<PAGE>   1
                       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 26, 1999       COMMISSION FILE NUMBER 0-19840

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

                   TENNESSEE                                    62-1015641
         (State or other jurisdiction                        (I.R.S. Employer
       of incorporation or organization)                  Identification Number)

130 MAPLE DRIVE, NORTH, HENDERSONVILLE, TENNESSEE                  37075
   (Address of principal executive offices)                     (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (615) 264-8000

           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
                                (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]

Aggregate market value of the voting stock held by non-affiliates of the
registrant on March 17, 2000, was approximately $10,400,000. The market value
calculation was determined using the last sale price of registrant's common
stock on March 17, 2000, 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 March 17, 2000, were
5,307,578.



<PAGE>   2




                       DOCUMENTS INCORPORATED BY REFERENCE

                             DOCUMENTS FROM WHICH PORTIONS ARE
PART OF FORM 10-K            INCORPORATED BY REFERENCE
------------------------------------------------------
Part III                     Proxy Statement for registrant's annual meeting
                             of shareholders to be held during the second
                             quarter of fiscal 2000.

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, 1997



<PAGE>   3



                                     PART I

ITEM 1. BUSINESS.

GENERAL

        The Company currently develops, owns and operates all-suites hotels
under the Sumner Suites brand name and is an operator and the exclusive
franchisor of Shoney's Inns. The Company's 27 Sumner Suites are mid-scale,
all-suites hotels located in Arizona, Colorado, Florida, Georgia, Indiana,
Kansas, Missouri, New Mexico, North Carolina, Ohio, Tennessee, Texas and
Virginia. The Shoney's Inn lodging system consists of 76 Shoney's Inns
containing approximately 7,300 rooms of which 17 containing approximately 1,900
rooms are owned or managed by the Company. Shoney's Inns are currently located
in 21 states with a concentration in the Southeast.

        Sumner Suites hotels are marketed primarily to business travelers and,
to a lesser extent, leisure travelers by offering an all-suite setting in a
convenient location at an attractive price/value relationship. Sumner Suites
offer mid-scale accommodations at rates between $75 and $100 per night and are
usually located in or near business or leisure travel destinations in mid-sized
and larger metropolitan markets. A typical Sumner Suites contains from 110 to
135 rooms, lounge facilities, meeting rooms, swimming pool and a fitness room,
and offers a deluxe continental breakfast.

        From 1990 until 1995, the Company developed and managed 12 mid-scale,
all-suites hotels under the AmeriSuites brand name before selling its interests
in those hotels in March 1995. The Sumner Suites concept was launched in 1995
with three hotels. In March 2000 the Company entered into an agreement to sell
all of its interests in its Sumner Suites hotels, as described under "Pending
Prime Transaction."

        Shoney's Inns operate in the upper economy limited-service segment and
are designed to appeal to both business and leisure travelers, with rooms
usually priced between $40 and $65 per night. The typical Shoney's Inn includes
60 to 120 rooms and, in most cases, meeting rooms. Although Shoney's Inns do not
offer full food service, most offer continental breakfast and most of the
Shoney's Inns are located adjacent or in close proximity to Shoney's
restaurants. Management believes that its strategy of locating most of its
Shoney's Inns in close proximity to free-standing Shoney's restaurants has given
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.

        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)
increasing REVPAR in Company-owned inns while maintaining the Company's
attractive room price/value relationships and controlling operating costs,(ii)
expanding the Shoney's Inn system through the addition of new franchised units
and (iii) utilizing the Company's experience in developing all-suite hotels to
construct and develop hotels for others.

        Internal Growth. The Company seeks to increase cash flow and earnings
from its existing hotels through increases in REVPAR while controlling operating
costs. The Company seeks to increase REVPAR by increasing average daily room
rates and supporting or increasing occupancy rates through targeted marketing
and advertising strategies, employing promotional activities in local markets
and capitalizing on the Company's proprietary central reservation system. In
addition, the Company is committed to sustaining the quality of its properties
through an ongoing renovation and maintenance program in order to increase
REVPAR. The Company seeks to minimize costs throughout its operations primarily
through the use of an in-house development and construction team and increased
economies of scale in purchasing.



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        Expansion of Shoney's Inn System. In the recent past the Company has
focused on expanding the Shoney's Inn system principally through the addition of
new franchises. Six franchised Shoney's Inns were opened in fiscal 1999, three
hotels left the Shoney's Inn system and currently three franchised Shoney's Inns
are under construction. As of 1999 fiscal year-end, there were 76 Shoney's Inns
(of which 15 are Company owned) with a total of 7,307 rooms. The Company targets
existing Shoney's Inn franchises, other hotel brand developers and contacts
within the industry as potential franchisees for additional Shoney's Inns.

        Development of Additional All-Suite Hotels. The Company has slowed its
aggressive schedule of developing inns for its own account in the recent past.
Currently, no Sumner Suites are under construction, and the Company has entered
into an agreement to sell its Sumner Suite hotels and two development sites that
it owns to Prime Hospitality Corp. and to develop AmeriSuites hotels on the two
sites for Prime. See "Pending Prime Transaction" below. The Company is
developing and constructing all-suite hotels for third parties and expects to
continue to do so in the immediate future.

        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, a continuation of the
development and operation of Sumner Suites, the continued franchising and
operation of Shoney's Inns, a sale of the remaining Shoney's Inns, negotiating
new credit arrangements, an increase in 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.

PENDING PRIME TRANSACTION

        On March 16, 2000 the Company entered into a Sale and Purchase Agreement
with Prime Hospitality Corp. ("Prime") that contemplates a series of
transactions in which the Company will (i) sell to Prime all of the Company's
interest in 20 Sumner Suites hotels currently leased from HPT Suite Properties
Trust and operated by the Company, (ii) sell to HPT Suite Properties Trust,
which would then lease to Prime, all of the Company's interest in four Sumner
Suites hotels currently owned and operated by ShoLodge, (iii) lease directly to
Prime the remaining three Sumner Suites hotels currently owned and operated by
the Company on terms similar to the existing lease agreement between the Company
and HPT Suite Properties Trust and (iv) sell to Prime two undeveloped hotel
sites. In addition, the agreement contemplates that Prime will engage the
Company to construct an AmeriSuites hotel on each of the two undeveloped sites
being purchased from the Company and to provide other services to Prime.

        The Company expects to receive at closing approximately $54 million in
cash and securities consisting of outstanding debt instruments of the Company
currently held by Prime or an affiliate, future minimum annual rental payments
of approximately $3 million, and additional future annual revenues for services
to be provided to Prime amounting to approximately $4 million per year. As a
condition to the transfer of the assets to Prime, the Company will receive a
release of its $14 million in cash currently securing its lease guaranty with
HPT Suite Properties Trust; this is included in the $54 million to be received
at closing.

        The Company will grant Prime the right to continue operating the hotels
as "Sumner Suites" for up to nine months after closing. As part of the
transaction the Company will agree not to operate another all-suites hotel in
competition with Prime within a defined geographic radius of each of the hotels
being sold. The radius is the same that currently exists with respect to the
Sumner Suites currently leased from HPT Suite Properties Trust and three miles
for each of the hotels in Texas. This restriction will not prevent the Company
from developing hotels for others in the restricted area or operating or
franchising any "Shoney's" brand inn in the restricted area.


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        The closing of the pending transaction is subject to a number of
conditions including Prime's satisfaction with its due diligence review of the
hotels and the approval of HPT Suites Properties Trust. It is possible that the
parties will not be able to successfully complete the transaction or that the
terms of the final transaction will vary, perhaps materially, from those
described herein.

SUMNER SUITES CONCEPT

        Sumner Suites are all-suites hotels positioned in the mid-scale segment
to appeal primarily to business travelers and, to a lesser extent, leisure
travelers. The Sumner Suites hotels are generally located in mid-sized to larger
metropolitan markets near business and leisure travel destinations such as
business parks, office buildings, local attractions and restaurants. The current
daily room rates typically range from $75 to $100; however, room rates vary
depending upon a number of factors, including location and competition. For
fiscal 1999, the average daily room rate for the Sumner Suites hotels was
$77.54.

        The Sumner Suites prototype hotel is a five story, interior corridor,
stucco building containing 110 to 135 rooms. The bedroom in each suite is
furnished with either a king size bed or two double beds, a night stand, vanity,
and closet area, and the sitting area contains a sleeper sofa, a desk, chairs
and reading lamps. A kitchenette area includes a sink, refrigerator, microwave
oven and cabinets that contain kitchen and cooking utensils. Additional room
amenities include new 26 inch remote control color televisions with premium
channel selections, in room coffee makers and dual line telephones for computer
connections.

        The lobby area of each Sumner Suites hotel features marble floors and
seating areas with numerous couches, tables and chairs allowing for informal
meeting and lounge space. Adjacent to the seating area is a combination buffet
and beverage service area. Each Sumner Suites is equipped with large meeting
rooms that can be sectioned to meet individual guests' or groups' needs. An
exercise facility and swimming pool are additional features. Guests at the
Sumner Suites are offered a wide range of amenities and services, such as deluxe
continental breakfast, fitness center, free unlimited local telephone calls, on
premises coin operated laundry, same-day laundry and dry cleaning, fax services,
24-hour front desk message service and free parking. Typically, the Sumner
Suites are located near free standing, full service restaurants. The Company
believes that Sumner Suites provides its guests with quality accommodations at
an attractive price/value relationship within the all-suites segment.

SHONEY'S INNS CONCEPT

        Shoney's Inns are limited-service hotels positioned in the upper economy
segment to appeal to both business and leisure travelers and are located in 21
states in markets ranging from small towns to larger metropolitan areas.
Shoney's Inns are generally located in proximity to interstate highways, major
streets and highways providing convenient access to business establishments.
Most of the Shoney's Inns are located adjacent or in close proximity to a
Shoney's restaurant. Management believes that its strategy of locating its
Shoney's Inns in close proximity to free-standing Shoney's restaurants gives it
a competitive advantage over many other limited-service lodging chains. Daily
room rates at Shoney's Inns range from $40 to $65 and vary depending upon a
number of factors, including location, competition and type of room. For fiscal
1999, the average daily room rate for Company-owned Shoney's Inns was $50.13.

        Historically, the typical Shoney's Inn has been a two story, exterior
corridor, brick veneer building with plate glass fronts, containing 100 to 125
rooms. New prototypes for Shoney's Inns include a four story, interior corridor,
brick or stucco building containing 100 to 120 rooms as well as smaller
prototype buildings containing 80 rooms. In some cases franchisees construct
smaller Shoney's Inns. Each room is


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professionally decorated and is generally furnished with two double beds, a
dresser, table and chairs and a color television.

        Amenities featured at most Shoney's Inns include swimming pools, meeting
rooms, facsimile machine service and continental breakfast. The Company believes
that Shoney's Inns provides its guests with quality accommodations at an
attractive price/value relationship within the upper economy segment.

HOTEL CONSTRUCTION AND DEVELOPMENT

        The Company's construction subsidiary has a full time staff who manage,
supervise, control and perform the construction of the hotels being developed by
the Company. Subcontractors are employed by the Company for most of the major
construction components of a new hotel, including plumbing, electrical, and
mechanical subcontracts. The Company intends to continue to build hotels both
for its own account and for others. When building hotels for its own account,
the Company believes that its in-house capabilities provide advantages in
controlling costs, quality, and development schedule as compared to using
independent contractors. The Company believes that its construction experience
and its relationship with many subcontractors will facilitate the effective
development of additional hotels.

        The Company devotes significant resources to the identification and
evaluation of potential sites for hotels. In the past, the Company has generally
targeted mid-sized to larger metropolitan markets for locating Sumner Suites
hotels. 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 Shoney's Inns in proximity to interstate highway access roads and
major streets and highways providing convenient access to local business
establishments and tourist attractions.

        Management believes that the development cost of a new Sumner Suites
hotel is approximately $65,000 to $70,000 per suite, depending on the location
of the hotel, size of the hotel (number of suites), cost of land, local zoning
and permitting costs, construction period and local building costs which are
affected by the cost of building materials and construction labor. Based on the
Company's experience to date, the capital investment (including land and
construction period interest) for a typical 135 suite Sumner Suites is
approximately $9.0 million (approximately $66,000 per suite).

        The construction phase of a hotel generally requires six months after
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.

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.

        Sumner Suites. Marketing of the Sumner Suites brand has primarily
targeted the business traveler through a variety of efforts. Initially,
pre-opening sales calls are made by the general manager and director of sales of
each property in the local market area during the 90 days prior to opening. In
addition, advertisements are placed in the Hotel Travel Index, a comprehensive
listing of hotels worldwide used by travel agents for booking clients into
destination cities. Advertising is also placed in local


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business publications, direct mail to targeted business travel and a
comprehensive on-line directory on the worldwide web at www.sumnersuites.com.
The Sumner Suites toll-free reservation number, 1-800-74-SUITE, is promoted to
travel agents through advertising and direct mailings. The Company believes that
approximately 31% of all Sumner Suites room sales are booked through the
Company's reservation center.

        Shoney's Inns. All Shoney's Inns participate in the "Sho Business"
frequent traveler program, entitling members to receive the lowest available
corporate rate, complimentary coffee and newspaper, free room upgrades, express
check-in and other privileges upon presentation of a membership card.
Approximately 13% of the rooms booked through INNLINK for Shoney's Inns during
fiscal 1999 have been reserved by guests who are members of the Sho Business
program. Historically, the Company has also marketed its hotels directly to
businesses whose employees travel in the southeastern United States.

        Additionally, the Company attempts to take advantage of the Shoney's
brand name recognition in the over-50 age group and in the package tour market
through advertisement in publications targeting such readers and by encouraging
franchisee participation in promotional discounts for frequent customers over-50
and for tour operators. The Company's program for the over-50 age group is tied
to AARP membership and entitles its members to receive special room rate
discounts, complimentary coffee and newspaper and other benefits. The Shoney's
Inn system also advertises in Shoney's restaurants, and individual Shoney's Inns
are encouraged to participate in joint mailings and other promotions with local
Shoney's restaurants.

        The Company annually publishes a Shoney's Inn system directory showing,
for each Inn, its address and telephone number, location as indicated on a
locator map, a brief description of the facilities, the services and amenities
provided and other relevant information. These directories are distributed in
each Shoney's 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 provides a comprehensive on-line directory
on the worldwide web at www.shoneysinns.com.

        Many properties have a full-time director of sales whose
responsibilities include local marketing and direct and group sales. At the
corporate level, a Director of Marketing oversees national marketing plans and
provides marketing support for each corporate and franchised property. The
Director of Marketing also oversees management of the Shoney's Inn national
advertising fund, into which all Shoney's Inns pay 1% of revenue to support
national marketing efforts such as the annual system directory and national
advertising (e.g. USA Today, Reader's Digest, Compass Travel Directory inserts).

        Travel Agents. The Company has a policy of paying travel agents a
commission, standard in the hotel industry, on all revenue booked by them. The
Company, with respect to all Sumner Suites and both owned and franchised
Shoney's Inns, has joined the TACS-Lite Program administered by Citibank.
TACS-Lite (Travel Agent Commission Settlement) is a program where each hotel
property reports to the Company each week by fax (or by electronic transmission
if capable) all of its room sales generated through travel agents. The Company
in turn forwards this information to Citibank which 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 Shoney's Inn or Sumner Suites knowing that their commissions will be paid
by Citibank without the travel agent having to go to the trouble and expense of
billing each separate location.


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LODGING OPERATIONS

        Hotel Management. Overall hotel operations are the responsibility of the
Vice President and Director of Hotel Operations. Shoney's Inns and Sumner Suites
are further managed by regional managers, who directly supervise the general
manager of each property. The general manager of each Shoney's Inns or Sumner
Suites 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, INNLINK, provides important support for the room reservation process for
both Sumner Suites and Shoney's Inns and is marketed to other chains as well.
Other chains that contract with the Company for the service include Country
Hearth Inns, Key West Inns and Wilson Inns & Hotels. 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 1-800-222-2222 for
Shoney's Inns and 1-800-74-SUITE for Sumner Suites. 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.
The Company believes that approximately 31% and 13% of room sales for Sumner
Suites and Shoney's Inns, respectively, are made through INNLINK.

        Quality Control. To ensure quality and consistency, the Company
regularly inspects each of its company owned and/or operated hotels and each
Shoney's Inn in the Shoney's Inn system for compliance with facility and service
standards. Generally, in addition to its ongoing refurbishment activities, the
Company fully renovates each of the Company-owned Shoney's Inns after
approximately seven years of operation and expects a similar renovation schedule
for Sumner Suites.

        Training. The Company utilizes the services of an "opening team" to
assist with hiring and training new staff and opening new Company-owned 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.

FRANCHISE OPERATIONS

        Franchise Sales. The Company markets the Shoney's Inn franchise
principally to existing Shoney's Inn franchisees, other hotel brand developers
and other prospects known through management's contacts in the lodging industry.
The Company employs two full-time licensed franchise salesmen. The Company also
markets franchises through advertisements in trade publications and
participation in trade shows and franchising conventions.

        Management believes that the Company attracts potential new franchisees
by offering a comparable 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.


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        Fees. Under the standard Shoney's Inn 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
20-year license agreement, and the franchisee generally pays a license fee equal
to the greater of $250 per room or $15,000. The application fee is applied
against the license fee.

        Under the standard Shoney's Inn franchise arrangement offered to
prospective franchisees, the franchisee pays monthly royalties of 3.5% of the
licensed hotel's gross sales during the term of the license agreement.
Additionally, a marketing cooperative fee of 1% of gross sales and a fee for
participation in the Shoney's Inn central reservation system of 1% of gross
sales are charged.

        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 Shoney's Inn 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 a Shoney's 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 Shoney's 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 Shoney's Inns 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 Shoney's Inn
franchisees pursuant to contractual arrangements. The Company's fee for these
services is a percentage of the managed hotel's gross revenues. Currently, the
Company manages two hotels under contract arrangement.

LICENSE AGREEMENT WITH SHONEY'S

        Under the License Agreement with Shoney's, Inc., the Company acts as
exclusive franchisor of Shoney's Inns and has certain rights to use and to
license the use of the service marks "Shoney's Inn" and "Shoney's Inn & Suites"
in connection with lodging operations. Under the License Agreement, Shoney's
retains certain rights, including the right to approve the styles, shapes,
colors and forms in which the "Shoney's Inn" and "Shoney's Inn & Suites" marks
are displayed, the nature and extent of on-site food and beverage service and
the terms of franchise agreements (other than the maximum fees and other
financial terms). Further, Shoney's retains the right to terminate the License
Agreement under limited circumstances, including the bankruptcy of the Company,
the failure to comply with the terms of the License Agreement and the failure to
desist from conduct likely to impair Shoney's goodwill and reputation.

        Prior to October 25, 1996, the License Agreement entitled Shoney's to
receive a portion of the franchise fees collected by the Company equal, in
substantially all cases, to 1.5% of 52 Shoney's Inns' gross revenues through
October 1999 and 0.5% of the remaining and all future Shoney's Inns' gross
revenues for the first ten years of their operation. Shoney's right to receive
such fees was terminated on October 25, 1996.


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LODGING INDUSTRY

        Smith Travel Research divides lodging chains into various segments based
on price. Shoney's Inns are included in the economy segment. Sumner Suites are
included in the mid-scale (without food and beverage) segment, although because
the average daily room rate at Sumner Suites exceeds $75.00, the Sumner Suites
could be included in the upscale segment.

        The following tables illustrate certain comparative information
regarding REVPAR and its components for the years indicated:

<TABLE>
<CAPTION>
                                                                        AVERAGE                    AVERAGE DAILY
                                          REVPAR                    OCCUPANCY RATE                 ROOM RATE (1)
                                          ------                    --------------                 -------------
                                 1997      1998      1999       1997      1998     1999      1997      1998      1999
                                 ----      ----      ----       ----      ----     ----      ----      ----      ----
<S>                             <C>       <C>       <C>         <C>       <C>      <C>      <C>       <C>       <C>
Industry-wide                   $48.68    $50.32    $51.42      64.6%     64.0%    63.3%    $75.30    $78.62    $81.27
Economy segment                  25.17     31.25     28.77      58.1      58.6     58.1      51.34     53.33     49.52
Mid-scale (w/o food and
  beverage) segment              39.77     41.09     41.81      67.5      66.6     65.1      58.94     61.69     64.22
Upscale segment                  63.97     61.65     66.38      71.9      67.4     69.6      88.94     91.47     95.37
All Shoney's Inns                28.00     27.96     27.23      59.2      57.3     54.1      47.30     48.80     50.36
Company-owned Shoney's
  Inns                           30.83     29.98     24.24      59.2      57.7     48.3      52.07     51.95     50.13
All Sumner Suites                41.66     42.89     43.63      57.9      55.4     56.3      71.94     77.43     77.54
</TABLE>

(1) Room revenues divided by the number of rented rooms.

Source:     Smith Travel Research, Standard Historical Trend Report for years
            ended 1997, 1998 and 1999, for industry wide, economy, mid-scale
            (w/o food and beverage) and upscale lodging chains, and the
            Company's internal data for all Shoney's Inns and Sumner Suites
            statistics.

COMPETITION

      The lodging industry is highly competitive. In franchising the Shoney's
Inn system 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 Shoney's Inns includes lodging chains
such as Holiday Inn Express, La Quinta, Comfort Inns, Drury Inns, Fairfield Inns
and Travelodges. The Company's Sumner Suites hotels experience competition from
chains such as Embassy Suites, Hampton Inns, Residence Inn, Courtyard by
Marriott, Quality Suites, AmeriSuites, Comfort Suites, and Springhill Suites.
Each of the Company's hotels is located in a developed area that includes
competing lodging facilities, and the Company expects that most of its 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


                                      - 8 -


<PAGE>   11



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 (the "ADA") prohibits discrimination
on the basis of disability in public accommodations and employment. The ADA
became effective as to public accommodations in January 1992 and as to
employment in July 1992. 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 accommodations for the
disabled. The Company intends to comply with future regulations relating to
accommodating the needs of the disabled, and the Company does not currently
anticipate that such compliance will require the Company to expend substantial
funds.

SERVICE MARKS

      The Company has the right to use the "Shoney's Inn" and "Shoney's Inn &
Suites" service marks in its lodging operations under its License Agreement with
Shoney's (See "License Agreement with Shoney's" above). The "Shoney's Inn" and
"Shoney's Inn & Suites" marks may not be used in certain limited areas in
southern and western Virginia and in northeastern Tennessee; however, the
Company does not believe that these limitations are material to its present
business or its expansion strategy. The Company believes that its ability to use
the Shoney's marks 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 "Sumner Suites" 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. Generally, 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 26, 1999 the Company had approximately 1,500 employees,
including approximately 115 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.


                                      - 9 -


<PAGE>   12



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 food services. Management believes that its corporate
headquarters building contains sufficient space to accommodate the Company's
currently anticipated needs.

      Thirteen of the fifteen Company-owned Shoney's Inns and nine of the 24
Company-owned or operated Sumner Suites are located on sites owned by the
Company either directly or through subsidiaries. The remaining hotels are
located on sites that are leased pursuant to long-term ground leases or through
sale-leaseback arrangements with a real estate investment trust 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 material legal action
pending or threatened against it, except for the following:

      Tri-State Inns, Inc. and Motels of America, Inc. v. ShoLodge Franchise
Systems, Inc., Superior Court of Liberty County, Georgia, Civil Action File No.
97-V-00591. In this action, Tri-State Inns, Inc., the franchisee of the Shoney's
Inn located in Hinesville, Georgia, seeks to be discharged, relieved and excused
of any future performance under the License Agreement relating to such Shoney's
Inn, and Motels of America, Inc. seeks to be discharged, relieved and excused of
any further performance under a Guaranty Agreement whereby the obligations of
Tri-State Inns, Inc. under such License Agreement were guaranteed by Motels of
America, Inc., or in the alternative compensatory damages, based on theories of
alleged breach of contractual obligations and implied warranties of good faith
and fair dealing, alleged fraudulent inducement based on alleged
misrepresentations and alleged failure to make material disclosures of fact,
alleged promissory estoppel and alleged breach of fiduciary duty. In addition,
the plaintiffs seek a declaratory judgment concerning the provision of the
License Agreement which specifies the damages due to the Company upon
termination of the License Agreement. The Company removed this action to the
U.S. District Court for the Southern District of Georgia, and the case has since
been transferred to the U.S. District Court for the Middle District of Tennessee
and redocketed as Case No. 3-98-0028. Subsequent to the removal, the plaintiffs
amended their complaint to assert the same allegations with regard to
plaintiffs' thirteen (13) other license agreements with the Company. On March
18, 1998, the plaintiffs filed a motion for summary judgment seeking to
invalidate the non-competition and stipulated damages provisions set forth in
the license agreements. On August 6, 1998, the court denied the plaintiffs'
motion. The case was set for trial on September 7, 1999. Prior to trial,
however, the parties reached a settlement of all claims pursuant to which the
plaintiffs agreed to pay the Company a total of $1,175,000 in exchange for the
parties' execution of mutual releases and a dismissal of all claims raised in
the action. The case has now been dismissed with prejudice.

      Paul Senior, on behalf of himself and all others similarly situated, v.
ShoLodge, Inc., Leon Moore, Michael A. Corbett and Bob Marlowe, Chancery Court
for Sumner County, Tennessee, No. 98C-136. In this action, filed on April 29,
1998, the plaintiff, Paul Senior, a shareholder of the Company, claims that the
Company and three of its senior officers, Leon Moore, Michael A. Corbett and Bob
Marlowe, violated the Tennessee Securities Act of 1980 by intentionally or
recklessly disseminating materially false and misleading information concerning
the financial condition of the Company during the first three quarters of 1997.
The action seeks to certify as a class of plaintiffs all persons who purchased
any stock in the Company from May 2, 1997 through March 9, 1998. The Complaint
seeks an unspecified amount of damages and unspecified injunctive relief. On
June 30, 1998, the Court granted the Company's motion to stay this action
pending


                                     - 10 -


<PAGE>   13



the resolution of a similar federal court action, which has since been
dismissed, on the basis that both actions sought the same relief on behalf of
the same class of plaintiffs. The plaintiff has now voluntarily dismissed the
claims asserted against Michael A. Corbett. The Company filed a motion to
dismiss the complaint, which was denied, but the Court granted the Company leave
to pursue an interlocutory appeal of the Court's denial of the Company's motion
to dismiss. The Company filed an Application for Permission to Appeal with the
Court of Appeals on October 12, 1998, which the Court of Appeals granted. On
January 29, 1999, the Company filed its appellate brief. Oral argument before
the Court of Appeals occurred on May 7, 1999, but the Court of Appeals has yet
to issue a ruling. The case is currently scheduled to be tried on April 24,
2000. The parties have, however, reached a settlement of this action (and the
Gale action discussed below) which, if approved by the Court, would result in
the dismissal of both the Senior and Gale actions with prejudice. Pursuant to
the terms of the settlement, the Company will pay $100,000 and will agree to
redeem up to $675,000 of its debt securities at seventy-five percent (75%) of
par value or the purchase price of the security, whichever is less. The
Company's insurance carrier has also agreed to contribute $1,250,000 toward the
settlement. It is expected that the Court will consider the fairness of the
settlement in May 2000. The settlement, if approved, will have no material
adverse impact on the Company.

      Stanley Gale, on behalf of himself and all others similarly situated, v.
ShoLodge, Inc., Leon Moore and Bob Marlowe, Chancery Court for Sumner County,
Tennessee, No. 98C-208. In this action, filed on July 2, 1998, Stanley Gale, who
claims to have purchased certain senior subordinated notes issued by the Company
in September 1997, claims that the Company and two of its senior officers, Leon
Moore and Bob Marlowe, violated the Tennessee Securities Act of 1980 by
intentionally or recklessly disseminating materially false and misleading
information concerning the financial condition of the Company during the first
three quarters of 1997. The action seeks to certify as a class of plaintiffs all
persons who purchased the Company's debt securities from May 7, 1997 to March 8,
1998. The Complaint seeks an unspecified amount of damages and unspecified
injunctive relief. The Company moved to dismiss this action for failure to state
a claim, which motion was heard by the Court on September 11, 1998. The Court
denied the motion to dismiss, and the case has now been set for trial on April
24, 2000. As discussed supra in the Senior action, the parties have reached a
settlement of this case which, if approved by the Court, would result in the
dismissal of this action with prejudice. It is expected that the Court will
consider the fairness of the settlement in May 2000. The settlement, if
approved, will have no material adverse impact on the Company.

      Michael A. Corbett v. ShoLodge, Inc. and Leon Moore, Chancery Court for
Sumner County, Tennessee, No. 98C-184. In this action, filed on June 12, 1998,
Michael A. Corbett, the former Chief Financial Officer of ShoLodge, claims that
he was wrongfully terminated by the Company and has asserted claims against the
Company and its chief executive officer, Leon Moore, for breach of contract,
fraud, retaliatory discharge and related claims. The plaintiff seeks $3,000,000
in compensatory damages and seeks punitive and treble damages in addition. The
defendants filed an answer to the complaint on July 9, 1998. On December 31,
1998, the Company filed a motion to dismiss this lawsuit on the basis that Mr.
Corbett had intentionally destroyed relevant evidence during the pendency of the
case. The Court heard oral argument on the motion on January 28, 1999, and
granted the motion at the conclusion of the hearing and dismissed the case with
prejudice. On March 8, 1999, Mr. Corbett filed a Motion to Alter or Amend the
Judgment dismissing the case, which the Court denied. The plaintiff has appealed
the dismissal of the case to the Tennessee Court of Appeals. No date for
argument has been set in the Court of Appeals.

      ShoLodge Franchise Systems, Inc. v. The William & Roxann Davis Company,
L.L.C., et al., U.S. District Court for the Middle District of Tennessee, Case
No. 3-99-0967. On October 12, 1999, the Company filed an action against The
William & Roxann Davis Company, L.L.C. and other parties arising out of a breach
of the License Agreement


                                     - 11 -


<PAGE>   14



concerning the Shoney's Inn in Texarkana, Arkansas. On January 11, 2000, the
defendants filed a counterclaim against the Company claiming that the Company
should be precluded from enforcing the License Agreement because of certain
alleged misrepresentations made prior to the execution of the License Agreement,
because of certain alleged breaches of the License Agreement by the Company, and
because of the Company's alleged violation of the Arkansas Franchise Practices
Act. The Court held an initial case management conference in the case on January
19, 2000. The case has not yet been set for trial.

      ShoLodge Franchise Systems, Inc. v. Franklin Hospitality, Ltd., et al.,
U.S. District Court for the Middle District of Tennessee, Case No. 3-99-0787. On
July 8, 1999, the Company instituted a lawsuit against Franklin Hospitality,
Ltd. and others in the Chancery Court for Davidson County, Tennessee, arising
out of the breach of the License Agreement for the Shoney's Inn Hotel in
Franklin, Tennessee. On August 16, 1999, the defendants removed the case to the
U.S. District Court for the Middle District of Tennessee and, on August 18,
1999, filed a counterclaim against the Company. The defendants claim that the
Company provided only partial and stale franchise offering disclosures to the
defendants prior to execution of the License Agreement and thereby violated 16
C.F.R. ss. 436.1. The defendants further claim that the Company misled them by
misrepresenting contributions received from the Company's reservation system.
The defendants still further claim that the Company breached the License
Agreement in a number of respects. The Company intends to defend the case
vigorously and has moved to have the counterclaim asserted against it dismissed
on a number of grounds, but as yet the Court has not yet ruled on the motion.
The case has not yet been scheduled for trial.

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 1999.


                                     - 12 -


<PAGE>   15



                                     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 sales prices for the Company's Common
Stock as reported by NASDAQ for the periods indicated.

<TABLE>
<CAPTION>
    FISCAL 1998                                          HIGH         LOW
    -----------                                          ----         ---
<S>                                                    <C>          <C>
First Quarter                                          $16 1/2      $7 7/8
Second Quarter                                          10 3/8       7 5/8
Third Quarter                                           10 3/8       3 3/8
Fourth Quarter                                           7 1/2       3 3/8

    FISCAL 1999                                          HIGH         LOW
    -----------                                          ----         ---
First Quarter                                            7 1/2       3 1/2
Second Quarter                                           5 13/16     4 5/16
Third Quarter                                            6 1/2       5 1/4
Fourth Quarter                                           6           3 7/8

    FISCAL 2000                                          HIGH         LOW
    -----------                                          ----         ---
First Quarter (through March 17, 2000)                   5 1/16      3 15/32
</TABLE>


      On March 17, 2000, the last reported sale price for the Company's Common
Stock as reported by NASDAQ was $3.75 per share. As of March 17, 2000, there
were approximately 54 holders of record of the Company's Common Stock and
approximately 1,100 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 does not therefore anticipate paying any cash
dividends in the foreseeable future. The Company's primary revolving credit
agreements prohibit the payment of dividends without the lender's consent.

      The Company declared a five-to-four stock split of its Common Stock to be
effected as a 25% stock dividend which was payable on May 14, 1993 to those
shareholders of record on April 30, 1993. The Company declared a four-to-three
stock split of its Common Stock to be effected as a 33 1/3% stock dividend
payable on March 28, 1994 to the shareholders of record on March 14, 1994.

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 26, 1999 have been
derived from the Company's audited Consolidated Financial Statements. The
Consolidated Financial Statements for each of the three fiscal years and the
periods ended December 26, 1999, 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.


                                     - 13 -


<PAGE>   16



                          SHOLODGE, INC. AND SUBSIDIARIES
                              SELECTED FINANCIAL DATA
                (amounts in thousands, except for per share data)

<TABLE>
<CAPTION>
                                                                           FISCAL YEAR ENDED
                                                                           -----------------
                                                     DEC. 31,     DEC. 29,      DEC. 28,      DEC. 27,      DEC. 26,
                                                       1995         1996          1997          1998          1999
                                                       ----         ----          ----          ----          ----
<S>                                                 <C>           <C>           <C>           <C>           <C>
REVENUES:
  HOTEL                                             $  44,144     $  57,528     $  71,945     $  69,240     $  66,188
  CONSTRUCTION AND DEVELOPMENT                         24,041         1,665             0            81        11,234
  FRANCHISING AND MANAGEMENT                            6,217         4,290         3,164         3,119         4,152
  SALE OF HOTELS                                        6,174             0             0             0             0
  PROFITS NOT RECOGNIZED ON INSTALLMENT SALES          (1,956)            0             0             0             0
                                                    ---------     ---------     ---------     ---------     ---------
        TOTAL OPERATING REVENUES                       78,620        63,483        75,109        72,440        81,574
COSTS AND EXPENSES:
  OPERATING EXPENSES:
    HOTEL                                              25,178        30,998        42,988        44,934        46,282
    CONSTRUCTION AND DEVELOPMENT                       10,096         1,200             0            71         9,826
    FRANCHISING AND MANAGEMENT                          2,861         3,255         2,301         2,393         2,420
    COST OF HOTELS SOLD                                 4,218             0             0             0             0
                                                    ---------     ---------     ---------     ---------     ---------
        TOTAL OPERATING EXPENSES                       42,353        35,453        45,289        47,398        58,528
                                                    ---------     ---------     ---------     ---------     ---------
  GENERAL AND ADMINISTRATIVE                            1,929         2,158         3,953         6,358         6,342
  RENT EXPENSE                                            784           861         1,991         9,838        13,530
  DEPRECIATION AND AMORTIZATION                         5,272         7,863        10,376         8,012         7,101
                                                    ---------     ---------     ---------     ---------     ---------
        INCOME FROM OPERATIONS                         28,282        17,148        13,500           834        (3,927)
OTHER INCOME (EXPENSES):
  INTEREST EXPENSE                                     (6,222)       (4,605)      (11,298)      (10,415)      (12,136)
  INTEREST INCOME                                       5,815         1,391         1,762         4,949         6,182
  GAIN ON SALE OF PROPERTY                                212           340         3,819        20,632        15,002
  OTHER INCOME                                            553         1,219           837           441           843
                                                    ---------     ---------     ---------     ---------     ---------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
  INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY
  ITEMS, AND CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING POLICY                                    28,640        15,493         8,620        16,441         5,964
INCOME TAXES                                          (10,529)       (5,598)       (2,259)       (6,581)       (1,909)
MINORITY INTEREST IN EARNINGS OF CONSOLIDATED
  SUBSIDIARIES & PARTNERSHIPS                            (351)         (423)         (173)         (647)       (1,910)
                                                    ---------     ---------     ---------     ---------     ---------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
  EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
  CHANGE IN ACCOUNTING POLICY                          17,760         9,472         6,188         9,213         2,145
DISCONTINUED OPERATIONS:
  INCOME (LOSS) FROM OPERATIONS OF RESTAURANT
    SUBSIDIARY DISPOSED OF, NET OF APPLICABLE
    INCOME TAXES & MINORITY INTEREST                      (75)            0             0             0             0
  GAIN ON DISPOSAL OF DISCONTINUED BUSINESS
    SEGMENT, NET OF INCOME TAX EFFECT                                    25           526             0             0
    EXTRAORDINARY LOSSES, NET OF INCOME TAX
      BENEFIT                                            (708)            0          (186)       (1,067)        2,394
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
  POLICY, NET OF INCOME TAX EFFECT                          0             0        (1,164)            0             0
                                                    ---------     ---------     ---------     ---------     ---------
NET EARNINGS                                        $  16,977     $   9,497     $   5,364     $   8,146     $   4,539
                                                    =========     =========     =========     =========     =========
EARNINGS PER COMMON SHARE
  BASIC:
    EARNINGS FROM CONTINUING OPERATIONS BEFORE
      EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT
      OF CHANGE IN ACCOUNTING POLICY                $    2.16     $    1.15     $    0.75     $    1.12     $    0.33
                                                    =========     =========     =========     =========     =========
    NET EARNINGS                                    $    2.06     $    1.15     $    0.65     $    0.99     $    0.70
                                                    =========     =========     =========     =========     =========
</TABLE>

                                     - 14 -

<PAGE>   17
<TABLE>
<S>                                                 <C>           <C>           <C>           <C>           <C>
  DILUTED:
    EARNINGS FROM CONTINUING OPERATIONS BEFORE
      EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT
      OF CHANGE IN ACCOUNTING POLICY                $    1.87     $    1.12     $    0.74     $    1.07     $    0.32
                                                    =========     =========     =========     =========     =========
    NET EARNINGS                                    $    1.80     $    1.12     $    0.64     $    0.95     $    0.67
                                                    =========     =========     =========     =========     =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
  BASIC                                                 8,227         8,232         8,245         8,191         6,518
                                                    =========     =========     =========     =========     =========
  DILUTED                                              10,842        10,757         8,415         8,611         6,745
                                                    =========     =========     =========     =========     =========
BALANCE SHEET DATA:
  WORKING CAPITAL                                   $   4,786     $ (21,745)    $  54,120     $ (19,109)    $  12,655
  TOTAL ASSETS                                        220,790       263,709       299,877       295,001       270,314
  LONG-TERM DEBT AND CAPITALIZED LEASES                89,343       138,794       154,638       128,946       125,551
  SHAREHOLDERS' EQUITY                                 82,737        89,736        95,352        98,099        90,879
</TABLE>



                                     - 15 -


<PAGE>   18




ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS.

OVERVIEW

      The Company derives revenue primarily from hotel room sales at its Sumner
Suites and Company-owned Shoney's Inn hotels. The Company also receives
management fees for services it performs for two franchised Shoney's Inns. The
Company derives additional revenue from franchise fees it receives as the
exclusive franchisor of Shoney's Inns.

      The Company's hotel operations have been supplemented by contract revenues
from construction and development of hotels for third parties. Revenues from
these activities have varied widely from period to period, depending upon
whether the Company's construction and development activities were primarily
focused on its own facilities or on outside projects. Construction revenues are
recognized on the percentage of completion basis.

      During first quarter of fiscal 1996, the Company sold its 60% ownership in
five restaurants to the 40% owner for a note receivable. The income or loss from
restaurant operations for each of the reported periods is reported as
discontinued operations net of applicable income taxes and minority interest.
The Company initially deferred recognition of the gain from the sale of this
segment until further principal payments on the note were received. In fiscal
1996 $40,000 of this gain was recognized and in fiscal 1997, the remaining
$813,000 was recognized as gain on disposal of discontinued business segment.

      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.

      The Company elected to make a change in accounting for pre-opening costs
effective with the beginning of its 1997 fiscal year to reflect the preferable
method of expensing pre-opening costs as incurred, rather than capitalizing
those expenditures and amortizing them over a three-year period.

PENDING PRIME TRANSACTION

      On March 16, 2000 the Company entered into a Sale and Purchase Agreement
with Prime Hospitality Corp. ("Prime") that contemplates a series of
transactions in which the Company will (i) sell to Prime all of the Company's
interest in 20 Sumner Suites hotels currently leased from HPT Suite Properties
Trust and operated by the Company, (ii) sell to HPT Suite Properties Trust which
will lease to Prime all of the Company's interest in four Sumner Suites hotels
currently owned and operated by ShoLodge, (iii) lease to Prime the remaining
three Sumner Suites hotels currently owned and operated by the Company on terms
similar to the existing lease agreement between the Company and HPT Suite
Properties Trust and (iv) sell to Prime two undeveloped hotel sites. In
addition, the agreement contemplates that Prime will engage the Company to
construct an AmeriSuites hotel on each of the two undeveloped sites being
purchased from the Company and to provide other future services to Prime.

      The Company expects to receive at closing approximately $54 million in
cash and securities consisting of outstanding debt instruments of the Company
currently held by Prime or an affiliate, future minimum annual rental payments
of approximately $3 million, and future additional annual revenues for services
to be provided to Prime in the future amounting to approximately $4 million per
year. As a condition to the transfer of the assets to Prime, the Company will
receive a release of its $14 million


                                     - 16 -


<PAGE>   19



in cash currently securing its lease guaranty with HPT Suite Properties Trust
(this is included in the $54 million cash at closing).

      If the Prime transaction closes as currently negotiated, the Company's
hotel operations will be significantly reduced and the Company's development and
construction activities will increase. The cash proceeds of the transaction will
be used primarily to reduce indebtedness and to fund the Company's working
capital needs.

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.

<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED
                                                           -----------------
                                                   DEC. 28,    DEC. 27,   DEC. 26,
                                                     1997        1998       1999
                                                     ----        ----       ----
<S>                                                <C>         <C>        <C>
Revenues:
  Hotel                                              95.8%       95.6%       81.1%
  Construction and development                        0.0%        0.1%       13.8%
  Franchising and management                          4.2%        4.3%        5.1%
      Total operating revenues                      100.0%      100.0%      100.0%
Costs and Expenses:
  Operating expenses:
    Hotel                                            57.2%       62.0%       56.7%
    Construction and development                      0.0%        0.1%       12.0%
    Franchising and management                        3.1%        3.3%        3.0%
                                                    -----       -----       -----
      Total operating expenses                       60.3%       65.4%       71.7%
                                                    -----       -----       -----
  General and administrative                          5.3%        8.8%        7.8%
  Rent expense                                        2.7%       13.6%       16.6%
  Depreciation and amortization                      13.8%       11.1%        8.7%
                                                    -----       -----       -----
        Income from operations                       18.0%        1.2%      (4.8)%
Other Income (expenses):
  Interest expense                                  (15.0)%     (14.4)%     (14.9)%
  Interest income                                     2.3%        6.8%        7.6%
  Gain on sale of property                            5.1%       28.5%       18.4%
  Other income                                        1.1%        0.6%        1.0%
                                                    -----       -----       -----
Earnings from Continuing Operations Before
  Income Taxes, Minority Interest, Extraordinary
  Items and Cumulative Effect of Change in
  Accounting Policy                                  11.5%       22.7%        7.3%
Income Taxes                                         (3.0)%      (9.1)%      (2.3)%
Minority Interest in Earnings of Consolidated
  Subsidiaries and Partnerships                      (0.2)%      (0.9)%      (2.3)%
                                                    -----       -----       -----
Earnings from Continuing Operations Before
  Extraordinary Items and Cumulative Effect of
  Change in Accounting Policy                         8.2%       12.7%        2.6%
Discontinued Operations:
   Gain on disposal of discontinued business
    segment, net of income tax effect                 0.7%        0.0%        0.0%
Extraordinary Losses, net of income tax benefit      (0.2)%      (1.5)%       2.9%
Cumulative Effect of Change in Accounting
  Policy, net of income tax effect                   (1.5)%       0.0%        0.0%
                                                    -----       -----       -----
  Net earnings                                        7.1%       11.2%        5.6%
                                                    =====       =====       =====
</TABLE>


                                     - 17 -


<PAGE>   20



FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998

      For the fiscal year ended December 26, 1999, total operating revenues
increased 12.6% to $81.6 million from $72.4 million for the fiscal year ended
December 27, 1998.

      Revenues from hotel operations in fiscal 1999 decreased by 4.4% to $66.2
million from $69.2 million for fiscal year 1998. For the 32 hotels opened for
all of both years (same hotels), average daily room rates in 1999 increased 2.0%
to $66.17 from $64.88 in 1998, while average occupancy rates decreased from
56.8% in 1998 to 55.1% in 1999, resulting in a total decrease in same hotel
revenues per available room (RevPAR) of 1.1%, from $36.87 in 1998 to $36.47 in
1999. The remaining (non-same) hotels contributed $15.4 million to hotel
revenues in 1999 compared with $18.0 million in 1998. The $15.4 million revenues
from non-same hotels in 1999 was from ten (10) new hotels opened in 1998 and
1999. The $18.0 million revenues from non-same hotels in 1998 consisted of $2.6
million from six new hotels opened in 1998 and $15.4 million from 16 hotels
which were sold in third quarter 1998.

      The Company owns and operates two hotel brands - Sumner Suites and
Shoney's Inns. The 27 Sumner Suites hotels' RevPAR increased by 1.7% in 1999
over 1998, from $42.89 to $43.63. The 17 Sumner Suites same hotels' RevPAR
increased by 3.4%, from $45.54 in 1998 to $47.10 in 1999. All future
Company-owned hotels currently planned will be of the all-suites type. RevPAR
for all Company-owned Shoney's Inns declined by 19.1% in 1999 from 1998, from
$29.98 to $24.24. For this same period, RevPAR for the 15 Shoney's Inns which
the Company currently owns, declined by 9.9% in 1999 from 1998, from $26.90 to
$24.24. The decreases in the Shoney's Inns RevPAR were due primarily to
increased competition from new hotels.

      Franchising and management revenues in fiscal 1999 increased by 33.1% from
1998, to $4.2 million in 1999 from $3.1 million in 1998. A settlement agreement
entered into between the Company and an ex-franchisee whereby the ex-franchisee
agreed to pay the Company $575,000 in cash and $200,000 each year for the next
three years, resulted in the recognition of $1.2 million in franchising revenues
in 1999. Exclusive of this non-recurring franchise revenue, the remaining
franchising and management revenues declined by $143,000 from 1998 to 1999. This
decrease was due primarily to the cancellation of reservation services by one
hotel chain in the first half of 1999. At the end of fiscal 1999 there were 61
franchised Shoney's Inns in operation compared with 59 at the end of fiscal
1998. As of December 26, 1999, there were three franchised Shoney's Inns under
construction scheduled to open in year 2000.

      Revenues from construction and development activities in 1999 were $11.2
million compared to only $81,000 in fiscal 1998. The 1999 revenues earned were
from three hotel construction contracts being performed for third parties, one
of which was still in progress at year-end. 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.

      Hotel operating expenses for fiscal 1999 increased by 3.0% to $46.3
million from $44.9 million in 1998. The sale of the 16 Shoney's Inns in third
quarter 1998 accounted for a decrease of $8.6 million in hotel operating
expenses from 1998 to 1999. The ten Sumner Suites hotels opened in 1998 and 1999
caused hotel operating expenses to increase by $8.6 million over 1998. Hotel
operating expenses on the 32 same-hotels increased by $1.4 million, or 4.3%, in
1999 over 1998. The operating expenses as a percentage of operating revenues for
this activity increased from 64.9% in 1998 to 69.9% in 1999. Operating expenses
as a percentage of operating revenues on the 32 same hotels increased from 63.7%
to 67.1% from 1998 to 1999. Increases in hotel operating expenses on same hotels
were primarily in the areas of payroll related costs, repairs and maintenance,
regional general and administrative expenses, and security costs. Repairs and
maintenance costs include the provisions to reserves for repairs and
replacements on the leased properties, including the six added in June 1999.
Regional


                                     - 18 -


<PAGE>   21



administrative expenses increased as a result of increasing the number and
quality of regional operations managers and their support staff in order to
achieve more efficiency and consistency in hotel operations.

      Franchising and management operating expenses increased by $27,000, or
1.1%, from 1998 to 1999. Construction and development costs in 1999 were $9.8
million compared to only $71,000 in 1998. The costs incurred in 1999 were
directly related to the revenues earned from the three third party construction
contracts, one of which was still in progress at year end 1999.

      General and administrative expenses declined by $15,000, or 0.2%, from
1998 to 1999. Excluding charge-offs of pre-development costs for sites no longer
deemed probable of development in the amounts of $623,000 in 1999 and $578,000
in 1998, general and administrative expenses declined by $60,000, or 1.0%, from
1998 to 1999.

      Rent expense increased by $3.7 million, or 37.5%, in 1999 from 1998. The
increase was due to the increase in base rent due to additional hotels being
sold and leased back in 1999 over 1998. The 1997 lease agreement was amended in
June 1999 to add six Sumner Suites hotels to the lease effective June 29, 1999.
The base rent on these six hotels from June 29, 1999, through December 26, 1999,
was $3.6 million. Rent expense related to the 15 Company-owned Shoney's Inns
decreased by $134,000, from $845,000 in 1998, to $711,000 in 1999, due primarily
to the sale of the 16 Shoney's Inns in third quarter 1998, where the buyer
assumed the lease obligations on those Inns acquired.

      Depreciation and amortization expenses decreased by $912,000 or 11.4%,
from 1998 to 1999. The sale of the 16 Shoney's Inns in third quarter 1998
reduced depreciation in 1999 by $2.1 million from 1998. However, depreciation
and amortization expense increased in 1999 over 1998 by $1.1 million due to the
ten additional hotels opened in 1998 and 1999, net of the effect of the
cessation of depreciation in June 1999 on the six hotels sold and leased back.

      Interest expense increased by $1.7 million, while interest income
increased by $1.2 million from 1998 to 1999, for an increase of $489,000 in net
interest expense. The increase in interest expense resulted from additional
borrowings incurred in 1998 and 1999 for capital expenditures for ten new
hotels, partially offset by interest expense reductions from the extinguishments
of debt in third quarter 1998 associated with the hotels sold, and the
extinguishments of debt in the second half of 1999 from the repurchase of $15.7
million of the Company's outstanding subordinated debt. The increase in interest
income in 1999 over 1998 was due primarily to interest earned for a full year on
mortgage notes receivable from the sale of the 16 hotels in third quarter 1998,
which exceeded interest earned in 1998 from cash temporarily invested from the
proceeds of the sale-leaseback transaction which occurred in the fourth quarter
of 1997.

      The gain recognized on the sale of property in 1999 was $15.0 million
compared with $20.6 million in 1998. $11.9 million of the $15.0 million
recognized in 1999 was due to the recognition of previously deferred gains
related to four of the 16 hotels sold in 1998, which was being recognized on the
installment method of accounting. The other $3.1 million was from the sale in
1999 of land held for resale. The $20.6 million recognized in 1998 represented
$20.4 million from the sale of the 16 hotels and $194,000 from the sale of land
held for resale.

      Other income increased by $402,000, or 91.0%, in 1999 from 1998. Other
income can vary widely from period to period due to the nature of this income
and its varied sources. Minority interests in earnings of consolidated
subsidiaries and partnerships increased by $1.3 million from 1998 to 1999. The
1999 minority interests included $1.8 million which represented the 40% minority
interest in $4.6 million of the gain on sale of property recognized in 1999
discussed above. This was partially offset by a


                                     - 19 -


<PAGE>   22



decrease in minority interests due to other operating activities in which
minority ownership was involved.

      The extraordinary gain from early extinguishments of debt in 1999 was the
result of the repurchase of $12.6 million of the Company's previously issued
subordinated debt at a discount from face value, net of the write-off of related
unamortized deferred financing costs. The extraordinary loss from early
extinguishments of debt in 1998 was a result of debt paid off in conjunction
with the sale of 16 Shoney's Inns in 1998.

FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997

      For the fiscal year ended December 27, 1998, total operating revenues
decreased 3.6% to $72.4 million from $75.1 million for the fiscal year ended
December 28, 1997.

      Revenues from hotel operations in fiscal 1998 decreased by 3.8% to $69.2
million from $71.9 million for fiscal year 1997. For the 28 hotels opened for
all of both years (same hotels), average daily room rates in 1998 increased 3.7%
to $63.01 from $60.74 in 1997, while average occupancy rates increased to 57.3%
from 56.5%, resulting in a total increase in same hotel revenues per available
room (RevPAR) of 5.1%, from $34.34 in 1997 to $36.10 in 1998. The remaining
(non-same) hotels contributed $25.5 million to hotel revenues in 1998 compared
with $29.9 million in 1997. The $25.5 million revenues from non-same hotels in
1998 consisted of $10.1 million from new hotels and $15.4 million from 17 hotels
which were sold (one in fourth quarter 1997 and 16 in third quarter 1998). The
$29.9 million revenues from non-same hotels in 1997 consisted of $1.9 million
from new hotels and $28.0 million from the 17 hotels sold in 1997 and 1998.

      The Company owns and operates two hotel brands - Shoney's Inns and Sumner
Suites hotels. RevPAR for all Company-owned Shoney's Inns declined by 2.8% in
1998 from 1997, from $30.83 to $29.98; however, for this same period, RevPAR for
the 15 Shoney's Inns which the Company currently owns, declined only slightly,
from $26.94 in 1997 to $26.90 in 1998.

      The 23 Sumner Suites hotels' RevPAR increased in 1998 by 3.1% from 1997,
from $41.66 to $42.96. The 13 Sumner Suites same hotels' RevPAR increased by
8.9% from $42.78 in 1997 to $46.60 in 1998. Effective August 1, 1998, the
company sold 16 of its Company-owned Shoney's Inns, and will consider additional
opportunities to sell its remaining 15 Company-owned Shoney's Inns.

      Franchising and management revenues in fiscal 1998 declined by 1.4% from
1997 to $3.1 million in 1998 compared with $3.2 million in 1997. A decrease in
monthly franchising fees resulted primarily from (1) the loss of 14 Shoney's
Inns from the chain in the first half of 1998, and (2) the cancellation of
reservation services by two hotel chains in the first half of 1997. These
decreases were offset by (1) the addition of new franchisees, primarily the 16
acquired from the Company in the third quarter of 1998, and (2) franchise
termination fees of $257,000 earned in 1998 from the termination of four
franchises compared with no such fees in 1997. Initial franchise fees and
franchise termination fees may vary widely from year to year. At the end of
fiscal 1998 there were 59 franchised Shoney's Inns in operation. Management fee
revenue in fiscal 1998 decreased by 1.5%, from $139,000 in 1997 to $137,000 in
1998, on the two Company-managed Shoney's Inns.

      Revenues from construction and development activities during 1998 were
only $81,000 compared with none in 1997. 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.

      Hotel operating expenses for fiscal 1998 increased by 4.6% to $44.9
million from $43.0 million in 1997. Operating expenses of all Company-owned
Shoney's Inns declined


                                     - 20 -


<PAGE>   23



by $6.0 million; however, revenues from these hotels declined by $12.9 million.
Both declines were due to the sale of the hotels discussed earlier. The gross
operating profit margin on all 32 Shoney's Inns declined from 40.5% in 1997 to
35.3% in 1998. Operating expenses on the 15 Shoney's Inns not sold increased by
1.6% in 1998 over 1997 even though revenues from these hotels declined by 1.5%
from 1997 to 1998. The gross operating profit margin on these Shoney's Inns
currently owned declined from 34.3% in 1997 to 32.2% in 1998. Operating expenses
of the 13 same-hotel Sumner Suites increased by $1.5 million due primarily to
the $1.9 million increase in hotel revenues. The gross profit margin on these
same-hotels declined slightly, from 42.2% in 1997 to 40.9% in 1998. All 23
Sumner Suites hotels reflected an increase in hotel operating expenses of $8.0
million from $16.1 million in 1997 to $24.0 million in 1998, due primarily to
the $10.2 million increase in hotel revenues. The gross profit margin on all
Sumner Suites hotels declined from 39.8% in 1997 to 34.9% in 1998. Hotel
operating expenses and gross profit margins for the Sumner Suites hotels
reflects the pre-opening costs for new hotels. In 1998, six new hotels were
opened and three additional hotels were nearing completion by year-end. Only
four new hotels were opened in 1997. The increased number of new hotels in 1998
as compared with 1997 caused pre-opening expenses to be higher in 1998 than in
1997. Other hotel operating expenses which increased as percentages of hotel
revenues in 1998 over 1997 were payroll related costs, replacement reserve
provisions, real estate taxes, repairs and maintenance, complimentary food and
beverage cost, and travel agent commissions.

      Franchising and management operating expenses in 1998 increased by 4.0% to
$2.4 million from $2.3 million in 1997. The increase was due primarily to
increases in travel expenses, inspections cost and training expenses.

      Construction and development costs on outside contracts was $71,000 in
1998 versus none in 1997. These costs were incurred in connection with the
$81,000 earned in construction and development revenues in 1998.

      General and administrative expense increased 60.9% to $6.4 million in 1998
from $4.0 million in 1997. The increase was due primarily to increased
professional fees, increased land acquisition costs as a result of implementing
Emerging Issues Task Force ("EITF") No. 97-11, increased corporate franchise
taxes, and increased expenses related to the occupancy of the new corporate
headquarters building.

      Rent expense increased by $7.8 million, from $2.0 million in 1997 to $9.8
million in 1998. This increase was due to the sale-leaseback of 14 hotels in
November 1997, for which rent expense in 1998 was $9.0 million compared with
$1.1 million in 1997. This increase was partially offset by reduction in rent
expense due to the sale of certain Shoney's Inns in 1998 which were on leased
land.

      Depreciation and amortization expense decreased by 22.8% to $8.0 million
in 1998 from $10.4 million in 1997. The sale-leaseback of 14 hotels in late 1997
caused depreciation expense to be eliminated on those hotels for 1998;
depreciation expense on those 14 hotels in 1997 was $2.8 million. The sale of
one hotel in December 1997 and 16 hotels in August 1998 reduced depreciation
expense as well; depreciation expense on those 17 hotels declined by $1.3
million, from $3.4 million in 1997 to $2.1 million in 1998. These reductions
were partially offset, however, with increases totaling $1.7 million in
depreciation and amortization on additions to depreciable and amortizable assets
beginning with first quarter 1997. Ten new hotel openings and several
renovations of existing hotels occurred during 1997 and 1998.

      In 1998, interest expense decreased by $833,000 while interest income
increased by $3.2 million, for a total decrease in net interest expense of $4.1
million as compared with 1997. This reduction in net interest expense from 1997
to 1998 was primarily the result of (1) the sale-leaseback of 14 hotels in late
1997, the proceeds of which were used to reduce indebtedness and to invest in
interest earning funds until needed for capital expenditures for new hotels, (2)
the sale of 17 hotels in December


                                     - 21 -


<PAGE>   24



1997 and August 1998, the proceeds of which were used to reduce indebtedness and
to invest in interest-earning funds until needed, and (3) interest earned on the
seller-financed promissory notes resulting from the sales transactions.

      The gain on sale of property in 1998 primarily represents a portion of the
gain on the sale of 16 hotels in third quarter 1998 for $90.0 million,
consisting of $22.5 million in cash with the balance of $67.5 million in the
form of interest-bearing promissory notes. Profit was recognized on 12 of the
sales under the full accrual method of accounting. Profit recognition on the
other 4 hotels sold is being accounted for under the installment method. Of the
approximately $12.0 million profit on these 4 hotels, $77,000 was recognized in
1998, with the balance to be recognized in future quarters on the installment
method of accounting. $194,000 of the 1998 gain on sale of property was from the
sale of properties other than the 16 hotels. The $3.8 million gain on sale of
property in 1997 consisted of $2.2 million from the sale of one hotel and $1.6
million from the sale of land held for resale.

      Other income declined by 47.3% in 1998 from 1997, from $838,000 to
$441,000. This decline was due primarily to the sale of hotels in 1998 which
generated rental income. Minority interests in earnings and losses of
subsidiaries and partnerships increased by $475,000 in 1998 from 1997, due
primarily to minority ownership interest in the gain on sale of property in
third quarter 1998.

      Income tax expense as a percentage of pre-tax earnings from continuing
operations before extraordinary items in 1998 was 41.7% compared with 26.7% in
1997. The unusually high effective rate in 1998 was due primarily to interest
due to the Internal Revenue Service resulting from the deferral of federally
taxable income due to the installment sales accounting resulting from the sale
of 16 hotels in 1998. The unusually low effective income tax rate in 1997 was
due primarily to refunds of prior years' state taxes.

      The gain on disposal of a discontinued business segment in 1997 was the
result of the recognition of previously deferred profit from the sale of the
Company's 60% interest in a restaurant subsidiary to the then 40% owner.

      The extraordinary loss from early extinguishments of debt in 1998 was a
result of debt paid off in conjunction with the sale of 16 hotels previously
discussed. In 1997, the loss was a result of debt paid off in connection with
the sale-leaseback transaction with a real estate investment trust. The
cumulative effect of a change in accounting principle in 1997 represents the
write-off of the unamortized balance of previously capitalized pre-opening costs
as of the beginning of the 1997 fiscal year. Beginning with 1997, these costs
are expenses as incurred.

LIQUIDITY AND CAPITAL RESOURCES

      The Company's cash flows used in operating activities were $20.8 million
in 1999, compared with $2.7 million in 1998 and $4.0 million in 1997. Earnings
from continuing operations before extraordinary items and cumulative effect of
change in accounting policy were $2.1 million in 1999, $9.2 million in 1998, and
$6.2 million in 1997. Depreciation and amortization was $7.1 million, $8.0
million, and $11.0 million in 1999, 1998, and 1997, respectively, the declines
each year being the result of the sale of properties in 1997, 1998, and 1999, in
excess of new properties being opened during these years. The Company recognized
$15.0 million and $20.6 million from gains on sale of property during 1999 and
1998, respectively, of which $11.9 million and $20.4 million during 1999 and
1998, respectively, was from the sale of 16 lodging facilities in 1998, a
portion of which was deferred to 1999 under the installment method of
accounting. The $3.8 million gain on sale of property in 1997 represented $2.2
million from the sale of one lodging facility and $1.6 million from the sale of
land held for resale. The $1.9 million cash provided by minority interests in
earnings of consolidated subsidiaries and partnerships in 1999 included $1.8
million from one

                                     - 22 -


<PAGE>   25



partnership which sold one of the 16 lodging facilities in 1998 upon which the
deferred gain was recognized in 1999 in the amount of $4.6 million. The
construction contracts receivable and estimated earnings in excess of billings
on construction contracts of $11.2 million in 1999, is due to two construction
contracts for third parties, which are not billable until the projects are
completed. A reduction of income taxes receivable of $1.4 million and $1.4
million in 1999 and 1998, respectively, provided cash flow in those years versus
using cash in 1997. Decreases in income and other taxes payable, however, used
cash of $1.7 million, $493,000, and $350,000, in 1999, 1998, and 1997,
respectively. Decreases in accounts payable and accrued expenses used $1.8
million cash in 1999, compared with increases which provided cash in 1998 of
$519,000, and decreases in 1997 which used $1.1 million. An increase in accounts
receivable in 1999 used $1.6 million cash, compared with only $250,000 and
$272,000 in 1998 and 1997, respectively.

      The Company's cash flows provided by investing activities were $55.9
million in 1999 and $58.1 million in 1997, whereas cash flows used by investing
activities were $63.2 million in 1998. The Company collected $12.3 million from
notes receivable in 1999, of which $12.2 million related to two hotel properties
sold in 1997 and 1998. Proceeds from the sale of property and other assets were
$70.9 million, $9.1 million, and $142.0 million in 1999, 1998, and 1997,
respectively. These amounts in 1999 and 1997 include the net proceeds from the
sale/leaseback of 14 hotels in 1997 and six hotels in 1999. The initial
sale/leaseback transaction in 1997 provided net proceeds of approximately $137.0
million, with $28.0 million being held by the acquirer of the properties as
security and guaranty deposits. In 1999, the original lease was amended to
include an additional six hotels sold for $65.0 million and leased back.
Additional security deposits of $7.3 million are being held by the acquirer of
the properties on this second transaction. An additional $4.9 million in 1997
was provided from the sale of one other hotel and land held for resale. In 1998,
the Company sold 16 hotels providing cash of $8.1 million. Various other
properties were sold, providing an additional $1.0 million cash in 1998. In
addition to the sale/leaseback transaction in 1999, several other parcels of
land held for resale were sold for cash. The Company has required capital
principally for the construction and acquisition of new lodging facilities and
the purchase of equipment and leasehold improvements. Capital expenditures for
such purposes were $20.1 million, $72.5 million, and $55.9 million in 1999,
1998, and 1997, respectively.

      Net cash used in financing activities was $34.2 million in 1999, compared
with $9.8 million and $284,000 in 1998 and 1997, respectively. In September of
1997 the Company issued $35.0 million of 9.55% Senior Subordinated Notes, due
2007, Series B under the Company's $125 million shelf registration. Net proceeds
from this issue was used to reduce the outstanding balances under the Company's
revolving credit facilities. A portion of the net proceeds from the
sale/leaseback of 14 hotels in 1997 was also used to pay off the balance of the
revolving credit facilities, a bank line of credit loan, and approximately $10.5
million of furniture, fixture and equipment loans. Proceeds from the financing
of new furniture, fixtures and equipment were approximately $4.0 million in
1997. In 1998, the Company sold 16 hotels, using a portion of the net proceeds
to reduce indebtedness. The transaction also resulted in the write-off of
deferred financing charges related to the debt paid off early, and distributions
of $2.0 million to minority owners of two of the hotels sold. In 1998, the
Company repurchased 784,000 shares of its common stock for $5.4 million, and in
1999, the Company repurchased 2.1 million shares of its common stock for $11.8
million pursuant to a plan to repurchase up to $20.0 million of the Company's
outstanding common stock. 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, and
repurchased $4.0 million of this debt for $2.5 million in 1999. In the third
quarter of 1999 the 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. As of the end of 1999, the Company had repurchased $8.6
million of these debt securities at a cost of $5.8


                                     - 23 -


<PAGE>   26



million. An additional $1.3 million of these debt securities has been
repurchased since 1999 year-end at a cost of $839,000.

      The Company's $25.2 million revolving credit facility with a group of five
banks matured on June 30, 1999. It was repaid in full on June 29, 1999, from a
portion of the $65.0 million gross proceeds from a sale/leaseback transaction
involving six of the Company's Sumner Suites hotels. The Company has established
a new three-year credit facility with a new bank group effective August 27,
1999. The new credit facility is for an initial amount of $30.0 million (a $10.0
million term loan and a $20.0 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. The borrowing base is the lower of (a) 85% of the outstanding principal
amount of the pledged notes, (b) 65% of the appraised market value of the
underlying real property collateral securing the pledged notes, or (c) $30.0
million. The interest rate is at the lender's base rate plus 50 basis points and
the Company is to pay commitment fees on the unused portion of the facility at
 .50% per annum. The Company incurred certain fees and expenses in association
with closing and administering the credit facility. The credit facility also
contains covenants which limit or prohibit the incurring of certain additional
indebtedness in excess of a specified debt to total capital ratio, prohibit
additional liens on the collateral, restrict mergers and the payment of
dividends and restrict the Company's ability to place liens on unencumbered
assets. The credit facility contains financial covenants as to the Company's
minimum net worth. As of December 26, 1999, the Company had $12.0 million in
borrowings outstanding under this credit facility, including the three-year term
loan of $10.0 million.

      The Company also maintains a $1.0 million unsecured line of credit with
another bank, bearing interest at the lender's prime rate, maturing May 31,
2000. As of December 26, 1999, the Company had no borrowings outstanding under
this credit facility.

      The Company opened six new Sumner Suites hotels in 1998 and four in 1999.
As of the end of 1999, no Sumner Suites hotels were under construction. The
Company has acquired four sites for future development, two of which will be
sold to Prime as part of the pending transaction and the other two will likely
be sold by the Company. In 1998 the Company decided to slow its aggressive
development schedule of new Sumner Suites hotels. This decision was based on
current market conditions, rooms supply in certain areas, and capital
availability.

      Under the terms of the trust indenture governing the senior subordinated
notes issued in 1996 and 1997, the Company is obligated to redeem at par up to
5% annually of the notes issued under the indenture beginning in 1999.
Approximately $3.0 million of these notes were redeemed under this provision on
December 1, 1999.

      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, a continuation of the
development and operation of Sumner Suites, the continued franchising and
operation of Shoney's Inns, a sale of the remaining Shoney's Inns, negotiating
new credit arrangements, an increase in 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 collection of notes
receivable, net cash provided by operations, borrowings under existing and new
revolving credit facilities or mortgage debt, and available furniture, fixture
and equipment financing packages will be sufficient to fund its scheduled hotel
development, stock repurchase plan, debt repayments and operations for the next
twelve months. If the pending Prime Transaction is completed, the Company will
have additional cash resources that will likely be used to repay indebtedness
and provide further working capital.


                                     - 24 -


<PAGE>   27



YEAR 2000 ISSUE

      The Company completed all Year 2000 readiness work and experienced no
significant problems.

FORWARD-LOOKING STATEMENT DISCLAIMER

      The statements appearing in this report which are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in the forward-looking
statements, including delays in concluding or the inability to conclude
transactions, the establishment of competing facilities and services,
cancellation of leases or contracts, changes in applicable laws and regulation,
in margins, demand fluctuations, access to debt or equity financing, adverse
uninsured determinations in existing or future litigation or regulatory
proceedings and other risks.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      The Company has not entered into any transactions using derivative
financial instruments and believes that its exposure to market risk associated
with other financial instruments is not material.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

      The Financial Statements required by Item 8 are filed at the end of this
Report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

      On November 24, 1998, the firm of Deloitte & Touche LLP verbally notified
the Company that they were resigning as auditors of the Company and confirmed
such resignation in writing by letter dated November 30, 1998. A copy of that
letter was attached as Exhibit 7.1 to the Company's Form 8-K filed with the
Securities and Exchange Commission on December 2, 1998.

      The reports of Deloitte & Touche LLP on the Company's financial statements
for the past two fiscal years did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles.

Disagreements:

      In connection with the audits of the Company's financial statements for
the fiscal years ended December 28, 1997 and December 29, 1996, and during the
subsequent unaudited interim periods since 1997 Deloitte & Touche LLP cited
three disagreements on matters of accounting principles or practices which if
not resolved to the satisfaction of Deloitte & Touche LLP would have caused
Deloitte & Touche LLP to make reference to the matter in their report. The
disagreements as communicated to the Company's Audit Committee related to the
1997 (i) accounting for profits on certain real estate transactions, (ii)
capitalization of general and administrative costs, and (iii) recording
intercompany revenues for rooms rented to construction workers. The matter of
accounting for profits on certain real estate transactions involved the question
of the timing of earnings recognition and also the allocation of cost basis
among various outparcels of land sold to third parties. The matter of
capitalization

                                     - 25 -


<PAGE>   28



of general and administrative costs concerned the method of allocating certain
indirect costs, such as salaries and related employee benefits, utilities,
telephone expense, printing and supplies, and other overhead expenses, to
internal development costs to be capitalized. The matter of recording
intercompany revenues for rooms rented to construction workers resulted from the
Company's recording room revenues at the hotel properties earned from the
construction company subsidiary of the Company during renovation or construction
of Company-owned hotels. Management recorded adjustments relating to each of
these transactions and also restated its financial statements for each of the
quarters in fiscal 1997, as described in three Form 10-Q/A's filed on March 30,
1998 with the Securities and Exchange Commission; Deloitte & Touche LLP
indicated that the disagreements were satisfactorily resolved. The Company's
Audit Committee discussed each of these disagreements with Deloitte & Touche
LLP. The Company authorized Deloitte & Touche LLP to respond fully to any
successor independent auditing firm regarding each disagreement. Deloitte &
Touche LLP cited no disagreements in this two year period regarding financial
statement disclosure or auditing scope and procedures which if not resolved to
the satisfaction of Deloitte & Touche LLP would have caused Deloitte & Touche
LLP to make reference to the matter in their report. There were no disagreements
on any types of matters described in Regulation S-K Item 304 in 1996 or in the
subsequent unaudited interim periods since 1997.

Reportable Conditions

      In addition, in connection with the 1997 audit there were six "reportable
conditions" as that term is described in Item 304(a)(1)(v)(A) of Regulation S-K;
that is, Deloitte & Touche LLP advised the Company that the internal controls
necessary for the development of reliable financial statements were inadequate.
The 1997 reportable conditions related to the following matters: accounting
structure and internal controls (which matter is considered by Deloitte & Touche
LLP to be a material weakness), accounting for certain real estate transactions,
capitalization of indirect costs associated with internal development and
construction, construction company accounting, capitalization of interest on
land under development, and accounts receivable allowance analysis. There were
four "reportable conditions" in connection with the 1996 audit; also of the type
described in Item 304(a)(1)(v)(A) of Regulation S-K. They related to the
accounting for capitalization of indirect costs associated with internal
development and construction, capitalization of construction period interest,
capitalization of pre-opening costs and accounting structure and the reporting
process. The Company's present accounting systems and internal controls appeared
to Deloitte & Touche LLP to be inadequate to ensure that transactions are
recorded and reported in conformity with generally accepted accounting
principles.

      The Company's Audit Committee discussed each of these "reportable
conditions" with Deloitte & Touche LLP.

      The Company authorized Deloitte & Touche LLP to respond fully to any
successor independent auditing firm regarding each reportable condition.

      The Company requested Deloitte & Touche LLP to furnish a letter addressed
to the Commission stating whether it agreed with the above statements. The
letter from the former accountant dated December 2, 1998 was filed as Exhibit
7.2 to the Company's Report on Form 8-K filed with the Commission on December 2,
1998. A subsequent letter from the former accountant dated December 18, 1998 and
received by the Company on December 22, 1998 was filed as Exhibit 7.2 to the
Company's Report on Form 8-K/A filed with the Commission on December 23, 1998.

Engagement of New Auditors

      On December 7, 1998 the Board of Directors and the Audit Committee of the
Company approved the engagement of Ernst & Young LLP as its independent auditors
for the fiscal year ending December 27, 1998.


                                     - 26 -


<PAGE>   29



      The Company did not consult with Ernst & Young LLP during the fiscal year
ended December 29, 1996, the fiscal year ended December 28, 1997 or during the
subsequent interim periods since 1997 with respect to the application of
accounting principles, the type of audit opinion that might be rendered on the
Company's financial statements or any matter that was the subject of a
disagreement or reportable event with the Company's former auditors.

      The Company requested Deloitte & Touche LLP to furnish a letter stating
whether it agreed with the above statements. A copy of that letter, dated
December 8, 1998 was filed as Exhibit 7.1 to the Company's Report on Form 8-K
filed with the Commission on December 8, 1998.

                                      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" and the information concerning compliance
with Section 16(a) of the Securities Exchange Act of 1934 under the heading
"Delinquent Filings of Ownership Reports" 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 is 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.


                                     - 27 -


<PAGE>   30



                                      PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

<TABLE>
<CAPTION>
                                                                           PAGE
--------------------------------------------------------------------------------
<S>         <C>                                                         <C>
(a)   1.    Financial Statements:

            The following Financial Statements are included herein:

            Independent Auditors' Report:
                  Report of Ernst & Young LLP                                  F-1
                  Report of Deloitte & Touche LLP                              F-2

            Consolidated Balance Sheets at December 27, 1998 and
              December 26, 1999                                          F-3 - F-4

            Consolidated Statements of Earnings for each of the
              three years in the period ended December 26, 1999          F-5 - F-6

            Consolidated Statements of Shareholders' Equity for
              each of the three years in the period ended
              December 26, 1999                                          F-7 - F-8

            Consolidated Statements of Cash Flows for each of the
              three years in the period ended December 26, 1999         F-9 - F-10

            Notes to consolidated financial statements                 F-11 - F-38

      2.    Financial Statement Schedules:
            Independent Auditors' Report:
                  Report of Ernst & Young LLP                                  S-1
                  Report of Deloitte & Touche LLP                              S-2
            Schedule II - Valuation and Qualifying Accounts                    S-3

            All 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 14 are listed below. Management contracts and
            compensatory plans and arrangements required to be filed as exhibits
            to this form are:

            10(14) -- 1991 Stock Option Plan
            10(15) -- First Amendment to 1991 Stock Option Plan
            10(16) -- Second Amendment to 1991 Stock Option Plan
            10(17) -- Key Employee Supplemental Income Plan
</TABLE>



                                     - 28 -


<PAGE>   31


<TABLE>
<CAPTION>
EXHIBIT
NUMBER      EXHIBIT
-------------------
<S>            <C>
3(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, 1991

3(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, 1997

3(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, 1998

3(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, 1991

3(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, 1998

4(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, 1994

4(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, 1996

4(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, 1996

4(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, 1997

         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.
</TABLE>


                                     - 29 -


<PAGE>   32


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                      EXHIBIT
-----------------------------------
<S>            <C>
10(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, 1991

10(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, 1991

10(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, 1991

10(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, 1991

10(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, 1991

10(6)    --    Amended and Restated Limited Partnership Agreement of Shoney's Inns 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, 1991

10(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, 1991

10(8)    --    Second Amended and Restated Limited Partnership Agreement of Shoney's
               Inn 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,
               1991

10(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, 1997

10(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, 1997

10(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, 1997

10(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
</TABLE>

                                       - 30 -


<PAGE>   33




<TABLE>
<S>            <C>
10(13)   --    License Agreement, dated October 25, 1991, by and among the Registrant,
               Shoney's Investments, Inc. and ShoLodge Franchise Systems, Inc.
               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

10(14)   --    Amendment No. 1 to License Agreement, dated September 16, 1992 by and
               among Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and
               the Registrant. Incorporated by reference to the Company's Annual
               Report on Form 10-K, filed with the Commission on March 29, 1993

10(15)   --    Amendment No. 2 to License Agreement, dated March 18, 1994 by and among
               Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and the
               Registrant. Incorporated by reference to the Company's Annual Report on
               Form 10-K, filed with the Commission on March 28, 1994

10(16)   --    Amendment No. 3 to License Agreement, dated March 13, 1995 by and among
               Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and the
               Registrant. Incorporated by reference to the Company's Annual Report on
               Form 10-K, filed with the Commission on April 11, 1995

10(17)   --    Amendment No. 4 to License Agreement, dated June 26, 1996, by and among
               Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and
               Registrant. Incorporated by reference to the Company's Quarterly Report
               on Form 10-Q, filed with the Commission on August 28, 1996

10(18)   --    Amendment No. 5 to License Agreement, dated October 25, 1996, by and
               among Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and
               Registrant. Incorporated by reference to the Company's Quarterly Report
               on Form 10-Q, filed with the Commission on November 20, 1996

10(19)   --    Agreement dated March 15, 1994 between ShoLodge Franchise Systems, Inc.
               and Shoney's of Knoxville, Inc. Incorporated by reference to the
               Company's Annual Report on Form 10-K, filed with the Commission on
               March 28, 1994

10(20)   --    Credit Agreement dated as of April 30, 1997 by and among the Registrant
               and certain Subsidiaries of the Registrant, as Borrowers, and the
               Lenders referred to therein, First Union National Bank of Tennessee, as
               Administrative Agent, and NationsBank of Tennessee, as Co-Agent.
               Incorporated by reference to the Company's Quarterly Report on Form
               10-Q, filed with the Commission on August 27, 1997

10(21)   --    Joinder Agreement Number 1 to the Credit Agreement, dated as of June
               11, 1997. Incorporated by reference to the Company's Quarterly Report
               on Form 10-Q, filed with the Commission on August 27, 1997

10(22)   --    First Amendment to Credit Agreement, dated as of January 16, 1998, by
               and among the Registrant and certain subsidiaries of the Registrant, as
               Borrower, the Lenders referred to therein, First Union National Bank of
               Tennessee, as Administrative Agent, and NationsBank of Tennessee, as
               Co-Agent.  Incorporated by reference to the Company's Annual Report on
               Form 10-K, filed with the Commission on April 13, 1998

10(23)   --    Second Amendment and Waiver Agreement to Credit Agreement dated as of
               October 21, 1998, by and among the Registrant and certain subsidiaries,
               as Borrower, the Lenders referred to therein, First Union National Bank
</TABLE>



                                       - 31 -


<PAGE>   34


<TABLE>
<S>            <C>
               of Tennessee, as Administrative Agent, and NationsBank of Tennessee, as
               Co-Agent.  Incorporated by reference to the Company's Quarterly Report
               on Form 10-Q, filed with the Commission on November 19, 1998

10(23)   --    Pledge and Security Agreement dated as of October 21, 1998, by the
               Registrant and certain subsidiaries, as Pledgors, and First Union
               National Bank as Administrative Agent.  Incorporated by reference to
               the Company's Quarterly Report on Form 10-Q, filed with the Commission
               on November 18, 1998

10(24)   --    Letter Agreement dated April 9, 1999 between First Union
               National Bank (f/k/a First Union National Bank of Tennessee) as
               Administrative Agent, the Registrant, et al. Incorporated by
               reference to the Company's Quarterly Report on Form 10-Q, filed
               with the Commission on June 2, 1999.

10(25)   --    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, 1997

10(26)   --    Purchase and Sale Agreement by and between the Registrant and certain
               of its Affiliates, as Sellers, and Hospitality Properties Trust, as
               Purchaser, dated October 24, 1997. Incorporated by reference to the
               Company's Current Report on Form 8-K, filed with the Commission on
               November 13, 1997

10(27)   --    Agreement to Lease between Hospitality Properties Trust and the
               Registrant dated October 24, 1997. Incorporated by reference to the
               Company's Current Report on Form 8-K, filed with the Commission on
               November 13, 1997

10(28)   --    Form of Lease Agreement to be entered into between certain Affiliates
               of the Registrant, as Tenant, and Hospitality Properties Trust, as
               Landlord. Incorporated by reference to the Company's Current Report on
               Form 8-K, filed with the Commission on November 13, 1997

10(29)   --    Form of Security Agreement to be entered into between certain
               Affiliates of the Registrant, as Tenant, and Hospitality Properties
               Trust, as Secured Party. Incorporated by reference to the Company's
               Current Report on Form 8-K, filed with the Commission on November 13,
               1997

10(30)   --    Form of Assignment and Security Agreement to be entered into between
               certain Affiliates of the Registrant, as Assignor, and Hospitality
               Properties Trust, as Assignee. Incorporated by reference to the
               Company's Current Report on Form 8-K, filed with the Commission on
               November 13, 1997

10(31)   --    Form of Stock Pledge Agreement to be entered into between the
               Registrant, as Pledgor, and Hospitality Properties Trust, as Secured
               Party. Incorporated by reference to the Company's Current Report on
               Form 8-K, filed with the Commission on November 13, 1997

10(32)   --    Form of Limited Guaranty Agreement to be entered into by the
               Registrant, as Guarantor, for the benefit of Hospitality Properties
               Trust. Incorporated by reference to the Company's Current Report on
               Form 8-K, filed with the Commission on November 13, 1997

</TABLE>


                                     - 32 -


<PAGE>   35


<TABLE>
<S>            <C>
10(33)   --    Letter between Hospitality Properties Trust and the Registrant dated
               November 19, 1997. Incorporated by reference to the Company's Current
               Report on Form 8-K, filed with the Commission on December 3, 1997

10(34)   --    Motel Purchase Agreement made as of July 22, 1998.  Incorporated by
               reference to the Company's Current Report on Form 8-K, filed with the
               Commission on September 18, 1998

10(35)   --    First Amendment to Motel Purchase Agreement made as of July 22, 1998.
               Incorporated by reference to the Company's Current Report on Form 8-K,
               filed with the Commission on September 18, 1998

10(36)   --    Purchase and Sale Agreement by and between the Registrant and
               certain of its Affiliates, as Sellers, and HPT Suite Properties
               Trust, as Purchaser, dated June 29, 1999. Incorporated by
               reference to the Company's Current Report on Form 8-K, filed with
               the Commission on July 14, 1999.

10(37)   --    Agreement to Lease between HPT Suite Properties Trust and
               Suite Tenant, Inc., dated June 29, 1999. Incorporated by
               reference to the Registrant's Current Report on Form 8-K, filed
               with the Commission on July 14, 1999.

10(38)   --    Second Amendment to Lease Agreement and First Amendment to
               Incidental Documents entered into between Hospitality Properties
               Trust, the Registrant and Suite Tenant, Inc., dated June 29,
               1999. Incorporated by reference to the Registrant's Current
               Report on Form 8-K, filed with the Commission on July 14, 1999.

10(39)   --    Loan and Security Agreement ben 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(40)   --    Sale and Purchase Agreement between the Registrant and Prime
               Hospitality Corp., dated as of March 16, 2000.*

21       --    Subsidiaries of the Registrant*

23(1)    --    Consent of Ernst & Young LLP*

23(2)    --    Consent of Deloitte & Touche LLP*

27       --    Financial Data Schedule*
</TABLE>

* Filed herewith

(b)      No reports on Form 8-K were filed during the fourth quarter ended
         December 26, 1999.

(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.


                                       - 33 -


<PAGE>   36


                                     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: March 27, 2000                     /s/ Leon Moore
                                         -----------------------
                                         Leon Moore
                                         Chief 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.

<TABLE>
<CAPTION>
SIGNATURE                  TITLE                                  DATE
-------------------------------------------------------------------------------
<S>                        <C>                                   <C>
/s/ Leon Moore             President, Chief Executive            March 27, 2000
----------------------     Officer, Principal Executive
Leon Moore                 Officer, Director

/s/ Bob Marlowe            Secretary, Treasurer, Chief           March 27, 2000
----------------------     Financial Officer, Chief
Bob Marlowe                Accounting Officer, Principal
                           Accounting Officer, Director

/s/ Richard L. Johnson     Executive Vice President,             March 27, 2000
----------------------     Director
Richard L. Johnson

/s/ Earl H. Sadler         Director                              March 27, 2000
----------------------
Earl H. Sadler

/s/ Helen L. Moskovitz     Director                              March 27, 2000
----------------------
Helen L. Moskovitz
</TABLE>

                                       - 34 -


<PAGE>   37



                         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 26, 1999 and December 27, 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of
Company's management. Our responsibility is to express an opinion on these
financial statements 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 presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of ShoLodge, Inc and subsidiaries at December 26, 1999 and
December 27, 1998, and the consolidated results of their operations and their
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.


                                                          ERNST & YOUNG LLP

Atlanta, Georgia
March 17, 2000




                                       F-1
<PAGE>   38
INDEPENDENT AUDITORS' REPORT


Board of Directors and Shareholders
ShoLodge, Inc.
Hendersonville, Tennessee

We have audited the consolidated statements of earnings, shareholders' equity
and cash flows of ShoLodge, Inc. and subsidiaries (the "Company") for the year
ended December 28, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally auditing standards. 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 audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of the operations of ShoLodge, Inc. and
subsidiaries and their cash flows for the year ended December 28, 1997, in
conformity with generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements the Company
changed its method of accounting for pre-opening costs for the year ended
December 28, 1997.


/s/ Deloitte & Touche LLP


Nashville, Tennessee
April 1, 1998



                                      F-2

<PAGE>   39




                         ShoLodge, Inc. and Subsidiaries

                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                        DECEMBER 26,      DECEMBER 27,
                                                            1999              1998
                                                       -------------------------------
<S>                                                    <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents                           $   3,386,937     $   2,480,984
   Restricted cash                                         1,605,513           701,484
   Accounts receivable -
     Trade, net of allowance for doubtful accounts
       of $459,869 and $642,780 for 1999 and
       1998, respectively                                  4,853,252         3,251,104
     Construction contracts                                7,674,104                --
     Costs and estimated earnings in excess of
        billings on construction contracts                 3,588,071            27,799
   Income taxes receivable                                 3,335,543         4,775,686
   Prepaid expenses                                          573,064           519,534
   Notes receivable, net                                     468,762         3,363,394
   Other current assets                                      441,023           443,967
                                                       --------------------------------
Total current assets                                      25,926,269        15,563,952

Notes receivable, net                                     60,887,262        58,390,170

Property and equipment                                   148,698,134       187,360,706
Less accumulated depreciation and amortization           (23,821,643)      (20,335,047)
                                                       --------------------------------
                                                         124,876,491       167,025,659

Land under development or held for sale                    9,186,608         9,556,720

Deferred charges, net                                      8,407,623         9,201,837
Deposits on sale/leaseback                                35,280,000        28,000,000
Deferred tax asset                                                --           127,035
Intangible assets                                          3,122,173         3,290,162
Other assets                                               2,627,487         3,845,824
                                                       --------------------------------
                                                       $ 270,313,913     $ 295,001,359
                                                       ================================
</TABLE>




                                      F-3

<PAGE>   40
                         Sholodge, Inc and Subsidiaries
                    Consolidated Balance Sheets (continued)

<TABLE>
<CAPTION>

                                                        DECEMBER 26,         DECEMBER 27,
                                                           1999                 1998
                                                      ------------------------------------
<S>                                                    <C>                 <C>

LIABILITIES
Current liabilities:
   Accounts payable and accrued expenses               $   9,594,955       $  11,438,292
   Taxes payable other than on income                      1,448,602           1,636,220
   Current portion of long-term debt and
     capitalized lease obligations                         2,227,929          21,597,951
                                                       ----------------------------------
Total current liabilities                                 13,271,486          34,672,463

Long-term debt and capitalized lease obligations,
   less current portion                                  125,550,557         128,945,784
Deferred income taxes                                      2,089,297                  --
Deferred gain on sale/leaseback                           36,307,820          30,158,244
Deferred credits                                           1,283,605           2,368,523
Minority interests in equity of consolidated
   subsidiaries and partnerships                             932,809             757,311
                                                       ----------------------------------
Total liabilities                                        179,435,574         196,902,325

Shareholders' equity:
   Preferred stock (no par value; 1,000,000 shares
     authorized; no shares issued)                                --                  --
   Series A redeemable nonparticipating stock (no
     par value; 1,000 shares authorized; no
     shares issued)                                               --                  --
   Common stock (no par value; 20,000,000 shares
     authorized, 5,372,578 and 7,472,310 shares
     issued and outstanding as of December 26, 1999
     and December 27, 1998, respectively)                      1,000               1,000
   Additional paid-in capital                             42,484,275          42,433,395
   Retained earnings                                      65,512,322          60,973,496
   Unrealized gain on securities available-for-sale,
     net of income taxes                                      80,321              67,704
   Less treasury stock, at cost, 2,897,300 and
      784,000 shares in 1999 and 1998, respectively      (17,199,579)         (5,376,561)
                                                       ----------------------------------
Total shareholders' equity                                90,878,339          98,099,034
                                                       ----------------------------------
                                                       $ 270,313,913       $ 295,001,359
                                                       ==================================

</TABLE>

See accompanying notes.


                                      F-4

<PAGE>   41


                         ShoLodge, Inc. and Subsidiaries

                       Consolidated Statements of Earnings

<TABLE>
<CAPTION>
                                                                             YEAR ENDED
                                                       ------------------------------------------------------
                                                         DECEMBER 26,       DECEMBER 27,       DECEMBER 28,
                                                            1999               1998               1997
                                                       -----------------------------------------------------
<S>                                                    <C>                 <C>                <C>
Revenues:
   Hotel                                                $ 66,187,974       $ 69,240,264       $ 71,944,716
   Franchising and management                              4,151,550          3,118,789          3,163,938
   Construction and development                           11,234,378             81,077                 --
                                                        ---------------------------------------------------
Total revenues                                            81,573,902         72,440,130         75,108,654

Cost and expenses:
   Operating expenses:
     Hotel                                                46,281,773         44,933,620         42,987,647
     Franchising and management                            2,419,700          2,392,978          2,301,401
     Construction and development                          9,825,958             71,351                 --
                                                        ---------------------------------------------------
Total operating expenses                                  58,527,431         47,397,949         45,289,048

   General and administrative                              6,342,439          6,357,877          3,952,603
   Rent expense, net                                      13,530,020          9,838,105          1,991,400
   Depreciation and amortization                           7,100,525          8,012,436         10,376,484
                                                        ---------------------------------------------------
   Income (loss) from operations                          (3,926,513)           833,763         13,499,119

Other income (expenses):
   Interest expense                                      (12,136,415)       (10,414,876)       (11,298,126)
   Interest income                                         6,182,084          4,949,404          1,762,450
   Gain on sale of property                               15,001,716         20,631,641          3,818,692
   Other income                                              843,047            441,292            837,611
                                                        ---------------------------------------------------

Earnings from continuing operations before
   income taxes, minority interests, extraordinary
   items, and cumulative effect of change in
   accounting policy                                       5,963,919         16,441,224          8,619,746
Income taxes                                              (1,909,000)        (6,581,000)        (2,259,000)
Minority interests in earnings of consolidated
   subsidiaries and partnerships                          (1,909,605)          (647,407)          (172,710)
                                                        ---------------------------------------------------
Earnings from continuing operations before
   extraordinary items and cumulative
   effect of change in accounting policy                   2,145,314          9,212,817          6,188,036

Discontinued operations:
   Gain on disposal of discontinued business
     segment, net of income tax provision of
     $287,000 for 1997                                            --                 --            526,000

</TABLE>



                                      F-5
<PAGE>   42


                         ShoLodge, Inc. and Subsidiaries

                 Consolidated Statements of Earnings (continued)
<TABLE>
<CAPTION>


                                                                                 YEAR ENDED
                                                       ----------------------------------------------------------------
                                                          DECEMBER 26,          DECEMBER 27,          DECEMBER 28,
                                                              1999                  1998                  1997
                                                       ----------------------------------------------------------------
<S>                                                    <C>                     <C>              <C>
Extraordinary gain (loss) on early extinguishment
   of debt, net of income tax effect of
   $(1,467,000), $600,000 and $101,000 for 1999,
   1998 and 1997, respectively                               2,393,512         (1,066,466)           (186,124)

Cumulative effect of change in accounting policy,
   net of income tax benefit of $691,000 in 1997                    --                 --          (1,164,114)
                                                         -----------------------------------------------------
Net earnings                                             $   4,538,826      $   8,146,351       $   5,363,798
                                                         =====================================================

Net earnings per common share:
   Basic:
     Continuing operations before extraordinary
       items and cumulative effect                       $        0.33      $        1.12       $        0.75
     Discontinued operations                                        --                 --                0.06
     Extraordinary gain (loss)                                    0.37              (0.13)              (0.02)
     Cumulative effect of change in accounting
       policy                                                       --                 --               (0.14)
                                                         -----------------------------------------------------
Net earnings                                             $        0.70      $        0.99       $        0.65
                                                         =====================================================

Diluted:
   Continuing operations before extraordinary items
     and cumulative effect                               $        0.32      $        1.07       $        0.74
   Discontinued operations                                          --                 --                0.06
    Extraordinary gain (loss)                                     0.35              (0.12)              (0.02)
   Cumulative effect of change in accounting policy                 --                 --               (0.14)
                                                         -----------------------------------------------------
Net earnings                                             $        0.67      $        0.95       $        0.64
                                                         =====================================================

Weighted average common shares outstanding:
   Basic                                                     6,517,717          8,190,593           8,244,572
                                                         =====================================================
   Diluted                                                   6,744,835          8,611,401           8,414,955
                                                         =====================================================

Pro forma amounts assuming the change in
   accounting policy is applied retroactively:
     Earnings from continuing operations before
       extraordinary item                                                                       $   6,188,036
     Earnings per share:
       Basic                                                                                             0.75
       Diluted                                                                                           0.74
     Net earnings                                                                                   6,527,912
       Net earnings per share:
       Basic                                                                                             0.79
       Diluted                                                                                           0.78

</TABLE>

See accompanying notes.




                                      F-6
<PAGE>   43


                         ShoLodge, Inc. and Subsidiaries

                 Consolidated Statements of Shareholders' Equity

     Years ended December 26, 1999, December 27, 1998 and December 28, 1997

<TABLE>
<CAPTION>

                                           SERIES A REDEEMABLE
                                         NONPARTICIPATING STOCK            COMMON STOCK           ADDITIONAL
                                       ------------------------------------------------------      PAID-IN
                                         SHARES       AMOUNT          SHARES          AMOUNT       CAPITAL
                                       -----------------------------------------------------------------------

<S>                                    <C>         <C>               <C>            <C>          <C>
Balance, December 29, 1996                 --      $        --       8,233,318       $1,000      $42,212,042
   Exercise of stock options, net          --               --          22,492           --          219,478
   Net earnings                            --               --              --           --               --
   Change in unrealized gain on
     securities available-for-sale,
     net of income taxes                   --               --              --           --               --
                                        ---------------------------------------------------------------------
Balance, December 28, 1997                 --               --       8,255,810        1,000       42,431,520
   Exercise of stock options, net          --               --             500           --            1,875
   Net earnings                            --               --              --           --               --
   Change in unrealized gain on
     securities available-for-sale,
     net of income taxes                   --               --              --           --               --
   Repurchased                             --               --        (784,000)          --               --
                                        ---------------------------------------------------------------------
Balance, December 27, 1998                 --               --       7,472,310        1,000       42,433,395
   Exercise of stock options, net          --               --          13,568           --           50,880
   Net earnings                            --               --              --           --               --
   Change in unrealized gain on
     securities available-for-sale,
     net of income taxes                   --               --              --           --               --
   Repurchased                             --               --      (2,113,300)          --               --
                                        ---------------------------------------------------------------------
Balance, December 26, 1999                 --      $        --       5,372,578       $1,000      $42,484,275
                                        =====================================================================

</TABLE>




                                      F-7
<PAGE>   44


                         ShoLodge, Inc. and Subsidiaries

           Consolidated Statements of Shareholders' Equity (continued)

     Years ended December 26, 1999, December 27, 1998 and December 28, 1997

<TABLE>
<CAPTION>

                                                              UNREALIZED GAIN
                                                              ON SECURITIES        COST OF
                                                              AVAILABLE-FOR-       COMMON
                                              RETAINED        SALE, NET OF         SHARES
                                              EARNINGS        INCOME TAXES       REPURCHASED          TOTAL
                                            --------------------------------------------------------------------

<S>                                         <C>              <C>               <C>                <C>
Balance, December 29, 1996                  $47,463,347      $    59,739       $         --       $ 89,736,128
   Exercise of stock options, net                    --               --                 --            219,478
   Net earnings                               5,363,798               --                 --          5,363,798
   Change in unrealized gain on
     securities available-for-sale,
     net of income taxes                             --           32,568                 --             32,568
                                            -------------------------------------------------------------------
Balance, December 28, 1997                   52,827,145           92,307                 --         95,351,972
   Exercise of stock options, net                    --               --                 --              1,875
   Net earnings                               8,146,351               --                 --          8,146,351
   Change in unrealized gain on
        securities available-for-sale,
        net of income taxes                          --          (24,603)                --            (24,603)
   Repurchased                                       --                          (5,376,561)        (5,376,561)
                                            -------------------------------------------------------------------
Balance, December 27, 1998                   60,973,496           67,704         (5,376,561)        98,099,034
  Exercise of stock options, net                     --               --                 --             50,880
   Net earnings                               4,538,826               --                 --          4,538,826
   Change in unrealized gain on
     securities available-for-sale,
     net of income taxes                             --           12,617                 --             12,617
   Repurchased                                       --               --        (11,823,018)       (11,823,018)
                                            -------------------------------------------------------------------
Balance, December 26, 1999                  $65,512,322      $    80,321       $(17,199,579)      $ 90,878,339
                                            ===================================================================

</TABLE>


See accompanying notes.



                                      F-8

<PAGE>   45


                         ShoLodge, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                               YEAR ENDED
                                                         ------------------------------------------------------
                                                            DECEMBER 26,       DECEMBER 27,       DECEMBER 28,
                                                               1999               1998               1997
                                                         ------------------------------------------------------
<S>                                                       <C>                <C>                <C>

CASH FLOWS FROM OPERATING ACTIVITIES
Earnings from continuing operations before
   extraordinary items and cumulative effect of
   change in accounting policy                            $  2,145,314       $  9,212,817       $   6,188,036
Adjustments to reconcile earnings from continuing
   operations before extraordinary items and
   cumulative effect of change in accounting
   policy to net cash (used in) provided by
   operating activities:
     Gain from discontinued operations                              --                 --             813,000
     Extraordinary gain (loss) on early
       extinguishment of debt                                3,860,512         (1,666,466)           (287,124)
     Depreciation and amortization                           7,100,525          8,012,436          11,034,031
     Accretion of discount on securities held to
       maturity                                                     --           (442,427)           (691,175)
     Recognition of previously deferred profit              (5,140,869)        (1,850,364)         (1,194,555)
     Gain on sale of property and other assets             (15,001,716)       (20,631,641)         (3,818,692)
     Deferred income tax provision                           2,216,333          4,289,965          (8,831,039)
     Minority interests in earnings of consolidated
       subsidiaries and partnerships                         1,909,605            647,407             172,710
     Changes in assets and liabilities:
       Increase in restricted cash                            (904,029)          (205,484)           (496,000)
       Increase in trade receivables                        (1,602,148)          (250,480)           (272,466)
       Increase in construction contract receivables        (7,674,104)                --                  --
       Increase in cost and estimated earnings in
           excess of billings on construction
           contracts                                        (3,560,272)                --                  --
       Decrease (increase) in income taxes
         receivable                                          1,440,143          1,356,468          (6,132,154)
       (Increase) decrease in prepaid expenses                 (53,530)            13,164             (60,875)
       (Increase) decrease in other assets                  (1,996,952)        (1,220,791)          1,066,360
       (Decrease) increase in accounts payable and
         accrued expenses                                   (1,843,337)           518,580          (1,126,003)
       Decrease in income and other taxes payable           (1,662,354)          (492,538)           (349,950)
                                                          ----------------------------------------------------
Net cash used in operating activities                      (20,766,879)        (2,709,354)         (3,985,896)

CASH FLOWS FROM INVESTING ACTIVITIES
Payments from notes receivable                              12,317,668            174,424                  --
Capital expenditures                                       (20,101,074)       (72,473,490)        (55,907,485)
Proceeds from sale of property and other assets             70,915,913          9,089,264         141,959,540
Deposits on sale/leaseback of hotels                        (7,280,000)                --         (28,000,000)
                                                          ----------------------------------------------------
Net cash provided by (used in) investing activities         55,852,507        (63,209,802)         58,052,055

</TABLE>




                                      F-9


<PAGE>   46


                         ShoLodge, Inc. and Subsidiaries

                Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>

                                                                              YEAR ENDED
                                                         ------------------------------------------------------
                                                            DECEMBER 26,      DECEMBER 27,        DECEMBER 28,
                                                               1999              1998                1997
                                                        -------------------------------------------------------

<S>                                                      <C>                  <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease (increase) in deferred loan financing
   charges                                                     457,712          1,236,761          (2,353,085)
Proceeds from long-term debt                                26,149,754         25,300,000         124,207,614
Payments on long-term debt                                 (48,681,641)        (8,758,117)       (120,946,562)
Payments on capitalized lease obligations                     (233,362)          (603,743)           (642,719)
Distributions to minority interests                           (100,000)        (2,009,580)           (201,148)
Exercise of stock options                                       50,880              1,875             219,478
Purchase of treasury stock                                 (11,823,018)        (5,376,561)                 --
                                                          ----------------------------------------------------
Net cash (used in) provided by financing activities        (34,179,675)         9,790,635             283,578

Net increase (decrease) in cash and cash equivalents           905,953        (56,128,521)         54,349,737

Cash and cash equivalents at beginning of year               2,480,984         58,609,505           4,259,768
                                                          ----------------------------------------------------
Cash and cash equivalents at end of year                  $  3,386,937       $  2,480,984       $  58,609,505
                                                          ====================================================

</TABLE>


See accompanying notes.



                                      F-10

<PAGE>   47


                         ShoLodge, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

     Years ended December 26, 1999, December 27, 1998 and December 28, 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The business activities of ShoLodge, Inc. and subsidiaries (the "Company") are
composed primarily of owning, franchising, operating and constructing lodging
facilities. Presently there are two brands, Sumner Suites and Shoney's Inns. As
of December 26, 1999, the Company derives its hotel revenues from both brands
from 22 owned properties and 20 leased properties located in 13 states across
the United States. Of these 42 properties, 13 are located in Texas and 7 are
located in Georgia. No other state has more than three properties. A summary of
the significant accounting policies used in the preparation of the accompanying
consolidated financial statements follows.

The Consolidated Financial Statements include the accounts of the Company and
its majority-owned and controlled 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 Year of 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
generally accepted accounting principles 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.

Cash and Cash Equivalents include highly liquid investments with original
maturities of three months or less.




                                      F-11
<PAGE>   48



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Restricted Cash represents $200,000 at one of the Company's major banks and the
balance is the cash funded in a reserve account as provided for in the lease
agreement on the sale/leaseback transaction (see Note 12) to cover the cost of
replacement, renewals, certain repairs and maintenance, major repairs,
alteration improvements, and renewals or replacements to the hotels' buildings,
furnishings, fixtures and equipment. The Company is required to add to the
account each year by a percentage of total annual hotel sales as defined in the
lease agreement. The applicable percentage was 3% in 1998, 4% in 1999 (3% for
four of the properties) and 5% will be each year thereafter during the term of
the lease (4% for four of the properties for 2000). The disbursements from this
fund are restricted to the above-listed uses as defined in the lease agreement.

Accounts Receivable from Construction Contracts include billed amounts earned on
construction contracts open at the date of the balance sheet. Revenues and costs
in 1999 include approximately $515,000 related to unexecuted change orders.
Costs and estimated earnings in excess of billings on construction contracts
were not billable to customers at the date of the balance sheet. As of December
26, 1999, construction amounts receivable were primarily from two contracts with
the same third party customer ($10,978,000 of the total of $11,262,000).

Property and Equipment is recorded at cost. 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. Equipment under capitalized leases is
amortized over the shorter of the estimated useful lives of the related assets
or the lease term using the straight-line method. 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
28, 1997, December 27, 1998 and December 26, 1999 were approximately $3,485,000,
$3,219,000, and $2,004,000, respectively. Preopening costs are expensed as
incurred effective at the beginning of fiscal year 1997 (See Note 2).



                                      F-12
<PAGE>   49



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Land Under Development or Held For Sale consists of land adjacent to
Company-owned hotels. The Company actively develops these sites to enhance the
profitability of the hotels.

Deferred Charges include loan costs incurred in obtaining financing and are
amortized using the interest method over the respective terms of the related
debt. In addition, deferred charges include costs incurred in amending the
Company's franchise license agreement, which is being amortized on the
straight-line method over twenty years. Accumulated amortization totaled
$3,541,811 and $3,967,041 as of December 27, 1998 and December 26, 1999,
respectively.

Investments. The Company's investment securities have been classified as either
available-for-sale or held to maturity. The available-for-sale securities are
carried at fair value with unrealized holding gains and losses, net of tax
effects, reported as a separate component of shareholders' equity. The
held-to-maturity securities are carried at amortized cost.

Intangible Assets include excess of cost over fair value of net assets acquired
(goodwill) in the amount of $2,837,019 at December 27, 1998 and $2,687,045 at
December 26, 1999, respectively, which is amortized on the straight-line method
over a period of twenty-five years. The amounts reported are net of accumulated
amortization of $912,306 and $1,062,279, as of 1998 and 1999, respectively. In
addition, costs of trademark are included in the amount of $453,143 and $435,128
as of 1998 and 1999, respectively, and are amortized on the straight-line method
over a period of twenty years. This amount is net of accumulated amortization of
$33,620 and $56,812 as of 1998 and 1999, respectively.

Other Assets include the long-term portion of notes receivables, cash surrender
value of life insurance, non-current portion of direct financing leases,
securities available for sale, and base linens stock. Base linens stock is
amortized to fifty percent of its initial cost on a straight-line basis over a
thirty-six month period.


                                      F-13

<PAGE>   50


                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Asset 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 indications of impairment are present and the
estimated fair value less costs to sell is less than their carrying amount.

Advertising. The Company charges the costs of advertising to expense as
incurred. Advertising expense was approximately $2,988,000, $2,311,000 and
$1,920,000 for the years ended December 28, 1997, December 27, 1998 and December
26, 1999, respectively.

Income Taxes. The Company uses the liability method to account for income taxes.

Revenues from hotel operations are recognized as services are rendered.
Construction and development revenues from fixed-price and modified fixed-price
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 it to be the
best available measure of progress on these contracts. Franchising and
management revenues are recognized as earned. 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.

Earnings Per Common Share for 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 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 6 for a reconciliation of
basic and diluted earnings per share.



                                      F-14

<PAGE>   51




                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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. See Note 8 for pro forma disclosures using the fair value
method as described in SFAS No. 123, Accounting for Stock-Based Compensation.

Concentrations of Credit Risk. Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
investments and trade receivables. The Company places its cash investments with
high credit quality financial institutions who 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. Notes receivable are from a group of
affiliated companies which acquired and operate the 16 hotels described in Note
13.

Comprehensive Income. Comprehensive income includes net income and other
comprehensive income which is defined as non-owner transactions in equity. The
following table sets forth the amounts of other comprehensive income included in
equity for the years ended December 26, 1999, December 27, 1998 and December 28,
1997.

<TABLE>
<CAPTION>

                                               1999         1998          1997
                                            ------------------------------------
<S>                                          <C>          <C>           <C>
Net unrealized gain (loss) on securities
   available for sale                        $13,000      $(25,000)      $33,000
</TABLE>


Reclassifications. Certain reclassifications have been made in the 1997 and 1998
consolidated financial statements to conform to the classifications used in
1999.



                                      F-15

<PAGE>   52



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



2. ACCOUNTING CHANGE

In the fourth quarter of fiscal 1997, the Company changed its method of
accounting for pre-opening costs, effective December 30, 1996, whereby
pre-opening costs are expensed as incurred rather than the previous method of
capitalizing such costs and amortizing them over a three-year period. The
Company believes the new method is preferable in the circumstances and conforms
to the predominant practice in the industry.

The cumulative effect of the change for periods prior to fiscal 1997, net of
income tax effect, is a reduction in net earnings of $1,164,114 or $0.14 per
share and was recognized in the first quarter of 1997.

On December 29, 1997, the Company adopted the practice of capitalizing only
directly identifiable internal costs of identifying and acquiring commercial
properties to be developed in accordance with Emerging Issues Task Force
("EITF") Issue No. 97-11, "Accounting for Internal Costs Relating to Real Estate
Property Acquisitions." The implementation of this EITF resulted in increased
operating costs of approximately $1,353,000 and $835,000 in 1998 and 1999,
respectively.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of:

<TABLE>
<CAPTION>


                                                      DECEMBER 26,     DECEMBER 27,
                                                         1999             1998
                                                   ---------------------------------

  <S>                                               <C>               <C>
  Land and improvements                             $  25,799,108     $  36,842,353
  Buildings and improvements                           91,250,926       100,989,405
  Furniture, fixtures and equipment                    29,209,987        29,686,485
  Equipment under capitalized leases                    1,596,278         2,103,182
  Construction in progress                                841,835        17,739,281
                                                    --------------------------------
                                                      148,698,134       187,360,706

  Less accumulated depreciation and amortization      (23,821,643)      (20,335,047)
                                                    --------------------------------
                                                    $ 124,876,491     $ 167,025,659
                                                    ================================

</TABLE>




                                      F-16

<PAGE>   53



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



4. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS

Long-term debt and capitalized lease obligations consist of:

<TABLE>
<CAPTION>

                                                           1999             1998
                                                     -------------------------------
  <S>                                                <C>               <C>
  Industrial revenue bonds, due in varying
     amounts through 2017                            $   3,055,000     $   3,120,000
  7.50% Convertible subordinated debentures             50,004,000        54,000,000
  9.75% Series A senior subordinated notes              28,909,000        33,021,000
  9.55% Series B senior subordinated notes              27,112,000        34,995,000
  Bank credit facility                                  12,000,000        20,300,000
  Notes payable - bank and other, bearing interest
     at 7.50% to 8.94%, due in varying amounts
     through 2003                                        6,505,571         4,497,859

  Notes payable - due in varying amounts
     through 2000                                            3,324            41,745

  Capitalized lease obligations                            189,591           568,131
                                                     --------------------------------
                                                       127,778,486       150,543,735
  Less current portion                                  (2,227,929)      (21,597,951)
                                                     --------------------------------
                                                     $ 125,550,557     $ 128,945,784
                                                     ================================

</TABLE>

The Industrial Revenue Bonds ("IRBs") and substantially all notes payable are
collateralized by property and equipment with a net book value of approximately
$12 million at December 26, 1999. Additionally, the IRBs, are collateralized by
irrevocable letters of credit and are guaranteed by the Company. The interest
rate on the IRBs is a variable rate reset weekly by the remarketing agent (5.01%
at December 26, 1999).




                                      F-17

<PAGE>   54



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



4. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)

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 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.

In 1998 and 1997, the Company had an unsecured, three-year revolving credit
facility with a group of five banks. The credit facility matured June 30, 1999,
and the outstanding balance of $25.2 million was repaid in full on June 29,
1999. The interest rate on this credit facility was at the lender's base rate,
or one hundred seventy-five basis points over the 30, 60, 90 or 180 day LIBOR
rate, at the Company's option.

The Company entered into a new three year credit facility with a new bank group
effective August 27, 1999. The new credit facility is for an initial amount of
$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



                                      F-18

<PAGE>   55


                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



4. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)

of 16 of the Company's lodging facilities in the third quarter of 1998. The
borrowing base is the lower of (a) 85% of the outstanding principal amount of
the pledged notes, (b) 65% of the appraised marked value of the underlying real
property collateral securing the pledged notes, or (c) $30 million. The interest
rate is at the lender's base rate (8.50% at December 26, 1999) plus 50 basis
points and the Company is to pay commitment fees on the unused portion of the
facility at .50% per annum. The credit facility also contains covenants which
limit or prohibit the incurring of certain additional indebtedness in excess of
a specified debt to total capital ratio, prohibit additional liens on the
collateral, restrict mergers and the payment of dividends and restrict the
Company's ability to place liens on unencumbered assets. The credit facility
contains financial covenants as to the Company's minimum net worth. As of
December 26, 1999, the Company had $12 million in borrowings outstanding under
this credit facility, including $10 million under the three year term loan.

The Company also maintains a $1 million unsecured line of credit with another
bank, bearing interest at the lender's prime rate, maturing May 31, 2000. As of
December 26, 1999, the Company had no borrowings outstanding under this credit
facility.

In November 1997, the Company repaid approximately $10,500,000 of equipment
loans with the proceeds of the sale/leaseback transaction (Note 12). This early
retirement of loans resulted in an extraordinary pretax charge of approximately
$287,000 for the year ended December 28, 1997.

In September 1998 the Company repaid approximately $14,111,000 of debt with the
proceeds of the sale of 16 hotels (Note 13). This early retirement of debt
resulted in an extraordinary pretax charge of approximately $1,666,000 for the
year ended December 27, 1998.



                                      F-19

<PAGE>   56



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


4. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)

From October 1, 1999, through December 26, 1999, the Company repurchased
$12,598,000 of the Company's previously issued subordinated debt at a discount
from face value resulting in an extraordinary pretax gain of approximately
$3,861,000, net of the write-off of related unamortized deferred financing costs
for the year ended December 26, 1999.

Maturities of long-term debt are as follows:

<TABLE>
<CAPTION>

         <S>                                      <C>
         2000                                     $   2,038,338
         2001                                         1,173,814
         2002                                        12,718,896
         2003                                         2,501,592
         2004                                        50,515,255
         Thereafter                                  58,641,000
                                                  =============
                                                  $ 127,588,895
                                                  =============
</TABLE>


See Note 5 for capitalized lease obligation maturities.

5. COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries lease certain property and equipment under
noncancelable operating and capitalized lease agreements. Total rental expense
under operating leases for the years ended December 28, 1997, December 27, 1998
and December 26, 1999 was approximately $2,711,000, $15,056,000 and $18,476,000,
respectively.



                                      F-20

<PAGE>   57


                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



5. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Future minimum rental payments are as follows:

<TABLE>
<CAPTION>

                                                     OPERATING        CAPITALIZED
                                                       LEASES           LEASES
                                                   ------------------------------
    <S>                                             <C>               <C>
    2000                                            $ 21,778,543      $  206,120
    2001                                              21,725,000              --
    2002                                              21,725,000              --
    2003                                              21,726,100              --
    2004                                              21,729,400              --
    Thereafter                                       141,158,729              --
                                                    -----------------------------
                                                    $249,842,772
                                                    =============
    Less amount representing interest at 9.5%                           (16,529)
    Less current portion                                               (189,591)
                                                                      ----------
                                                                      $       --
                                                                      ==========
</TABLE>


The Company is self-insured for workers' compensation benefits up to $500,000
annually in aggregate and $250,000 per occurrence and has recorded a reserve for
all outstanding claims at December 26, 1999. 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 reserves recorded, the
Company had outstanding letters of credit in the amount of $667,000, $667,000
and $45,000, as of December 28, 1997, December 27, 1998, and December 26, 1999,
respectively, to satisfy workers compensation self-insurance security deposit
requirements.




                                      F-21
<PAGE>   58



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



5. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 following is a summary of legal action
pending against the Company and action recently concluded.

In 1997, Tri-State Inns, Inc. and Motels of America, Inc. filed a suit against
ShoLodge Franchise Systems, Inc., a subsidiary of the Company, seeking to be
discharged, relieved and excused of any future performance under the License
Agreement relating to 14 Shoney's Inns, or in the alternative, compensatory
damages, based on theories of alleged breach of contractual obligations and
implied warranties of good faith and fair dealing, alleged fraudulent inducement
based on alleged misrepresentations and alleged failure to make material
disclosures of fact, alleged promissory estoppel and alleged breach of fiduciary
duty. In addition, the plaintiffs originally sought a declaratory judgment
concerning the provision of the License Agreement which specifies the damages
due upon termination of the License Agreement. On March 18, 1998, the plaintiffs
filed a motion for summary judgment seeking to invalidate the non-competition
and stipulated damages provisions set forth in the License Agreements. On August
6, 1998, the court denied the plaintiff's motion. The Company also had filed
counter claims against the plaintiffs. The case was dismissed on July 16, 1999,
in accordance with a settlement agreement entered into by the parties, pursuant
to which the parties exchanged mutual releases and Tri-State and its affiliates
agreed to pay the Company a total of $1,175,000 in cash ($575,000 at the
settlement date and $200,000 each year for the next three years). The case is
now concluded. The total of $1,175,000 was recognized as franchising revenues in
1999.

In 1998, two purported class action lawsuits were filed against the Company and
certain officers of the Company, by plaintiffs who claim to be shareholders and
debt security holders of the Company, respectively, both alleging that the
Company violated certain anti-fraud provisions of the Tennessee Securities Act
of 1980, as amended, by issuing allegedly false and misleading statements and
financial information to the investing public. The complaints sought an
unspecified amount of damages and unspecified injunctive relief. The Company
filed motions to dismiss both suits on the basis that the plaintiff's
allegations failed to state a cause of action under the applicable state
statute.




                                      F-22

<PAGE>   59


                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



5. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The trial court denied both motions. On January 29, 1999, the Company filed its
appellate brief. The case was argued before the Court of Appeals on May 7, 1999.
On December 15, 1999, a settlement agreement was entered into by the parties
which, if approved by the Court, would result in the dismissal of both actions
with prejudice. Pursuant to the terms of the settlement, the Company will pay
$100,000 and will agree to redeem up to $675,000 of its debt securities at 75%
of par value or the purchase price of the security, whichever is less. The
Company's insurance carrier has agreed to contribute $1,250,000 toward this
settlement. It is expected that the Court will consider the fairness of the
settlement in May 2000. The Company believes the settlement will be approved by
the Court, and if so, there will be no material adverse impact on the Company.

In 1998, a former chief financial officer of the Company, filed a lawsuit
against the Company and its chief executive officer alleging that his employment
by the Company was wrongfully terminated, claiming breach of contract, fraud,
retaliatory discharge and related claims. The plaintiff seeks $3 million in
compensatory damages and punitive and treble damages. On December 31, 1998 the
Company filed a motion to dismiss this lawsuit on the basis that the plaintiff
has intentionally destroyed relevant evidence during the pendency of the case.
The court granted this motion on January 28, 1999 and dismissed the case with
prejudice. On March 8, 1999 the plaintiff filed a Motion to Alter or Amend the
judgement dismissing the case. The court denied the motion on April 23, 1999.
The plaintiff has filed an appeal with the Tennessee Court of Appeals. No date
for argument has been set in the Court of Appeals. The Company believes the suit
is without merit and will defend itself vigorously.



                                      F-23

<PAGE>   60



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



6. EARNINGS PER SHARE

The following tables reconcile earnings and weighted average shares used in the
earnings per share ("EPS") calculations for fiscal years 1999, 1998 and 1997.

<TABLE>
<CAPTION>


                                                                   FOR THE YEARS ENDED
                                                      DECEMBER 26,     DECEMBER 27,      DECEMBER 28,
                                                          1999             1998             1997
                                                      ------------------------------------------------
<S>                                                   <C>              <C>               <C>
NUMERATOR:
Earnings from continuing operations before
   extraordinary items and cumulative effect of
   change in accounting policy                         $2,145,314      $ 9,212,817       $ 6,188,036
Gain on disposal of discontinued business segment              --               --           526,000
Extraordinary gain (loss)                               2,393,512       (1,066,466)         (186,124)
Cumulative effect of change in accounting policy               --               --        (1,164,114)
                                                       ----------------------------------------------
Numerator for basic earnings per share- earnings
   available to shareholders                           $4,538,826      $ 8,146,351       $ 5,363,798
                                                       ==============================================

DENOMINATOR:
Denominator for basic earnings per share -
   weighted-average shares                              6,517,717        8,190,593         8,244,572
Effect of dilutive securities:
   Options                                                227,118          420,808           170,383
                                                       ----------------------------------------------
Denominator for diluted earnings per share -
   adjusted weighted-average shares and
   assumed conversion                                   6,744,835        8,611,401         8,414,955
                                                       ==============================================

BASIC EARNINGS PER SHARE:
Continuing operations before extraordinary
   items and cumulative effect                         $     0.33      $      1.12       $      0.75
Discontinued operations                                        --               --              0.06
Extraordinary gain (Loss)                                    0.37            (0.13)            (0.02)
Cumulative effect of change in accounting policy               --               --             (0.14)
                                                       ----------------------------------------------
Net earnings                                           $     0.70      $      0.99       $      0.65
                                                       ==============================================

</TABLE>




                                      F-24
<PAGE>   61


                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



6. EARNINGS PER SHARE (CONTINUED)

<TABLE>
<CAPTION>

                                                      FOR THE YEARS ENDED
                                             DECEMBER 26   DECEMBER 27,   DECEMBER 28,
                                                1999          1998           1997
                                            ------------------------------------------
<S>                                         <C>            <C>            <C>
DILUTED EARNINGS PER SHARE:
Continuing operations before extraordinary
   items and cumulative effect                  $0.32         $1.07         $0.74
Discontinued operations                           --           --            0.06
Extraordinary gain (Loss)                        0.35         (0.12)        (0.02)
Cumulative effect of change in accounting
   policy                                         --            --          (0.14)
                                            -----------------------------------------
Net earnings                                    $0.67         $0.95         $0.64
                                            =========================================

</TABLE>

The Company's 7.5% debentures were convertible into 2,316,602, 2,316,602, and
2,283,252 shares of stock at December 28, 1997, December 27, 1998 and December
26, 1999, respectively, but were not included in the computation of diluted EPS,
as such securities were anti-dilutive.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable, and
borrowings under lines of credit approximate fair values due to the short-term
maturities of these instruments. The carrying value of notes receivable
approximate fair value due to the recent advancement of funds at market interest
rates and terms based upon the nature of the loans. The carrying value of
industrial revenue bonds approximate fair value due to the weekly remarketing of
these instruments. The fair value of convertible subordinated debentures and
senior subordinated notes was based upon quoted market prices at those dates.
The convertible subordinated debentures and senior subordinated notes have the
following estimated fair values as of December 26, 1999 and December 27, 1998:

<TABLE>
<CAPTION>

                                           1999                              1998
                             ------------------------------    ------------------------------
                              FAIR VALUE     CARRYING VALUE    FAIR VALUE     CARRYING VALUE
                             ------------------------------    ------------------------------
<S>                          <C>             <C>               <C>            <C>
Convertible subordinated
   Debentures                $ 31,190,000     $ 50,004,000     $ 33,480,000    $ 54,000,000

Senior subordinated
   notes                       36,974,000       56,021,000       44,210,000      68,016,000
                             -----------------------------     -----------------------------
                             $ 68,164,000     $106,025,000     $ 77,690,000    $122,016,000
                             ==============================    =============================

</TABLE>



                                      F-25

<PAGE>   62



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

As of December 26, 1999 and December 27, 1998, securities available-for-sale are
carried at fair value in accordance with SFAS No. 115.

8. STOCK OPTION PLAN

The Company's 1991 Stock Option Plan (the "Plan"), authorizes the grant to key
employees of options to purchase up to an aggregate of 616,667 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. Under the Plan, the options are exercisable
at various periods from one to five years after date of grant and expire ten
years after date of grant. During the year ended December 29, 1996, an
additional 283,333 shares were authorized for future grants.




                                      F-26
<PAGE>   63



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



8. STOCK OPTION PLAN (CONTINUED)

A summary of the status of the Plan for the years ended December 28, 1997,
December 27, 1998 and December 26, 1999, follows:

<TABLE>
<CAPTION>

                                SHARES SUBJECT TO OPTION
                         -------------------------------------
                          AVAILABLE FOR                          WEIGHTED AVERAGE
                             GRANT              OUTSTANDING      EXERCISE PRICE
                         -------------------------------------
<S>                       <C>                   <C>              <C>

December 29, 1996            236,781              641,858            $10.45
  Granted                   (194,000)             194,000             13.25
  Exercised                       --              (22,492)             9.76
  Canceled                    12,494              (12,494)            12.88
                         ------------------------------------
December 28, 1997             55,275              800,872             11.11
  Granted                   (722,537)             722,537              3.75
  Exercised                       --                 (500)             3.75
  Canceled                   800,872             (800,872)            11.11
                         ------------------------------------
December 27, 1998            133,610              722,037              3.75
  Granted                     (5,000)               5,000              5.50
  Exercised                       --              (13,568)             3.75
  Canceled                    18,134              (18,134)             3.75
                         ------------------------------------
December 26, 1999            146,744              695,335              3.76
                         ====================================
</TABLE>

On September 23, 1998, the Company repriced approximately 723,000 stock options
that had been granted in previous years. The options were repriced to $3.75 per
share, which was the market value of the Company's stock on September 23, 1998.
These repriced options are included as cancellations and new grants in the table
above for the year ended December 27, 1998.



                                      F-27

<PAGE>   64



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



8. STOCK OPTION PLAN (CONTINUED)

The weighted average fair value of options granted during the year was $3.75 and
$5.50 for the years ended December 28, 1998 and December 26, 1999, respectively.

The following table summarizes information relating to the stock options
outstanding as of December 26, 1999:

<TABLE>
<CAPTION>

                         OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
----------------------------------------------------------------------------------------------
                     NUMBER           WEIGHTED-                      NUMBER
                   OUTSTANDING        AVERAGE          WEIGHTED-   EXERCISABLE        WEIGHTED-
                       AT            REMAINING         AVERAGE         AT              AVERAGE
   EXERCISE        DECEMBER 26,      CONTRACTUAL       EXERCISE     DECEMBER 26,      EXERCISE
    PRICE             1999              LIFE            PRICE          1999            PRICE
-----------------------------------------------------------------------------------------------
<S>               <C>                <C>               <C>          <C>               <C>
    $3.75           307,334             2.13            $3.75        307,334           $3.75
     3.75            66,001             4.05             3.75         66,001            3.75
     3.75            66,000             5.33             3.75         52,800            3.75
     3.75            93,000             6.59             3.75         55,800            3.75
     3.75           158,000             7.42             3.75         63,200            3.75
     5.50             5,000             9.39             5.50           --               --
                   --------                                          -------
                    695,335                                          545,135
                   ========                                          =======

</TABLE>

Had the fair value of options granted under the plan beginning in 1996 been
recognized as compensation expense on a straight-line basis over the vesting
period of the options, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                              1999              1998                 1997
                                          --------------------------------------------------

<S>                    <C>                 <C>                 <C>                <C>
Net earnings           As reported         $4,538,826          $8,146,351         $5,363,798
                        Pro forma           3,898,931           7,539,654          4,889,823

Basic earnings         As reported               0.70                0.99               0.65
 Per share              Pro forma                0.60                0.92               0.59

Diluted earnings       As reported               0.67                0.95               0.64
 Per share              Pro forma                0.58                0.88               0.58
</TABLE>



                                      F-28

<PAGE>   65



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



8. STOCK OPTION PLAN (CONTINUED)

The pro forma effect on net earnings for 1997, 1998 and 1999 is not
representative of the pro forma effect on net earnings in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to 1995.

The fair value of each option grant is estimated on the date of grant using the
Black Scholes option pricing model with the following weighted average
assumptions used for grants in 1997, 1998 and 1999: no dividend yield for all
years; expected volatility of 45%, 33% and 32%, respectively; risk free interest
rates of 6.79%, 6.00% and 6.10%, respectively; and expected lives of 10, 9 and 9
years, respectively.

9. SHAREHOLDERS' EQUITY

In 1999 and prior years, the Company's Board of Directors authorized the
repurchase of various amounts of its common stock, so that through December 26,
1999, the total authorized amount of the Company's common stock repurchases was
$20,000,000. The cumulative number of shares repurchased as of December 26,
1999, was 2,897,300 shares at a cost of $17,199,579.




                                      F-29

<PAGE>   66



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



10. INCOME TAXES

The provision for income taxes from continuing operations consists of the
following:

<TABLE>
<CAPTION>

                                      1999             1998            1997
                                  ----------------------------------------------
     <S>                          <C>               <C>             <C>
     Current expense (benefit):
       Federal                    $ (278,165)       $2,215,788      $11,785,000
       State                         (29,168)           75,247         (207,000)
                                 -----------------------------------------------
                                    (307,333)        2,291,035       11,578,000

     Deferred expense (benefit)    2,216,333         4,289,965       (9,319,000)
                                 -----------------------------------------------
                                  $1,909,000        $6,581,000      $ 2,259,000
                                 ===============================================
</TABLE>


The difference between income taxes using the effective income tax rate and the
statutory federal income tax rate is as follows:

<TABLE>
<CAPTION>
                                          1999            1998            1997
                                      --------------------------------------------
     <S>                              <C>              <C>             <C>
     Federal income tax based on the
        statutory rate                $ 2,087,372      $ 5,754,428     $ 3,017,000
     State income taxes, less
        federal income tax benefit        218,876          603,393         317,000
     State income tax refund
        received, less Federal
        provision                              --         (137,337)     (1,115,000)
     Minority interest                   (738,444)        (250,352)             --
     Interest on deferred gain            250,028          314,015              --
     Permanent differences & other         91,168          296,853          40,000
                                      ---------------------------------------------
                                      $ 1,909,000      $ 6,581,000     $ 2,259,000
                                      =============================================
</TABLE>



                                      F-30

<PAGE>   67


                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



10. INCOME TAXES (CONTINUED)

Deferred tax (liabilities) assets are comprised of the following:

<TABLE>
<CAPTION>

                                                           1999              1998
                                                     ---------------------------------
     <C>                                             <C>                <C>
     Deferred tax liabilities:
        Differences between book and tax
           basis of property                         $ (8,590,000)      $ (7,548,000)
        Profits not recognized on installment
           sales                                       (7,051,000)        (5,434,000)
        Direct financing leases                           (90,000)          (114,000)
        Other                                            (130,000)                --
                                                     --------------------------------
                                                      (15,861,000)       (13,096,000)

     Deferred tax assets:
        Deferred profit on sales of hotels             12,799,000         11,996,000
        Differences between book and tax losses
          recognized by minority interests                638,000            742,000
        Allowance for doubtful accounts                   179,000            249,000
        Other                                             156,000            236,035
                                                     --------------------------------
                                                       13,772,000         13,223,035
                                                     --------------------------------
     Net deferred tax (liability) asset              $ (2,089,000)      $    127,035
                                                     ================================
</TABLE>


As of December 26, 1999 and December 27, 1998, the Company has recorded a
deferred tax liability resulting from the unrealized gain on securities
available-for-sale of $53,000 and $45,000, respectively.

In December 1997, the Company recorded state income tax refunds attributable to
certain restructuring changes. The effect of these refunds has been included as
a reduction to the 1997 state income tax provision, net of the federal taxes due
on such amount.




                                      F-31
<PAGE>   68


                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


11. RELATED PARTY TRANSACTIONS

Effective January 1, 1996, the Company sold its sixty percent interest in a
corporation which owned five restaurants to the minority shareholder in exchange
for approximately $848,000. The entire purchase price, along with approximately
$1,250,000 of previously existing indebtedness of the corporation and the
minority shareholder, was financed by the Company over a seven year period with
interest accruing annually at the prime rate as defined in the note agreements.
As a result of the transaction, the Company initially deferred recognition of
the approximate $853,000 gain from the sale of this segment until such time
further principal payments on the note were received which would support full
collectibility of the note. For the year ended December 29, 1996, approximately
$40,000 was recorded as a gain on disposal of discontinued business segment. In
December 1997, management determined the amount to be fully collectible based on
positive cash flows of the restaurants and past collection experience;
therefore, the remaining pre-tax $813,000 was recorded as a gain on disposal of
discontinued business segment for the year ended December 28, 1997.



                                      F-32

<PAGE>   69



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


12. SALE/LEASEBACK TRANSACTIONS

In November 1997, the Company entered into a sale and leaseback agreement for 14
of its Sumner Suites hotels. In June 1999, the Company entered into a similar
sale and leaseback agreement with the same party for an additional six of its
Sumner Suites hotels. The assets of the hotels were sold to a real estate
investment trust and the hotels continue to be operated by the Company. The
lease is classified as an operating lease. The original lease term was for ten
years with five renewal periods of ten years each. In 1999, the original lease
term was extended to expire June 30, 2011.

The Company sold hotel assets in 1997 with a net book value of approximately
$101.5 million for $140 million in cash. The gain of approximately $34.9 million
was initially deferred and is being recognized on the straight-line method over
the initial lease term, as amended in 1999, as a reduction of rent expense. The
1999 cash sale price of the six hotels was $65 million; these hotels had a net
book value of approximately $54 million. The $11 million gain was deferred and
is being recognized over the remainder of the 12-year lease term. The minimum
base rental is $21.3 million annually with contingent rent due of 8% of the
excess of the leased hotels' base revenues (as defined in the lease agreement)
beginning in 1999. Contingent rentals totaled $91,000 during 1999.

The Company was required to pay a deposit of $14 million (increased to $21.3
million in 1999) to be retained by the purchaser in the event of default or
nonobservance of the lease agreement. The deposit will be refunded to the
Company at the end of the lease term in the event no default has occurred. This
non-interest bearing deposit is included in long-term deposits on sale/leaseback
on the accompanying consolidated balance sheets.

The Company was also required to provide an additional deposit of $14 million.
This deposit, included in long-term deposits on sale/leaseback, earns interest
at a rate of 11.11% annually. Interest earned is credited to the required rent
payment due the lessor. The deposit will be refunded to the Company upon the
earlier of achievement of certain operating results of the leased hotels or
expiration of the lease.




                                      F-33

<PAGE>   70



                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



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. 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, $77,000 of which was recognized in 1998, with
the remaining $11.9 million recognized in 1999 as the criteria for full accrual
sales accounting were satisfied. The deferred profit of $4.6 million and $7.3
million are netted against current notes receivable and non-current notes
receivable, respectively, as of December 27, 1998. All of the deferred profit
was recognized as of December 26, 1999. As of December 27, 1998, deferred
credits totaling $2.4 million related to the 12 hotels on which profit was
recognized under the full accrual method were recorded of which $262,000 was
used for the completion of renovation and replacement expenditures. The
remaining $2.1 million deferred credit is being reduced as the buyer reduces its
payments to the Company for payments of interest on debt assumed by the buyer.
As of December 26, 1999, the balance of this deferred credit was $1.3 million.

14. SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>

                                               1999            1998            1997
                                         ------------------------------------------------
<S>                                      <C>               <C>              <C>

Cash paid during the year for interest   $  14,030,265     $ 13,669,330     $ 11,800,125
                                         ================================================
Cash paid during the year for
   income taxes                          $     277,890     $  2,572,681     $ 18,604,588
                                         ================================================
Significant non-cash investing and
   financing activities:
     Sales of hotels:
       Notes receivable                             --     $ 67,500,001     $  4,500,000
       Property and equipment                       --      (67,500,001)      (4,500,000)
                                         ------------------------------------------------
                                         $          --     $         --     $         --
                                         ================================================
</TABLE>



                                      F-34


<PAGE>   71




                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


15. OPERATING SEGMENT INFORMATION

The Company's significant operating segments are hotel operations, franchising
and management and construction and development. The hotel operating segment has
exceeded 90%, 90%, and 80% of total revenues for the years ending December 28,
1997, December 27, 1998, and December 26, 1999, 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.

Revenues from the franchising and management segment include franchising
revenues from one controlled group of franchisees of 16 Shoney's Inns which
contributed approximately $426,000, or 13.7%, and $1.0 million, or 24.8%, of
total franchising and management revenues in 1998 and 1999, respectively.
Construction and development revenues earned in 1999 included two construction
contracts with one customer comprising approximately $11.0 million, or 97.7%, of
total construction revenues.



                                      F-35

<PAGE>   72




                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


15. OPERATING SEGMENT INFORMATION (CONTINUED)

A summary of the Company's operations by segment follows (in thousands of
dollars):

<TABLE>
<CAPTION>
                                                 1999           1998            1997
                                             -------------------------------------------
     <S>                                     <C>              <C>             <C>

     Revenues:
        Hotel revenues from external
          customers                           $  66,188       $  69,240       $  71,945
        Franchising and management                8,688           8,443           9,045
        Construction and development             26,413          57,071          35,808
        Elimination of intersegment
          revenue franchising and
          construction                          (19,715)        (62,314)        (41,689)
                                              ------------------------------------------
     Total revenues                           $  81,574       $  72,440       $  75,109
                                              ==========================================
     Operating profit:
         Hotel                                $     350       $   6,989       $  16,780
         Franchising and management              (5,617)         (6,140)         (3,170)
         Construction and development             1,340             (16)           (111)
                                              ------------------------------------------
     Total operating profit                   $  (3,927)      $     833       $  13,499
                                              ==========================================
     Total assets:
        Hotel                                 $ 200,773       $ 245,893       $ 201,302
        Franchising and management               57,986          48,680          98,136
        Construction and development             11,555             428             439
                                              ------------------------------------------
     Total assets                             $ 270,314       $ 295,001       $ 299,877
                                              ==========================================
     Capital expenditures:
        Hotel                                 $  16,955       $  71,416       $  47,464
        Franchising and management                3,126             954           8,443
        Construction and development                 20             103              --
                                              ------------------------------------------
     Total capital expenditures               $  20,101       $  72,473       $  55,907
                                              ==========================================
     Depreciation and amortization:
        Hotel                                 $   5,920       $   6,911       $   9,765
        Franchising and management                1,143           1,076             598
        Construction and development                 38              25              13
                                              ------------------------------------------
     Total depreciation and amortization      $   7,101       $   8,012       $  10,376
                                              ==========================================

</TABLE>



                                      F-36


<PAGE>   73




                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



16. SUBSEQUENT EVENT

On March 16, 2000 the Company entered into a Sale and Purchase Agreement with
Prime Hospitality Corp. ("Prime") that contemplates a series of transactions in
which the Company will (i) sell to Prime the Company's leasehold interest in 20
Sumner Suites hotels currently leased from HPT Suite Properties Trust and
operated by the Company, (ii) sell to HPT Suite Properties Trust, which would
then lease to Prime, all of the Company's interest in four additional Sumner
Suites hotels currently owned and operated by ShoLodge, (iii) lease directly to
Prime the remaining three Sumner Suites hotels currently owned and operated by
the Company on terms similar to the existing lease agreement between the Company
and HPT Suite Properties Trust and (iv) sell to Prime two undeveloped hotel
sites. In addition, the agreement contemplates that Prime will engage the
Company to construct a hotel on each of the two undeveloped sites being
purchased from the Company and to provide other services to Prime in the future.

The Company expects to receive at closing approximately $54 million in cash and
securities consisting of outstanding debt instruments of the Company currently
held by Prime or an affiliate, future minimum annual rental payments of
approximately $3 million, and additional future annual revenues for services to
be provided to Prime in the future amounting to approximately $4 million per
year. As a condition to the transfer of the assets to Prime, the Company will
receive a release and return of its $14 million in cash currently securing its
lease guaranty with HPT Suite Properties Trust. The Company's $14 million lease
security deposit will be transferred to Prime as a part of the lease.

The Company will grant Prime the right to continue operating the hotels using
the Sumner Suites brand name for up to nine months after closing. As part of the
transaction the Company agrees to operate no other all-suites hotel in
competition with Prime within a defined geographic radius of each of the hotels
being sold. The radius is the same that exists with respect to the Sumner Suites
currently leased from HPT Suite Properties Trust and three miles for each of the
hotels in Texas. This restriction will not prevent the Company from developing
hotels for others in the restricted area or operating or franchising any
Shoney's Inn brand hotel in the restricted area.

The closing of the pending transaction, which is expected to be in April, 2000,
is subject to a number of conditions including Prime's satisfaction with its due
diligence review of



                                      F-37
<PAGE>   74




                         ShoLodge, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


16. SUBSEQUENT EVENT (CONTINUED)

the hotels and the approval of HPT Suite Properties Trust. It is possible that
the parties will not be able to successfully complete the transaction or that
the terms of the final transaction will vary from those presently contemplated.

17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of the unaudited quarterly financial information for
the years ended December 26, 1999 and December 27, 1998:

<TABLE>
<CAPTION>

                                                      QUARTERS
                                 -------------------------------------------------
                                   FIRST        SECOND        THIRD       FOURTH
                                 -------------------------------------------------
                                       (IN (000'S) EXCEPT FOR PER SHARE DATA)
<S>                              <C>           <C>           <C>          <C>

1999
  Revenues                       $19,472       $17,559       $23,440      $21,102
  Gross operating profit           6,545         5,930         7,472        3,099
  Net income (loss)                  376         3,344           856          (38)
  Net income per share:
    Basic                            .05           .47           .15         (.01)
    Diluted                          .05           .41           .14         (.01)

1998
  Revenues                       $23,614       $19,907       $15,671      $13,249
  Gross operating profit           9,359         7,804         5,036        2,844
  Net income (loss)                  130           159        10,860       (3,003)
  Net income (loss) per share:
    Basic                            .02           .02          1.32         (.38)
    Diluted                          .02           .02          1.05         (.38)

</TABLE>





                                      F-38
<PAGE>   75




Shareholders and Board of Directors
ShoLodge, Inc.

We have audited the consolidated financial statements of ShoLodge, Inc. and
subsidiaries as of December 26, 1999 and December 27, 1998 and for the years
then ended, and have issued our report thereon dated March 17, 2000 (included
elsewhere in this Registration Statement). Our audits also included the
financial statement schedule in Item 14 of this registration statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.



                                             ERNST & YOUNG LLP

Atlanta, Georgia
March 27, 2000




                                      S-1
<PAGE>   76
                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
ShoLodge, Inc.
Hendersonville, Tennessee

We have audited the consolidated financial statements of ShoLodge, Inc. and
subsidiaries as of and for the year ended December 28, 1997, and have issued
our report thereon dated April 1, 1998, such report is included elsewhere in
this Form 10-K. Our audits also included the consolidated financial statement
schedule of ShoLodge, Inc. listed in Item 14. This consolidated financial
statements schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.


/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Nashville, Tennessee
April 1, 1998





                                      S-2
<PAGE>   77


                         SHOLODGE, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS            SCHEDULE II


     Years ended December 28, 1997, December 27, 1998, and December 26, 1999


<TABLE>
<CAPTION>
                                                   ADDITIONS
                                                    CHARGED      ADDITIONS
                                    BALANCE AT     TO COSTS      CHARGED                     BALANCE
                                   BEGINNING OF      AND         TO OTHER                     AT END
                                       YEAR        EXPENSES       ASSETS       DEDUCTIONS    OF YEAR
<S>                                <C>             <C>           <C>          <C>            <C>
Year ended
     December 28, 1997
         Allowance for doubtful
            accounts receivable      $150,000      $202,500      $    --      $      --       $352,500
                                     ========      ========      =======      ==========      ========
Year ended
     December 27, 1998
         Allowance for doubtful
            accounts receivable      $352,500      $427,904      $55,945      $(193,569)      $642,780
                                     ========      ========      =======      =========       ========
Year ended
     December 26, 1999
         Allowance for doubtful
            accounts receivable      $642,780      $280,472      $    --      $(463,383)      $459,869
                                     ========      ========      =======      =========       ========

</TABLE>




                                      S-3