##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K/A

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 30, 2001
        
        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. Employerof incorporation or organization)
        
        Identification Number)130 Maple Drive, North, Hendersonville, Tennessee
        
        37075(Address of principal executive offices)
        
        (Zip Code)


Registrants telephone number, including area code (615) 264-8000

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value
Rights to Acquire Series A Subordinated Preferred Stock(Title of Class)

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]  No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

Aggregate market value of the voting stock held by non-affiliates of the
registrant on March 21, 2002, was approximately $11,500,000. The market value
calculation was determined using the last sale price of registrants common
stock on March 21, 2002, 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 21, 2002, were
5,118,778.





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TABLE OF CONTENTS



|                                          |  |  |  |  |  |  |  | 
|----------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                   
|PART II                                  
|PART III                                 
|PART IV                                  
|SIGNATURES                               
|CERTIFICATION                            
|EX-21 SUBSIDIARIES OF THE REGISTRANT     
|EX-23.1 CONSENT OF ERNST & YOUNG LLP     
|EX-99.1 CERTIFICATIONS OF THE CEO AND CFO



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DOCUMENTS INCORPORATED BY REFERENCE

Documents from which portions arePart of Form 10-K
        
        incorporated by referencePart III
        
        Proxy Statement for registrants annual meeting of shareholders
to be held during the second quarter of fiscal 2002.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






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##### Table of Contents






PART I

ITEM 1. BUSINESS.

General

The Company develops, owns and, through July 9, 2000, operated 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 hotels owned and
operated through July 9, 2000 were mid-scale, all-suites hotels located in
Arizona, Colorado, Florida, Georgia, Indiana, Kansas, New Mexico, North
Carolina, Ohio, Tennessee, Texas and Virginia. See Sale of Leasehold
Interests below for a discussion of the transaction which transferred the
operations of all of the 27 Sumner Suites hotels to Prime Hospitality Corp.
(Prime) effective with the close of business on July 9, 2000. As of December
30, 2001, the Shoneys Inn lodging system consisted of 70 Shoneys Inns
containing 6,681 rooms of which 30 containing 3,612 rooms are owned or managed
by the Company. Shoneys Inns are currently located in 16 states with a
concentration in the Southeast.

There are no plans to develop and operate Sumner Suites hotels in the near
term. The Company is, however, developing this type of hotel for third parties,
including new AmeriSuites hotels for Prime. Also, the Company retains
ownership of the Sumner Suites registered trademark and may continue to develop
hotels under this name in the longer term.

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

The Company also franchises and manages Shoneys Inns, earning revenues
from royalties, reservation services, and management services provided to the
franchisees, and reservation services provided to other hotel chains and
independent hotel operators. The Company also leases hotels and restaurants to
others, earning rental income from these third party lessees.

The Company was incorporated under the laws of the State of Tennessee in
1976.

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Sale of Leasehold Interests

On July 9, 2000, the Company completed a transaction with Prime
Hospitality Corp. (Prime) in which it sold to Prime all of its leasehold
interest in 24 Sumner Suites hotels, for a total of $15.6 million. The
Company received $100,000 in cash, $13.9 million in the form of an escrow fund
and retired its debt securities held by Prime with a face value of $2.6 million
and a fair value of $1.6 million. As a part of the transaction, the Company
assigned its interest to Prime in two deposits related to the lease, the $14.0
million guaranty deposit and $25.6 million in lease security deposits and the
related supplies inventory at each hotel.

The Company also agreed to construct two hotels on sites then owned by the
Company. One of these construction projects was completed in October 2001,
and the hotel opened on October 3, 2001. The other project was completed and
the hotel opened on February 7, 2002. These projects were funded by the $13.9
million escrow money from the sale and any excess escrow funds were to be
released to the Company. No excess funds were available to be released upon
completion of the two hotels. The Company also gave Hospitality Properties
Trust (HPT), the owner of the 24 Sumner Suites whose leasehold rights were
assigned to Prime, the right to exchange one or both of two specific hotels
included in the leasehold group for these two new properties, upon completion
of their construction, without payment or receipt of any additional
consideration. If the Company did not consent to the property exchange, then
HPT could have required the Company to purchase the two properties. As of
December 30, 2001, the completed hotel was being operated by the Company as an
AmeriSuites hotel, subject to HPTs exchange option being exercised and
consummated. The exchange subsequently occurred on March 14, 2002. The other
hotel was completed and opened by the Company as an AmeriSuites hotel on
February 7, 2002, and is being operated by the Company pending the exchange,
which is expected to occur before the end of the Companys first fiscal quarter
ending April 21, 2002.

The Company further agreed to lease to Prime three other Sumner Suites
hotels, which the Company owns. The 11-year lease provides for initial minimum
annual rental payments of $2.9 million, increasing to $3.1 million if the lease
is extended, and also provides for percentage rents based on hotel sales, as
defined. Prime has converted all 27 of the Sumner Suites hotels to the
AmeriSuites brand. The Company agreed to not operate any other all-suites
hotels in competition with Prime within a defined geographic radius of each of
the hotels being sold. This restriction will not prevent the Company from
developing hotels for others in the restricted area or operating or franchising
any Shoneys Inn brand hotel in the restricted area.

The Company recognized a gain of $3.6 million, continued to defer gains of
$4.1 million from previous sale/leaseback transactions on two of the hotels
subject to possible exchange, and recognized gains related to the early
extinguishment of the debt securities received from Prime of $855,000, all
before income tax.

In addition, the Company agreed to construct one 124-room AmeriSuites
hotel for Prime on a site presently owned by Prime at a construction and
development price of $76,500 per room, less Primes cost of the land. This
construction was completed in the fourth quarter of 2001. The Company also
agreed to provide reservation services to Prime for all of its existing hotels,
for a fee based on a percentage of room revenue.

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Reservation service fees are now included in franchising and management
revenues. The reservation system technology was enhanced in order to
accommodate Primes requirements, and was ready to add these additional hotel
properties in early 2001. However, Prime failed to commence use of the
Companys reservation services as agreed, and on June 25, 2001, the Company
filed an arbitration proceeding against Prime, seeking $20 million in monetary
damages. The parties have selected an arbitrator, and the arbitration hearing
has been scheduled to begin on April 15, 2002.

Growth Strategy

The Companys strategy is to increase cash flow and earnings by (i)
increasing Revenue Per Available Room 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, (iii) utilizing the Companys experience in developing all-suite hotels
to construct and develop hotels for others, and (iv) expanding the number of
lodging facilities served by the Companys proprietary central reservation
center (InnLink).

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.

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. Two franchised Shoneys Inns were opened in fiscal 2001,
five hotels left the Shoneys Inn system, and two Company-owned Shoneys Inns
were sold to franchisees. As of 2001 fiscal year-end, there were 70 Shoneys
Inns (of which 12 are Company owned) with a total of 6,681 rooms. The Company
targets existing Shoneys Inn franchisees, other hotel brand developers and
contacts within the industry as potential franchisees for additional Shoneys
Inns.

Reservation Services. The Company provides reservation services to its
Shoneys Inn franchisees and to other hotel chains and independent hotel
operators. This call center (InnLink) continues to expand its customer base,
currently serving approximately 550 hotels as compared with approximately 100
hotels a year ago. The Company is continuing to aggressively market this
service, capitalizing on its state of the art technology.

Development of Additional All-Suite Hotels. Currently, no Sumner Suites
hotels are owned, under construction, or planned for the near term. The Company
has developed and opened two AmeriSuites hotels for Prime on sites that it
owns. See Sale of Leasehold Interests above. The Company is developing and
constructing all-suite hotels for third parties and expects to continue to do
so in the immediate future.

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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 sale of the remaining
Shoneys Inns, negotiating new credit arrangements, developing hotels for other
owners, the repurchase of additional shares of the Companys common stock or
outstanding debt securities, or any combination of these or other strategies.

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 16
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
2001, the average daily room rate for Company-owned Shoneys Inns was $50.89.

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 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 electrical and
mechanical work. The Company intends to continue to build hotels for others.
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.

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The construction phase of a hotel generally requires six months after the
selection and acquisition of the site and all approvals and permits have been
obtained. The Companys experience in selection and acquisition of sites has
varied and generally averages six months. The approval and permitting phase can
occur simultaneously with site acquisition and generally requires three months.
The entire development process generally ranges from 10 to 12 months, but may
take longer.

Sales and Marketing

The Company directs marketing efforts on behalf of its Company-owned inns
primarily to business travelers, whom management believes have represented the
largest segment of its customers in recent years.

Key to the success of the Shoneys Inn chain is the Franchise Service
Manager Program. Currently three Franchise Service Managers (FSM) provide
sales direction and hands-on assistance to all inns with the goal of helping
them achieve their property financial, guest service and operational goals.
Each FSM takes personal ownership of the properties in his/her region and
provides assistance through regular property visits and constant phone
communications.

The Director of Marketing directs the FSM program and oversees management
of the national advertising fund, into which all Shoneys Inns pay 1% of
revenue to support national marketing efforts such as the FSM program, the
publications of the annual Vacation and Travel Directory and Group Tour Guide,
participation in travel shows and targeted niche advertising.

Programs designed to target the primary markets of business travelers and
mature leisure travelers provide brand recognition. All Shoneys Inns
participate in the Sho Business frequent business traveler program entitling
members to receive the lowest available corporate rate as well as express
check-in upon presentation of their membership card.

Additionally the Company attempts to capitalize on the Shoneys brand name
recognition in the over 50-age group with two programs designed for mature
travelers. As an approved Preferred Provider of AARP, all Shoneys Inns
provide members of AARP with a 15% discount off the standard room rate at all
times. Our Any Senior program provides a 10% discount on the standard room
rate to any traveler age 55 or older.

Shoneys Inns are promoted to the group tour market through the annual
publication of the Group Tour Guide, annual participation in three major tour
operator marketplaces and by direct mail. In addition, InnLink provides a
Group Tour Specialist to assist tour operators in contacting and booking
Shoneys Inns. The non-professional group planner is targeted through
advertisements in publications such as Reunions Magazine and through
participation in travel shows targeting the non-professional planner.

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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, services and amenities provided and
other relevant information such as proximity to area attractions, businesses
and restaurants. 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 maintains a comprehensive on line directory with
reservations booking capabilities at www.shoneysinn.com.

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 both owned and franchised Shoneys Inns, has joined
the TACS-Lite Program administered by Perot Systems. 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 Perot Systems 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
knowing that their commissions will be paid by Perot Systems without the travel
agent having to go to the trouble and expense of billing each separate
location.

Lodging Operations

Hotel Management.Overall hotel operations are the responsibility of the
Director of Hotel Operations. The hotels are further managed by regional
managers, who directly supervise the general manager of each property. The
general manager of each hotel is fully responsible for day-to-day operations
and is compensated by salary and bonus systems which reward revenue and
operating margin performance. Each general manager, in conjunction with senior
management, develops the propertys operating budget and is held accountable
for meeting the goals and objectives of the hotel.

Reservation System.The Companys proprietary central reservation system,
InnLink, provides important support for the room reservation process for
Shoneys Inns and is marketed to other chains as well. Other chains that
contract with the Company for the service include Baymont Inns & Suites, Key
West Inns and 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 1-800-552-4667 for Shoneys
Inns. 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 11% of room
sales for Shoneys Inns 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.

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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 one full-time licensed franchise salesman. 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.

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.

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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 eighteen 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. Shoneys
right to receive such fees was terminated on October 25, 1996.

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 were
included in the mid-scale (without food and beverage) segment.

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

Average
        
        Average DailyREVPAR
        
        Occupancy Rate
        
        Room Rate (1)1999
        
        2000
        
        2001
        
        1999
        
        2000
        
        2001
        
        1999
        
        2000
        
        2001Industry-wide
        
        $
        51.42
        
        
        $
        54.13
        
        
        $
        50.99
        
        
        
        63.3
        %
        
        
        63.5
        %
        
        
        60.1
        %
        
        $
        81.27
        
        
        $
        85.24
        
        
        $
        84.85Economy segment
        
        
        28.77
        
        
        
        30.68
        
        
        
        30.47
        
        
        
        58.1
        
        
        
        58.5
        
        
        
        56.2
        
        
        
        49.52
        
        
        
        52.44
        
        
        
        54.22Mid-scale (w/o food and
beverage) segment
        
        
        41.81
        
        
        
        43.76
        
        
        
        42.78
        
        
        
        65.1
        
        
        
        65.0
        
        
        
        62.3
        
        
        
        64.22
        
        
        
        67.32
        
        
        
        68.67All Shoneys Inns
        
        
        27.23
        
        
        
        25.32
        
        
        
        24.56
        
        
        
        54.1
        
        
        
        50.6
        
        
        
        49.9
        
        
        
        50.36
        
        
        
        50.00
        
        
        
        49.26Company-owned Shoneys
Inns
        
        
        24.24
        
        
        
        23.41
        
        
        
        24.88
        
        
        
        48.3
        
        
        
        46.5
        
        
        
        48.9
        
        
        
        50.13
        
        
        
        50.31
        
        
        
        50.89All Sumner Suites (2)
        
        
        43.63
        
        
        
        47.76
        
        
        
        N/A
        
        
        
        56.3
        
        
        
        61.8
        
        
        
        N/A
        
        
        
        77.54
        
        
        
        77.32
        
        
        
        N/A


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



|(2) |  | Year 2000 represents only the first 28 weeks of the fiscal year to the
date of sale of the leasehold interests to Prime. No Sumner Suites were
operated in 2001.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

Source:
        
        Smith Travel Research, Standard Historical Trend Report for years ended
1999, 2000 and 2001, for industry wide, economy, and mid-scale (w/o food
and beverage), 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 Travelodge. The Companys Sumner Suites hotels
experienced competition from chains such as Embassy Suites, 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 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.

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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.

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. 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 30, 2001 the Company had approximately 550 employees,
including approximately 140 in the Companys corporate headquarters. The
companys employees are not represented by a labor union. The Company considers
its relationships with employees to be good.

ITEM 2. PROPERTIES.

The Companys corporate headquarters, owned by the Company, is located in
Hendersonville, Tennessee and contains approximately 42,000 square feet of
space including storage and employee cafeteria. Management believes that its
corporate headquarters building contains sufficient space to accommodate the
Companys currently anticipated needs.

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Eleven of the twelve Company-owned Shoneys Inns, the three AmeriSuites
hotels leased to another hotel operator, and the Company-owned Baymont Inn &
Suites are located on sites owned by the Company either directly or through
subsidiaries. The remaining Shoneys Inn is located on a site that is leased
pursuant to a long-term lease involving both the land and improvements. The
eleven Company-owned and operated Shoneys Inns include five Inns containing
589 guest rooms located in Houston, Texas, one 118-room Inn in Mobile, Alabama,
one 115-room Inn in Birmingham, Alabama, one 111-room Inn in Goodlettsville,
Tennessee, one 92-room Inn in Cedar Rapids, Iowa, one 110-room Inn in Gulfport,
Mississippi and one 144-room Inn in Atlanta, Georgia. The 92-room
Company-owned and operated Baymont Inn & Suites is located in Hattiesburg,
Mississippi. The three AmeriSuites hotels owned by the Company and leased to
another operator are all located in Texas, one each in Dallas, Houston and San
Antonio.

ITEM 3. LEGAL PROCEEDINGS.

The Company is subject to litigation from time to time in the ordinary
course of its business. The Company is not aware of any legal action pending or
threatened against it that would have a material impact on the consolidated
financial position or results of operations of the Company.

On June 25, 2001 the Company filed an arbitration proceeding against Prime
Hospitality Corporation (Prime) based on Primes failure to commence use of
the Companys reservation services for a fee as agreed by Prime in an Agreement
for Reservation Services dated July 9, 2000. The Company is seeking $20
million in monetary damages. The parties have selected an arbitrator, and the
arbitration hearing has been scheduled to begin on April 15, 2002. There is no
assurance that the Company will be successful in the proceeding.

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 2001.

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PART II

ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS.

The Companys Common Stock is traded in the over-the-counter market and is
quoted on The Nasdaq Stock Market (NASDAQ) under the symbol LODG. The
prices set forth below reflect the high and low sales prices for the Companys
Common Stock as reported by NASDAQ for the periods indicated.

Fiscal 2000
        
        High
        
        LowFirst Quarter
        
        
        5.13
        
        
        
        3.47Second Quarter
        
        
        4.25
        
        
        
        3.00Third Quarter
        
        
        5.69
        
        
        
        3.25Fourth Quarter
        
        
        6.00
        
        
        
        4.63


Fiscal 2001
        
        High
        
        LowFirst Quarter
        
        
        5.38
        
        
        
        4.63Second Quarter
        
        
        5.78
        
        
        
        4.75Third Quarter
        
        
        6.25
        
        
        
        3.83Fourth Quarter
        
        
        6.00
        
        
        
        3.83


Fiscal 2002
        
        High
        
        LowFirst Quarter (through March 21, 2002)
        
        
        6.00
        
        
        
        5.70


On March 21, 2002, the last reported sale price for the Companys Common
Stock as reported by NASDAQ was $5.75 per share. As of March 21, 2002, there
were approximately 48 holders of record of the Companys Common Stock and
approximately 650 beneficial owners.

The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its earnings to finance future
development of its business, and therefore does not anticipate paying any cash
dividends in the foreseeable future. The Companys primary revolving credit
agreement prohibits the payment of dividends without the lenders consent.

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 30, 2001 have been
derived from the Companys audited Consolidated Financial Statements. The
Consolidated Financial Statements for each of the three fiscal years in the
period ended December 30, 2001, 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.

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

FISCAL YEAR ENDEDDEC.28,
        
        DEC.27,
        
        DEC.26,
        
        DEC.31,
        
        DEC.30,1997
        
        1998
        
        1999
        
        2000
        
        2001REVENUES:Hotel
        
        $
        70,237
        
        
        $
        67,866
        
        
        $
        65,116
        
        
        $
        45,429
        
        
        $
        12,533Franchising and management
        
        
        3,164
        
        
        
        3,119
        
        
        
        4,152
        
        
        
        3,606
        
        
        
        3,971Construction and development
        
        
        
        
        
        
        81
        
        
        
        11,234
        
        
        
        12,037
        
        
        
        27,480Rent
        
        
        442
        
        
        
        532
        
        
        
        483
        
        
        
        1,955
        
        
        
        3,468Other income
        
        
        395
        
        
        
        30
        
        
        
        360
        
        
        
        49
        
        
        
        337Total revenues
        
        
        74,238
        
        
        
        71,628
        
        
        
        81,345
        
        
        
        63,076
        
        
        
        47,789COSTS AND EXPENSES:Hotel
        
        
        42,041
        
        
        
        44,059
        
        
        
        45,382
        
        
        
        33,653
        
        
        
        10,193Franchising and management
        
        
        2,301
        
        
        
        2,393
        
        
        
        2,420
        
        
        
        2,460
        
        
        
        2,192Construction and development
        
        
        
        
        
        
        71
        
        
        
        9,826
        
        
        
        12,571
        
        
        
        25,692Rent expense
        
        
        1,991
        
        
        
        9,838
        
        
        
        13,530
        
        
        
        10,333
        
        
        
        582General and administrative
        
        
        3,949
        
        
        
        6,358
        
        
        
        6,342
        
        
        
        5,019
        
        
        
        5,927Depreciation and amortization
        
        
        10,169
        
        
        
        7,801
        
        
        
        6,887
        
        
        
        5,565
        
        
        
        4,440Total expenses
        
        
        60,451
        
        
        
        70,520
        
        
        
        84,387
        
        
        
        69,601
        
        
        
        49,026Operating earnings (loss)
        
        
        13,787
        
        
        
        1,108
        
        
        
        (3,042
        )
        
        
        (6,525
        )
        
        
        (1,237
        )Gain on sale of property and
leasehold interests
        
        
        3,819
        
        
        
        20,511
        
        
        
        15,002
        
        
        
        4,902
        
        
        
        3,762Gain on early extinguishment of debt
        
        
        (287
        )
        
        
        (1,667
        )
        
        
        3,861
        
        
        
        7,307
        
        
        
        913Interest expense
        
        
        (11,249
        )
        
        
        (10,376
        )
        
        
        (12,109
        )
        
        
        (10,471
        )
        
        
        (8,452
        )Interest income
        
        
        1,762
        
        
        
        4,948
        
        
        
        6,182
        
        
        
        6,462
        
        
        
        6,376Earnings from continuing
operations before income taxes and
minority interests
        
        
        7,832
        
        
        
        14,524
        
        
        
        9,894
        
        
        
        1,675
        
        
        
        1,362Income taxes
        
        
        (1,968
        )
        
        
        (5,886
        )
        
        
        (3,376
        )
        
        
        (1,000
        )
        
        
        (454
        )Minority interests in earnings of
consolidated subsidiaries and partnerships
        
        
        (173
        )
        
        
        (648
        )
        
        
        (1,910
        )
        
        
        (57
        )
        
        
        (58
        )Earnings from continuing operations
before cumulative effect of change in
accounting policy
        
        
        5,691
        
        
        
        7,990
        
        
        
        4,608
        
        
        
        618
        
        
        
        850Discontinued operations:Operations of hotel disposed of, net
of income tax effect
        
        
        311
        
        
        
        156
        
        
        
        (69
        )
        
        
        (40
        )
        
        
        62Gain on disposal of discontinued
business segment, net of income
tax effect
        
        
        526
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Cumulative effect of change in
accounting policy, net of income
tax effect
        
        
        (1,164
        )
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Net earnings
        
        $
        5,364
        
        
        $
        8,146
        
        
        $
        4,539
        
        
        $
        578
        
        
        $
        912


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Earnings per common shareBasic:Earnings from continuing operations
before cumulative effect of
change in accounting policy
        
        $
        0.69
        
        
        $
        0.98
        
        
        $
        0.71
        
        
        $
        0.11
        
        
        $
        0.15Net Earnings
        
        $
        0.65
        
        
        $
        0.99
        
        
        $
        0.70
        
        
        $
        0.11
        
        
        $
        0.16Diluted:Earnings from continuing operations
before cumulative effect of
a change in accounting policy
        
        $
        0.68
        
        
        $
        0.93
        
        
        $
        0.68
        
        
        $
        0.11
        
        
        $
        0.15Net Earnings
        
        $
        0.64
        
        
        $
        0.95
        
        
        $
        0.67
        
        
        $
        0.10
        
        
        $
        0.16Weighted average common shares
outstandingBasic
        
        
        8,245
        
        
        
        8,191
        
        
        
        6,518
        
        
        
        5,472
        
        
        
        5,465Diluted
        
        
        8,415
        
        
        
        8,611
        
        
        
        6,745
        
        
        
        5,554
        
        
        
        5,530Balance sheet data:Working capital
        
        $
        54,120
        
        
        $
        (22,516
        )
        
        $
        9,337
        
        
        $
        4,557
        
        
        $
        (6,777
        )Total assets
        
        
        299,877
        
        
        
        295,001
        
        
        
        270,314
        
        
        
        204,631
        
        
        
        206,587Long-term debt and capitalized
leases
        
        
        154,638
        
        
        
        125,539
        
        
        
        122,233
        
        
        
        90,762
        
        
        
        86,293Shareholders equity
        
        
        95,352
        
        
        
        98,099
        
        
        
        90,878
        
        
        
        90,322
        
        
        
        89,273


Notes to Selected Financial Data



|(A) |  | Fluctuations in hotel revenues, hotel operating costs and expenses,
and depreciation expense are due primarily to fluctuations in the number
of hotels operated by the Company. At the end of 1997, 1998, 1999, 2000
and 2001, there were 49, 38, 42, 14, and 13 hotels, respectively, being
owned and operated by the Company. Sixteen hotels were sold in July of
1998 to a group of buyers affiliated with each other. In July of 2000,
the Company sold its operating interest in 27 hotels to Prime
Hospitality Corp. (Prime) by selling its leasehold interest in 24 of
them and leasing the remaining three to them.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(B) |  | Construction and development revenues and cost and expenses vary
widely from year to year depending upon the number of third party
construction contracts in progress. Prior to 1999, construction and
development was done primarily on the Companys own hotels.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(C) |  | Rental revenues increased significantly in 2000 due to the lease of
the three hotels to Prime as discussed in (A) above, increasing rent
income by approximately $3.0 million per year beginning in July of 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(D) |  | Rent expense fluctuations are due primarily to rent paid to the
landlord on 24 hotels sold and leased back in 1997, 1999, and 2000,
prior to the sale of these leasehold interests to Prime in July of 2000.
Fourteen hotels were sold and leased back in November of 1997; six
hotels were sold and leased back in June of 1999; and four hotels were
sold and leased back in May of 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|(E) |  | The unusually high level of gains on sales of properties in 1998 and
1999 was due to the sale of the sixteen hotels in July of 1998, a
portion of which was recognized in 1998 and the remainder in 1999 due to
the installment method of accounting required on four of the hotels sold
due to insufficient down payments in 1998.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(F) |  | Losses in 1997 and 1998 on early extinguishments of debt were in
connection with the sale of hotels. The gains in 1999, 2000, and 2001
were due primarily to the Companys repurchases of its outstanding
public debt at a discount.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(G) |  | The gains and losses from early extinguishment of debt previously
classified as extraordinary items have been reclassified to conform with
the provisions of SFAS No. 145 which was adopted by the Company at the
beginning of fiscal 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(H) |  | This table reclassifies the operations of one hotel sold in June of
2002 to discontinued operations for all periods presented.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------

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

Overview

The Company derives revenue primarily from hotel room sales at its Sumner
Suites hotels (through July 9, 2000) and Company-owned Shoneys Inn hotels. The
Company also receives management fees for services it performs for eighteen
franchised Shoneys Inns. The Company derives additional revenue from franchise
fees it receives as the exclusive franchiser 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.

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.

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Results of Operations

The following table sets forth, for the periods indicted, the percentage
relationship of certain items of revenue and expense to the total revenues of the
Company.

Fiscal Year EndedDec.26,
        
        Dec.31,
        
        Dec.30,1999
        
        2000
        
        2001Revenues:Hotel
        
        
        80.0
        %
        
        
        72.0
        %
        
        
        26.2
        %Franchising and management
        
        
        5.1
        %
        
        
        5.7
        %
        
        
        8.3
        %Construction and development
        
        
        13.8
        %
        
        
        19.1
        %
        
        
        57.5
        %Rent income
        
        
        0.6
        %
        
        
        3.1
        %
        
        
        7.3
        %Other income
        
        
        0.5
        %
        
        
        0.1
        %
        
        
        0.7
        %Total revenues
        
        
        100.0
        %
        
        
        100.0
        %
        
        
        100.0
        %Costs and expenses:Hotel
        
        
        55.8
        %
        
        
        53.4
        %
        
        
        21.3
        %Franchising and management
        
        
        3.0
        %
        
        
        3.9
        %
        
        
        4.6
        %Construction and development
        
        
        12.1
        %
        
        
        19.9
        %
        
        
        53.8
        %Rent expense, net
        
        
        16.6
        %
        
        
        16.4
        %
        
        
        1.2
        %General and administrative
        
        
        7.8
        %
        
        
        8.0
        %
        
        
        12.4
        %Depreciation and amortization
        
        
        8.4
        %
        
        
        8.8
        %
        
        
        9.3
        %Total expenses
        
        
        103.7
        %
        
        
        110.4
        %
        
        
        102.6
        %Operating (loss)
        
        
        (3.7
        )%
        
        
        (10.4
        )%
        
        
        (2.6
        )%Gain on sale of property
        
        
        18.5
        %
        
        
        7.8
        %
        
        
        7.9
        %Gain on early extinguishment
of debt
        
        
        4.7
        %
        
        
        11.6
        %
        
        
        1.9
        %Interest expense
        
        
        (14.9
        )%
        
        
        (16.6
        )%
        
        
        (17.7
        )%Interest income
        
        
        7.6
        %
        
        
        10.2
        %
        
        
        13.4
        %Earnings from continuing
operations before income
taxes and minority interests
        
        
        12.2
        %
        
        
        2.6
        %
        
        
        2.9
        %Income taxes
        
        
        (4.2
        )%
        
        
        (1.6
        )%
        
        
        (1.0
        )%Minority interests in earnings of
consolidated subsidiaries and
partnerships
        
        
        (2.3
        )%
        
        
        (0.1
        )%
        
        
        (0.1
        )%Earnings from continuing operations
        
        
        5.7
        %
        
        
        0.9
        %
        
        
        1.8
        %Discontinued operations:Operations of hotel disposed of,
net of income tax effect
        
        
        (0.1
        )%
        
        
        (0.1
        )%
        
        
        0.1
        %Net earnings
        
        
        5.6
        %
        
        
        0.8
        %
        
        
        1.9
        %


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For the Fiscal Years Ended December 30, 2001 and December 31, 2000

For the fiscal year ended December 30, 2001, total revenues decreased
24.2% to $47.8 million from $63.1 million for the fiscal year ended December
31, 2000.

The Company owned and operated two hotel brands (Sumner Suites and
Shoneys Inns) until mid-2000, and primarily one brand (Shoneys Inns) in the
last two quarters of 2000 and during fiscal 2001. The Company owned and
operated one AmeriSuites hotel and one Baymont Inn & Suites beginning in late
2001. Revenues from hotel operations in fiscal 2001 decreased by 72.4% to $12.5
million from $45.4 million for fiscal year 2000. For the 11 hotels opened for
all of both years (same hotels), average daily room rates in 2001 decreased
0.6% to $50.54 from $50.85 in 2000, and average occupancy rates increased from
45.2% in 2000 to 48.7% in 2001, resulting in an increase in same hotel revenues
per available room (RevPAR) of 6.9%, from $22.99 in 2000 to $24.59 in 2001.
RevPAR for all Company-owned Shoneys Inns increased by 4.8% in 2001 from 2000,
from $23.54 to $24.66. The increases in the Shoneys Inns RevPAR were due
primarily to the improved economic conditions in the Houston, Texas, market
area where four of the Company-owned Shoneys Inns are located. The remaining
(non-same) hotels contributed $1.0 million to hotel revenues in 2001 compared
with $34.7 million in 2000. The $1.0 million revenues from non-same hotels in
2001 was from two hotels in which the Company sold its interests in the first
quarter of 2001, one new hotel which opened in the third quarter of 2001, and
one hotel which was acquired in the fourth quarter of 2001. The $34.7 million
revenues from non-same hotels in 2000 was from 28 hotels in which the Company
sold its interests in the second quarter of 2000 and the two hotels sold in the
first quarter of 2001.

Franchising and management revenues in fiscal 2001 increased by 10.1% from
2000, to $4.0 million in 2001 from $3.6 million in 2000. In fiscal 2001 and
2000, initial franchise and franchise termination fees totaled $314,000 and
$615,000, respectively. Exclusive of these non-recurring franchise revenues,
the remaining franchising and management revenues increased by $666,000, or
22.3%, from 2000 to 2001, including an increase in management fee revenues of
$891,000 which was due entirely to 17 new management contracts which became
effective in April 2001. At the end of fiscal 2001 there were 58 franchised
Shoneys Inns in operation compared with 59 at the end of fiscal 2000; this
decrease was due to five terminations, two new franchised Inns added, and two
Company-owned Inns sold to franchisees during 2001. As of December 30, 2001,
there were no franchised Shoneys Inns under construction.

Revenues from construction and development activities in 2001 were $27.5
million compared with $12.0 million in fiscal 2000. The 2001 revenues earned
were primarily from four hotel construction contracts being performed for third
parties, two of which were still in progress at year-end, while 2000 revenues
earned were from three hotel construction contracts being performed for third
parties, two of which were 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.

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Rent revenue was $3.5 million in 2001, compared with $2.0 million in 2000.
The entire $1.5 million increase was due to the lease of three hotels
effective July 10, 2000, to Prime Hospitality Corp. These three hotels had
been previously operated by the Company. Other income increased by $288,000 in
2001 from 2000. Other income can vary widely from period to period due to the
nature of this income and its varied sources.

Hotel operating expenses for fiscal 2001 decreased by $23.5 million, or
69.7%, to $10.2 million from $33.7 million in 2000. The sale of the Companys
interest in one Shoneys Inn and all 27 of its Sumner Suites hotels in second
quarter 2000 and the sale of two Shoneys Inns in the first quarter of 2001
accounted for a decrease of $24.2 million in hotel operating expenses from 2000
to 2001. Hotel operating expenses on the two hotels added in late 2001 were
$230,000. Hotel operating expenses on the 11 same-hotels increased by
$533,000, or 6.0%, in 2001 over 2000. The operating expenses as a percentage
of operating revenues for this activity increased from 74.1% in 2000 to 81.3%
in 2001. Operating expenses as a percentage of operating revenues on the 11
same-hotels decreased from 82.8% to 82.0% from 2000 to 2001. Increases in
hotel operating expenses on same hotels were primarily in the areas of
payroll-related costs, utilities, and insurance.

Franchising and management operating expenses decreased by $268,000, or
10.9%, from 2000 to 2001. This was due primarily to reduced central
reservation center expenses caused by the cancellation of reservation services
in November of 2000 on the 27 hotels of which the Companys operating interests
had been sold in mid-2000.

Construction and development costs in 2001 were $25.7 million compared
with $12.6 million in 2000. The costs incurred were directly related to the
revenues earned from the third party construction contracts in progress in 2001
compared with the third party construction contracts in progress in 2000, two
of which were still in progress at year-end 2000 and two of which were still in
progress at year-end 2001.

Rent expense decreased by $9.8 million, or 94.4%, in 2001 from 2000. The
decrease was due to (1) the Companys sale of its leasehold interest in 24 of
its Sumner Suites hotels on July 9, 2000, which had previously been sold and
leased back, (2) the lease of another Sumner Suites hotel on July 9, 2000, to a
tenant who assumed a land lease on that hotel, and (3) the sale of a Shoneys
Inn in June, 2000, on which the purchaser assumed the existing land lease. As
of December 30, 2001, the Company was obligated on only one hotel lease; in
2001, rent expense on this lease was $582,000.

General and administrative expenses increased by $909,000, or 18.1%, from
2000 to 2001. The increase was due primarily to increased insurance costs,
professional fees, and travel expenses.

Depreciation and amortization expenses decreased by $1.1 million, or
20.2%, from 2000 to 2001. This decrease was due primarily to the sale and
leaseback of four hotels in May of 2000, combined with the sale of another
hotel in June of 2000 and two hotels in April of 2001. The Company opened one
new Company-owned hotel in October of 2001 and acquired one hotel in November
of 2001. One new hotel was under construction at the end of the year.

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The gain recognized on the sale of property in 2001 was $3.8 million
compared with $4.9 million in 2000. The gain of $3.8 million in 2001 included
$3.6 million from the Companys sale of one hotel and three restaurants.
Another hotel was sold in 2001, but the gain was deferred and is being
recognized under the installment method of accounting until full accrual
accounting is warranted. Approximately $175,000 of the gain on the sale of two
of the restaurants was also deferred and is being recognized under the
installment method of accounting. The $4.9 million recognized in 2000 included
$3.6 million from the sale of the Companys leasehold interest in 24 Sumner
Suites hotels which had been previously sold and leased back, at which time the
gain had been deferred and was being amortized over the lease term.
Additionally, a Shoneys Inn was sold in second quarter at a gain of $755,000
and $299,000 was recognized in first quarter from the recognition of previously
deferred gains related to the sale of two Shoneys Inns in 1998. The remaining
$207,000 gain in 2000 was from the sale of land held for resale and
miscellaneous real estate.

The gains from early extinguishments of debt in 2001 and 2000 were the
result of the repurchase of $3.4 million and $29.8 million, respectively, 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.

Interest expense decreased by $2.0 million, while interest income
decreased by $86,000 from 2000 to 2001, for a total decrease of $2.1 million in
net interest expense. The decrease in interest expense resulted primarily from
interest expense reductions from the extinguishments of debt from the
repurchase of $45.8 million of the Companys outstanding subordinated debt in
the open market and in privately negotiated transactions beginning October 1,
1999 and continuing through 2001, of which $33.2 million of these
extinguishments occurred in 2000 and 2001. Additional debt reductions,
including a paydown of $7.5 million of the Companys outstanding debt using a
portion of the $38.4 million gross proceeds from the sale-leaseback of four
hotels in May of 2000, further reduced interest expense. Partially offsetting
these reductions in interest expense was interest incurred to the Internal
Revenue Service due to a tax payment deficiency for 1997, assessed based upon
an audit by the Service (see Footnote 9 to the consolidated financial
statements). The decrease in interest income in 2001 from 2000 was due
primarily to the net effect of a reduction in the interest rate on 15 mortgage
notes receivable in mid-2001, and an increase in interest earned on mortgage
notes receivable from the seller-financed portion of the proceeds of the sale
of one hotel in June 2000 and two hotels in April 2001.

The Companys effective tax rate of 26.4% for the year ended December 30,
2001 differed from the federal statutory rate primarily as a result of interest
on deferred gains and a reduction due to previously accrued income taxes. This
$451,000 reduction in 2001 income taxes resulted from a settlement with taxing
authorities on amounts previously provided for disputes on the 1997 tax year.
The Companys effective tax rate of 31.2% for the year ended December 31, 2000
differed from the federal statutory rate primarily as a result of interest on
deferred gains.

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For the Fiscal Years Ended December 31, 2000 and December 26, 1999

For the fiscal year ended December 31, 2000, total revenues decreased
18.3% to $63.1 million from $81.3 million for the fiscal year ended December
26, 1999.

The Company owned and operated two hotel brands  Sumner Suites and
Shoneys Inns. Revenues from hotel operations in fiscal 2000 decreased by 30.2%
to $45.4 million from $65.1 million for fiscal year 1999. For the 13 hotels
opened for all of both years (same hotels), average daily room rates in 2000
decreased 0.4% to $49.80 from $49.98 in 1999, and average occupancy rates
decreased from 48.2% in 1999 to 47.2% in 2000, resulting in a decrease in same
hotel revenues per available room (RevPAR) of 2.5%, from $24.12 in 1999 to
$23.52 in 2000. RevPAR for all Company-owned Shoneys Inns declined by 3.1% in
2000 from 1999, from $24.14 to $23.40. The decreases in the Shoneys Inns
RevPAR were due primarily to increased competition from new hotels. The
remaining (non-same) hotels contributed $32.1 million to hotel revenues in 2000
compared with $51.8 million in 1999. The $32.1 million revenues from non-same
hotels in 2000 was from 28 hotels in which the Company sold its interests in
the second quarter of 2000. The $51.8 million revenues from non-same hotels in
1999 was from 24 of those 28 hotels which were open for all of 1999 and 4 of
them which opened during the year 1999. The 27 Sumner Suites hotels RevPAR
increased by 9.5% in 2000 over 1999, from $43.63 to $47.76.

Franchising and management revenues in fiscal 2000 decreased by 13.1% from
1999, to $3.6 million in 2000 from $4.2 million in 1999. 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. In fiscal 1999 and 2000, other termination fees
totaled $13,000 and $560,000, respectively. Exclusive of these non-recurring
franchise revenues, the remaining franchising and management revenues increased
by $70,000, or 2.3%, from 1999 to 2000. At the end of fiscal 2000 there were
59 franchised Shoneys Inns in operation compared with 61 at the end of fiscal
1999; this decrease was due to seven terminations compared with five additions
during 2000. As of December 31, 2000, there were no franchised Shoneys Inns
under construction.

Revenues from construction and development activities in 2000 were $12.0
million compared with $11.2 million in fiscal 1999. The 2000 revenues earned
were primarily from three hotel construction contracts being performed for
third parties, two of which were still in progress at year-end, while 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.

Rent revenue was $2.0 million in 2000, compared with $483,000 in 1999.
The entire $1.5 million increase was due to the lease of three hotels effective
July 10, 2000, to Prime Hospitality Corp. These three hotels had been
previously operated by the Company. Other income decreased by $311,000, or
86.4%, in 2000 from 1999. Other income can vary widely from period to period
due to the nature of this income and its varied sources.

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Hotel operating expenses for fiscal 2000 decreased by $11.7 million, or
25.8%, to $33.7 million from $45.4 million in 1999. The sale of the Companys
interest in one Shoneys Inn and all 27 of its Sumner Suites hotels in second
quarter 2000 accounted for a decrease of $12.2 million in hotel operating
expenses from 1999 to 2000. Hotel operating expenses on the 13 same-hotels
increased by $577,000, or 5.8%, in 2000 over 1999. The operating expenses as a
percentage of operating revenues for this activity increased from 69.7% in 1999
to 74.1% in 2000. Operating expenses as a percentage of operating revenues on
the 13 same hotels increased from 75.2% to 79.5% from 1999 to 2000. Increases
in hotel operating expenses on same hotels were primarily in the areas of
payroll-related costs and regional general and administrative expenses.

Franchising and management operating expenses increased by $40,000, or
1.7%, from 1999 to 2000. Construction and development costs in 2000 were $12.6
million compared with $9.8 million in 1998. The costs incurred were directly
related to the revenues earned from the three third party construction
contracts in each of the two years, one of which was still in progress at
year-end 1999 and two of which were still in progress at year-end 2000.

Rent expense decreased by $3.2 million, or 23.6%, in 2000 from 1999. The
decrease was due to (1) the Companys sale of its leasehold interest in 24 of
its Sumner Suites hotels on July 9, 2000, which had previously been sold and
leased back, (2) the lease of another Sumner Suites hotel on July 9, 2000, to a
tenant who assumed a land lease on that hotel, and (3) the sale of a Shoneys
Inn in June, 2000, on which the purchaser assumed the existing land lease. As
of December 31, 2000, the Company was obligated on only one hotel lease; in
2000, rent expense on this lease was $625,000.

General and administrative expenses declined by $1.3 million, or 20.9%,
from 1999 to 2000. Excluding expensing of pre-development costs for sites no
longer deemed probable of development in the amount of $623,000 in 1999,
general and administrative expenses declined by $700,000, or 12.2%, from 1999
to 2000. This was due primarily to reductions in general and administrative
expenses made possible by the Companys sale of its interests in 28 hotels in
mid-2000.

Depreciation and amortization expenses decreased by $1.3 million, or
19.2%, from 1999 to 2000. This decrease was due primarily to the sale and
leaseback of four hotels in May of 2000, combined with the sale of another
hotel in June of 2000. The Company opened no new Company-owned hotels in 2000,
and none were under construction at the end of the year.

The gain recognized on the sale of property in 2000 was $4.9 million
compared with $15.0 million in 1999. The $4.9 million recognized in 2000
included $3.6 million from the sale of the Companys leasehold interest in 24
Sumner Suites hotels which had been previously sold and leased back, at which
time the gain had been deferred and was being amortized over the lease term.
Additionally, a Shoneys Inn was sold in second quarter at a gain of $755,000
and $299,000 was recognized in first quarter from the recognition of previously
deferred gains related to the sale of two Shoneys Inns in 1998. The remaining
$207,000 gain in 2000 was from the sale of land held for resale and
miscellaneous real estate. $11.9 million of the $15.0 million recognized in
1999 was

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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 gains from early extinguishments of debt in 2000 and 1999 were the
result of the repurchase of $29.8 million and $12.6 million, respectively, 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.

Interest expense decreased by $1.6 million, while interest income
increased by $280,000 from 1999 to 2000, for a decrease of $1.9 million in net
interest expense. The decrease in interest expense resulted primarily from
interest expense reductions from the extinguishments of debt from the
repurchase of $42.4 million of the Companys outstanding subordinated debt in
the open market and in privately negotiated transactions beginning October 1,
1999 and continuing through 2000. The increase in interest income in 2000 over
1999 was due primarily to interest earned at a higher interest rate on mortgage
notes receivable from the sale of 16 hotels in third quarter 1998, and to
interest earned on the seller-financed portion of the proceeds of the sale of
one hotel in June 2000.

The Companys effective tax rate of 31.2% for the year ended December 31,
2000 differed from the federal statutory rate primarily as a result of interest
on deferred gains. The Companys effective tax rate of 32% for the year ended
December 26, 1999 differed from the federal statutory rate primarily as a
result of interest on deferred gains and minority interest income excluded from
taxable income.

Minority interests in earnings of consolidated subsidiaries and
partnerships decreased by $1.9 million from 1999 to 2000. 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 in 1998 which was recognized in
1999.

Critical Accounting Policies and Practices

The Company has prepared its financial statements in conformity with
accounting principles generally accepted in the United States, and these
statements necessarily include some amounts that are based upon informed
judgments and estimates of management. The Companys significant accounting
policies are discussed in Note 1 of the Notes to Consolidated Financial
Statements. The Companys critical accounting policies are subject to
judgments and uncertainties which affect the application of such policies. The
Companys financial position or results of operations may be materially
different when reported under different conditions or when using different
assumptions in the application of such policies. In the event estimates or
assumptions prove to be different from reported amounts, adjustments are made
in subsequent periods to reflect more current information. The Companys
critical accounting policies and practices include impairment of long-lived
assets, collectibility of accounts and notes receivable, percentage of
completion accounting for construction contracts, profit recognition on sale
transactions, nonmonetary transactions, and income taxes. The following is a
brief discussion of these more significant accounting policies and practices
used by the Company.

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Impairment of Long-Lived Assets: The Company records impairment losses on
long-lived assets used in operations and intangibles when indicators of
impairment are present and the undiscounted cash flows related to those assets
are less than their carrying amounts. The Company records impairment losses on
long-lived assets under development or held for sale when indications of
impairment are present and the estimated fair value less costs to sell is less
than the carrying amount. The Companys impairment review process relies on
managements judgment regarding the indicators of impairment, the remaining
lives of assets used to generate assets undiscounted cash flows, and the fair
value of assets at a particular point in time. Under different assumptions or
conditions, the asset impairment analysis may yield a different result, which
would alter the gain or loss on the eventual disposition of the asset.

Collectibility of Accounts and Notes Receivable: The Company continuously
monitors collections from its customers and debtors under notes receivable and
maintains allowances for doubtful accounts based upon historical experience and
any specific customer collection issues that are identified. While such credit
losses have historically been within the Companys expectations, there can be
no assurance that the historical experience will continue at the same level in
the future. Notes receivable are generally secured by first mortgages on the
underlying assets. The majority of these are from a group of companies that
are affiliated with one another, creating a concentration of credit risk. In
the event the fair values of the underlying assets were to be less than the
balances of the first mortgage notes (which are cross-defaulted and
cross-collateralized), the notes receivable could be under-collateralized.

Percentage of Completion Accounting for Construction Contracts:
Construction and development revenues earned on fixed price contracts are
recognized based upon the percentage of completion method, measured by the
percentage of cost incurred to total estimated cost for each contract. The
total estimated cost of each contract involves the use of various estimating
techniques to project costs of completion. These percentage of completion and
cost estimates involve various assumptions and projections relative to the
outcome of future events, such as price and timing of construction materials,
labor costs, and overhead costs. The Company reevaluates its contract cost
estimates periodically and reflects changes in estimates in the current and
future periods.

Profit Recognition on Sale Transactions: As prescribed by Financial
Accounting Standards Board (FASB)Statement No. 66, Accounting for Sales of
Real Estate, profit from the sale of land and hotel properties is recognized at
the time the sale is consummated, the minimum down payment is received, and
there is no significant continuing involvement. When the sale involves a
leaseback, and otherwise qualifies for sale-leaseback accounting, as defined by
FASB Statement No. 98, Accounting for Leases, the profit is then accounted for
in accordance with FASB Statements No. 13, Accounting for Leasesand No. 28,
Accounting for Sales with Leasebacks, which generally require deferral and
amortization of profits ratably over the related lease terms.

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Nonmonetary Transactions: The Company accounts for nonmonetary
transactions involving its hotels in accordance with Accounting Principles
Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions, FASB
Statement No. 141, Business Combinations, and Emerging Issues Task Force
(EITF) Issues No. 98-3, Determining Whether a Nonmonetary Transaction Involves
Receipt of Productive Assets or a Businessand No. 01-2, Interpretations of
APB Opinion No. 29. If the hotel received in a nonmonetary exchange of hotels
meets the definition of a business, it is accounted for as a purchase at fair
value. If the hotel received does not meet the definition of a business, the
guidance of APB No. 29, as interpreted by EITF 01-2, is followed. Under the
general guidelines of APB No. 29, an exchange of nonmonetary assets is
accounted for at fair value, unless the assets are similar and the other
conditions of APB No. 29 and EITF 01-2 are met, whereby the transaction is
accounted for at historical cost, resulting in no gain recognition.

Income Taxes: The Company uses the liability method to account for income
taxes. The preparation of consolidated financial statements involves estimating
the Companys current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities,
which are included within the consolidated balance sheet. An assessment of the
recoverability of the deferred tax assets is made, and a valuation allowance
may be established based upon this assessment.

Liquidity and Capital Resources

The Companys cash flows provided by operating activities were $8.0
million in 2001, compared with cash flows used in operating activities of $1.2
million in 2000 and $22.6 million in 1999. Earnings from continuing operations
were $850,000 in 2001, $618,000 in 2000, and $4.6 million in 1999.
Depreciation and amortization was $4.4 million, $5.6 million, and $6.9 million
in 2001, 2000, and 1999, respectively, the declines each year being the result
of the sale of properties in 1999, 2000, and 2001, in excess of new properties
being opened during these years. The Company recognized $3.8 million, $4.9
million, and $15.0 million from gains on sale of property during 2001, 2000 and
1999, respectively, of which $299,000 and $11.9 million during 2000 and 1999,
respectively, was from the sale of 16 lodging facilities in 1998, a portion of
which was deferred under the installment method of accounting. The gain of $3.8
million in 2001 included $3.6 million from the Companys sale of one hotel and
three restaurants. Another hotel was sold in 2001, but the gain was deferred
and is being recognized under the installment method of accounting until full
accrual accounting is warranted. Approximately $175,000 of the gain on the
sale of two of the restaurants was also deferred and is being recognized under
the installment method of accounting. The remaining $4.6 million gain on sale
of property in 2000 represented $4.4 million from the sale of the Companys
interest in 25 lodging facilities and $207,000 from the sale of other real
estate. The gains on early extinguishment of debt were all due to the
repurchase by the Company of its outstanding public debt at a discount from
face value. The $1.9 million cash provided by minority interests in earnings of
consolidated subsidiaries and partnerships in 1999 included $1.8 million from
one 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 increased by $4.6 million in 2001 compared with a
decrease of $8.8 million in 2000 and an increase of $11.2 million in 1999; the
decrease in 2000 was due to two construction contracts for third parties in
1999, which were completed in late 1999 and in 2000, which were

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not billable
until the projects were completed. Increases in accounts payable and accrued
expenses provided $6.7 million cash in 2001 as compared with cash used of $5.4
million and $1.8 million in 2000 and 1999, respectively. An increase in
accounts receivable of $926,000 and $1.6 million in 2001 and 1999,
respectively, contrasts to a decrease in accounts receivable of $2.2 million in
2000. The changes in accounts receivable and accounts payable in 2000 were due
primarily to the Companys sale of its operating interests in 27 of its hotels
in mid-2000.

The Companys cash flows used in investing activities were $4.7 million in
2001, as compared with cash flows provided by investing activities of $28.6
million in 2000 and $54.9 million in 1999. 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
leasehold interests were $2.9 million, $53.5 million, and $70.9 million in
2001, 2000, and 1999, respectively. These amounts in 2000 and 1999 include the
net proceeds from the sale/leaseback of four hotels in 2000 and six hotels in
1999. In addition to the sale/leaseback transactions in 1999 and 2000, several
other parcels of land held for resale were sold for cash, and in 2000 one hotel
was sold for a cash down payment of $550,000. In 2001, three restaurants and
two hotels were sold for a combination of cash and seller-financed notes,
resulting in cash proceeds of $2.9 million. The significant increase in
restricted cash in 2000 was the result of $14.2 million escrowed for the
construction of two hotels subject to a swap option related to the transfer of
the Companys leasehold interest in 24 hotels in July 2000. The construction of
these two hotels used $12.4 of the escrowed funds, reducing the restricted cash
accordingly. One of the two hotels opened in October of 2001 and the other one
opened in early 2002. 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 $20.9 million, $8.8 million, and $20.1 million in 2001, 2000, and 1999,
respectively.

Net cash used in financing activities was $6.0 million in 2001, compared
with $25.4 million in 2000 and $31.4 million in 1999. 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 $12.5 million of the Companys outstanding common
stock. In July of 1999 the Company increased the authorized amount to
repurchase an additional $7.5 million of common stock pursuant to the plan,
increasing the total amount authorized to $20.0 million. In 2000, 238,000
shares were repurchased for $1.2 million. In November of 2001 the Company
increased the authorized amount to repurchase an additional $3.0 million of
common stock pursuant to the plan, increasing the total amount authorized to
$23.0 million. In 2001, 457,000 shares were repurchased for $1.9 million. In
the second quarter of 1999 the Company announced its plan to use up to $12.0
million of its Company funds to repurchase a portion of its $54.0 million
outstanding convertible subordinated debentures, and repurchased $4.0 million
of this debt for $2.5 million in 1999. In the third quarter of 2000 the
Company increased the total amount authorized to $20.0 million, and repurchased
$21.0 million of this debt for $15.4 million in 2000. The Company increased the
total amount authorized to $25.0 million in November of 2001. An additional
$3.4 million of this debt was repurchased for $2.3 million in 2001. 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. In 1999, the Company repurchased $8.6 million of
these debt securities at a cost of $5.8 million, and in 2000, the Company
repurchased an additional $8.8 million of these debt securities at a cost of
$6.2 million.

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The Company established a three-year credit facility with a financial
institution effective August 27, 1999. An amendment to the credit facility
became effective October 3, 2001, which, among other changes, extended the
maturity to September 30, 2004. The credit facility is for $30 million (a $10
million term loan and a $20 million revolving line of credit), secured by a
pledge of certain promissory notes payable to the Company received in
connection with the sale of 16 of the Companys lodging 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
million. Effective October 3, 2001, the interest rate on the term loan is at
the lenders base rate plus 100 basis points, and the interest rate on the
revolving line of credit is at the lenders base rate plus 250 points, with a
floor of 7.00% on both portions of the facility. The Company is to pay
commitment fees on the unused portion of the facility at .50% per annum. The
credit facility also contains covenants which limit or prohibit the incurring
of certain additional indebtedness in excess of a specified debt to total
capital ratio, prohibit additional liens on the collateral, restrict mergers
and the payment of dividends and restrict the Companys ability to place liens
on unencumbered assets. The credit facility contains financial covenants as to
the Companys minimum net worth. As of December 30, 2001, the Company had $13
million in borrowings outstanding under this credit facility, consisting of the
$10 million term loan and $3 million on the revolving line of credit.

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,
2002. As of December 30, 2001, the Company had no borrowings outstanding under
this credit facility.

As of the end of 2001, one hotel was under construction. The funds
required to complete the construction and furnishing of this hotel were held in
escrow at the end of 2001. The Company has acquired two sites for future
development and expects to develop hotels for third parties on these sites,
requiring no Company funds to complete the development of these sites. In 2000,
the Company sold its interests in all of its Sumner Suites hotels, and has no
plans to develop additional Sumner Suites hotels in the immediate future.

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 $3.1 million, $2.9 million, and $3.0 million of these notes were
redeemed under this provision on December 1, 2001, December 1, 2000 and
December 1, 1999, respectively.

The Company is investigating various alternatives to maximize shareholder
value. These alternatives could include, without limitation, the franchising
and operation of additional Shoneys Inns, a sale of the remaining Shoneys
Inns, negotiating new credit arrangements, developing hotels for other owners,
the repurchase of additional shares of the Companys common stock or
outstanding debt securities, or any combination of these or other strategies.
The Company believes that a combination of existing cash, the collection of
notes receivable, net cash provided by operations, and borrowings

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under
existing credit facilities or mortgage debt, will be sufficient to fund its
scheduled hotel development, stock repurchase plan, debt repayments and
operations for at least the next twelve months. The Companys outstanding 7.50%
Convertible Subordinated Debentures in the face amount of $28.4 million mature
in May of 2004. Its outstanding Series A Senior Subordinated Notes in the face
amount of $20.2 million mature in November of 2006 and its Series B Notes in
the face amount of $20.3 million mature in September of 2007. Additionally,
the Companys $30.0 million bank credit facility, of which the Company had
$13.0 million outstanding as of December 30, 2001, is currently scheduled to
expire in September of 2004. The Company believes that these obligations will
be satisfied from the collection of notes receivable, the establishment of new
credit facilities or renewal of existing credit facilities, the sale of its
hotel properties, and operating cash flows. Any continued repurchases of the
Subordinated Debentures and Senior Subordinated Notes at a discount from face
value will reduce the amount of cash needed to satisfy those obligations.

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, (SFAS No. 141) and SFAS No. 142, Goodwill and
Other Intangible Assets(SFAS No. 142). SFAS No. 141 was effective July 1,
2001, and SFAS No. 142 is effective January 1, 2002. Under the new rules in
SFAS No. 142, goodwill and indefinite lived intangible assets will no longer be
amortized effective January 1, 2002, but will be subject to annual impairment
tests. Other intangible assets will continue to be amortized over their useful
lives.

The Company will apply the new rules on accounting for goodwill and
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of SFAS No. 142 is expected to result in an increase
in net income of approximately $263,000 ($0.05 per share) per year. During
2002, the Company will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002, and has
not yet determined what the effect of these tests will be on the earnings and
financial position of the Company.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets(SFAS No. 144), which supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, (SFAS No. 121), and the accounting and
reporting provisions of APB No. 30, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. SFAS No. 144 removes goodwill from its scope and
clarifies other implementation issues related to SFAS No. 121. SFAS No. 144
also provides a single framework for evaluating long-lived assets to be
disposed of by sale. The provisions of this statement were adopted at the
beginning of fiscal 2002 and had no material effect on the Companys results of
operations or financial position.

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,

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and are subject to risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements, including delays in concluding or the inability to conclude
transactions, the establishment of competing facilities and services,
cancellation of leases or contracts, collectibility of notes receivable,
changes in applicable laws and regulation, in margins, demand fluctuations,
access to debt or equity financing, adverse uninsured determinations in
existing or future litigation or regulatory proceedings and other risks.

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

The Company has not entered into any transactions using derivative
financial instruments.

The Company is exposed to market risk from changes in interest rates. The
Company holds notes receivable that earn interest at variable rates. A
hypothetical one-percentage point change in interest rates would change annual
interest income by $605,000 based on the balances of these variable-rate notes
receivable at December 30, 2001. Changes in interest rates also impact interest
expense on long-term variable-rate debt. A hypothetical one-percentage point
change in interest rates would change annual interest expense by $179,000 based
on the balances of variable-rate long-term debt at December 30, 2001.

Management believes that market risk as a result of interest rate changes
would have a minimal effect on the fair value of the Companys fixed-rate debt
because the fair value of the Companys debt is traded based more on the
publics perception of the nature of the debt than on any fundamental changes
in the debt markets; therefore, a hypothetical change in interest rates would
not necessarily impact the fair value of the Companys fixed rate debt.

There were no significant changes in the Companys market risk in the
fiscal year ended December 30, 2001, and management foresees no significant
changes in the Companys exposure to fluctuations in interest rates in the near
future.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information concerning the directors and officers of the Company under
the heading Election of Director to be contained in the Companys Proxy
Statement with respect to the next Annual Meeting of Shareholders is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information under the heading Executive Compensation and the
information under the heading Performance Graph to be contained in the
Companys Proxy Statement with respect to the next Annual Meeting of
Shareholders are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information under the heading Security Ownership of Certain Beneficial
Owners and Management to be contained in the Companys Proxy Statement with
respect to the next Annual Meeting of Shareholders is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information under the heading Certain Transactions to be contained in the
Companys Proxy Statement with respect to the next Annual Meeting of
Shareholders is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

(a) Within the ninety day period prior to the filing date of this amended
report, we carried out an evaluation, under the supervision and with the
participation of our management, including our principal executive officer and
our principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based upon
that evaluation, our management, including our principal executive officer and
our principal financial officer, concluded that the design and operation of
these disclosure controls and procedures were effective to timely alert them to
any material information relating to the company (including its consolidated
subsidiaries) that must be included in our periodic SEC filings.

(b) There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

Page(a)
        
        
        1.
        
        
        Financial Statements:The following Financial Statements are included herein:Independent Auditors Report
        
        F-1Consolidated Balance Sheets at December 30, 2001 and
December 31, 2000
        
        F-2  F-3Consolidated Statements of Earnings for each of the
three years in the period ended December 30, 2001
        
        F-4  F-5Consolidated Statements of Shareholders Equity
and Comprehensive Earnings for each of the three years
in the period ended December 30, 2001
        
        F-6  F-7Consolidated Statements of Cash Flows for each of the
three years in the period ended December 30, 2001
        
        F-8  F-9Notes to consolidated financial statements
        
        F-10  F-392.
        
        
        Financial Statement Schedules:Independent Auditors Report
        
        F-1Schedule II  Valuation and Qualifying Accounts
        
        S-1All other schedules required by Regulation S-X
are omitted as the required information is
inapplicable or the information requested thereby
is set forth in the financial statements or the
notes thereto.3.
        
        
        Exhibits:The exhibits required by Item 601 of Regulation
S-K and paragraph (c) of this Item 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 Plan10(15)  First Amendment to 1991 Stock Option Plan10(16)  Second Amendment to 1991 Stock Option Plan10(17)  Key Employee Supplemental Income Plan


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ExhibitNumber
        
        
        
        Exhibit3(1)
        
        
        
        Amended and Restated Charter. Incorporated by
reference to the Companys Registration statement on
Form S-1, Commission File No. 33-44504, filed with the
Commission on December 12, 19913(2)
        
        
        
        Articles of Amendment to Charter creating Series A
Subordinated Preferred Stock. Incorporated by
reference to the Companys Registration Statement on
Form 8-A filed with the Commission on July 3, 19973(3)
        
        
        
        Articles of Amendment to Amended and Restated Charter
dated September 8, 1997. Incorporated by reference to
the Companys Annual Report on Form 10-K, filed with
the Commission on April 13, 19983(4)
        
        
        
        Amended and Restated Bylaws. Incorporated by reference
to the Companys Registration statement on Form S-1,
Commission File No. 33-44504, filed with the
Commission on December 12, 19913(5)
        
        
        
        Amendment to the Amended and Restated Bylaws adopted
on July 31, 1996. Incorporated by reference to the
Companys Annual Report on Form 10-K, filed with the
Commission on April 13, 19984(1)
        
        
        
        Amended and Restated Charter. Section 6 of the Amended
and Restated Charter is included in Exhibit 3(1)4(2)
        
        
        
        Indenture dated as of June 6, 1994, by and between the
Registrant and Third National Bank in Nashville,
Tennessee, Trustee, relating to $54,000,000 in 7 1/2
Convertible Subordinated Debentures due 2004.
Incorporated by reference to the Companys
Registration Statement on Form S-3, Commission File
No. 33-77910, filed with the Commission on April 19,
19944(3)
        
        
        
        Indenture dated as of November 15, 1996, by and
between the Registrant and Bankers Trust Company,
Trustee, relating to Senior Subordinated Notes.
Incorporated by reference to the Companys Quarterly
Report on Form 10-Q, filed with the Commission on
November 20, 19964(4)
        
        
        
        First Supplemental Indenture dated as of November 15,
1996 by and between the Registrant and Bankers Trust
Company, Trustee, relating to 9 3/4% Senior
Subordinated Notes due 2006, Series A. Incorporated by
reference to the Companys Quarterly Report on Form
10-Q, filed with the Commission on November 20, 19964(5)
        
        
        
        Second Supplemental Indenture dated as of September
25, 1997 by and between the Registrant and Bankers
Trust Company, Trustee, relating to 9.55% Senior
Subordinated Notes due 2007, Series B. Incorporated by
reference to the Companys Current Report on Form 8-K,
filed with the Commission on September 30, 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.

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


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10(13)
        
        
        
        Rights Agreement between the Registrant and SunTrust,
Atlanta, as Rights Agent, dated as of June 27, 1997.
Incorporated by reference to the Companys Registration
Statement on Form 8-A filed with the Commission on July 3,
199710(14)
        
        
        
        Loan and Security Agreement by and among The Hotel Group, Inc., as
Borrower, the Registrant, as Holdings, and the financial
institutions that are signatories thereto, the Lenders, and
Foothill Capital Corporation, as Agent, dated as of August 27,
1999. Incorporated by reference to the Companys Current
Report on Form 8-K dated September 15, 1999, filed with the
Commission on September 28, 1999.10(15)
        
        
        
        Amendment Number One to Loan and Security Agreement between and
among The Hotel Group, Inc., a Borrower, the Registrant, as
Holdings, and the financial institutions that are signatories
thereto, the Lenders, and Foothill Capital Corporation, as
Agent, dated as of October 3, 2001. Incorporated by
reference to the Companys Annual Report on Form 10-K filed
with the Commission on April 1, 2002.10(16)
        
        
        
        Sale and Purchase Agreement between ShoLodge, Inc. and Prime
Hospitality Corp., dated as of March 16, 2000. Incorporated by
reference to the Companys Annual Report on Form 10-K filed
with the Commission on March 27, 2000.10(17)
        
        
        
        First Amendment to Sale and Purchase Agreement by and between
ShoLodge, Inc. and Prime Hospitality Corp., dated as of July
9, 2000. Incorporated by reference to the Companys Current
Report on Form 8-K, filed with the Commission on July 24,
2000.10(18)
        
        
        
        Purchase and Sale Agreement by and between ShoLodge, Inc. and
certain of its Affiliates, as Sellers, and HPT Suite
Properties Trust, as Purchaser, dated May 11, 2000.
Incorporated by reference to the Companys Current Report on
Form 8-K filed with the Commission on May 26, 2000.10(19)
        
        
        
        Agreement to Lease between HPT Suite Properties Trust and Suite
Tenant, Inc., dated May 11, 2000. Incorporated by reference to
the Companys Current Report on Form 8-K filed with the
Commission on May 26, 2000.10(20)
        
        
        
        Fourth Amendment to Lease Agreement and Amendment to Incidental
Documents entered into between Hospitality Properties Trust,
HPT Suite Properties Trust, ShoLodge, Inc and Suite Tenant,
Inc., dated May 11, 2000. Incorporated by reference to the
Companys Current Report on Form 8-K filed with the Commission
on May 26, 2000.10(21)
        
        
        
        Lease Agreement by and between Southeast Texas Inns, Inc., ad
landlord, and May-Ridge, L.P., as tenant, dated as of July 9,
2000. Incorporated by reference to the Companys Current
Report on Form 8-K filed with the Commission on July 24, 2000.10(22)
        
        
        
        Contractor and Development Agreement by and between Prime
Hospitality Corp., as owner, Moore & Associates, Inc., as
contractor, and ShoLodge, Inc., as guarantor, dated as of July
9, 2000. Incorporated by reference to the Companys Current
Report on Form 8-K, filed with the Commission on July 24,
2000.


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10(23)
        
        
        
        Interim Agreement for Reservation Services by and between ShoLodge,
Inc., and Prime Hospitality Corp. dated as of July 9, 2000.
Incorporated by reference to the Companys Current Report on
Form 8-K, filed with the Commission on July 24, 2000.10(24)
        
        
        
        Agreement for Reservation Services by and between ShoLodge, Inc. and
Prime Hospitality Corp., dated as of July 9, 2000.
Incorporated by reference to the Companys Current Report on
Form 8-K filed with the Commission on July 24, 2000.10(25)
        
        
        
        Amended and Restated License Agreement entered into September 27,
2000 by and between Shoneys Inc., ShoLodge Franchise Systems,
Inc and the Company. Incorporated by reference to the
Companys Quarterly Report on Form 10-Q, filed with the
Commission on November 15, 2000.21
        
        
        
        Subsidiaries of the Registrant*23(1)
        
        
        
        Consent of Ernst & Young LLP*99.1
        
        
        
        Certifications
required by Section 906 of the Sarbanes-Oxley Act of 2002.*


* Filed herewith



|(b) |  | No reports on Form 8-K were filed during the fourth quarter ended
December 30, 2001.
|--- |  | ------------------------------------------------------------------------------------



|(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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

SHOLODGE, INC.Date: April 8, 2003
        
        /s/ Leon MooreLeon MooreChief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature
        
        Title
        
        Date/s/ Leon MooreLeon Moore
        
        President, Chief Executive
Officer, Principal Executive
Officer, Director
        
        April 8, 2003/s/ Bob MarloweBob Marlowe
        
        Secretary, Treasurer, Chief
Financial Officer, Chief
Accounting Officer, Principal
Accounting Officer, Director
        
        April 8, 2003/s/ Richard L. JohnsonRichard L. Johnson
        
        Executive Vice President,
Director
        
        April 8, 2003/s/ Earl H. SadlerEarl H. Sadler
        
        Director
        
        April 8, 2003/s/ Helen L. MoskovitzHelen L. Moskovitz
        
        Director
        
        April 8, 2003/s/ David M. ReshaDavid M. Resha
        
        Director
        
        April 8, 2003


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CERTIFICATION

I, Leon Moore, certify that:

1.     I have reviewed this annual report on Form 10-K/A of ShoLodge, Inc.

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

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

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

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

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

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

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

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

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





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



Dated: April 8, 2003
        
        /s/ Leon Moore[signature]President, Chief Executive Officer,Principal Executive Officer




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CERTIFICATION

I, Bob Marlowe, certify that:

1.     I have reviewed this annual report on Form 10-K/A of ShoLodge, Inc.

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

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

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

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

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

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

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

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

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





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

Dated: April 8, 2003
        
        /s/ Bob Marlowe[signature]Secretary, Treasurer, Chief Accounting Officer,Principal Accounting Officer,Chief Financial Officer






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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 30, 2001 and December 31, 2000 and the related
consolidated statements of earnings, shareholders equity and cash flows for
each of the three years in the period ended December 30, 2001. Our audits also
included the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ShoLodge, Inc and
subsidiaries at December 30, 2001 and December 31, 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 30, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.



| | /s/ Ernst & Young LLP
| | ---------------------

Nashville, Tennessee
March 22, 2002, except for Note 18,
as to which the date is January 31, 2003

F-1



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Balance Sheets

December 30,
        
        December 31,2001
        
        2000AssetsCurrent assets:Cash and cash equivalents
        
        $
        2,704,161
        
        
        $
        5,339,689Restricted cash
        
        
        200,000
        
        
        
        200,000Accounts receivable:Trade, net of allowance for doubtful
accounts of $184,404 and $380,314 for
2001 and 2000, respectively
        
        
        3,557,591
        
        
        
        2,631,494Construction contracts
        
        
        4,016,502
        
        
        
        2,405,629Costs and estimated earnings in excess of
billings on construction contracts
        
        
        3,063,747
        
        
        
        42,844Income taxes receivable
        
        
        
        
        
        
        4,750,074Prepaid expenses
        
        
        365,849
        
        
        
        311,513Notes receivable, net
        
        
        1,728,340
        
        
        
        909,656Other current assets
        
        
        153,766
        
        
        
        146,850Total current assets
        
        
        15,789,956
        
        
        
        16,737,749Notes receivable, net
        
        
        68,227,306
        
        
        
        63,044,920Restricted cash
        
        
        1,781,747
        
        
        
        14,193,534Property and equipment
        
        
        123,112,190
        
        
        
        114,361,649Less accumulated depreciation and amortization
        
        
        (21,944,927
        )
        
        
        (23,526,651
        )101,167,263
        
        
        
        90,834,998Land under development or held for sale
        
        
        9,254,986
        
        
        
        8,231,714Deferred charges, net
        
        
        6,111,825
        
        
        
        6,721,247Goodwill, net
        
        
        2,387,100
        
        
        
        2,537,072Trademark and franchise costs, net
        
        
        408,559
        
        
        
        411,936Other assets
        
        
        1,457,907
        
        
        
        1,917,918$
        206,586,649
        
        
        $
        204,631,088


F-2



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Balance Sheets (continued)

December 30,
        
        December 31,2001
        
        2000LiabilitiesCurrent liabilities:Accounts payable and accrued expenses
        
        $
        14,171,631
        
        
        $
        7,518,321Taxes payable other than on income
        
        
        476,809
        
        
        
        384,352Income taxes payable
        
        
        3,859,873
        
        
        
        Current portion of long-term debt
        
        
        4,058,700
        
        
        
        4,277,636Total current liabilities
        
        
        22,567,013
        
        
        
        12,180,309Long-term debt, less current portion
        
        
        86,293,381
        
        
        
        90,762,013Deferred income taxes
        
        
        992,275
        
        
        
        4,290,423Deferred gain on sale/leaseback
        
        
        4,129,962
        
        
        
        4,129,962Deferred credits
        
        
        2,545,004
        
        
        
        2,218,519Minority interests in equity of
consolidated subsidiaries and
partnerships
        
        
        786,477
        
        
        
        728,222Total liabilities
        
        
        117,314,112
        
        
        
        114,309,448Shareholders 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,
5,088,278 and 5,544,211 shares
issued and outstanding as of
December 30, 2001 and December 31,
2000, respectively)
        
        
        1,000
        
        
        
        1,000Additional paid-in capital
        
        
        23,519,506
        
        
        
        25,425,175Retained earnings
        
        
        67,001,529
        
        
        
        66,089,984Unrealized gain on securities
available-for-sale, net of income
taxes
        
        
        100,307
        
        
        
        53,231Notes receivable from officer, net
of discount of $181,444 and $283,499
as of December 30, 2001 and December
31, 2000, respectively
        
        
        (1,349,805
        )
        
        
        (1,247,750
        )Total shareholders equity
        
        
        89,272,537
        
        
        
        90,321,640$
        206,586,649
        
        
        $
        204,631,088


See accompanying notes.

F-3



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Earnings

Year endedDecember 30,
        
        December 31,
        
        December 26,2001
        
        2000
        
        1999Revenues:Hotel
        
        $
        12,533,050
        
        
        $
        45,429,175
        
        
        $
        65,115,997Franchising and management
        
        
        3,970,821
        
        
        
        3,606,243
        
        
        
        4,151,550Construction and development
        
        
        27,479,885
        
        
        
        12,036,744
        
        
        
        11,234,378Rent
        
        
        3,467,744
        
        
        
        1,955,324
        
        
        
        483,443Other income
        
        
        336,595
        
        
        
        48,982
        
        
        
        359,604Total revenues
        
        
        47,788,095
        
        
        
        63,076,468
        
        
        
        81,344,972Cost and expenses:Hotel
        
        
        10,192,744
        
        
        
        33,652,855
        
        
        
        45,381,624Franchising and management
        
        
        2,191,659
        
        
        
        2,459,801
        
        
        
        2,419,700Construction and development
        
        
        25,691,829
        
        
        
        12,571,160
        
        
        
        9,825,958Rent expense
        
        
        581,900
        
        
        
        10,332,830
        
        
        
        13,530,020General and administrative
        
        
        5,927,641
        
        
        
        5,018,981
        
        
        
        6,342,439Depreciation and amortization
        
        
        4,439,588
        
        
        
        5,565,398
        
        
        
        6,887,561Total expenses
        
        
        49,025,361
        
        
        
        69,601,025
        
        
        
        84,387,302Operating loss
        
        
        (1,237,266
        )
        
        
        (6,524,557
        )
        
        
        (3,042,330
        )Gain on sale of property and leasehold interests
        
        
        3,761,890
        
        
        
        4,901,523
        
        
        
        15,001,716Gain on early extinguishment of debt
        
        
        912,719
        
        
        
        7,306,645
        
        
        
        3,860,512Interest expense
        
        
        (8,451,658
        )
        
        
        (10,471,086
        )
        
        
        (12,109,323
        )Interest income
        
        
        6,376,349
        
        
        
        6,462,292
        
        
        
        6,182,497Earnings from continuing operations before
income taxes and minority interests
        
        
        1,362,034
        
        
        
        1,674,817
        
        
        
        9,893,072Income tax expense
        
        
        (454,000
        )
        
        
        (1,000,000
        )
        
        
        (3,376,000
        )Minority interests in earnings of consolidated
subsidiaries and partnerships
        
        
        (58,255
        )
        
        
        (57,246
        )
        
        
        (1,909,605
        )Earnings from continuing operations
        
        
        849,779
        
        
        
        617,571
        
        
        
        4,607,467Discontinued operations:Operations of hotel disposed of, net of
income tax effect
        
        
        61,766
        
        
        
        (39,909
        )
        
        
        (68,641
        )Net earnings
        
        $
        911,545
        
        
        $
        577,662
        
        
        $
        4,538,826


F-4



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Earnings (continued)

Year endedDecember 30,
        
        December 31,
        
        December 26,2001
        
        2000
        
        1999Earnings per common share:Basic:Earnings from continuing operations
        
        $
        0.15
        
        
        $
        0.11
        
        
        $
        0.71Income (loss) from operations of
hotel disposed of
        
        
        0.01
        
        
        
        0.00
        
        
        
        (0.01
        )Net earnings
        
        $
        0.16
        
        
        $
        0.11
        
        
        $
        0.70Diluted:Earnings from continuing operations
        
        $
        0.15
        
        
        $
        0.11
        
        
        $
        0.68Income (loss) from operations of
hotel disposed of
        
        
        0.01
        
        
        
        (0.01
        )
        
        
        (0.01
        )Net earnings
        
        $
        0.16
        
        
        $
        0.10
        
        
        $
        0.67Weighted average common shares outstanding:Basic
        
        
        5,464,533
        
        
        
        5,471,962
        
        
        
        6,517,717Diluted
        
        
        5,529,825
        
        
        
        5,553,852
        
        
        
        6,744,835


See accompanying notes.

F-5



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity

Years ended December 30, 2001, December 31, 2000 and December 26, 1999

Common Stock
        

NotesReceivable From
        

Additional Pain-InShares
        
        Amount
        
        Officer
        
        CapitalBalance, December 27, 1998
        
        
        7,472,310
        
        
        $
        1,000
        
        
        $
        
        
        
        $
        37,056,834Exercise of stock options, net
        
        
        13,568
        
        
        
        
        
        
        
        
        
        
        
        50,880Net earnings
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Change in unrealized gain on
securities
available-for-sale, net of
income taxes
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Comprehensive earningsCommon stock repurchased
        
        
        (2,113,300
        )
        
        
        
        
        
        
        
        
        
        
        (11,823,018
        )Balance, December 26, 1999
        
        
        5,372,578
        
        
        
        1,000
        
        
        
        
        
        
        
        25,284,696Exercise of stock options, net
        
        
        1,067
        
        
        
        
        
        
        
        
        
        
        
        4,001Notes receivable from officer
for exercise of options to
purchase common stock
        
        
        408,333
        
        
        
        
        
        
        
        (1,247,750
        )
        
        
        1,352,603Net earnings
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Change in unrealized gain on
securities
available-for-sale, net of
income taxes
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Comprehensive
earningsCommon stock repurchased
        
        
        (237,767
        )
        
        
        
        
        
        
        
        
        
        
        (1,216,125
        )Balance, December 31, 2000
        
        
        5,544,211
        
        
        
        1,000
        
        
        
        (1,247,750
        )
        
        
        25,425,175Exercise of stock options, net
        
        
        1,067
        
        
        
        
        
        
        
        
        
        
        
        4,001Net earnings
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Interest accreted on notes
receivable from officer for
exercise of options to
purchase common stock
        
        
        
        
        
        
        
        
        
        
        (102,055
        )
        
        
        Change in unrealized gain on
securities
available-for-sale, net of
income taxes
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Comprehensive earningsCommon stock repurchased
        
        
        (457,000
        )
        
        
        
        
        
        
        
        
        
        
        (1,909,670
        )Balance, December 30, 2001
        
        
        5,088,278
        
        
        $
        1,000
        
        
        $
        (1,349,805
        )
        
        $
        23,519,506


F-6



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity (continued)

Years ended December 30, 2001, December 31, 2000 and December 26, 1999

Accumulated OtherRetained
        
        ComprehensiveEarnings
        
        Income
        
        TotalBalance, December 27, 1998
        
        $
        60,973,496
        
        
        $
        67,704
        
        
        $
        98,099,034Exercise of stock options, net
        
        
        
        
        
        
        
        
        
        
        50,880Net earnings
        
        
        4,538,826
        
        
        
        
        
        
        
        4,538,826Change in unrealized gain on
securities available-for-sale,
net of income taxes
        
        
        
        
        
        
        12,617
        
        
        
        12,617Comprehensive earnings
        
        
        
        
        
        
        
        
        
        
        4,551,443Common stock repurchased
        
        
        
        
        
        
        
        
        
        
        (11,823,018
        )Balance, December 26, 1999
        
        
        65,512,322
        
        
        
        80,321
        
        
        
        90,878,339Exercise of stock options, net
        
        
        
        
        
        
        
        
        
        
        4,001Notes receivable from officer for
exercise of options to purchase
common stock
        
        
        
        
        
        
        
        
        
        
        104,853Net earnings
        
        
        577,662
        
        
        
        
        
        
        
        577,662Change in unrealized gain on
securities available-for-sale,
net of income taxes
        
        
        
        
        
        
        (27,090
        )
        
        
        (27,090
        )Comprehensive earnings
        
        
        
        
        
        
        
        
        
        
        550,572Common stock repurchased
        
        
        
        
        
        
        
        
        
        
        (1,216,125
        )Balance, December 31, 2000
        
        
        66,089,984
        
        
        
        53,231
        
        
        
        90,321,640Exercise of stock options, net
        
        
        
        
        
        
        
        
        
        
        4,001Interest accreted on notes
receivable from officer for
exercise of options to purchase
common stock
        
        
        
        
        
        
        
        
        
        
        (102,055
        )Net earnings
        
        
        911,545
        
        
        
        
        
        
        
        911,545Change in unrealized gain on
securities available-for-sale,
net of income taxes
        
        
        
        
        
        
        47,076
        
        
        
        47,076Comprehensive earnings
        
        
        
        
        
        
        
        
        
        
        958,621Common stock repurchased
        
        
        
        
        
        
        
        
        
        
        (1,909,670
        )Balance, December 30, 2001
        
        $
        67,001,529
        
        
        $
        100,307
        
        
        $
        89,272,537


See accompanying notes.

F-7



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Year endedDecember 30,
        
        December 31,
        
        December 26,2001
        
        2000
        
        1999Cash flows from operating activitiesEarnings from continuing operations
        
        $
        849,779
        
        
        $
        617,571
        
        
        $
        4,607,467Adjustments to reconcile earnings from
continuing operations to net cash provided by
(used in) operating activities:Income (loss) from discontinued operations
        
        
        (61,766
        )
        
        
        (39,909
        )
        
        
        (68,641
        )Depreciation and amortization
        
        
        4,439,588
        
        
        
        5,565,398
        
        
        
        6,887,561Amortization of deferred charges recorded
as interest expense
        
        
        608,804
        
        
        
        718,694
        
        
        
        1,101,689Recognition of previously deferred gains
        
        
        (305,391
        )
        
        
        (2,684,184
        )
        
        
        (5,140,869
        )Gain on sale of property and leasehold
interests
        
        
        (3,761,890
        )
        
        
        (4,901,523
        )
        
        
        (15,001,716
        )Gain on early extinguishments of debt
        
        
        (912,719
        )
        
        
        (7,306,645
        )
        
        
        (3,860,512
        )Deferred income tax (benefit) provision
        
        
        
        
        
        
        2,201,126
        
        
        
        2,216,332Increase in minority interest in equity
of consolidated subsidiaries and
partnerships
        
        
        58,255
        
        
        
        57,246
        
        
        
        1,909,605Compensation expense related to equity
        
        
        
        
        
        
        151,955
        
        
        
        Changes in assets and liabilities:Trade receivables
        
        
        (926,097
        )
        
        
        2,221,758
        
        
        
        (1,602,148
        )Construction contracts receivable
        
        
        (1,610,873
        )
        
        
        5,268,475
        
        
        
        (7,674,104
        )Costs and estimated earnings in
excess of billings on construction
contracts
        
        
        (3,020,903
        )
        
        
        3,545,227
        
        
        
        (3,560,272
        )Income and other taxes receivable and
payable
        
        
        5,720,231
        
        
        
        (2,242,511
        )
        
        
        1,457,753Prepaid expenses
        
        
        (54,336
        )
        
        
        261,551
        
        
        
        (53,530
        )Other assets
        
        
        361,395
        
        
        
        829,049
        
        
        
        (1,996,951
        )Accounts payable and accrued expenses
        
        
        6,653,310
        
        
        
        (5,419,990
        )
        
        
        (1,843,337
        )Net cash provided by (used in) operating
activities
        
        
        8,037,387
        
        
        
        (1,156,712
        )
        
        
        (22,621,673
        )Cash flows from investing activitiesDecrease (increase) in restricted cash
        
        
        12,624,732
        
        
        
        (12,788,021
        )
        
        
        (904,029
        )Payments from notes receivable
        
        
        681,433
        
        
        
        418,098
        
        
        
        12,317,668Capital expenditures
        
        
        (20,931,949
        )
        
        
        (8,830,699
        )
        
        
        (20,101,074
        )Proceeds from sale of equipment
        
        
        
        
        
        
        538,725
        
        
        
        Proceeds from sale of property and leasehold
interests
        
        
        2,907,258
        
        
        
        39,680,623
        
        
        
        70,915,913Proceeds from sale of leasehold interests,
net of expenses
        
        
        
        
        
        
        13,832,482
        
        
        
        Deposits on sale/leaseback of hotels
        
        
        
        
        
        
        (4,295,000
        )
        
        
        (7,280,000
        )Net cash (used in) provided by investing
activities
        
        
        (4,718,526
        )
        
        
        28,556,208
        
        
        
        54,948,478


F-8



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (continued)

Year endedDecember 30,
        
        December 31,
        
        December 26,2001
        
        2000
        
        1999Cash flows from financing activitiesPayments for deferred loan costs
        
        
        (462,937
        )
        
        
        (188,438
        )
        
        
        (1,134,671
        )Proceeds from long-term debt
        
        
        7,500,000
        
        
        
        22,500,500
        
        
        
        26,149,754Payments on long-term debt
        
        
        (11,085,783
        )
        
        
        (46,095,258
        )
        
        
        (44,330,435
        )Payments on capitalized lease obligations
        
        
        
        
        
        
        (189,590
        )
        
        
        (233,362
        )Distributions to minority interests
        
        
        
        
        
        
        (261,834
        )
        
        
        (100,000
        )Exercise of stock options
        
        
        4,001
        
        
        
        4,001
        
        
        
        50,880Purchases of treasury stock
        
        
        (1,909,670
        )
        
        
        (1,216,125
        )
        
        
        (11,823,018
        )Net cash used in financing activities
        
        
        (5,954,389
        )
        
        
        (25,446,744
        )
        
        
        (31,420,852
        )Net (decrease) increase in cash and cash
equivalents
        
        
        (2,635,528
        )
        
        
        1,952,752
        
        
        
        905,953Cash and cash equivalents   beginning of year
        
        
        5,339,689
        
        
        
        3,386,937
        
        
        
        2,480,984Cash and cash equivalents   end of year
        
        $
        2,704,161
        
        
        $
        5,339,689
        
        
        $
        3,386,937


See accompanying notes.

F-9



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Years ended December 30, 2001, December 31, 2000 and December 26, 1999

1.  Summary of Significant Accounting Policies

The Businessactivities of ShoLodge, Inc. and subsidiaries (the Company) are
composed primarily of owning, franchising, operating, leasing, and constructing
lodging facilities. Presently, there are three brands, Shoneys Inns, Baymont
Inns & Suites, and AmeriSuites. As of December 30, 2001, the Company derived
its hotel revenues from fourteen owned properties located in eight states
across the United States. Of these fourteen properties, five are located in
Texas, two are located in Mississippi, and two are located in Alabama. No
other state has more than one property. Twelve of the properties are Shoneys
Inns, one is a Baymont Inn & Suites, and one is an AmeriSuites hotel.

The Consolidated Financial Statementsinclude the accounts of the Company and
its majority-owned subsidiaries and partnerships. All significant intercompany
items and transactions have been eliminated. The Company is the managing
general partner in the partnership entities.

The Fiscal Yearof the Company consists of 52/53 weeks ending the last Sunday
of the calendar year.

Accounting Estimates.The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. Estimates also affect the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.

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

F-10



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies (continued)

Restricted Cashrepresents approximately $1,782,000 escrowed to fund the
completion of construction and furnishing of one hotel on a site presently
owned by the Company. This construction project is presently in progress and
is expected to be completed in the first quarter of 2002. Restricted cash also
includes $200,000 at one of the Companys major banks.

Accounts Receivable from Construction Contractsincludes billed amounts earned
on construction contracts open at the date of the balance sheet. Costs and
estimated earnings in excess of billings on construction contracts were not
billable to customers at the date of the balance sheet. As of December 30,
2001, $3,966,000 of the total construction amounts receivable were from three
contracts with three third party customers.

Property and Equipmentis 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. Capital lease amortization is
included in depreciation expense. 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 26, 1999, December 31, 2000 and December 30, 2001 were approximately
$2,004,000, $349,000, and $858,000, respectively. Pre-opening costs are
expensed as incurred.

Land Under Development or Held For Saleconsists of land adjacent to hotels
developed by the Company and land adjoining the Companys corporate
headquarters which is being developed for sale or is held for sale.

Deferred Chargesinclude 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
$3,309,360 and $4,089,029 as of December 31, 2000 and December 30, 2001,
respectively.

F-11



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies (continued)

Investments.The Companys investment securities have been classified as
available-for-sale and are included in other assets in the accompanying balance
sheets. 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.

Goodwillincludes excess of cost over fair value of net assets acquired
(goodwill) in the amount of $2,537,070 and $2,387,099 at December 31, 2000 and
December 30, 2001, 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 $1,212,254 and $1,362,225, as of December 31, 2000
and December 30, 2001, respectively.

Trademark and franchise costsinclude costs of the Sumner Suites trademark in
the amount of $411,936 and $388,744 as of December 31, 2000 and December 30,
2001, respectively, and are amortized on the straight-line method over a period
of twenty years. This amount is net of accumulated amortization of $80,004 and
$103,196 as of December 31, 2000 and December 30, 2001, respectively. As of
December 30, 2001, franchise costs of Baymont Inn & Suites was $19,815 net of
accumulated amortization of $185. The franchise was acquired in November of
2001 and is being amortized on a straight-line basis over a period of five
years.

Other Assetsinclude cash surrender value of life insurance, non-current
portion of direct financing leases, securities available for sale, and base
linens stock.

Asset Impairment.The Company records impairment losses on long-lived assets
used in operations and intangibles when indicators of impairment are present
and the undiscounted cash flows related to those assets are less than their
carrying amounts. The Company records impairment losses on long-lived assets
under development or held for sale when indications of impairment are present
and the estimated fair value less costs to sell is less than their carrying
amount.

Advertising.The Company charges the costs of advertising to expense as
incurred. Advertising expense was approximately $1,920,000, $1,117,000 and
$486,000 for the years ended December 26, 1999, December 31, 2000 and December
30, 2001, respectively.

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

F-12



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies (continued)

Revenues from hotel operationsare recognized as services are rendered.

Construction and development revenuesfrom fixed-price and cost-plus
construction contracts are recognized based on the percentage of completion
method, measured by the percentage of cost incurred to total estimated cost for
each contract. This method is used because management considers costs incurred
to be the best available measure of progress on these contracts. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions and
estimated profitability (including those arising from contract penalty
provisions) and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
No material amounts were recognized due to revisions in 2001, 2000 or 1999.

Claims are amounts in excess of the agreed contract price that a contractor
seeks to collect from customers or others for customer caused delays, errors in
specifications and designs, contract terminations, change orders in dispute or
unapproved as to both scope and price, or other causes of unanticipated
additional costs. An amount equal to contract costs attributable to claims is
included in revenues when realization is probable and the amount can be
reliably estimated. Those two requirements are satisfied by managements
determination of the existence of all of the following conditions: the contract
or other evidence provides a legal basis for the claim; additional costs are
caused by circumstances that were unforeseen at the contract date and are not
the result of deficiencies in the contractors performance; costs associated
with the claim are identifiable or otherwise determinable and are reasonable in
view of the work performed; and the evidence supporting the claim is
objective and verifiable. If such requirements are met, revenue from a claim
is recorded to the extent that contract costs relating to the claim have been
incurred. Costs attributable to claims are treated as costs of contract
performance as incurred.

Franchising, reservation and management revenuesare 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 Sharefor all periods has been computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share. Basic earnings per share is computed by dividing earnings by the
weighted average number of common shares outstanding during the year. Diluted
earnings per common

F-13Table of Contents

ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies (continued)

share is computed by dividing earnings by the weighted average number of common
shares outstanding during the year plus incremental shares that would have been
outstanding upon the assumed exercise of dilutive options and the assumed
conversion of dilutive debentures. See Note 5 for a reconciliation of basic and
diluted earnings per share.

Stock-Based Compensation.The Company uses the intrinsic value method for
valuing its awards of stock options and recording the related compensation
expense, if any. See Note 7 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, trade receivables, construction contracts receivable, and notes
receivable. 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. Concentrations of credit risk with respect to
construction contracts receivable and notes receivable are increased due to the
smaller number of contracts and notes and their higher dollar amounts. The
Company performs credit evaluations of its customers and generally does not
require collateral or other security to support customer receivables. As of
December 31, 2000, and December 30, 2001, $59,560,899 and $58,799,391,
respectively, of notes receivable are from a group of companies affiliated with
one another which acquired and operate the 16 hotels described in Note 13.
Although notes receivable generally consist of first mortgages notes that are
cross-collateralized and cross-defaulted, in the event the fair values of the
underlying assets were to be less than balances of the first mortgage notes,
the notes receivable could be under-collateralized.

Recently Issued Accounting Pronouncements.In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations,
(SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets(SFAS
No. 142). SFAS No. 141 was effective July 1, 2001, and SFAS No. 142 is
effective January 1, 2002. Under the new rules in SFAS No. 142, goodwill and
indefinite lived intangible assets will no longer be amortized effective
January 1, 2002, but will be subject to annual impairment tests. Other
intangible assets will continue to be amortized over their useful lives.

F-14



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies (continued)

The Company will apply the new rules on accounting for goodwill and intangible
assets
beginning in the first quarter of 2002. Application of the nonamortization
provisions of SFAS No. 142 is expected to result in an increase in net income
of approximately $263,000 ($0.05 per share) per year. During 2002, the Company
will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets(SFAS No. 144), which supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, (SFAS No. 121), and the accounting and reporting provisions
of APB No. 30, Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS No. 144 removes goodwill from its scope and clarifies other implementation
issues related to SFAS No. 121. SFAS No. 144 also provides a single framework
for evaluating long-lived assets to be disposed of by sale. The provisions of
this statement were adopted at the beginning of fiscal 2002 and had no material
effect on the Companys results of operations or financial position.

Reclassifications.Certain reclassifications have been made in the 1999 and
2000 consolidated financial statements to conform to the classifications used
in 2001.

F-15



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

2.  Property and Equipment

Property and equipment consists of:

December 30,
        
        December 31,2001
        
        2000Land and improvements
        
        $
        19,953,352
        
        
        $
        20,209,885Buildings and improvements
        
        
        69,133,846
        
        
        
        64,560,598Furniture, fixtures, equipment and software
        
        
        26,178,322
        
        
        
        27,254,209Construction in progress
        
        
        7,846,670
        
        
        
        2,336,957123,112,190
        
        
        
        114,361,649Less accumulated depreciation and
amortization
        
        
        (21,944,927
        )
        
        
        (23,526,651
        )$
        101,167,263
        
        
        $
        90,834,998


3.  Long-Term Debt

Long-term debt consists of:

2001
        
        2000Industrial revenue bonds, due in varying
amounts through 2017
        
        $
        2,905,000
        
        
        $
        2,982,5007.50% Convertible subordinated debentures
        
        
        25,596,000
        
        
        
        29,008,0009.75% Series A senior subordinated notes
        
        
        20,167,000
        
        
        
        21,824,0009.55% Series B senior subordinated notes
        
        
        20,341,000
        
        
        
        22,091,000Bank credit facility
        
        
        13,000,000
        
        
        
        10,000,000Notes payable  bank and other, bearing
interest at 2.01% to 8.19%, due in varying
amounts through 2010
        
        
        8,343,081
        
        
        
        9,134,14990,352,081
        
        
        
        95,039,649Less current portion
        
        
        (4,058,700
        )
        
        
        (4,277,636
        )$
        86,293,381
        
        
        $
        90,762,013


F-16



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

3.  Long-Term Debt (continued)

The Industrial Revenue Bonds (IRBs) and substantially all notes payable are
collateralized by property and equipment with a net book value of approximately
$9.9 million at December 30, 2001. 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 (2.01% at December 30, 2001).

The Companys 7.50% convertible subordinated debentures mature in May 2004 with
interest payable in semi-annual installments. The debentures are convertible
at any time before maturity, unless previously redeemed, into common stock of
the Company at a conversion price of $23.31 per share, subject to adjustment.
The debentures are unsecured and subordinated in right of payment to the prior
payment in full of all existing and future senior indebtedness, as defined in
the debentures. The Company, at its option, can redeem the bonds beginning in
May 1997 at 105.25% of par, declining .75% each year thereafter to par in May
2004.

During November 1996, the Company issued $33,150,000 of 9.75% senior
subordinated notes, Series A, under an aggregate $125,000,000 senior
subordinated indenture agreement. The notes mature in November 2006, with
interest payable quarterly. The notes are unsecured and subordinated in right
of payment to the prior payment in full of all existing and future senior
indebtedness of the Company. Additionally, in September 1997, the Company
issued $35,000,000 of 9.55% senior subordinated notes, Series B, also under the
aggregate $125,000,000 senior subordinated indenture agreement. The notes
mature in September 2007, with interest payable quarterly. The notes are
unsecured and subordinated in right of payment to the prior payment in full of
all other senior indebtedness of the Company and will be senior in right of
payment to, or pari passu with all other subordinated indebtedness of the
Company, including the Series A notes. Both Series A and Series B of the
senior subordinated notes are subject to annual redemptions at the option of
the holder of the notes in the amount of 5% of the original aggregate amount
issued under the indenture, which is $3,407,500 per year beginning December 1,
1999. The note holders exercised this option in each of the last three years
and are expected to do so again in fiscal 2002. Accordingly, the annual
redemption amount has been included in current portion of long-term debt in
these financial statements.

The Company established a three-year credit facility with a financial
institution effective August 27, 1999. An amendment to the credit facility
became effective October 3, 2001, which, among other changes, extended the
maturity to September 30, 2004. The credit

F-17Table of Contents

ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

3.  Long-Term Debt (continued)

facility is for $30 million (a $10 million term loan and a $20 million
revolving line of credit), secured by a pledge of certain promissory notes
payable to the Company received
in connection with the sale of 16 of the Companys lodging facilities in the
third quarter of 1998 (Note 13). 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 million. Effective October 3, 2001, the interest rate on the
term loan is at the lenders base rate plus 100 basis points, and the interest
rate on the revolving line of credit is at the lenders base rate plus 250
basis points, with a floor of 7.00% on both portions of the facility. The
Company is to pay commitment fees on the unused portion of the facility at .50%
per annum. The credit facility also contains covenants which limit or prohibit
the incurring of certain additional indebtedness in excess of a specified debt
to total capital ratio, prohibit additional liens on the collateral, restrict
mergers and the payment of dividends and restrict the Companys ability to
place liens on unencumbered assets. The credit facility contains financial
covenants as to the Companys minimum net worth. As of December 30, 2001, the
Company had $13 million in borrowings outstanding under this credit facility,
consisting of the $10 million term loan and $3 million on the revolving line of
credit. The balances of notes receivable collateralizing this credit facility
totaled $58,799,000 as of December 30, 2001.

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, 2002. As
of December 31, 2000, and December 30, 2001, the Company had no borrowings
outstanding under this credit facility.

In May 2000, the Company repaid approximately $7,458,000 of debt with a portion
of the proceeds of the sale of four hotels (Note 11). In July 2000, the Company
repaid approximately $1,638,000 of debt with the proceeds of the sale of its
leasehold interests in 24 hotels (Note 12).

In the years ended December 26, 1999, December 31, 2000, and December 30, 2001,
the Company repurchased $12,598,000, $29,784,000, and $3,412,000, respectively,
of the Companys previously issued subordinated debt at a discount from face
value. These repurchases resulted in extraordinary pretax gains, net of the
write-off of related unamortized deferred financing costs, of $3,861,000,
$7,307,000, and $913,000 in 1999, 2000, and 2001, respectively.

F-18



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

3.  Long-Term Debt (continued)

Maturities of long-term debt are as follows:

2002
        
        $
        4,058,7002003
        
        
        2,599,4762004
        
        
        39,273,9022005
        
        
        736,6242006
        
        
        19,308,491Thereafter
        
        
        24,374,888$
        90,352,081


4.  Commitments and Contingencies

The Company and its subsidiaries lease certain property and equipment under
noncancelable operating lease agreements. Total rental expense under operating
leases for the years ended December 26, 1999, December 31, 2000 and December
30, 2001 was approximately $18,476,000, $12,987,000 and $582,000, respectively.

Future minimum rental payments are as follows:

2002
        
        $
        350,0002003
        
        
        350,0002004
        
        
        350,0002005
        
        
        291,667Thereafter
        
        
        -$
        1,341,667


The Company is self-insured for workers compensation benefits up to $500,000
annually in the aggregate and $250,000 per occurrence and has recorded an
accrual for all expected and outstanding claims at December 30, 2001. While
the Companys ultimate liability may exceed or be less than the amount accrued,
the Company believes that it is unlikely that it would experience losses that
would be materially in excess of such estimated amounts. In addition to the
recorded accruals, the Company had outstanding letters of credit in the amount
of $-0- and $125,000 as of December 31, 2000 and December 30, 2001,
respectively, to satisfy workers compensation self-insurance security deposit
requirements.

F-19



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

4.  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 construction of a hotel was completed for a third party during 2001 and a
balance of approximately $2,000,000 remained uncollected as of December 30,
2001. The Company has a lien against the property and has filed an arbitration
claim against the owner. The arbitration hearing has been scheduled for July
22, 2002. While the outcome of the proceeding cannot presently be determined,
management does not believe it is probable that the carrying value of the
receivable has been impaired. Accordingly, an allowance for doubtful
collectibility was not necessary at December 30, 2001. Should the Company be
unsuccessful in the arbitration hearing, the required write-off of the
receivable would be charged to 2002 operations.

As discussed in Note 12, the Company has filed an arbitration proceeding
against Prime Hospitality Corp., seeking $20,000,000 in monetary damages
related to the non-use of the Companys reservation center as agreed. The
outcome of the arbitration proceeding cannot presently be determined. Any
monetary damages awarded to the Company from the arbitration proceeding would
be recorded as income upon receipt.

F-20



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

5.  Earnings Per Share

The following tables reconcile earnings and weighted average shares used in the
earnings per share (EPS) calculations for fiscal years 2001, 2000 and 1999.

Year endedDecember 30, 2001
        
        December 31, 2000
        
        December 26, 1999Numerator:Earnings from continuing operations
        
        
        
        
        
        $
        849,779
        
        
        $
        617,571
        
        
        $
        4,607,467Earnings (loss) from discontinued operations
        
        
        
        
        
        
        61,766
        
        
        
        (39,909
        )
        
        
        (68,641
        )Numerator for basic earnings per share-
earnings available to shareholders
        
        
        
        
        
        $
        911,545
        
        
        $
        577,662
        
        
        $
        4,538,826Denominator:Denominator for basic earnings per share -
weighted-average shares
        
        
        
        
        
        
        5,464,533
        
        
        
        5,471,962
        
        
        
        6,517,717Effect of dilutive securities:Options
        
        
        
        
        
        
        65,292
        
        
        
        81,890
        
        
        
        227,118Denominator for diluted earnings per share
 adjusted weighted-average shares
        
        
        
        
        
        
        5,529,825
        
        
        
        5,553,852
        
        
        
        6,744,835Basic earnings (loss) per share:Earnings from continuing operations
        
        
        
        
        
        $
        0.15
        
        
        $
        0.11
        
        
        $
        0.71Earnings (loss) from discontinued operations
        
        
        
        
        
        
        0.01
        
        
        
        0.00
        
        
        
        (0.01
        )Net earnings
        
        
        
        
        
        $
        0.16
        
        
        $
        0.11
        
        
        $
        0.70Diluted earnings (loss) per share:Earnings from continuing operations
        
        
        
        
        
        $
        0.15
        
        
        $
        0.11
        
        
        $
        0.68Earnings (loss) from discontinued operations
        
        
        
        
        
        
        0.01
        
        
        
        (0.01
        )
        
        
        (0.01
        )Net earnings
        
        
        
        
        
        $
        0.16
        
        
        $
        0.10
        
        
        $
        0.67


The Companys 7.5% debentures were convertible into 2,283,252, 1,244,444, and
1,098,069 shares of common stock at December 26, 1999, December 31, 2000 and
December 30, 2001, respectively, but were not included in the computation of
diluted EPS, as such securities were anti-dilutive.

F-21



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

6.  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 annual adjustment to market interest rates.
Notes payable carrying value approximates fair value due to (1) a recent
borrowing and (2) variable rates on earlier borrowings. The carrying value of
industrial revenue bonds approximate fair value due to the variable interest
rate of these instruments. The convertible subordinated debentures and senior
subordinated notes have the following estimated fair values based upon quoted
market prices as of December 30, 2001 and December 31, 2000:

2001
        
        2000Fair Value
        
        Carrying Value
        
        Fair Value
        
        Carrying ValueConvertible subordinated
debentures
        
        $
        16,253,460
        
        
        $
        25,596,000
        
        
        $
        17,840,000
        
        
        $
        29,008,000Senior subordinated
notes
        
        
        25,719,970
        
        
        
        40,508,000
        
        
        
        30,740,000
        
        
        
        43,915,000$
        41,973,430
        
        
        $
        66,104,000
        
        
        $
        48,580,000
        
        
        $
        72,923,000


As of December 31, 2000 and December 30, 2001, the aggregate fair values of
securities available-for-sale were $203,524 and $279,506, respectively.

7.  Stock Option Plan

The Companys 1991 Stock Option Plan, as amended, (the Plan), authorizes the
grant to key employees of options to purchase up to an aggregate of 900,000
shares of common stock. The exercise price of options granted under the terms
of the Plan must not be less than 100% of the fair market value of the shares
as of the date of grant, or 110% of the fair market value for incentive stock
options granted to option holders possessing more than 10% of the total
combined voting power of all classes of stock of the Company. 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. The plan has now
expired, and no more options will be granted under this plan.

F-22



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

7.  Stock Option Plan (continued)

A summary of the status of the Plan for the years ended December 26, 1999,
December 31, 2000 and December 30, 2001, follows:

Shares Subject to OptionAvailable for
        
        
        
        Weighted AverageGrant
        
        Outstanding
        
        Exercise PriceDecember 27, 1998
        
        
        133,610
        
        
        
        722,037
        
        
        $
        3.75Granted
        
        
        (5,000
        )
        
        
        5,000
        
        
        
        5.50Exercised
        
        
        
        
        
        
        (13,568
        )
        
        
        3.75Canceled
        
        
        18,134
        
        
        
        (18,134
        )
        
        
        3.75December 26, 1999
        
        
        146,744
        
        
        
        695,335
        
        
        
        3.76Granted
        
        
        
        
        
        
        
        
        
        
        Exercised
        
        
        
        
        
        
        (409,400
        )
        
        
        3.75Canceled
        
        
        2,901
        
        
        
        (2,901
        )
        
        
        3.75December 31, 2000
        
        
        149,645
        
        
        
        283,034
        
        
        
        3.78Granted
        
        
        
        
        
        
        
        
        
        
        Exercised
        
        
        
        
        
        
        (1,067
        )
        
        
        3.75Canceled
        
        
        
        
        
        
        
        
        
        
        Plan expired for
grants
        
        
        (149,645
        )
        
        
        
        
        
        
        December 30, 2001
        
        
        
        
        
        
        281,967
        
        
        
        3.78


The weighted average fair value of options granted during the year was $2.96
for the year ended December 26, 1999. No options were granted in 2000 or 2001.

F-23



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

7.  Stock Option Plan (continued)

The following table summarizes information relating to the stock options
outstanding as of December 30, 2001:

Options Outstanding
        
        
        
        
        
        Options ExercisableNumber
        
        Weighted-
        
        
        
        NumberOutstanding
        
        Average
        
        Weighted-
        
        Exercisable
        
        Weighted-at
        
        Remaining
        
        Average
        
        at
        
        AverageExercise
        
        December 30,
        
        Contractual
        
        Exercise
        
        December 30,
        
        ExercisePrice
        
        2001
        
        Life
        
        Price
        
        2001
        
        Price$3.75
        
        
        55,500
        
        
        
        0.13
        
        
        $
        3.75
        
        
        
        55,500
        
        
        $
        3.753.75
        
        
        29,467
        
        
        
        2.05
        
        
        
        3.75
        
        
        
        29,467
        
        
        
        3.753.75
        
        
        41,000
        
        
        
        3.33
        
        
        
        3.75
        
        
        
        41,000
        
        
        
        3.753.75
        
        
        68,000
        
        
        
        4.59
        
        
        
        3.75
        
        
        
        68,000
        
        
        
        3.753.75
        
        
        83,000
        
        
        
        5.42
        
        
        
        3.75
        
        
        
        66,400
        
        
        
        3.755.50
        
        
        5,000
        
        
        
        7.39
        
        
        
        5.50
        
        
        
        2,000
        
        
        
        5.50281,967
        
        
        
        
        
        
        
        
        
        
        
        262,367


Had the fair value of options granted under the plan beginning in 1997 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:

2001
        
        2000
        
        1999Net earnings
        
        As reported
        
        $
        911,545
        
        
        $
        577,662
        
        
        $
        4,538,826Pro forma
        
        
        815,860
        
        
        
        (18,605
        )
        
        
        3,898,931Basic earnings
        
        As reported
        
        
        0.16
        
        
        
        0.11
        
        
        
        0.70per share
        
        Pro forma
        
        
        .15
        
        
        
        .00
        
        
        
        0.60Diluted earnings
        
        As reported
        
        
        0.16
        
        
        
        0.10
        
        
        
        0.67per share
        
        Pro forma
        
        
        .15
        
        
        
        .00
        
        
        
        0.58


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 1999: no dividend yield for all years; expected
volatility of 32%; risk free interest rate of 6.10%; and expected life of 9
years. There were no grants in 2000 or 2001.

F-24



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

8.  Shareholders Equity

In 2001 and prior years, the Companys Board of Directors authorized the
repurchase of various amounts of its common stock, so that through December 30,
2001, the total authorized amount of the Companys common stock repurchases was
$23,000,000. The cumulative number of shares repurchased as of December 30,
2001, was 3,592,067 shares at a cost of $20,325,374.

9.  Income Taxes

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

2001
        
        2000
        
        1999Current expense (benefit):Federal
        
        $
        3,541,152
        
        
        $
        (1,201,125
        )
        
        $
        1,188,835State
        
        
        210,996
        
        
        
        
        
        
        
        (29,168
        )3,752,148
        
        
        
        (1,201,125
        )
        
        
        1,159,667Deferred expense (benefit)
        
        
        (3,298,148
        )
        
        
        2,201,125
        
        
        
        2,216,333$
        454,000
        
        
        $
        1,000,000
        
        
        $
        3,376,000


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

2001
        
        2000
        
        1999Federal income tax based on the statutory
rate
        
        $
        495,688
        
        
        $
        600,332
        
        
        $
        3,554,372State income taxes, less federal income tax
benefit
        
        
        2,781
        
        
        
        209,028
        
        
        
        218,876Minority interest
        
        
        (19,807
        )
        
        
        (20,036
        )
        
        
        (738,444
        )Interest on deferred gain
        
        
        373,560
        
        
        
        466,000
        
        
        
        250,028Previously accrued income
taxes
        
        
        (451,465
        )
        
        
        
        
        
        
        Permanent differences & other
        
        
        53,243
        
        
        
        (255,324
        )
        
        
        91,168$
        454,000
        
        
        $
        1,000,000
        
        
        $
        3,376,000


The Company reevaluated its tax exposure during the quarter ended December 30,
2001 and, as a result of the resolution of certain tax issues, reduced
previously accrued income tax liabilities by $451,465.

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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

9.   Income Taxes (continued)

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

2001
        
        2000Deferred tax liabilities:Differences between book and tax
basis of property
        
        $
        (2,151,000
        )
        
        $
        Profits on installment sales
        
        
        (8,722,000
        )
        
        
        (9,432,000
        )Unrealized gain on securities
available for sale
        
        
        (64,000
        )
        
        
        (34,000
        )Other
        
        
        (321,000
        )
        
        
        (236,000
        )(11,258,000
        )
        
        
        (9,702,000
        )Deferred tax assets:Difference between book and tax
basis of property
        
        
        
        
        
        
        454,000Deferred profit on sales of hotels
        
        
        6,154,000
        
        
        
        3,724,000Direct financing leases
        
        
        88,000
        
        
        
        83,000Differences between book and tax
losses recognized by minority
interests
        
        
        725,000
        
        
        
        743,000Allowance for doubtful accounts
        
        
        70,000
        
        
        
        147,000Alternative minimum tax credits
        
        
        281,000
        
        
        
        Net operating losses
        
        
        5,866,000
        
        
        
        2,687,000Other
        
        
        168,000
        
        
        
        261,000Total deferred tax asset
        
        
        13,352,000
        
        
        
        8,099,000Valuation allowance
        
        
        (3,086,000
        )
        
        
        (2,687,000
        )Deferred tax asset
        
        
        10,266,000
        
        
        
        5,412,000Net deferred tax liability
        
        $
        (992,000
        )
        
        $
        (4,290,000
        )


During September 2000, the Internal Revenue Service (the Service) issued a
Revenue Agents Report to the Company asserting income tax deficiencies and
additions to tax relating to the tax year ended December 28, 1997. The Company
filed a protest to the Services asserted deficiencies and additions to tax.
The amounts of the income tax deficiencies and additions to tax asserted does
not include interest which accrues from the dates the taxes were due until the
date of the payment. The asserted deficiencies are related solely to the
timing of taxable income between the four years from fiscal 1997

F-26Table of Contents

ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

9.  Income Taxes (continued)

through fiscal 2000, in which year the Company provided taxes thereon. The
Service submitted a proposed agreement on August 6, 2001, and the Company
accepted the agreement on September 20, 2001. On March 22, 2002, the Company
received a notice from the Service of tax due for fiscal 1997 in the amount of
$2,493,807 plus statutory interest of $724,812 (no penalties). Both the income
tax due and the statutory interest are provided for in the accompanying
financial statements.

The Company has a federal net operating loss carryforward of approximately
$8,000,000 as of December 30, 2001. The Company expects to realize the benefit
of this deferred tax asset and therefore no valuation allowance has been placed
against it. In addition, the Company has state net operating loss
carryforwards of approximately $85,000,000 and $73,000,000 at December 30, 2001
and December 31, 2000 respectively. These losses expire from tax years 2002
through 2021. Because of the uncertainty of the ultimate realization of this
deferred tax asset, the Company has established a valuation allowance for the
full amount. During 2001 the valuation allowance increased $399,000.

The Company also has available alternative minimum tax credit carryforwards of
$281,000 that can be used to offset future taxes in years in which the
alternative minimum tax credit does not apply. The credit can be carried
forward indefinitely.

10.  Related Party Transactions

On July 5, 2000, the Board of Directors accelerated the vesting of certain
options held by the Companys president and chief executive officer to purchase
40,000 shares of common stock. He was expected to become fully vested under the
original terms of the options, the options had no intrinsic value on the date
of acceleration and, therefore, additional compensation expense was not
incurred as a result of the accelerated vesting. Immediately thereafter, the
president and chief executive officer of the Company exercised vested employee
stock options for 408,333 shares of the Companys common stock, at the exercise
price of $3.75 per share. He executed non-interest bearing, unsecured,
full-recourse promissory notes totaling $1,531,249 with maturity dates
coinciding with the expiration dates of each option grant, ranging from
February 11, 2002, to May 30, 2007. The closing market price of the Companys
common stock on July 5, 2000, was $3.31 per share. The Company recorded the
notes receivable of $1,531,249, net of unearned discount of $331,000, assuming
a market interest rate of 8.50%. During 2000, compensation expense was
recorded in the amount of $152,000 (the fair value of shares received less the
present value of the notes receivable using an 8.50% discount rate). The fair
value of shares issued of $1,352,603 has been recorded as

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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

10.  Related Party Transactions (continued)

paid-in capital and the notes receivable are recorded as a deduction from
shareholders equity. The Company has accreted $47,102 and $102,055 of
discount on these notes as interest income in 2000 and 2001, respectively.
During 2001 the Company purchased five vehicles from a corporation owned by the
president and chief executive officer and a director of the Company, for an
aggregate purchase price of approximately $120,000.

11.  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. In May 2000, the Company entered into a third sale
and leaseback agreement with the same party for an additional four of its
Sumner Suites hotels. The assets of the hotels were sold to a real estate
investment trust, and the hotels continued to be operated by the Company until
the sale of leasehold interests on July 9, 2000 as described in Note 12 below.
The lease was classified as an operating lease.

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 was 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 was being recognized over the remainder of the 12-year lease
term. The 2000 cash sale price of the four hotels was $38.4 million; these
hotels had a net book value of approximately $34 million. The resulting $3.7
million gain was deferred and was being recognized over the remainder of the
12-year lease term. The minimum base rental was $25.6 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 and $56,000 during 2000 to the date of sale of leasehold
interests on July 9, 2000.

The Company was required to pay a deposit of $14 million (increased to $21.3
million in 1999 and to $25.6 million in 2000) to be retained by the purchaser
in the event of default or nonobservance of the lease agreement. The deposit
was to be refunded to the Company at the end of the lease term in the event no
default had occurred. The Company was also required to provide an additional
deposit of $14 million to be retained by the purchaser in the event of default
or nonobservance of the lease agreement. This deposit earned interest

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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

11.  Sale/Leaseback Transactions (continued)

at a rate of 11.11% annually. Interest earned was credited to the required rent
payment due the lessor. The deposit was to be refunded to the Company upon the
earlier of achievement of certain operating results of the leased hotels or at
the end of the lease term in the event no default had occurred. On July 9,
2000, the Company sold its leasehold
interests in the 24 hotels to Prime Hospitality Corp. (Prime), and as a part
of the transaction, the Company assigned its interest to Prime in the two
deposits related to the lease, the $25.6 million in lease security deposits and
the $14 million additional deposit.

12.  Sale of Leasehold Interests

On July 9, 2000, the Company completed a transaction with Prime Hospitality
Corp. (Prime) in which it sold to Prime all of its leasehold interest in 24
Sumner Suites hotels, for a total of $15.6 million (Note 11). The Company
received $14.0 million in cash, and retired its debt securities held by Prime
with a face value of $2.6 million and a fair value of $1.6 million. As a part
of the transaction, the Company assigned its interest to Prime in two deposits
related to the lease, the $14.0 million guaranty deposit and $25.6 million in
lease security deposits and the related supplies inventory at each hotel.

The Company also agreed, on July 9, 2000, with Hospitality Properties Trust
(HPT), the landlord whose consent was required to assign the lease to Prime,
to construct two hotels on sites presently owned by the Company. One of these
construction projects was completed in October 2001, and the hotel opened on
October 3, 2001. The other project is presently in process and is expected to
be completed in the first quarter of 2002. These projects were funded by $13.9
million that was escrowed from the cash proceeds from the sale of the
leasehold interests to Prime. The escrowed funds were owned by the Company and
drawn down from the escrow agent to finish the construction and furnishing of
these hotels. The Company by an exchange option agreement dated July 9, 2000,
also gave HPT, the owner of the 24 Sumner Suites whose leasehold rights were
assigned to Prime, the right to exchange one or both of two specific hotels
included in the leasehold group for these two new hotels, upon completion of
their construction. If the Company does not consent to the property exchange,
then HPT may require the Company to purchase the two specific hotels. Even
though Prime was not concerned, HPT was concerned about the two specific hotels
in the 24-hotel lease being in close proximity to two existing AmeriSuites
hotels owned and operated by Prime. Since the Company was selling its interest
in all of its existing Sumner Suites hotels, it had no need to complete the
development of the two Sumner suites hotels on the two sites. The exchange
option, therefore, served a business purpose for both HPT and the Company with
no objection from Prime. The exchanges were to be even exchanges with no
additional compensation

F-29Table of Contents

ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

12.  Sale of Leasehold Interests (continued)

involved. The sale of the leasehold interests to Prime was not contingent upon
the
exchange option agreement between the Company and HPT. The Company believes
that Prime was aware of the existence of the exchange option agreements at the
time of the sale of the leasehold interests, but Prime did not condition its
willingness to complete the transaction on the exchange option agreements being
present. The $13.9 million was escrowed by the Company to insure that the two
new hotels would be completed to HPTs satisfaction so that its exchange
options would be executable. ShoLodge had already started development and
construction of the two new hotels and needed a source of funds to complete
construction. The escrow of the funds to complete hotels that were already
under development was considered a non-event by the Company, and from the
Companys perspective, did not represent a restriction on the use of its cash,
but rather, represented a source of funds to complete projects that had already
been undertaken. The exchange option was between HPT and the Company. Prime
was aware of the exchange option, but had no agreement with HPT concerning the
exchange rights of HPT.

As of December 30, 2001, the completed hotel was being operated by the Company
as an AmeriSuites hotel, subject to HPTs exchange option being exercised and
consummated. The exchange subsequently occurred on March 14, 2002. The other
hotel was completed and opened by the Company as an AmeriSuites hotel on
February 7, 2002, and was operated by the Company as an AmeriSuites hotel
until the exchange, occurred on April 9, 2002.

The Company further agreed to lease to Prime three other Sumner Suites hotels,
which the Company owns. The 11-year lease provides for initial minimum annual
rental payments of $2.9 million, increasing to $3.1 million if the lease is
extended, and also provides for percentage rents based on hotel sales, as
defined. The Company has not earned any contingency rental income to date.
Prime has converted all 27 of the Sumner Suites hotels to the AmeriSuites
brand. The Company agreed to not operate any other all-suites hotels in
competition with Prime within a defined geographic radius of each of the hotels
being sold. This restriction will not prevent the Company from developing
hotels for others in the restricted area or operating or franchising any
Shoneys Inn brand hotel in the restricted area.

In 2000, the Company recognized a gain of $3.6 million, continued to defer
gains of $4.1 million from previous sale/leaseback transactions on the two
hotels subject to possible exchange, and recognized gains related to the early
extinguishment of the debt securities received from Prime of $855,000, all
before income tax. In addition, the Company agreed to construct one 124-room
AmeriSuites hotel for Prime on a site presently owned

F-30



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

12.  Sale of Leasehold Interests (continued)

by Prime at a construction and development price of $76,500 per room, less
Primes cost of the land. This construction was completed in 2001. The
Company also agreed to
provide reservation services to Prime for all of its existing hotels, for a fee
based on a percentage of room revenue. Reservation service fees are now
included in franchising and management revenues. The reservation system
technology was enhanced in order to accommodate Primes requirements, and was
ready to add these additional hotel properties in early 2001. However, Prime
failed to commence use of the Companys reservation services as agreed, and on
June 25, 2001, the Company filed an arbitration proceeding against Prime,
seeking $20 million in monetary damages. The parties selected an arbitrator,
and the arbitration hearing was held during the week of April 15, 2002. The
results of the arbitration proceeding were released on June 28, 2002. The
Arbitrator ruled that Primes material breach of contract caused the Company to
lose $8.9 million in anticipated profit under the terms of the Agreement. The
Arbitrator accordingly awarded the Company its full damages of $8.9 million, to
be paid within 30 days of the award. Prime paid the award by wire transfer on
August 1, 2002. The Company recorded the $8.9 million receivable and earnings
in its second fiscal quarter of 2002.

13.  Sale of Hotels

During 1998, the Company sold 16 of its company-owned Shoneys Inn hotels for
$90 million. The sales price consisted of $22.5 million in cash with the
balance of $67.5 million in the form of interest-bearing promissory notes that
are currently collateralized by 15 of the Shoneys Inn hotels that were sold.
These notes contain cross-collateralization and cross-default provisions. The
notes are currently being amortized on a 24-year amortization period at a 7.50%
interest rate, and mature on July 30, 2003. Annually, on July 30, the then
principal balance of the notes are amortized over one less year and at an
interest rate adjusted based upon a formula tied to 5-year U. S. Treasury
rates. Profit was recognized on twelve of the sales under the full accrual
method of accounting. Profit of approximately $12 million on the other four
hotels sold was accounted for under the installment method as the minimum
initial cash down payment specified by SFAS No. 66, Accounting for Sales of
Real Estate, was not satisfied at the purchase date. Of the $12 million
profit, $77,000 was recognized in 1998, with the remaining $11.9 million
recognized in 1999 as the required minimum cash down payment for each of the
four hotels was received.

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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

14.   Supplemental Cash Flow Information

2001
        
        2000
        
        1999Cash paid during the year for
interest
        
        $
        8,776,470
        
        
        $
        11,114,856
        
        
        $
        14,030,265Cash (received) paid during the
year (from) for income taxes
        
        $
        (4,253,461
        )
        
        $
        634,046
        
        
        $
        277,890Significant non-cash activities:Investing:Proceeds from sale of
property arising from
notes receivable
        
        $
        6,507,500
        
        
        $
        2,850,000
        
        
        $
        Proceeds from sale of
leasehold interests
arising from
repurchase of
long-term debt at a
discount
        
        
        
        
        
        
        1,617,625
        
        
        
        Financing:Exercise of stock
options financed by
notes receivable
        
        
        
        
        
        
        1,531,249
        
        
        
        $
        6,507,500
        
        
        $
        5,998,874
        
        
        $
        


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 represented approximately 80%, 72%, and 26% of total revenues for the years
ending December 26, 1999, December 31, 2000, and December 30, 2001,
respectively. The construction and development segment represented
approximately 58% of total revenues in the year ended December 30, 2001, as
compared with approximately 14% in 1999 and 19% in 2000. 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

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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

15.  Operating Segment Information (continued)

from one controlled group of franchisees of 16 Shoneys Inns which contributed
approximately $1.0 million, or 24.8%, $920,000, or 25.5%, and $1.9 million, or
45.9%,
of total franchising and management revenues, after elimination of intersegment
amounts,
in 1999, 2000 and 2001, 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. Construction and
development revenues earned in 2000 included two construction contracts with
two customers comprising approximately $10.5 million, or 87.5%, of total
construction revenues. Construction and development revenues earned in 2001
included three construction contracts with three customers comprising
approximately $21.6 million, or 78.6%, of total construction and development
revenues.

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ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

15.  Operating Segment Information (continued)

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

2001
        
        2000
        
        1999Revenues:Hotel revenues from external
customers
        
        $
        16,975
        
        
        $
        48,148
        
        
        $
        66,551Franchising and management
        
        
        5,319
        
        
        
        6,975
        
        
        
        8,687Construction and development
        
        
        41,650
        
        
        
        15,094
        
        
        
        26,413Elimination of intersegment
franchising and construction
revenue
        
        
        (16,156
        )
        
        
        (7,141
        )
        
        
        (20,306
        )Total revenues
        
        $
        47,788
        
        
        $
        63,076
        
        
        $
        81,345Operating profit (loss):Hotel
        
        $
        2,808
        
        
        $
        (672
        )
        
        $
        1,681Franchising and management
        
        
        (6,010
        )
        
        
        (5,526
        )
        
        
        (6,084
        )Construction and development
        
        
        1,965
        
        
        
        (327
        )
        
        
        1,361Total operating profit (loss)
        
        $
        (1,237
        )
        
        $
        (6,525
        )
        
        $
        (3,042
        )Total assets:Hotel
        
        $
        152,142
        
        
        $
        138,421
        
        
        $
        200,773Franchising and management
        
        
        44,500
        
        
        
        63,351
        
        
        
        57,986Construction and development
        
        
        9,945
        
        
        
        2,859
        
        
        
        11,555Total assets
        
        $
        206,587
        
        
        $
        204,631
        
        
        $
        270,314Capital expenditures:Hotel
        
        $
        18,211
        
        
        $
        3,595
        
        
        $
        16,955Franchising and management
        
        
        2,555
        
        
        
        5,129
        
        
        
        3,126Construction and development
        
        
        166
        
        
        
        107
        
        
        
        20Total capital expenditures
        
        $
        20,932
        
        
        $
        8,831
        
        
        $
        20,101Depreciation and amortization:Hotel
        
        $
        3,306
        
        
        $
        4,388
        
        
        $
        5,707Franchising and management
        
        
        1,068
        
        
        
        1,130
        
        
        
        1,143Construction and development
        
        
        66
        
        
        
        47
        
        
        
        38Total depreciation and
amortization
        
        $
        4,440
        
        
        $
        5,565
        
        
        $
        6,888


16.  Defined Contribution Plan

In 2000, the Company began sponsoring a 401(k) defined contribution plan for
all employees. Eligible participants may contribute up to 15% of their annual
compensation,
subject to maximum amounts established by the United States Internal Revenue
Service (the IRS). The Company makes matching contributions which equal 20%
of the first 6% of annual compensation contributed to the plan by each
employee, subject to

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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

maximum amounts established by the IRS. The Companys
contributions under this plan
amounted to $80,782 in 2000 and $51,985 in 2001.

17.  Quarterly Financial Information (Unaudited)

The following is a summary of the unaudited quarterly financial information for
the years ended December 30, 2001 and December 31, 2000:

QuartersFirst
        
        Second
        
        Third
        
        Fourth(in (000's) except for per share data)2001Revenues
        
        $
        10,739
        
        
        $
        10,533
        
        
        $
        12,666
        
        
        $
        13,850Operating earnings (loss)
        
        
        (563
        )
        
        
        141
        
        
        
        (72
        )
        
        
        (743
        )Earnings from continuing
operations
        
        
        1,573
        
        
        
        9
        
        
        
        78
        
        
        
        (810
        )Earnings (loss) from
discontinued operations
        
        
        13
        
        
        
        44
        
        
        
        14
        
        
        
        (9
        )Net income (loss)
        
        
        1,586
        
        
        
        53
        
        
        
        92
        
        
        
        (819
        )Net income (loss) per share:Basic:From continuing operations
        
        
        .28
        
        
        
        .00
        
        
        
        .02
        
        
        
        (.16
        )From discontinued operations
        
        
        .00
        
        
        
        .01
        
        
        
        .00
        
        
        
        .00Net income (loss)
        
        
        .28
        
        
        
        .01
        
        
        
        .02
        
        
        
        (.16
        )Diluted:From continuing operations
        
        
        .23
        
        
        
        .00
        
        
        
        .02
        
        
        
        (.16
        )From discontinued operations
        
        
        .00
        
        
        
        .01
        
        
        
        .00
        
        
        
        .00Net income (loss)
        
        
        .23
        
        
        
        .01
        
        
        
        .02
        
        
        
        (.16
        )2000Revenues
        
        $
        27,104
        
        
        $
        21,352
        
        
        $
        7,273
        
        
        $
        7,347Operating loss
        
        
        (1,965
        )
        
        
        (2,610
        )
        
        
        (555
        )
        
        
        (1,395
        )Earnings (loss) from
continuing operations
        
        
        (1,999
        )
        
        
        2,639
        
        
        
        1,036
        
        
        
        (1,059
        )Earnings (loss) from
discontinued operations
        
        
        (33
        )
        
        
        (2
        )
        
        
        80
        
        
        
        (84
        )Net income (loss)
        
        
        (2,032
        )
        
        
        2,637
        
        
        
        1,116
        
        
        
        (1,143
        )Net income (loss) per share:Basic:From continuing operations
        
        
        (.37
        )
        
        
        .50
        
        
        
        .19
        
        
        
        (.19
        )From discontinued operations
        
        
        (.01
        )
        
        
        .00
        
        
        
        .01
        
        
        
        (.01
        )Net income (loss)
        
        
        (.38
        )
        
        
        .50
        
        
        
        .20
        
        
        
        (.20
        )Diluted:From continuing operations
        
        
        (.37
        )
        
        
        .50
        
        
        
        .19
        
        
        
        (.19
        )From discontinued operations
        
        
        (.01
        )
        
        
        .00
        
        
        
        .01
        
        
        
        (.01
        )Net income (loss)
        
        
        (.38
        )
        
        
        .50
        
        
        
        .20
        
        
        
        (.20
        )


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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

18.  Subsequent Events

In the second quarter of 2002, the Company sold one hotel. The effect of this
hotels operations has been removed from operating earnings for all periods
presented in accordance with Statement of Financial Accounting Standards No.
144, Accounting for
the Impairment or Disposal of Long-Lived Assets. Balance sheet
reclassifications as of December 30, 2001 and December 31, 2000, and cash flow
statement reclassifications for each of the three years in the period ended
December 30, 2001, were not made because of the insignificance of such amounts
to the consolidated amounts. At December 30, 2001, this hotel had $63,812 in
current assets, $4,442,462 in property and equipment (net of accumulated
depreciation), $22,921 in other assets, $137,135 in current liabilities,
$7,182,419 due to related parties, and $2,790,359 in stockholders deficit. At
December 31, 2000, this hotel had $75,349 in current assets, $4,642,069 in
property and equipment (net of accumulated depreciation), $22,967 in other
assets, $227,112 in current liabilities, $6,700,823 due to related parties, and
$2,187,550 in stockholders deficit.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 rescinds Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Since the issuance of
Statement 4, the use of debt extinguishment has become part of the risk
management strategy of many companies, including the Company. These debt
extinguishments do not meet the criteria for classification as extraordinary
items in APB Opinion No. 30, Reporting the Results of Operations  Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, and therefore, should not
be classified as extraordinary after the adoption of SFAS No. 145. Adoption of
SFAS No. 145 is required for fiscal years beginning after May 15, 2002, but
earlier application is encouraged. The Company elected to adopt the provisions
of SFAS No. 145 at the beginning of fiscal 2002. The extraordinary gains on
extinguishment of debt previously classified as an extraordinary item in prior
periods have been reclassified for all periods presented to conform with the
provisions of Statement 145.

The president and chief executive officer renewed his non-interest bearing,
unsecured, full-recourse promissory note in the amount of $937,500 that came
due on February 11, 2002 with the Company for one year at an interest rate of
prime plus 250 basis points. The Company collected the promissory note and
related interest receivable in full before the renewed maturity date.

On May 3, 2002, the Company acquired all of the common stock of GuestHouse

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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

18.  Subsequent Events (continued)

International Franchise Systems, Inc. (GuestHouse) in a cash transaction.
GuestHouse is the exclusive franchisor of the GuestHouse Inns & Suites hotel
brand, consisting of 71 properties open and operating, had an additional 12
properties under development of
which 5 were scheduled to open by mid-2002, and had an additional 27 license
agreements in various stages of completion. As a result of the acquisition,
the Company will be in charge of the operation and growth of the GuestHouse
brand, and expects the transaction to be accretive to earnings beginning with
the fiscal year ending December 29, 2002. On May 21, 2002, the Company
announced its plan to convert the name of the Shoneys Inns and Shoneys Inns &
Suites hotel chain to GuestHouse International Inns & Suites as soon as
practical.

The Company had filed an arbitration claim against Prime Hospitality Corp. in
June of 2001 seeking monetary damages related to the non-use of the Companys
reservation center as agreed. In June of 2002, the Arbitrator ruled that
Primes material breach of contract caused the Company to lose $8.9 million in
anticipated profit under the terms of the agreement and, accordingly, awarded
the Company its full damages of $8.9 million. Prime paid the award to the
Company on August 1, 2002.

19.  Fourth Quarter 2002 Developments (Unaudited)

Sholodge expects to report after-tax net losses in the fourth quarter of 2002
of approximately $20 million on an unaudited basis. The losses are primarily
the result of losses on the sale of hotels, charge-offs of construction and
development costs on abandoned hotel development projects and write-downs of
notes and accounts receivable due to impaired values of hotels underlying the
receivables.

Approximately $12 million of the estimated after-tax net losses are from the
write-down of 18 notes receivable totaling $67.8 million secured by first
mortgages on 18 hotel properties. Fifteen of the mortgages totaling $58.8
million are cross-collateralized and cross-defaulted and mature on July 30,
2003. Even though all first mortgage payments on these 15 hotels have been
timely received, in late December of 2002 the owner notified the Company that
it is highly unlikely that it will be able to refinance the properties by the
notes maturity dates. Consequently, since the Company does not desire to
extend the maturity dates, the Company anticipates that it will be necessary to
resume title to the properties. The owner of the properties agreed in late
December of 2002 to transfer the hotels back to the Company by deeds in lieu of
foreclosure. In anticipation of this, the Company began midway through the
fourth fiscal quarter to find cash purchasers

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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

19.  Fourth Quarter 2002 Developments (Unaudited) (continued)

of the properties in the event the Company re-acquired ownership. The Company
generally does not buy and sell hotels, typically selling only one or two
hotels each year, and any new hotels added are almost always developed rather
than purchased. The only sale of a hotel property by the Company between
September 11, 2001, and December 27,
2002, was at a pre-tax gain of $331,000. The two hotels sold in 2001 were also
sold at a
gain. Therefore, based upon the Companys recent experience, the Company has
been greatly disappointed in offers received recently for the fifteen hotels
securing the notes receivable. Since the Company does not desire to take back
ownership and operate the properties, it is likely to sell the properties at
values significantly below the balances of the notes receivable and has written
down the notes receivable to the estimated net sales prices of the properties.

Separately from the hotels collateralizing notes receivable discussed above,
the Company sold one and transferred five of its company-owned hotels on
December 27, 2002, at an after-tax charge of approximately $3 million. The
Company transferred the five hotels for notes receivable with a maturity of six
months. Accordingly, the transaction did not qualify as a sale and the
properties will continue to be carried on the Companys balance sheet. The
buyer intends to resell the hotels. If the buyer is unsuccessful and the
hotels ultimately have to be taken back, the Company intends to pursue other
potential buyers.

The Company constructed two hotels for third parties from which it has been
unable to collect the balances due. One of the contracts receivable is for
approximately $2 million and the Company received an arbitration award of
substantially all of its claim in the fourth quarter to be paid within 30 days
of the October 30, 2002 award date. The owner of the hotel failed to pay the
award when due, and on January 3, 2003 filed Chapter 11 bankruptcy. As a
result, the Company has charged the entire balance off in the fourth quarter.
The other contract receivable is for approximately $1 million, and arbitration
proceedings were initiated on January 15, 2003. The owner of the hotel claims
damages in excess of the amount owed. Consequently, the Company has charged
the entire amount off in its fourth quarter. These two contracts together
resulted in an after-tax charge-off in the fourth quarter of approximately $2
million. Any recovery from these contracts will be recorded as earned when
received.

The Company has incurred development costs related to several sites upon which
hotel development for third parties was planned. In early 2002, the lodging
industry anticipated an economic upturn in the second half of the year. The
upturn failed to materialize. Consequently, new hotel development
opportunities eroded in late 2002 and the development opportunities on all of
these sites were lost. These development costs,

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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

19.  Fourth Quarter 2002 Developments (Unaudited) (continued)

which had been previously capitalized, were charged off in the fourth quarter
since none of the costs improved the value of the land upon which they were
incurred. The impact of these charge-offs on the fourth quarter net earnings
totaled approximately $1 million. An estimated net loss from routine operations
is expected in addition to the transactions discussed above, principally due to
the off season for the hotel industry and to the uncollectibility of unsecured
accounts receivable, primarily management fees, royalty fees
and reservation fees.

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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Valuation and Qualifying AccountsSchedule II

Years ended December 26, 1999, December 31, 2000, and December 30, 2001

AdditionsBalance at
        
        Charged to
        
        
        
        Balance atBeginning of
        
        Costs and
        
        
        
        End ofYear
        
        Expenses
        
        Deductions*
        
        YearYear ended
December 26, 1999
Allowance for
doubtful accounts
receivable
        
        $
        642,780
        
        
        $
        280,472
        
        
        $
        (463,383
        )
        
        $
        459,869Year ended
December 31, 2000
Allowance for
doubtful accounts
receivable
        
        $
        459,869
        
        
        $
        213,723
        
        
        $
        (293,278
        )
        
        $
        380,314Year ended
December 30, 2001
Allowance for
doubtful accounts
receivable
        
        $
        380,314
        
        
        $
        127,816
        
        
        $
        (323,726
        )
        
        $
        184,404




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|* |  | Represents write-offs of uncollectible accounts receivable
|- |  | ----------------------------------------------------------

S-1