4,253,461
    )Significant non-cash activities:Investing:Proceeds from sale and
transfer of property
arising from notes
receivable
    
    $
    
    
    
    $
    15,389,938
    
    
    $
    6,507,500Financing:Exchange of long-term
debt at a discount
    
    
    
    
    
    
    1,393,420
    
    
    
    $
    
    
    
    $
    16,783,358
    
    
    $
    6,507,500
 16. Operating Segment Information The Companys significant operating segments are hotel operations; franchising,
reservation, and management services; and construction and development. The
hotel operations segment has represented approximately 11%, 19%, and 12% of
total revenues for the years ended December 30, 2001, December 29, 2002 and
December 28, 2003, respectively. The franchising, reservation, and management
segment has represented approximately 11%, 31%, and 21% of total revenues for
the years ended December 30, 2001, December 29, 2002 and December 28, 2003,
respectively. The construction and development segment represented
approximately 78%, 50%, and 67% of total revenues in the year ended December
30, 2001, December 29, 2002 and December 28, 2003, respectively. None of the
Companys segments conduct foreign operations. Operating profit includes the
operating revenues and expenses directly identifiable with the operating
segment. Identifiable assets are those used directly in the operations of each
segment. Construction and development segment revenues earned in 2001 included three
construction contracts with three customers comprising approximately $21.6
million, or 78.6%, of total construction and development revenues. Construction
and development segment revenues earned in 2002 included three construction
contracts with three customers comprising approximately $9.8 million, or 98.4%,
of total construction and development revenues. Construction and development
segment revenues earned in 2003 included four construction contracts with
related parties controlled by the Companys chief executive officer comprising
approximately $22.0 million, or 91.6%, of total F-35




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ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements construction and development
revenues. A summary of the Companys operations by segment follows (in thousands of
dollars): 2003
    
    2002
    
    2001Revenues:Hotel
    
    $
    4,878
    
    
    $
    4,469
    
    
    $
    4,336Franchising, reservation and
management
    
    
    8,374
    
    
    
    7,326
    
    
    
    5,319Construction and development
    
    
    24,261
    
    
    
    12,486
    
    
    
    41,650Elimination of intersegment
franchising and construction
revenue
    
    
    (1,458
    )
    
    
    (4,517
    )
    
    
    (16,156
    )Total revenues
    
    $
    36,055
    
    
    $
    19,764
    
    
    $
    35,149Operating loss:Hotel
    
    $
    561
    
    
    $
    1,671
    
    
    $
    1,808Franchising, reservation and
management
    
    
    (6,807
    )
    
    
    (38,631
    )
    
    
    (5,841
    )Construction and development
    
    
    3,507
    
    
    
    (6,099
    )
    
    
    1,965Total operating loss
    
    $
    (2,739
    )
    
    $
    (43,059
    )
    
    $
    (2,068
    )Total assets:Hotel
    
    $
    45,572
    
    
    $
    89,433
    
    
    $
    101,599Franchising, reservation and
management
    
    
    52,522
    
    
    
    69,679
    
    
    
    95,037Construction and development
    
    
    23,926
    
    
    
    8,167
    
    
    
    9,951Total assets
    
    $
    122,020
    
    
    $
    167,279
    
    
    $
    206,587Capital expenditures:Hotel
    
    $
    58
    
    
    $
    1,002
    
    
    $
    18,211Franchising, reservation and
management
    
    
    750
    
    
    
    1,068
    
    
    
    2,555Construction and development
    
    
    
    
    
    
    1,876
    
    
    
    166Total capital expenditures
    
    $
    808
    
    
    $
    3,946
    
    
    $
    20,932Depreciation and amortization:Hotel
    
    $
    671
    
    
    $
    605
    
    
    $
    509Franchising, reservation and
management
    
    
    1,028
    
    
    
    906
    
    
    
    1,068Construction and development
    
    
    42
    
    
    
    59
    
    
    
    66Total depreciation and amortization
    
    $
    1,741
    
    
    $
    1,570
    
    
    $
    1,643
 F-36




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ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements 17. Defined Contribution Plan In 2000, the Company began sponsoring a 401(k) defined contribution plan for
all employees. Eligible participants may contribute up to 15% of their annual
compensation, subject to maximum amounts established by the United States Internal Revenue
Service (the IRS). The Company makes matching contributions which equal 20%
of the first 6% of annual compensation contributed to the plan by each
employee, subject to maximum amounts established by the IRS. The Companys
contributions under this plan
totaled $51,985 in 2001, $49,133 in 2002, and $44,040 in 2003. 18. Quarterly Financial Information (Unaudited) The following is a summary of the unaudited quarterly financial information for
the years ended December 28, 2003 and December 29, 2002: QuartersFirst
    
    Second
    
    Third
    
    Fourth(in thousands except for per share data)2003Revenues
    
    $
    6,165
    
    
    $
    9,569
    
    
    $
    9,928
    
    
    $
    10,393Operating (loss) earnings
    
    
    (2,239
    )
    
    
    (1,004
    )
    
    
    374
    
    
    
    131Earnings (loss) from continuing operations
    
    
    2,007
    
    
    
    (1,349
    )
    
    
    (93
    )
    
    
    1,245Discontinued operations
    
    
    (1,548
    )
    
    
    542
    
    
    
    (194
    )
    
    
    (312
    )Net income (loss)
    
    
    459
    
    
    
    (807
    )
    
    
    (286
    )
    
    
    933Net earnings (loss) per share:Basic:From continuing operations
    
    
    .39
    
    
    
    (.26
    )
    
    
    (.02
    )
    
    
    .25From discontinued operations
    
    
    (.30
    )
    
    
    .10
    
    
    
    (.04
    )
    
    
    (.06
    )Net income (loss)
    
    
    .09
    
    
    
    (.16
    )
    
    
    (.06
    )
    
    
    .19Diluted:From continuing operations
    
    
    .39
    
    
    
    (.26
    )
    
    
    (.02
    )
    
    
    .25From discontinued operations
    
    
    (.30
    )
    
    
    .10
    
    
    
    (.04
    )
    
    
    (.06
    )Net income (loss)
    
    
    .09
    
    
    
    (.16
    )
    
    
    (.06
    )
    
    
    .192002Revenues
    
    $
    6,090
    
    
    $
    3,200
    
    
    $
    5,441
    
    
    $
    5,033Operating loss
    
    
    (1,194
    )
    
    
    (8,843
    )
    
    
    (1,266
    )
    
    
    (31,757
    )(Loss) earnings from continuing operations
    
    
    (1,127
    )
    
    
    811
    
    
    
    (1,380
    )
    
    
    (23,322
    )Discontinued operations
    
    
    111
    
    
    
    451
    
    
    
    (116
    )
    
    
    (3,675
    )Net (loss) income
    
    
    (1,016
    )
    
    
    1,262
    
    
    
    (1,496
    )
    
    
    (26,997
    )Net (loss) income per share:Basic:From continuing operations
    
    
    (.22
    )
    
    
    .16
    
    
    
    (.27
    )
    
    
    (4.56
    )From discontinued operations
    
    
    .02
    
    
    
    .09
    
    
    
    (.02
    )
    
    
    (.71
    )Net (loss) income
    
    
    (.20
    )
    
    
    .25
    
    
    
    (.29
    )
    
    
    (5.27
    )Diluted:From continuing operations
    
    
    (.22
    )
    
    
    .16
    
    
    
    (.27
    )
    
    
    (4.56
    )From discontinued operations
    
    
    (.02
    )
    
    
    .08
    
    
    
    (.02
    )
    
    
    (.71
    )Net (loss) income
    
    
    (.20
    )
    
    
    .24
    
    
    
    (.29
    )
    
    
    (5.27
    )
 F-37




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ShoLodge, Inc. and
SubsidiariesNotes to Consolidated Financial Statements 19. Discontinued Operations SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
requires that long-lived assets to be disposed of by sale, including those of
discontinued operations, be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Discontinued operations do not include amounts for
operating losses that have not yet been incurred. Under SFAS No. 144, the
reporting of discontinued operations includes all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The Company reports as discontinued operations assets held for
sale (as defined by SFAS 144) and assets sold in the current period. All
results of these discontinued operations are included in a separate component
of income on the consolidated statements of operations under the heading,
operations of hotels disposed of and transferred. The following table summarizes the results of operations for the five
properties transferred, as discussed in Note 14, and eleven properties sold or
classified as held for sale, from the hotel operations segment for the three
years ended December 28, 2003, December 29, 2002, and December 30, 2001
(amounts in thousands): Year endedDecember 28,
    
    December 29,
    
    December 30,2003
    
    2002
    
    2001Revenues:Hotel
    
    $
    8,055
    
    
    $
    12,442
    
    
    $
    11,692Rent
    
    
    490
    
    
    
    1,966
    
    
    
    1,982Other income
    
    
    
    
    
    
    (110
    )
    
    
    109Total revenues
    
    
    8,545
    
    
    
    14,298
    
    
    
    13,783Cost and expenses:Hotel
    
    
    7,128
    
    
    
    11,105
    
    
    
    9,765General and administrative
    
    
    30
    
    
    
    134
    
    
    
    69Depreciation and amortization
    
    
    658
    
    
    
    2,872
    
    
    
    3,017Total expenses
    
    
    7,816
    
    
    
    14,111
    
    
    
    12,851Loss on sale of property
    
    
    
    
    
    
    
    
    
    
    (30
    )Interest expense
    
    
    (36
    )
    
    
    (106
    )
    
    
    (234
    )Interest income
    
    
    
    
    
    
    27
    
    
    
    115Earnings before income taxes
    
    
    693
    
    
    
    108
    
    
    
    783Income taxes
    
    
    (263
    )
    
    
    (41
    )
    
    
    (298
    )Operations of hotels included in
discontinued operations, net of
income tax effect
    
    $
    430
    
    
    $
    67
    
    
    $
    485
 F-38




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ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements The assets and liabilities of the five properties transferred presented in the
accompanying consolidated balance sheets are as follows at December 28, 2003
(two properties) and December 29, 2002 (five properties) (amounts in thousands): December 28,
    
    December 29,2003
    
    2002AssetsOther current assets
    
    $
    16
    
    
    $
    44Property and equipment, net
    
    
    4,307
    
    
    
    11,447Other assets
    
    
    29
    
    
    
    81Total assets
    
    $
    4,352
    
    
    $
    11,572
 The assets and liabilities of the properties held for sale presented in the
accompanying consolidated balance sheets are as follows (amounts in thousands): December 28,
    
    December 29,2003
    
    2002AssetsOther current assets
    
    $
    17
    
    
    $
    Property and equipment, net
    
    
    16,080
    
    
    
    9,444Other assets
    
    
    42
    
    
    
    41Total assets
    
    $
    16,139
    
    
    $
    9,485
 The assets and liabilities of the other properties included in discontinued
operations presented in the accompanying consolidated balance sheets are as
follows (amounts in thousands): December 28,
    
    December 29,2003
    
    2002AssetsOther current assets
    
    $
    
    
    
    $
    53Property and equipment, net
    
    
    
    
    
    
    21,405Other assets
    
    
    
    
    
    
    106Total assets
    
    $
    
    
    
    $
    21,564
 F-39




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries Valuation and Qualifying Accounts Schedule II Years ended December 30, 2001, December 29, 2002, and December 28, 2003 Additions
    
    AdditionsBalance at
    
    Charged to
    
    Charged toBeginning of
    
    Costs and
    
    Other
    
    
    
    
    
    Balance atYear
    
    Expenses
    
    Accounts (2)
    
    Deductions (1)
    
    End of YearYear ended December 30, 2001Allowance for
doubtful accounts
receivable
    
    $
    380,314
    
    
    $
    127,816
    
    
    $
    
    
    
    $
    (323,726
    )
    
    $
    184,404Year ended December 29, 2002Allowance for
doubtful accounts
receivable
    
    $
    184,404
    
    
    $
    631,801
    
    
    $
    290,000
    
    
    $
    (711,725
    )
    
    $
    394,480Year ended December 28, 2003Allowance for
doubtful accounts
receivable
    
    $
    394,480
    
    
    $
    499,878
    
    
    $
    
    
    
    $
    (240,726
    )
    
    $
    653,632
  (1)
    
    Represents write-offs of uncollectible accounts receivable(2)
    
    Allowance of acquired Company S-1