SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 2928, ~~2002~~2003 Commission File Number 0-19840

SHOLODGE, INC.

(Exact name of registrant as specified in its charter)

Tennessee		62-1015641
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification Number)
130 Maple Drive, North, Hendersonville, Tennessee		37075
(Address of principal executive offices)		(Zip Code)


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


130 Maple Drive, North, Hendersonville, Tennessee (Address of principal executive offices)		37075 (Zip Code)

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

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

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

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

Aggregate market value of the voting stock held by non-affiliates of the registrant on July 1211, ~~2002~~2003, was approximately $96,~~500~~400,000. The market value calculation was determined using the last sale price of registrant’s common stock on July 1211, ~~2002~~2003, as reported on The Nasdaq Stock Market, and assumes that all shares beneficially held by executive officers and directors of the registrant are shares owned by “affiliates,” a status which each of the officers and directors individually disclaims.

Shares of common stock, no par value, outstanding on April 41, ~~2003~~2004, were 5,~~118~~006,~~778~~611.

TABLE OF CONTENTS

DOCUMENTS INCORPORATED BY REFERENCE PART I PART II PART III PART IV SIGNATURES CERTIFICATION A#2 TO LOAN AND SECURITY AGREEMENT SUBSIDIARIES OF THE REGISTRANT CONSENT OF ERNST & YOUNG LLP SARBANES CERTIFICATION OF CEO AND CFO

DOCUMENTS INCORPORATED BY REFERENCE

		Documents from which portions are
Part of Form 10-K		incorporated by reference
Part III		Proxy Statement for registrant’s annual meeting of shareholders to be held during the second quarter of fiscal ~~2003~~2004.
Part IV		Registration Statement on Form S-1, Commission File No. 33-44504.
Part IV		Registration Statement on Form S-3, Commission File No. 33-77910.
Part IV		Registration Statement on Form S-8, filed with the Commission on June 24, 1997
Part IV		Registration Statement on Form S-4/A, Commission File No. 333-98789

TABLE OF CONTENTS


PART I
	ITEM 1. BUSINESS.
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
PART II
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	ITEM 9A. CONTROLS AND PROCEDURES
PART III
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
EX-21 SUBSIDIARIES OF THE REGISTRANT
EX-23.1 CONSENT OF ERNST & YOUNG
EX-31.1 SECTION 302 CERTIFICATIONS
EX-32.1 SECTION 906 CERTIFICATIONS

PART I

ITEM 1. BUSINESS.

General

The Company develops, ~~and~~ owns, operates and is ~~an operator and~~ the exclusive franchisor of Shoney’s Inns and GuestHouse Inns & Suites. In the second quarter of 2002, the Company acquired the exclusive franchise rights of the GuestHouse Inns & Suites hotel brand and announced its plan to convert the name of the Shoney’s Inns and Shoney’s Inns & Suites hotel chain to GuestHouse International Inns & Suites as soon as practical. As of December 2928, ~~2002~~2003, the Shoney’s Inn /GuestHouse lodging system consisted of ~~118~~ 91 properties containing 97,~~747~~108 rooms of which ~~six~~ one containing ~~686~~98 rooms ~~are~~is owned by the Company. Shoney’s Inns and GuestHouse Inns & Suites are currently located in 1920 states. As of December 28, 2003, the Company also owned and operated two AmeriSuites hotels.

~~The~~ Except for three owned hotel properties which the Company ~~also~~intends ~~owns~~to continue ~~and~~to ~~operates~~operate ~~five~~at ~~AmeriSuites~~present, ~~hotels~~all ~~and~~of isthe Company’s remaining owned hotel ~~currently~~properties ~~negotiating~~are held for sale at December 28, 2003. The Company’s present strategy does not include the ~~sale~~ownership of ~~these~~additional ~~hotels~~hotel properties.

The Company also franchises and manages Shoney’s Inns and GuestHouse Inns & Suites, ~~operate~~earning inrevenues ~~the~~from ~~economy limited-service~~royalties, ~~segment~~reservation ~~and are designed to appeal to both business and leisure travelers~~services, ~~with rooms usually priced between $40~~ and ~~$65 per night. The~~management ~~typical~~services ~~property~~provided ~~includes 60~~ to ~~120~~the ~~rooms~~franchisees, and, inreservation ~~most~~services ~~cases,~~provided ~~meeting rooms.~~to ~~Although~~other ~~they~~hotel dochains ~~not offer full food service, most offer continental breakfast,~~ and ~~most~~independent ofhotel ~~the inns are located adjacent or in close proximity to free-standing restaurants~~operators. ~~Management~~The ~~believes~~Company ~~that~~also ~~its strategy of locating~~leases ~~most~~hotels ofand ~~its~~restaurants ~~inns in close proximity~~ to ~~free-standing~~others, ~~restaurants~~earning ~~has~~rental ~~given~~income itfrom ~~a competitive~~these ~~advantage~~third ~~over many other limited-service lodging chains by~~party ~~offering guest services approximating those of full-service facilities without the additional capital expenditures, operating costs or higher room rates~~lessees.

~~The Company~~ Shoney’s ~~operations~~Inns ~~have~~and ~~been~~GuestHouse ~~supplemented~~Inns by& ~~contract~~Suites ~~revenues~~operate ~~from~~in the economy ~~construction~~limited-service segment and ~~development~~are ofdesigned ~~hotels~~to appeal to both business and ~~other~~leisure travelers, ~~real~~with ~~estate~~rooms ~~projects~~usually ~~for~~priced ~~third~~between $45 and $85 per night. The ~~parties~~typical property includes 60 to 120 rooms and, ~~including~~in ~~developments~~most ~~for~~cases, ~~related~~meeting ~~parties~~rooms. Although ~~Revenues~~they ~~from~~do ~~these~~not offer full food service, most offer continental breakfast, ~~activities~~and ~~have~~most ~~varied~~of ~~widely~~the ~~from~~inns ~~period~~are located adjacent or in close proximity to free-standing ~~period,~~restaurants. ~~depending~~Management ~~upon~~believes ~~whether~~that the location of the inns ~~Company’s~~in ~~construction~~close ~~and~~proximity ~~development~~to ~~activities~~free-standing ~~were~~restaurants ~~primarily~~gives ~~focused~~it ona ~~its~~competitive ~~own~~advantage ~~facilities~~over ormany onother ~~outside~~limited-service ~~projects.~~lodging ~~Construction~~chains ~~revenues~~by ~~are~~offering ~~recognized on~~guest ~~the~~services ~~percentage~~approximating those of ~~completion~~full-service ~~basis~~facilities without the additional capital expenditures, operating costs or higher room rates.

~~The~~ A ~~Company~~significant ~~also~~portion ~~franchises~~of ~~and~~the ~~manages Shoney~~Company’s ~~Inns~~operations ~~and~~have ~~GuestHouse~~been ~~Inns~~generated in &recent ~~Suites,~~years ~~earning~~by contract revenues from ~~royalties,~~construction ~~reservation~~and ~~services,~~development of hotels and ~~management~~other real estate projects for third parties, including developments for ~~services~~related ~~provided~~parties. Revenues from these activities have varied widely from period to period, depending upon whether the ~~franchisees,~~Company’s construction and ~~reservation~~development activities ~~services~~were ~~provided~~primarily ~~to other~~focused ~~hotel~~on ~~chains~~its ~~and~~own ~~independent~~facilities ~~hotel~~or ~~operators~~on outside projects. Construction ~~The~~revenues ~~Company~~are ~~also~~generally ~~leases hotels~~recognized ~~and~~on ~~restaurants~~the topercentage ~~others~~of completion basis, ~~earning~~but ~~rental~~construction ~~income~~and ~~from~~development ~~these~~for ~~third~~related ~~party~~parties are generally ~~lessees~~performed on a cost-plus basis.

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

-Growth ~~1 -~~Strategy

~~Table~~ The Company’s strategy is to increase cash flow and earnings by (i) continuing its current strategy of ~~Contents~~selling most of its remaining Company-owned hotels and other

~~Growth~~- ~~Strategy~~1 -

TheTable 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 while controlling operating costs, (ii) expanding the GuestHouse Inn & Suites system through the addition of new franchised units, (iii) utilizing the Company’s experience in developing all-suite hotels to construct and develop hotels for others, and (iv) expanding the number of lodging facilities served by the Company’s proprietary central reservation center (“InnLink”). Contents

~~Internal~~real ~~Growth.~~estate, ~~The~~(ii) expanding ~~Company~~the ~~seeks~~GuestHouse toInn ~~increase~~& ~~cash~~Suites ~~flow~~system ~~and earnings from its existing hotels~~ through ~~increases in REVPAR while controlling operating~~the ~~costs.~~addition ~~The~~of ~~Company~~new ~~seeks~~franchised ~~to increase REVPAR by increasing average daily room rates and supporting or increasing occupancy rates through targeted marketing and advertising strategies~~units, ~~employing~~(iii) utilizing ~~promotional activities in local markets and capitalizing on~~ the Company’s ~~proprietary~~experience ~~central reservation system. In~~in ~~addition,~~developing ~~the~~all-suite ~~Company~~hotels ~~is committed~~ to ~~sustaining~~construct ~~the quality of its properties through an ongoing renovation~~ and ~~maintenance~~develop ~~program~~hotels infor ~~order~~others, ~~to increase~~and ~~REVPAR.~~(iv) expanding ~~The Company seeks to minimize costs throughout its operations primarily through~~ the ~~use~~number of anlodging ~~in-house~~facilities ~~development~~served ~~and~~by ~~construction~~the ~~team and increased~~Company’s ~~economies~~proprietary ofcentral ~~scale~~reservation incenter ~~purchasing~~(“InnLink”).

Expansion of GuestHouse Inns & Suites Franchise System. In ~~2002~~2003, the Company has focused on expanding the GuestHouse Inns & Suites system principally through the addition of new franchises and the conversion of franchised Shoney’s Inns to GuestHouse. As of ~~2002~~2003 fiscal year-end, there were 91 ~~118~~ Shoney’s Inns and GuestHouse Inns (of which 6one ~~are~~is Company owned) with a total of 97,~~747~~108 rooms. The Company targets existing Shoney’s Inn and GuestHouse franchisees, other hotel brand developers and contacts within the industry as potential franchisees for additional GuestHouse Inns & Suites.

Development of Additional All-Suite Hotels. ~~Currently,~~Except nofor ~~Sumner~~the ~~Suites~~two owned ~~hotels~~all-suite ~~are~~hotel ~~owned,~~properties ~~under~~which ~~construction~~the Company intends to continue to operate at present, orthe ~~planned~~Company’s remaining owned all-suite hotel properties are held for sale ~~the~~at ~~future~~December 28, 2003. The Company ~~has~~’s ~~developed~~present ~~and~~strategy ~~opened~~does ~~two~~not ~~AmeriSuites~~include ~~hotels~~the ownership ~~for~~of ~~Prime~~additional onall-suite ~~sites~~hotel ~~that it owned~~properties. The Company plans to ~~continue~~ continue to develop all-suite hotels for third parties in the future as the opportunities arise.

Reservation Services. The Company provides reservation services to its Shoney’s Inn and GuestHouse franchisees and to other hotel chains and independent hotel operators. This call center (“InnLink”) continues to expand its customer base, ~~currently~~ serving approximately ~~680~~949 hotels as of December 28, 2003, as compared with approximately ~~550~~680 hotels a year ago. The Company is continuing to aggressively market this service, capitalizing on its state of the art technology.

In addition to the strategies described above, the Company may from time to time investigate various alternatives to maximize shareholder value. These alternatives could include, without limitation, the franchising and ~~operation~~ operation of additional ~~Guest~~GuestHouse ~~House~~ Inns & Suites, a sale of the remaining Company-owned hotels, negotiating new credit arrangements, developing hotels for other owners, the repurchase of ~~additional~~ shares of the Company’s common stock or outstanding debt securities, or any combination of these or other strategies~~, including, as announced on January 16, 2003, the possible spin-off of its reservation services subsidiary (InnLink) to the Company’s shareholders~~. ~~If that event were to occur, each shareholder of the~~ ~~Company would receive shares of common stock in a financial services company~~ ~~which would own InnLink as a travel agency segment of its business.~~

-Shoney’s 2Inns/GuestHouse -Franchisor Concept

~~Table~~ Shoney’s Inns and GuestHouse Inns & Suites that are owned by franchisees are primarily limited-service hotels positioned in the economy segment to appeal to both business and leisure travelers and are located in 19 states in markets ranging from small towns to larger metropolitan areas. Shoney’s Inns and GuestHouse Inns & Suites that are owned by franchisees are generally located in proximity to interstate highways, major streets and highways providing convenient access to business establishments. Daily room rates range from $45 to $85 and vary depending upon a number of ~~Contents~~factors, including location, competition, type of room and property designator (hotel, inn, inn & suites, etc.).

~~Shoney’s~~ Historically, ~~Inns/GuestHouse~~the ~~Concept~~typical property that is owned by a franchisee has been a two story, exterior corridor, brick veneer building with plate glass fronts, containing 100 to 125 rooms. Newer inns include a four story, interior corridor, brick or stucco building containing 100 to 120 rooms as well as smaller prototype buildings containing

~~Shoney’s Inns and GuestHouse Inns & Suites are limited~~-~~service~~ ~~hotels positioned~~2 in the economy segment to appeal to both business and leisure travelers and are located in 19 states in markets ranging from small towns to larger metropolitan areas. Shoney’s Inns and GuestHouse Inns & Suites are generally located in proximity to interstate highways, major streets and highways providing convenient access to business establishments. Most of the inns are located adjacent or in close proximity to a free-~~standing restaurant.~~ Management believes that its strategy of locating its inns in close proximity to free-standing restaurants gives it a competitive advantage over many other limited-service lodging chains. Daily room rates range from $40 to $65 and vary depending upon a number of factors, including location, competition and type of room. For fiscal 2002, the average daily room rate for Company-owned Shoney’s Inns and GuestHouse Inns & Suites was $51.46.

Historically,Table theof typical property has been a two story, exterior corridor, brick veneer building with plate glass fronts, containing 100 to 125 rooms. Newer inns include a four story, interior corridor, brick or stucco building containing 100 to 120 rooms as well as smaller prototype buildings containing 80 rooms. In some cases franchisees construct smaller properties. Each room is professionally decorated and is generally furnished with two double beds, a dresser, table and chairs and a color television. Contents

~~Amenities~~80 ~~featured~~rooms. atIn ~~most~~some ~~properties~~cases ~~include~~franchisees ~~swimming~~construct ~~pools,~~smaller ~~meeting~~properties. Each ~~rooms,~~room ~~facsimile~~is ~~machine~~professionally ~~service~~decorated and ~~continental~~is ~~breakfast.~~generally ~~The~~furnished ~~Company~~with two double ~~believes~~beds, ~~that~~a ~~the~~dresser, ~~properties~~table ~~provide~~and ~~their~~chairs, ~~guests~~color ~~with~~television ~~quality~~and ~~accommodations~~coffeemaker. Many atconversion anproperties ~~attractive~~reflect ~~price/value~~the ~~relationship~~architecture ~~within~~and ~~the~~personality ~~upper~~of ~~economy~~its ~~segment~~locale.

~~Construction~~ Amenities featured at the properties of most franchisees include swimming pools, meeting rooms, facsimile machine service, high-speed internet access, and ~~Development~~continental breakfast. The Company believes that the properties provide their guests with quality accommodations at an attractive price/value relationship within the economy segment.

~~The~~Sales ~~Company’s construction subsidiary has a full time staff who manage, supervise, control~~ and ~~perform the construction of hotels and other real estate~~Marketing ~~projects being developed by the Company or for third parties. Subcontractors~~ ~~are employed by the Company for most of the major construction components of~~ ~~hotels and other buildings, including electrical and mechanical work. The~~ Company intends to continue to build hotels and other structures for third parties. The Company believes that its construction experience and its relationship with many subcontractors will facilitate the effective development of additional real estate projects.

The Company ~~devotes~~directs ~~significant~~marketing ~~resources~~efforts toon ~~the~~behalf ~~identification and evaluation~~ of ~~potential~~its ~~sites for hotels. The~~ Company-owned ~~has typically targeted~~inns ~~markets~~primarily ~~with~~to ~~populations~~business ~~of 500~~travelers,~~000~~ orwhom ~~more~~management ~~that~~believes have ~~high~~represented ~~levels of business~~the ~~development~~largest ~~and~~segment ~~multiple sources~~ of ~~room~~its ~~demand.~~customers The site selection process focuses on the competitive environment, including room and occupancy rates and proximity to business parks, office buildings, and other demand generators. The Company’s franchisees focus on sites for their inns in ~~proximity~~recent ~~to interstate highway access roads and major streets and highways providing convenient access to local business establishments and tourist attractions~~years.

- Key 3to the success of the franchised Shoney’s Inn and GuestHouse Inn & Suites chains is the Franchise Service Manager Program. Currently three Franchise Service Managers (“FSM”) provide sales direction and hands-on assistance to all inns with the goal of helping them achieve their properties’ financial, guest service and operational goals. Each FSM takes personal ownership of the properties in his/her region and provides assistance through regular property visits and constant phone communications.

~~Table~~ The Vice President of ~~Contents~~Marketing directs the FSM program and oversees management of the national advertising fund, into which all Shoney’s Inns pay 1% of revenue to support national marketing efforts such as the FSM program, the publications of the annual Vacation and Travel Directory, participation in travel shows and targeted niche advertising. GuestHouse Inns & Suites pay up to $0.50 per available room per day for these services.

~~The~~ Programs ~~construction~~designed ~~phase~~to oftarget ~~a hotel generally requires six months after~~ the ~~selection~~ ~~and~~primary ~~acquisition~~markets of ~~the~~business ~~site~~travelers and mature ~~all~~leisure ~~approvals~~travelers ~~and~~provide ~~permits~~brand ~~have been obtained~~recognition. The Company’s ~~experience~~attempts ~~in selection and acquisition of sites has~~to ~~varied~~capitalize ~~and~~on ~~generally~~the ~~averages~~brand ~~six~~name ~~months.~~recognition ~~The~~in ~~approval~~the ~~and~~over ~~permitting~~50-age ~~phase~~group ~~can occur simultaneously~~ with ~~site~~the ~~acquisition~~“Any Senior” ~~and~~program ~~generally~~which ~~requires~~provides ~~three~~a ~~months. The~~minimum ~~entire~~10% ~~development~~discount ~~process~~on ~~generally~~the ~~ranges~~standard ~~from~~room 10 rate to ~~12 months,~~any ~~but~~traveler ~~may take~~age ~~longer~~55 or older.

~~Sales~~ The Company annually publishes a GuestHouse system directory showing for each owned and ~~Marketing~~franchised inn, its address and telephone number, location as indicated on a locator map, a brief description of the facilities, services and amenities provided and other relevant information such as proximity to area attractions, businesses and restaurants. These directories are distributed in each inn and state travel centers and are provided directly to travel agents, sponsors of group tours, corporate travel departments and other selected potential customers.

The Company ~~directs~~also ~~marketing~~maintains ~~efforts~~comprehensive on ~~behalf~~line ofdirectories ~~its Company-owned inns~~with ~~primarily~~reservations tobooking ~~business~~capabilities ~~travelers,~~at ~~whom~~www.shoneysinn.com ~~management believes have represented the~~and ~~largest segment of its customers in recent years~~www.guesthouseintl.com.

~~Key~~ Travel toAgents. ~~the~~The ~~success~~Company ofhas ~~the~~a ~~Shoney’s~~policy ~~Inn~~of ~~and~~paying ~~GuestHouse~~travel ~~Inn~~agents &a commission, ~~Suites~~standard ~~chains is~~in the ~~Franchise~~hotel ~~Service~~industry, ~~Manager Program. Currently three Franchise Service Managers (“FSM”) provide sales direction and hands-~~on ~~assistance to~~ all ~~inns with~~rack ~~the~~rate ~~goal~~revenue ofbooked ~~helping~~ by them. ~~achieve~~The ~~their properties’ financial~~Company, ~~guest~~with ~~service and~~respect ~~operational~~to ~~goals.~~both ~~Each~~owned ~~FSM~~and ~~takes~~franchised ~~personal~~inns, ~~ownership~~has of joined the ~~properties~~TACS-Classic ~~in his/her~~Program ~~region~~administered ~~and~~by ~~provides~~Perot ~~assistance~~Systems. ~~through~~TACS-Classic ~~regular~~(Travel Agent ~~property~~Commission ~~visits~~Settlement) ~~and constant~~is ~~phone communications.~~a

~~The~~- ~~Director~~3 ~~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. GuestHouse Inns & Suites pay up to $0.50 per available room per day for these services.

ProgramsTable designed to target the primary markets of business travelers and mature leisure travelers provide brand recognition. The Company attempts to capitalize on the brand name recognition in the over 50-age group with the “Any Senior” program which provides a 10% discount on the standard room rate to any traveler age 55 or older. Contents

~~The~~program ~~Company~~where ~~annually~~each ~~publishes~~hotel aproperty ~~Shoney’s~~reports ~~Inn/GuestHouse~~by ~~system~~electronic ~~directory showing~~transmission ~~for~~to ~~each~~Perot Systems ~~inn,~~all of its ~~address~~commissionable ~~and~~room ~~telephone~~sales ~~number,~~generated ~~location~~through astravel ~~indicated~~agents. onPerot aSystems ~~locator~~automatically ~~map,~~generates achecks ~~brief~~each ~~description~~month ofto ~~the~~travel ~~facilities,~~agents ~~services and amenities~~across ~~provided~~the ~~and~~country ~~other~~for ~~relevant~~the ~~information~~total ~~such~~commissions asearned. ~~proximity~~The toCompany ~~area~~believes ~~attractions,~~that travel ~~businesses~~agents ~~and~~are ~~restaurants.~~more ~~These~~likely ~~directories~~to ~~are~~book ~~distributed~~guests ininto ~~each~~a ~~inn~~property ~~and~~knowing that their ~~state~~commissions ~~travel~~will ~~centers~~be ~~and~~paid ~~are~~by ~~provided~~Perot ~~directly~~Systems towithout the travel ~~agents,~~agent ~~sponsors~~having ofto go ~~group~~to ~~tours,~~the ~~corporate~~trouble ~~travel~~and ~~departments~~expense ~~and~~of ~~other~~billing ~~selected~~each ~~potential customers~~separate location.

~~The~~Construction ~~Company~~and ~~also maintains comprehensive on line directories with~~Development ~~reservations booking capabilities at www.shoneysinn.com and~~ ~~www.guesthouseintl.com.~~

~~Travel Agents.~~ The Company’s construction subsidiary has a ~~policy~~full oftime ~~paying~~staff ~~travel~~who ~~agents a~~manage, ~~commission~~supervise, ~~standard~~control inand perform the ~~hotel~~construction ~~industry,~~of onhotels ~~all~~and ~~revenue~~other ~~booked~~real estate projects being developed by ~~them.~~the ~~The~~ Company, ~~with~~or ~~respect~~for tothird ~~both~~parties, ~~owned~~including construction and ~~franchised~~development ~~inns,~~of ~~has joined the TACS~~non-~~Lite~~hotel ~~Program~~projects ~~administered~~for byrelated ~~Perot Systems~~parties. Subcontractors ~~TACS-Lite~~are ~~(Travel~~employed ~~Agent Commission~~by ~~Settlement)~~the isCompany afor ~~program~~most ~~where~~of ~~each~~the ~~hotel~~major ~~property~~construction components ~~reports~~of tohotels ~~the Company~~and ~~each~~other ~~week~~buildings, byincluding ~~fax~~electrical ~~(or~~and bymechanical work. ~~electronic~~The ~~transmission~~Company ifintends ~~capable)~~to ~~all~~continue ofto ~~its room~~build ~~sales~~hotels ~~generated~~and ~~through~~other ~~travel~~structures ~~agents~~for third parties. The Company inbelieves ~~turn~~that ~~forwards~~its ~~this information~~construction toexperience ~~Perot~~and ~~Systems~~its relationship ~~which~~with ~~automatically~~many ~~generates~~subcontractors ~~checks~~will ~~each~~facilitate ~~month~~the toeffective development ~~travel~~of ~~agents~~additional ~~across~~real ~~the~~estate ~~country for the~~projects.

- The 4Company -is structured to devote significant resources to the identification and evaluation of potential sites for hotels when the opportunities arise. The Company has typically targeted markets with populations of 500,000 or more that have high levels of business development and multiple sources of room demand. The site selection process focuses on the competitive environment, including room and occupancy rates and proximity to business parks, office buildings, and other demand generators. The Company’s franchisees focus on sites for their inns in proximity to interstate highway access roads and major streets and highways providing convenient access to local business establishments and tourist attractions.

~~Table~~ The construction phase of ~~Contents~~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.

~~total commissions earned.~~ The Company ~~believes~~ ~~that~~constructed ~~travel~~no ~~agents~~new ~~are~~hotels ~~more~~in ~~likely~~2003 toand ~~book~~currently ~~guests~~has ~~into a property~~no ~~knowing~~contracts ~~that~~to ~~their~~construct ~~commissions~~any ~~will~~hotels befor ~~paid~~itself byor ~~Perot~~for ~~Systems~~third ~~without~~parties, ~~the~~but ~~travel~~will ~~agent~~pursue ~~having~~any tofuture goopportunities to ~~the~~do ~~trouble~~so ~~and~~in ~~expense~~the ~~of billing each separate location~~future.

Lodging Operations

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

Reservation System. The Company’s proprietary central reservation system, ~~InnLink, provides important support for the room reservation process for~~ ~~Shoney’s Inns and GuestHouse Inns & Suites and is marketed to other chains as~~ well. Other chains that contract with the Company for the service include Baymont Inns & Suites, Key West Inns and 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. Electronically, InnLink is accessed through numerous global distribution systems (e.g., SABRE Travel Information Network, Galileo International, Amadeus and WorldSpan). The reservation system includes specially designed hotel reservation software, with adequate capacity, and state of the art hardware and telecommunications devices.

Quality Control. To ensure quality and consistency, the Company regularly inspects each of its company owned and/or operated hotels and each hotel in the Shoney’s Inn and GuestHouse Inn franchise systems for compliance with facility and service standards. Generally, in addition to its ongoing refurbishment activities, the Company fully renovates each of the Company-~~owned~~ ~~inns~~4 ~~after~~- ~~approximately seven years of operation.~~

Training.Table 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. Contents

~~Franchise~~InnLink, ~~Operations~~provides important support for the room reservation process for Shoney’s Inns and GuestHouse Inns & Suites and is marketed to other chains as well. Other chains that contract with the Company for the service include Baymont Inns & Suites, Key West Inns and Americinns International. InnLink operates 24 hours a day, 7 days a week. The InnLink system may be accessed by individual travelers as well as by travel agents, tour and group booking agents at 1-800-552-4667. Electronically, InnLink is accessed through numerous global distribution systems (e.g., SABRE Travel Information Network, Galileo International, Amadeus and WorldSpan). The reservation system includes specially designed hotel reservation software, with adequate capacity, and state of the art hardware and telecommunications devices.

~~Franchise~~ Quality ~~Sales~~Control. ~~The~~To ~~Company~~ensure ~~markets~~quality ~~the~~and ~~GuestHouse~~consistency, ~~franchise~~the ~~principally~~Company regularly toinspects ~~existing~~each ~~Shoney’s~~of ~~Inn~~its company owned and/or ~~GuestHouse~~operated ~~franchisees,~~hotels ~~other~~and each hotel ~~brand~~in the ~~developers~~Shoney’s Inn and ~~other~~GuestHouse ~~prospects~~Inn ~~known~~franchise ~~through~~systems ~~management’s~~for ~~contacts~~compliance inwith ~~the~~facility ~~lodging~~and ~~industry~~service standards. ~~The~~Generally, ~~Company~~in ~~employs~~addition ~~two~~to ~~full-time~~its ~~licensed~~ongoing ~~franchise~~refurbishment ~~salesmen.~~activities, ~~The~~the Company ~~also~~fully ~~markets~~renovates ~~franchises~~each ~~through~~of ~~advertisements~~the inCompany-owned ~~trade~~inns after ~~publications~~approximately ~~and~~seven ~~participation~~years inof ~~trade~~operation. ~~shows~~In ~~and~~addition, ~~franchising~~the ~~conventions.~~quality ~~The~~assurance ~~Company~~consultants noprovide ~~longer~~on-site ~~markets~~housekeeping ~~the~~and ~~Shoney’s~~maintenance ~~Inns~~training, ~~franchises~~utilizing a combination of classroom and hands-on training.

Training. The Company utilizes the services of an “opening team” to assist with hiring and training new staff and opening new hotels. The opening team trains local hotel personnel in front desk operations, operational policies, hotel accounting and cash handling procedures, record-keeping, 5housekeeping and laundry, maintenance and repair, marketing, personnel management, purchasing, quality assurance and sales. Sales training includes a team of direct sales personnel that assists the local staff in the actual pre-selling of rooms. An opening team generally remains on site for one to four weeks depending on the prior experience of the local general manager. The Company currently has no plans to open any new Company-owned hotels.

~~Table~~Franchise ~~of Contents~~Operations

~~Management~~ Franchise ~~believes~~Sales. ~~that~~The ~~the~~ Company ~~attracts~~markets ~~potential~~the ~~new~~GuestHouse ~~franchisees~~franchise byprincipally ~~offering~~to aexisting ~~comparable~~Shoney’s ~~level~~Inn ofand ~~franchisee~~GuestHouse ~~support~~franchisees, ~~services~~other athotel ~~a lower price~~brand ~~than~~developers ~~its~~and ~~competitors.~~other ~~Management~~prospects ~~periodically~~known ~~monitors~~through ~~the~~management’s ~~initial~~contacts ~~fee,~~in ~~royalty~~the ~~fee,~~lodging ~~advertising~~industry. ~~fee,~~The ~~reservation~~Company ~~fee~~employs ~~and~~three ~~other~~full-time ~~charges~~licensed ~~imposed by other~~franchise ~~franchisors~~salesmen. ~~with~~The ~~whom the~~ Company ~~competes~~also ~~and~~markets ~~believes~~franchises ~~that~~through ~~the~~advertisements ~~fees~~in ~~charged~~trade bypublications ~~the~~and ~~Company~~participation ~~are~~in ~~competitive~~trade shows and, infranchising ~~most~~conventions. ~~cases,~~The Company ~~lower~~no ~~than~~longer ~~such~~markets ~~other franchisors~~the Shoney’s Inns franchises.

~~Fees.~~ Management ~~Under~~believes that the ~~standard~~Company ~~GuestHouse~~attracts ~~franchise~~potential ~~arrangement~~new ~~offered~~franchisees toby ~~prospective~~offering ~~franchisees,~~ a ~~potential~~superior level of franchisee ~~pays~~support services at a ~~$2,500~~lower ~~application~~price ~~fee.~~than ~~Upon~~its ~~approval~~competitors. ofManagement periodically monitors the ~~application~~initial fee, ~~the~~royalty ~~Company~~fee, advertising ~~and~~fee, ~~the~~reservation ~~franchisee~~fee ~~enter~~and ~~into~~other ~~a 5-year~~charges ~~license~~imposed ~~agreement,~~by ~~and~~other ~~the~~franchisors with ~~franchisee~~whom ~~generally~~the ~~pays~~Company acompetes ~~license~~and ~~fee~~believes ~~equal to~~that the ~~greater~~fees ofcharged ~~$250~~by ~~per~~the Company ~~room~~are orcompetitive ~~$15~~and,~~000.~~ ~~The~~in ~~application~~most ~~fee~~cases, islower ~~applied against~~than ~~the~~such ~~license~~other ~~fee~~franchisors.

Fees. Under the standard GuestHouse franchise arrangement offered to ~~prospective~~ prospective franchisees, ~~the~~a potential franchisee pays ~~monthly~~a ~~royalties~~$2,500 ofapplication $1fee.25 Upon ~~per~~approval ~~available~~of ~~room per~~the ~~day~~application, ~~during~~ the ~~term~~Company ofand the ~~license~~franchisee ~~agreement.~~enter ~~Additionally,~~into a ~~marketing~~ ~~cooperative~~5-year ~~fee~~license ofagreement, ~~$0.30~~and ~~per~~the ~~available~~franchisee ~~room~~generally ~~per~~pays ~~day and~~ a license fee ~~for participation~~equal into the ~~central~~greater ~~reservation system are charged at 8%~~ of ~~revenue generated by voice communications and 5% of revenue generated by electronic communication plus~~ $~~5.00~~250 per ~~reservation.~~room or

~~Franchisee~~- ~~Services.~~5 ~~Management believes that the support the Company~~- offers to franchisees is a significant factor in determining its success as a franchisor and that the Company’s successful record as a builder, owner and operator evidences valuable experience and abilities which can enhance the franchisee support function. As franchisor, the Company draws on its own operational experience to assist franchisees.

OnceTable anof 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. Contents

~~The Company inspects every franchised inn at least three times a year~~$15, ~~at least two of which are unannounced, through its Quality Standards and Compliance program, using trained field representatives~~000. The ~~Company~~application ~~encourages franchisees~~fee tois ~~renovate~~applied ~~each~~against of the ~~properties~~license ~~after approximately seven years of operations, in the same manner that the Company renovates its own hotels~~fee.

~~The~~ Under ~~Company~~the ~~offers~~standard toGuestHouse ~~provide~~franchise ~~management~~arrangement ~~services~~offered to prospective franchisees, ~~pursuant~~the franchisee pays monthly royalties of $1.25 per available room toper ~~contractual~~day ~~arrangements~~during the term of the license agreement. ~~The~~Additionally, ~~Company’s~~a marketing fund fee ~~for~~of ~~these~~$0.30 ~~services~~per isavailable room per day and a fee for participation in the ~~percentage~~central reservation system are charged at 8% of ~~the~~revenue ~~managed~~generated ~~hotel’s~~by ~~gross~~voice communications ~~revenues.~~and ~~Currently,~~5% ~~the~~of ~~Company~~revenue generated by electronic communication plus ~~manages~~$5.00 ~~eighteen~~per ~~hotels~~reservation ~~under~~to ~~contract~~cover ~~arrangement~~GDS and electronic “pass through fees”.

~~Lodging~~ Franchisee ~~Industry~~Services. Management believes that the support the Company offers to franchisees is a significant factor in determining its success as a franchisor and that the Company’s successful record as a builder, owner and operator evidences valuable experience and abilities which can enhance the franchisee support function. As franchisor, the Company draws on its own operational experience to assist franchisees.

~~Smith~~ Once ~~Travel~~an ~~Research~~inn ~~divides~~is ~~lodging~~constructed, ~~chains~~the ~~into~~Company ~~various~~requires ~~segments~~the ~~based~~franchisee to send onthe ~~price.~~site ~~Shoney’s~~general ~~Inns~~manager to a management training class conducted by the Company covering topics including human resources, sales and ~~GuestHouse~~marketing, ~~Inns~~yield management &and ~~Suites~~cost ~~are~~controls. ~~included~~Currently, inthe Company does not charge for the ~~economy~~training ~~segment~~program but reserves the right to do so in the future.

- The 6Company -inspects every franchised inn at least three times a year, at least two of which are unannounced, through its Quality Standards and Compliance program, using trained field representatives. The Company encourages franchisees to renovate each of the properties after approximately seven years of operations, in the same manner that the Company renovates its own hotels.

~~Table~~ The Company offers to provide management services to franchisees pursuant to contractual arrangements. The Company’s fee for these services is a percentage of ~~Contents~~the managed hotel’s gross revenues. As of December 28, 2003, the Company managed six hotels under contract arrangement.

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

							Average									Average Daily
	REVPAR						Occupancy Rate									Room Rate (1)
	2000		2001		2002		2000			2001			2002			2000		2001		2002
Industry-wide	$	54.13	$	50.99	$	49.24		63.5	%		60.1	%		59.2	%	$	85.24	$	84.85	$	83.15
Economy segment		30.68		30.47		25.65		58.5			56.2			54.2			52.44		54.22		47.83
All Shoney’s Inns		25.32		24.56		23.53		50.6			49.9			48.4			50.00		49.26		48.65
Company-owned Shoney’s Inns/GuestHouse		23.41		26.83		22.87		46.5			53.3			44.4			50.31		51.69		51.46

Smith Travel Research divides lodging chains into various segments based on price. Shoney’s Inns and GuestHouse Inns & Suites are included in the economy segment.

~~(1)~~The ~~Room~~following ~~revenues~~tables ~~divided~~illustrate bycertain ~~the~~comparative ~~number~~information ofregarding REVPAR ~~rented~~and ~~rooms.~~its components for the years indicated:

Source: Smith Travel Research, Standard Historical Trend Report for years ended 2000, 2001 and 2002, for industry wide and the economy segment, and the Company’s internal data for all Shoney’s Inns and GuestHouse Inns & Suites statistics.


							Average									Average Daily
			REVPAR				Occupancy Rate									Room Rate (1)
	2001		2002		2003		2001			2002			2003			2001		2002		2003
Industry-wide	$	50.99	$	49.24	$	49.34		60.1	%		59.2	%		59.2	%	$	84.85	$	83.15	$	83.28
Economy segment		30.47		25.65		25.19		56.2			54.2			53.4			54.22		47.83		47.17
All Shoney’s Inns		24.56		23.53		20.26		49.9			48.4			42.3			49.26		48.65		47.86
Company-owned GuestHouse (2)		37.17		36.37		32.40		70.5			64.6			61.7			52.74		56.34		52.54

Competition

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

(2)		Many GuestHouse franchisees do not report to either Smith Travel Research or the Company since the fees are not based upon room revenues; therefore, GuestHouse

~~The~~- ~~lodging~~6 ~~industry is highly competitive. In franchising the GuestHouse~~- brand and managing its own lodging facilities, the Company encounters competition from numerous lodging companies, many of which have greater industry experience, name recognition, and financial and marketing resources than the Company. While the actual competition for individual lodging facilities varies by location, the primary competition for GuestHouse Inns & Suites includes lodging chains such as Holiday Inn Express, La Quinta, Comfort Inns, Drury Inns, Fairfield Inns and Travelodge. Each of the Company’s hotels is located in a developed area that includes competing lodging facilities, and the Company expects that most of 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.

GovernmentTable Regulation of Contents

~~The~~chain ~~Company~~statistics iswould ~~subject~~not tobe ~~various federal, state and local laws, regulations and administrative practices affecting its business~~meaningful. The Company~~’s lodging~~ ~~operations~~statistics ~~must~~include ~~comply~~only ~~with~~one ~~provisions~~GuestHouse ~~relating to health, sanitation~~ and ~~safety~~no ~~standards,~~Shoney’s ~~equal~~Inns 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~~continuing ~~franchise offers and sales. In addition~~operations, ~~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.~~

-Source: 7Smith - Travel Research, Standard Historical Trend Report for years ended 2001, 2002 and 2003, for industry wide and the economy segment, and the Company’s internal data for all Shoney’s Inns and GuestHouse Inns & Suites statistics.

~~Table of Contents~~Competition

~~Federal~~ The lodging industry is highly competitive. In franchising the GuestHouse brand and ~~state~~managing ~~environmental~~its ~~regulations~~own ~~are~~lodging ~~not~~facilities, ~~expected~~the toCompany encounters competition from numerous lodging companies, many of which have agreater ~~material~~industry ~~effect~~experience, onname recognition, and financial and marketing resources than the Company’s. ~~operations~~While the actual competition for individual lodging facilities varies by location, ~~but~~the ~~more~~primary ~~stringent~~competition ~~and~~for ~~varied~~GuestHouse Inns & ~~requirements~~Suites ofincludes ~~local~~lodging ~~governmental~~chains ~~bodies~~such ~~with~~as ~~respect~~Holiday toInn ~~zoning~~Express, ~~land~~La ~~use~~Quinta, ~~and~~Comfort ~~environmental~~Inns, ~~factors~~Drury ~~could~~Inns, ~~delay~~Fairfield ~~construction~~Inns and Travelodge. Each of the Company’s hotels is located in a developed area that includes competing lodging facilities, and the ~~add~~Company toexpects that most of any future hotels which it constructs will be ~~their~~located ~~cost.~~in Asimilar ~~significant~~areas. ~~portion~~Management ofbelieves that the ~~Company’s~~principal ~~personnel~~competitive factors ~~are~~in ~~paid~~its atlodging operations are room rates ~~related~~, toquality ~~federal~~of ~~minimum~~accommodations, name ~~wages~~recognition, supply and availability of alternative lodging facilities, service ~~accordingly~~levels, ~~increases~~reputation, inreservation systems and convenience of location. In its franchising operations, the ~~minimum~~principal competitive factors are fee structure ~~wage~~and ~~could~~support ~~adversely~~services. ~~affect~~Management further believes that the Company’s ~~operating~~is ~~results~~presently competitive in all these respects.

~~The~~Government ~~Americans with Disabilities Act prohibits discrimination~~Regulation ~~on the basis of disability in public accommodations and employment. The Company currently designs its lodging facilities~~ ~~to be accessible to the disabled and believes that it is in substantial~~ ~~compliance with all current applicable regulations relating to accommodations~~ ~~for the disabled. The Company intends to comply with future regulations relating to accommodating the needs of the disabled.~~

~~Service~~ The ~~Marks~~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.

~~The~~ Federal ~~Company~~and ~~owns~~state ~~the~~environmental ~~right~~regulations toare ~~use~~not ~~the~~expected ~~“GuestHouse~~to ~~Inns~~have ~~& Suites” service~~a ~~marks~~material ineffect ~~its~~on ~~lodging~~the ~~operations. The~~ Company’s ~~believes~~operations, ~~that~~but ~~its~~more ~~ability~~stringent toand ~~use~~varied ~~the~~requirements ~~GuestHouse~~of ~~mark~~local isgovernmental ~~material~~bodies towith ~~its~~respect ~~business.~~to ~~The~~zoning, ~~Company~~land ~~has~~use ~~registered the~~and ~~service~~environmental ~~mark~~factors ~~“InnLink,”~~could ~~which~~delay itconstruction ~~uses~~of inlodging ~~connection~~facilities ~~with~~and ~~its~~add ~~reservation~~to ~~system,~~their ~~with~~cost. ~~the~~A ~~United~~significant ~~States~~portion ~~Patent~~of ~~and~~the ~~Trademark~~Company’s ~~Office.~~personnel ~~The~~are ~~Company~~paid ~~has~~at rates ~~registered~~related ~~the~~to ~~service~~federal ~~mark~~minimum ~~“Raylogic”~~wages ~~which~~and, itaccordingly, ~~uses~~increases in ~~connection~~the ~~with~~minimum ~~computer~~wage ~~game~~could ~~software,~~adversely ~~with~~affect the ~~United~~Company’s ~~States~~operating ~~Patent and Trademark Office~~results.

~~Insurance~~ The Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. The Company currently designs its lodging facilities to be accessible to the disabled and believes that it is in substantial compliance with all current applicable regulations relating to

~~The~~- ~~Company~~7 ~~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 Table of Contents

Asaccommodations offor ~~December 29, 2002~~ the ~~Company had approximately 420 employees, including approximately 230 in the Company’s corporate headquarters~~disabled. The Company’s ~~employees~~intends ~~are~~to ~~not~~comply ~~represented~~with byfuture regulations arelating ~~labor~~to ~~union.~~accommodating ~~The~~the ~~Company~~needs ~~considers its~~of ~~relationships~~the ~~with employees to be good~~disabled.

~~ITEM~~Service ~~2. PROPERTIES.~~Marks

The Company’s ~~corporate~~owns ~~headquarters,~~the ~~owned~~right byto use the “GuestHouse Inns & Suites” service marks in its lodging operations. The Company, believes that its ability to use the GuestHouse mark is ~~located~~material into its business. The Company has registered the ~~Hendersonville~~service mark “InnLink,” ~~Tennessee~~which ~~and~~it ~~contains~~uses ~~approximately~~in ~~42,000~~connection ~~square~~with ~~feet~~its ofreservation ~~space~~system, ~~including~~with ~~storage~~the United States Patent and ~~employee~~Trademark ~~cafeteria~~Office. ~~Management~~The ~~believes~~Company ~~that its~~has ~~corporate~~registered ~~headquarters~~the ~~building~~service ~~contains~~mark ~~sufficient~~“Raylogic” ~~space~~which toit ~~accommodate~~uses ~~the~~in connection with ~~Company’s~~computer ~~currently~~game ~~anticipated~~software, ~~needs~~with the United States Patent and Trademark Office.

~~- 8 -~~Insurance

~~Table~~ 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 ~~Contents~~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.

~~Four of the five Company-owned GuestHouse Inns & Suites, the Company owned~~Employees ~~Shoney’s Inn, the two Company-owned and operated AmeriSuites hotels, and, the~~ ~~three AmeriSuites hotels leased to another hotel operator, at~~ ~~December 29, 2002, are located on sites~~ owned by the Company either directly or through subsidiaries. The remaining GuestHouse Inn & Suites is located on a site that is leased pursuant to a long-term lease involving both the land and improvements. The four Company-owned and operated GuestHouse Inns & Suites include two Inns containing 245 guest rooms located in Houston, Texas, one 118-room Inn in Mobile, Alabama, and one 110-room Inn in Gulfport, Mississippi. The 115-room Company-owned and operated Shoney’s Inn is located in Houston, Texas. One of the Company-owned and operated AmeriSuites hotels is located in Albuquerque, New Mexico and the other one is located in Alpharetta, Georgia. The three AmeriSuites hotels owned by the Company and leased to another operator at December 29, 2002 are all located in Texas, one each in Dallas, Houston and San Antonio.

~~ITEM~~ As 3of December 28, 2003 the Company had approximately 491 employees, including approximately 136 in the Company’s corporate headquarters. ~~LEGAL~~ ~~PROCEEDINGS~~The Company’s employees are not represented by a labor union. The Company considers its relationships with employees to be good.

~~The~~ITEM ~~Company is subject to litigation from time to time in the ordinary course of its business~~2. ~~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~~PROPERTIES.

~~ITEM~~ The 4Company’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. ~~SUBMISSION~~ OFManagement ~~MATTERS~~believes TOthat Aits corporate ~~VOTE~~headquarters OFbuilding ~~SHAREHOLDERS~~contains sufficient space to accommodate the Company’s currently anticipated needs.

No The ~~matters~~two ~~were~~Company-owned ~~submitted~~and tooperated aAmeriSuites ~~vote~~hotels at December 28, 2003, are located on sites owned by the Company either directly or through subsidiaries. One of ~~security~~the ~~holders~~Company-owned and operated AmeriSuites hotels is located in Alpharetta, Georgia and the ~~fourth~~other ~~quarter~~one is located in Grand Prairie, ofTexas. ~~2002~~The remaining GuestHouse Inn & Suites is located on a site that is leased pursuant to a long-term lease involving both the land and improvements.

~~PART~~ITEM II 3. LEGAL PROCEEDINGS.

~~ITEM~~ The 5Company is subject to litigation from time to time in the ordinary course of its business. ~~MARKET~~ ~~FOR~~The ~~THE~~Company ~~REGISTRANT’S~~is ~~COMMON~~not ~~STOCK~~aware ~~AND~~of ~~RELATED~~any ~~SHAREHOLDER~~legal ~~MATTERS~~action pending or threatened against it that would have a material impact on the consolidated financial position or results of operations of the Company.

~~The Company’s Common Stock is traded in the over~~-~~the-counter~~ ~~market~~8 ~~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 2001	High		Low
First Quarter	$	5.38	$	4.63
Second Quarter		5.78		4.75
Third Quarter		6.25		3.83
Fourth Quarter		6.00		3.83

Fiscal 2002	High		Low
First Quarter	$	5.98	$	5.32
Second Quarter		6.00		4.10
Third Quarter		5.29		4.10
Fourth Quarter		4.75		3.30

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.

Fiscal 2003		High				Low
First Quarter (through April 4, 2003)		$	4.40			$	2.57

No matters were submitted to a vote of security holders in the fourth quarter of 2003.

- 9 -

OnPART ~~April 4, 2003, the last reported sale price for the Company’s Common~~II ~~Stock as reported by NASDAQ was $4.40 per share. As of April 4, 2003, there~~ ~~were approximately 41 holders of record of the Company’s Common Stock and~~ ~~approximately 591 beneficial owners.~~

~~ITEM~~ The ~~6. SELECTED~~Company’s ~~FINANCIAL~~Common ~~DATA~~Stock is traded in the over-the-counter market and is quoted on The Nasdaq Stock Market (“NASDAQ”) under the symbol “LODG.” The prices set forth below reflect the high and low closing sales prices for the Company’s Common Stock as reported by NASDAQ for the periods indicated.

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 29, 2002 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 29, 2002, 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.


Fiscal 2002	High		Low
First Quarter	$	5.98	$	5.32
Second Quarter		6.00		4.10
Third Quarter		5.29		4.10
Fourth Quarter		4.75		3.30

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


Fiscal 2003	High		Low
First Quarter	$	4.40	$	2.57
Second Quarter		3.79		3.10
Third Quarter		3.76		3.10
Fourth Quarter		4.69		3.81

				Fiscal Year Ended
Fiscal 2004		High				Low
				Dec. 27,				Dec. 26,		Dec. 31,		Dec. 30,		Dec. 29,
First Quarter (through April 1, 2004)		$	5.60			$	4.37
				1998				1999		2000		2001		2002
Revenues:
	Hotel			$	62,413			$	60,301	$	40,678	$	7,783	$	8,873
	Franchising, reservation and management				3,119				4,152		3,606		3,971		6,083
	Construction and development				81				11,234		12,037		27,480		9,912
	Rent income				532				483		1,955		3,468		3,398
	Other income				30				360		49		336		67
		Total revenues			66,175				76,530		58,325		43,038		28,333
Costs and expenses:
	Hotel				40,133				41,580		29,554		5,857		7,108
	Franchising, reservation and management				2,393				2,420		2,460		2,192		4,276
	Construction and development				71				9,826		12,571		25,692		12,119
	Rent expense				9,838				13,530		10,333		582		584
	General and administrative				6,311				6,340		5,010		5,860		7,983
	Depreciation and amortization				6,702				5,803		4,501		3,392		3,336
	Write-off of pre-development costs				—				—		—		—		1,864
	Write-off of construction contracts receivable				—				—		—		—		3,631
	Write-off of accounts receivable				—				—		—		—		1,297
	Write-off of goodwill				—				—		—		—		2,387
	Write-off of trademarks and franchise rights				—				—		—		—		4,421
	Write-down of notes receivable				—				—		—		—		21,167
	Impairment of real estate				—				—		—		—		644
		Total cost and expenses			65,448				79,499		64,429		43,575		70,817

- On 10April 1, -2004, the last reported sale price for the Company’s Common Stock as reported by NASDAQ was $5.31 per share. As of April 1, 2004, there were approximately 43 holders of record of the Company’s Common Stock and approximately 600 beneficial owners.

~~Table~~ 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 ~~Contents~~its business, and therefore does not anticipate paying any cash dividends in the foreseeable future.

Operating earnings (loss)						727			(2,969	)		(6,104	)		(537	)		(42,484	)
	Gain on sale of property and leasehold interests					20,510			15,017			4,901			3,761			628
	Gain on sale of available-for-sale securities					—			—			—			—			315
	(Loss) gain on early extinguishment of debt					(1,666	)		3,861			7,306			913			2,592
	Interest expense					(10,073	)		(11,847	)		(10,245	)		(8,281	)		(8,782	)
	Interest income					4,944			6,181			6,397			6,376			5,016
	Arbitration award					—			—			—			—			8,900
Earnings (loss) from continuing operations before income taxes and minority interests						14,442			10,243			2,255			2,232			(33,815	)
Income tax (expense) benefit						(5,855	)		(3,535	)		(1,220	)		(785	)		8,959
Minority interests in (earnings) loss of consolidated subsidiaries and partnerships						(647	)		(1,909	)		(57	)		(58	)		179
Earnings (loss) from continuing operations						7,940			4,799			978			1,389			(24,677	)
Discontinued operations:
		Operations of hotels disposed of and transferred				206			(260	)		(400	)		(477	)		(657	)
		Loss on disposal and transfer of discontinued operations				—			—			—			—			(2,914	)
Net earnings (loss)					$	8,146		$	4,539		$	578		$	912		$	(28,248	)
Net earnings (loss) per common share:
			Basic:
				Earnings (loss) from continuing operations	$	0.97		$	0.74		$	0.18		$	0.25		$	(4.83	)
				Net earnings (loss)	$	0.99		$	0.70		$	0.11		$	0.16		$	(5.52	)
			Diluted:
				Earnings (loss) from continuing operations	$	0.92		$	0.71		$	0.18		$	0.25		$	(4.83	)
				Net earnings (loss)	$	0.95		$	0.67		$	0.10		$	0.16		$	(5.52	)
Weighted average common shares outstanding:
			Basic			8,191			6,518			5,472			5,465			5,113
			Diluted			8,611			6,745			5,554			5,530			5,113
Balance sheet data:
	Working capital				$	(22,516	)	$	9,337		$	4,557		$	11,384		$	(2,656	)
	Total assets					295,001			270,314			204,631			206,587			167,279
	Long-term debt and capitalized leases					125,539			122,233			90,762			86,293			24,381
	Shareholders’ equity					98,099			90,878			90,322			89,273			61,194

The following table sets forth certain information as of the end of the most recently completed fiscal year with respect to compensation plans (including individual compensation arrangements) under which equity securities of the registrant are authorized for issuance.

- 1110 -

~~Notes~~Equity toCompensation ~~Selected~~Plan ~~Financial Data~~Information

(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 1998, 1999, 2000, 2001 and 2002, there were 31, 35, 7, 7, and 8 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.

Number of

securities

remaining available

Number of

for future issuance

securities to be

under equity

issued upon

Weighted-average

compensation plans

exercise of

exercise price of

(excluding

outstanding

securities

options, warrants

reflected in Column

Plan category

and rights

(a))

Equity compensation plans approved by security holders

142,500

3.75

-0-

Equity compensation plans not approved by security holders

-0-

N/A

-0-

Total

142,500

3.75

-0-

~~(B)~~ITEM ~~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~~6. ~~Prior~~SELECTED toFINANCIAL ~~1999, construction and development was done primarily on the Company’s own hotels~~DATA.

~~(C)~~ The ~~Rental~~selected ~~revenues~~financial ~~increased~~data ~~significantly~~set forth on the following page as of and for each of the five fiscal years in ~~2000~~the ~~due~~period toended December 28, 2003 have been derived from the ~~lease~~Company’s audited Consolidated Financial Statements. The Consolidated Financial Statements for each of the three ~~hotels~~fiscal toyears ~~Prime~~in asthe period ~~discussed~~ended inDecember 28, ~~(A) above~~2003, ~~increasing~~which ~~rent~~have ~~income~~been audited by ~~approximately~~independent auditors, $3are included elsewhere in this Report.0 ~~million~~The ~~per~~information ~~year~~set ~~beginning~~forth on the following page should be read in ~~July~~conjunction with “Management’s Discussion and Analysis of ~~2000~~Financial Condition and Results of Operations” and the Company’s Consolidated Financial Statements and the related notes thereto included elsewhere in this Report.

~~(D) Rent expense fluctuations are due primarily to rent paid to the landlord on 24 hotels sold and leased back in 1997~~SHOLODGE, ~~1999, and 2000, prior to the sale of these leasehold interests to Prime in July of 2000~~INC. ~~Fourteen~~AND ~~hotels~~SUBSIDIARIES SELECTED ~~were~~FINANCIAL ~~sold~~DATA (amounts ~~and leased back~~ in ~~November~~thousands ofexcept ~~1997;~~for ~~six~~per ~~hotels~~share ~~were sold and leased back in June of 1999; and four hotels were sold and leased back in May of 2000.~~data)

(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.


	Fiscal Year Ended
	Dec. 26,		Dec. 31,		Dec. 30,		Dec. 29,		Dec. 28,
	1999		2000		2001		2002		2003
Revenues:
Hotel(A)	$	51,015	$	32,933	$	1,985	$	2,160	$	3,842
Franchising, reservation and management		4,152		3,606		3,971		6,084		7,675
Construction and development – related parties (B)		—		115		35		5,688		21,978
Construction and development – other (B)		11,234		11,922		27,445		4,224		2,007
Rent income (C)		483		1,009		1,486		1,431		400
Other income		351		49		227		177		153

Total revenues		67,235		49,634		35,149		19,764		36,055

~~(F)~~- ~~Losses~~11 in 1998 on early extinguishments of debt were in connection with the sale of hotels. The gains in 1999, 2000, 2001 and 2002 were due primarily to the Company’s repurchases of its outstanding public debt at a discount.-

(G)Table 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 early adopted by the Company at the beginning of fiscal 2002.Contents

(H) This table reclassifies the operations of seven hotels sold or transferred in 2002 to discontinued operations for all periods presented.


	Fiscal Year Ended
	Dec. 26,			Dec. 31,			Dec. 30,			Dec. 29,			Dec. 28,
	1999			2000			2001			2002			2003
Costs and expenses:
Hotel (A)		34,946			23,280			1,250			1,443			3,014
Franchising, reservation and management		2,420			2,460			2,192			4,276			6,477
Construction and development (B)		9,826			12,571			25,692			12,119			20,334
Rent expense (D)		12,322			9,678			582			584			518
General and administrative		6,297			4,928			5,858			7,987			4,978
Depreciation and amortization (A)		4,245			2,675			1,643			1,570			1,741
Write-off of pre-development costs (H)		—			—			—			1,864			6
Write-off of construction contracts receivable (H)		—			—			—			3,631			61
Write-off of accounts receivable (H)		—			—			—			1,297			650
Write-off of goodwill (H)		—			—			—			2,387			—
Write-off of trademarks and franchise rights (H)		—			—			—			4,421			—
Write-down of notes receivable (H)		—			—			—			21,167			1,015
Impairment of real estate (H)		—			—			—			77			—

Total cost and expenses		70,056			55,592			37,217			62,823			38,794

Operating loss		(2,821	)		(5,958	)		(2,068	)		(43,059	)		(2,739	)
Gain on sale of property and leasehold interests (E)		15,017			5,058			3,791			677			1,251
Gain on sale of available-for-sale securities		—			—			—			315			—
Gain on early extinguishments of debt (F) (G)		3,860			7,306			913			2,592			1,345
Interest expense		(12,024	)		(10,063	)		(8,220	)		(8,780	)		(7,775	)
Interest income		6,010			6,245			6,262			4,990			2,249
Lease abandonment income (H)		—			—			—			—			5,330
Arbitration award (H)		—			—			—			8,900			—

Earnings (loss) from continuing operations before income taxes and minority interests		10,042			2,588			678			(34,365	)		(339	)
Income tax (expense) benefit		(3,459	)		(1,347	)		(194	)		9,167			2,256
Minority interests in (earnings) loss of consolidated subsidiaries and partnerships		(1,909	)		(57	)		(58	)		179			(106	)

Earnings (loss) from continuing operations		4,674			1,184			426			(25,019	)		1,811
Discontinued operations (I):
Operations of hotels disposed of and transferred		(135	)		(606	)		486			67			430
Loss on disposal and transfer of discontinued operations		—			—			—			(3,296	)		(1,942	)

Net earnings (loss)	$	4,539		$	578		$	912		$	(28,248	)	$	299

Net earnings (loss) per common share:
Basic:
Earnings (loss) from continuing operations	$	0.72		$	0.22		$	0.08		$	(4.89	)	$	0.36

Net earnings (loss)	$	0.70		$	0.11		$	0.16		$	(5.52	)	$	0.06

Diluted:
Earnings (loss) from continuing operations	$	0.69		$	0.21		$	0.08		$	(4.89	)	$	0.36

Net earnings (loss)	$	0.67		$	0.10		$	0.16		$	(5.52	)	$	0.06

~~ITEM~~- ~~7. MANAGEMENT’S~~12 ~~DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.~~-

Overview Table of Contents

The Company derives revenue from hotel room sales at its Sumner Suites hotels (through July 9, 2000) and Company-owned Shoney’s Inn and GuestHouse Inns & Suites hotels. The Company also receives management fees for services it performs for eighteen franchised Shoney’s Inns and GuestHouse Inns & Suites hotels. The Company derives additional revenue from franchise fees it receives as the exclusive franchiser of Shoney’s Inns and GuestHouse Inns & Suites hotels. On May 2, 2002, the Company became


	Fiscal Year Ended
	Dec. 26,		Dec. 31,		Dec. 30,		Dec. 29,		Dec. 28,
	1999		2000		2001		2002		2003
Weighted average common shares outstanding:
Basic		6,518		5,472		5,465		5,114		5,071

Diluted		6,745		5,554		5,530		5,114		5,071

Balance sheet data:
Working capital	$	68,723	$	60,612	$	67,852	$	28,339	$	52,488
Total assets		270,314		204,631		206,587		167,279		122,020
Long-term debt and capitalized leases		122,233		90,762		86,293		24,381		41,373
Shareholders’ equity		90,878		90,322		89,273		61,194		62,182

-Notes 12to -Selected Financial Data

~~Table~~(A) Fluctuations in hotel revenues, hotel costs and expenses, and depreciation and amortization expense are due primarily to fluctuations in the number of ~~Contents~~hotels operated by the Company. At the end of 1999, 2000, 2001, 2002 and 2003, there were 29, 1, 1, 2, and 3 hotels, respectively, being owned and operated and included in continuing operations by the Company. In July of 2000, the Company sold its operating interest in 27 hotels to Prime Hospitality Corp. (“Prime”) by selling its leasehold interest in 24 of them and leasing the remaining three to them. The three hotels leased to Prime in 2000 were taken back in April of 2003 due to the lease abandonment by Prime, and are currently operated by the Company. One of these three hotels is included in continuing operations, while the other two are classified as held for sale and are included in discontinued operations. (B) Construction and development revenues and cost and expenses vary widely from year to year depending upon the number of third party construction contracts in progress. Prior to 1999, construction and development was done primarily on the Company’s own hotels. In 2002 and 2003 construction and development included a significant amount earned from related parties. (C) Rental revenues increased significantly in 2000 due to the lease of the three hotels to Prime as discussed in (A) above, increasing rent income beginning in July of 2000 and ending in April of 2003. In April of 2003, Prime abandoned the lease and the Company resumed operating the hotels, one of which is included in continuing operations and the other two are included in discontinued operations since these two are classified as held for sale as of fiscal year-end 2003. (D) Rent expense fluctuations are due primarily to rent paid to the landlord on 24 hotels sold and leased back in 1997, 1999, and 2000, prior to the sale of these leasehold interests to Prime in July of 2000. Fourteen hotels were sold and leased back in November of 1997; six hotels were sold and leased back in June of 1999; and four hotels were sold and leased back in May of 2000. (E) The unusually high gain on sales of property and leasehold interests in 1999 was due to the sale of the sixteen hotels in July of 1998, a portion of which was recognized in 1998 and the remainder in 1999 due to the installment method

~~the exclusive franchiser of the GuestHouse Inns & Suites brand (“GuestHouse”). GuestHouse operates in the mid~~-~~market~~ ~~limited~~13 service segment, with rooms typically priced between $50 and $70 per night. The properties range in size from 21 to 180 rooms, and in most cases, contain meeting rooms. They are designed to appeal to both business and leisure travelers. The Company is in the process of converting all Shoney’s Inns to the GuestHouse brand. No additional Shoney’s Inns will be developed or franchised in the future. The Shoney’s and GuestHouse brands will be discussed as a combined brand due to these factors and due to the fact than many of the Shoney’s Inns (both Company-~~owned and operated and franchised) have already~~ ~~been converted to GuestHouse.~~

TheTable 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. Contents

~~The~~of ~~Company’s~~accounting ~~hotel~~required ~~operations~~on ~~have~~four ~~been~~of ~~supplemented~~the byhotels ~~contract~~sold ~~revenues from~~due ~~construction~~to ~~and~~insufficient ~~development~~down payments in 1998. (F) The gains on early extinguishments of ~~hotels~~debt ~~and~~were ~~other~~due ~~real~~primarily ~~estate~~to ~~projects~~the ~~for third~~Company’s ~~parties,~~repurchases ~~including~~of ~~related~~its ~~parties~~outstanding public debt at a discount. ~~Revenues~~(G) The gains from ~~these~~early ~~activities~~extinguishments ~~have varied~~of ~~widely~~debt ~~from~~previously ~~period~~classified as extraordinary items have been reclassified to ~~period~~conform with the provisions of SFAS No. 145, ~~depending~~which ~~upon~~was ~~whether~~early adopted by the Company~~’s construction~~ ~~and~~at ~~development~~the ~~activities~~beginning ~~were~~of ~~primarily~~fiscal ~~focused~~2002. on(H) ~~its~~See ~~own facilities~~the or“Results onof ~~outside~~Operations” ~~projects.~~section ~~Construction~~of ~~revenues~~Item ~~are~~7. ~~recognized~~(I) onThis table reclassifies the ~~percentage~~ operations of ~~completion~~16 ~~basis~~hotels sold, transferred, or held for sale in 2002 and 2003 to discontinued operations for all periods presented.

~~Fourth~~ITEM ~~Quarter~~7. ~~Adjustments~~ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

~~The Company reported a net loss in the fourth quarter of 2002 of $27.0~~Overview ~~million. The losses are primarily the result of write-downs of notes and~~ ~~write-offs of related accounts receivable due to impaired values of hotels~~ ~~underlying the receivables, losses on the sale and transfer of hotels, and~~ ~~charge-offs of construction and development costs on abandoned hotel development projects.~~

~~Approximately~~ The ~~$21.2 million~~Company ofderives ~~the~~revenue ~~losses~~from ~~are~~hotel ~~from~~room ~~the~~sales ~~write-down~~at ofits 18Company-owned ~~notes~~GuestHouse ~~receivable~~Inn ~~totaling~~& ~~$67~~Suites hotel.~~8 million~~ ~~secured~~The byCompany ~~first~~also ~~mortgages~~receives onmanagement 18fees ~~hotel~~for ~~properties.~~services ~~Fifteen~~it ofperforms ~~the~~for ~~mortgages~~eighteen ~~totaling~~franchised ~~$58.8 million~~Shoney’s ~~are cross-collateralized~~Inns and ~~cross-defaulted~~GuestHouse ~~and~~Inns & ~~mature~~Suites ~~on July 30, 2003~~hotels. ~~Even though~~The ~~all~~Company ~~first~~derives ~~mortgage~~additional ~~payments~~revenue onfrom ~~these~~franchise 15fees ~~hotels have been timely~~it ~~received,~~receives inas ~~late~~the ~~December~~exclusive franchiser of ~~2002~~Shoney’s ~~the~~Inns ~~owner~~and ~~notified~~GuestHouse ~~the~~Inns ~~Company that it is~~& ~~highly~~Suites ~~unlikely~~hotels. ~~that~~On itMay 2, ~~will~~2002, bethe ~~able~~Company tobecame ~~refinance~~ the ~~properties~~exclusive byfranchiser of the ~~notes’ maturity~~GuestHouse ~~dates.~~Inns ~~Consequently,~~& ~~since~~Suites ~~the~~brand ~~Company~~(“GuestHouse”). ~~does~~GuestHouse ~~not~~operates ~~desire~~in ~~to extend~~ the ~~maturity~~mid-market ~~dates,~~limited ~~the~~service ~~Company~~segment, ~~anticipates~~with ~~that~~rooms ittypically ~~will~~priced bebetween ~~necessary~~$45 ~~to resume~~and ~~title~~$85 toper ~~the properties~~night. The ~~owner of the~~ properties ~~agreed~~range in ~~late~~size ~~December of~~from ~~2002~~21 to ~~transfer~~180 ~~the~~rooms, ~~hotels~~and ~~back~~in tomost cases, ~~the~~contain ~~Company~~meeting byrooms. ~~deeds~~They inare ~~lieu~~designed ofto appeal to both business and ~~foreclosure~~leisure travelers. InThe ~~anticipation~~Company ofis ~~this,~~in the ~~Company~~process ~~began~~of ~~midway~~converting ~~through~~all ~~the~~Shoney’s ~~fourth~~Inns ~~fiscal~~to ~~quarter~~the toGuestHouse ~~find~~brand. ~~cash~~No ~~purchasers~~additional ofShoney’s ~~the~~Inns ~~properties~~will inbe ~~the~~developed ~~event~~or ~~the~~franchised ~~Company~~in ~~re-acquired~~the ~~ownership~~future. The ~~Company~~ ~~has~~Shoney’s ~~been~~and ~~greatly~~GuestHouse ~~disappointed~~brands inwill ~~offers~~be ~~received~~discussed as ~~recently~~a ~~for~~combined ~~the fifteen~~brand ~~hotels~~due ~~securing~~to ~~the~~these ~~notes~~factors ~~receivable.~~and ~~Since~~due to the ~~Company~~fact ~~does~~than ~~not desire~~many toof ~~take~~the Shoney’s ~~back~~Inns ~~ownership~~(both Company-owned and ~~operate~~operated ~~the~~and ~~properties,~~franchised) ithave isalready been ~~likely~~converted to ~~sell~~GuestHouse. ~~the properties at values~~

- The 13Company’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.

~~Table~~ A significant portion of ~~Contents~~the Company’s operations have been generated in recent years by contract revenues from construction and development of hotels and other real estate projects for third parties, including related parties. Revenues from these activities have varied widely from period to period, depending upon whether the Company’s construction and development activities were primarily focused on its own facilities or on outside projects. Construction revenues are generally recognized on the percentage of completion basis.

~~significantly~~- ~~below~~14 ~~the balances of the notes~~- receivable and has written down the notes receivable to the estimated net sales prices of the properties. Also, unsecured accounts receivable which related to these properties were deemed to be uncollectible and were written off in the amount of approximately $1.3 million in the fourth quarter.

SeparatelyTable from the hotels collateralizing notes receivable discussed above, on December 27, 2002, the Company sold one and transferred five of its company-owned hotels on December 27, 2002, at an after-tax charge of approximately $2.9 million. The Company transferred the five hotels for notes receivable with a maturity of six months. Accordingly, the transaction did not qualify as a sale and the properties will continue to be carried on the Company’s balance sheet as assets of hotels transferred under contractual agreements (notes receivable). 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 $2.9 million, net of income tax effect, is reported in discontinued operations as a loss on disposal and transfer of discontinued businesses. Contents

~~The~~Certain ~~Company~~Discontinued ~~constructed two hotels for third parties from which it has~~Operations ~~been unable to collect the balances due. One of the contracts receivable is~~ ~~for approximately $2.0 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 $1.0 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 a charge-off in the fourth quarter of approximately $3.0 million. Any recovery from these contracts will be recorded as earned when received. Approximately $600,000 of other construction contracts receivable was also charged off as uncollectible in the fourth fiscal quarter of 2002.

~~The~~ Except ~~Company~~for ~~has~~three ~~incurred~~owned ~~development~~hotel ~~costs~~properties ~~related to several sites upon~~ which ~~hotel development for third parties was planned. In early 2002,~~ the ~~lodging~~ ~~industry~~Company ~~anticipated~~intends ~~an economic upturn in the second half of the year.~~to ~~The~~continue ~~upturn failed~~ to ~~materialize.~~operate ~~Consequently~~at present, ~~new hotel development opportunities eroded in late 2002 and the development opportunities on~~ all of ~~these~~ ~~sites were lost. These development costs, which had been previously capitalized, were charged off in~~ the ~~fourth~~Company’s ~~quarter~~remaining ~~since~~owned ~~none of the costs~~hotel ~~improved~~properties ~~the~~are ~~value~~held offor ~~the~~sale ~~land~~at ~~upon~~December 28, ~~which they were incurred~~2003. The ~~amount~~Company’s ofpresent ~~these~~strategy ~~charge-offs~~does innot include the ~~fourth~~ownership ~~quarter~~of ~~totaled~~additional ~~approximately~~hotel $1properties.~~9 million.~~

~~Results~~ The Company transferred five of ~~Operations~~its company-owned hotels on December 27, 2002, at an after-tax charge of approximately $2.9 million. The Company transferred the five hotels for notes receivable with a maturity of six months. Accordingly, the transaction did not qualify as a sale and the properties have been carried on the Company’s balance sheet as assets of hotels transferred under contractual agreements (notes receivable) pending their sale. The buyer intended to resell the hotels. The operations and gains or losses on disposal of these hotels have been reported in discontinued operations. Three of the properties were resold by the buyer in 2003 and the net proceeds were used to pay the notes. The proceeds from the sales approximated the balance of the notes. One of the remaining two hotels was resold by the buyer in the first quarter of 2004, with net proceeds to be used to apply to the note. The note was written down by $528,000 in the fourth quarter of 2003 based upon the net proceeds received subsequent to December 28, 2003. The proceeds from the sale of the remaining property are expected to approximate the balance of the note.

~~The~~ Contracts ~~following~~for ~~table~~the ~~sets~~sale ~~forth,~~of ~~for~~two of the ~~periods~~Company’s ~~indicated,~~AmeriSuites ~~the~~hotels ~~percentage~~owned ~~relationship~~and operated at December 28, 2003, at estimated net proceeds in excess of ~~certain~~their carrying ~~items~~values, resulted in the reclassification of ~~revenue~~these properties to “held for sale”, and ~~expense~~their operations for all periods presented have been reclassified to ~~the~~discontinued ~~total~~operations. ~~revenues~~These ofhotels had been included in continuing operations prior to the ~~Company~~fourth quarter.

-Related 14Party -Transactions

~~Table~~On July 5, 2000, the Board of ~~Contents~~Directors accelerated the vesting of certain options held by the Company’s president and chief executive officer to purchase 40,000 shares of common stock. He was expected to become fully vested under the original terms of the options; the options had no intrinsic value on the date of acceleration and, therefore, additional compensation expense was not incurred as a result of the accelerated vesting. Immediately thereafter, the president and chief executive officer of the Company exercised vested employee stock options for 408,333 shares of the Company’s common stock, at the exercise price of $3.75 per share. He executed non-interest bearing, unsecured, full-recourse promissory notes totaling $1,531,249 with maturity dates coinciding with the expiration dates of each option grant, ranging from February 11, 2002, to May 30, 2007. The closing market price of the Company’s common stock on July 5, 2000, was $3.31 per share. The Company recorded the notes receivable of $1,531,249, net of unearned discount of $331,000, assuming a market interest rate of 8.50%. During 2000, compensation expense was recorded in the amount of $152,000 (the fair value of shares received less the present value of the notes receivable using an 8.50% discount rate). The fair value of shares issued of $1,352,603 has been recorded as paid-in capital, and the notes receivable are recorded as a deduction from shareholders’ equity. The Company has accreted $102,055, $40,611 and $140,833 of discount on these notes as interest income in 2001, 2002, and 2003 respectively. The president and chief executive officer renewed his non-interest bearing, unsecured,

				Fiscal Year Ended
				Dec. 31,			Dec. 30,			Dec. 29,
				2000			2001			2002
Revenues:
	Hotel				69.7	%		18.1	%		31.3	%
	Franchising, reservation and management				6.2	%		9.2	%		21.5	%
	Construction and development				20.6	%		63.9	%		35.0	%
	Rent income				3.4	%		8.1	%		12.0	%
	Other income				0.1	%		0.8	%		0.2	%
			Total revenues		100.0	%		100.0	%		100.0	%
Cost and expenses:
	Hotel				50.7	%		13.6	%		25.1	%
	Franchising, reservation and management				4.2	%		5.1	%		15.1	%
	Construction and development				21.6	%		59.7	%		42.8	%
	Rent expense				17.7	%		1.4	%		2.0	%
	General and administrative				8.6	%		13.6	%		28.1	%
	Depreciation and amortization				7.7	%		7.9	%		11.8	%
	Write-off of pre-development costs				0.0	%		0.0	%		6.6	%
	Write-off of construction contracts				0.0	%		0.0	%		12.8	%
	Write-off of accounts receivable				0.0	%		0.0	%		4.6	%
	Write-off of goodwill				0.0	%		0.0	%		8.4	%
	Write-off of trademarks and franchise rights				0.0	%		0.0	%		15.6	%
	Write-down of notes receivable				0.0	%		0.0	%		74.7	%
	Impairment of real estate				0.0	%		0.0	%		2.3	%
			Total cost and expenses		110.5	%		101.2	%		249.9	%
Operating loss					(10.5	)%		(1.2	)%		(149.9	)%
	Gain on sale of property and leasehold interests				8.4	%		8.7	%		2.2	%
	Gain on sale of available-for-sale securities				0.0	%		0.0	%		1.1	%
	Gain on early extinguishments of debt				12.5	%		2.1	%		9.1	%
	Interest expense				(17.6	)%		(19.2	)%		(31.0	)%
	Interest income				11.0	%		14.8	%		17.7	%
	Arbitration award				0.0	%		0.0	%		31.4	%
Earnings (loss) before income taxes and minority interests					3.9	%		5.2	%		(119.4	)%
Income tax (expense) benefit					(2.1	)%		(1.8	)%		31.6	%
Minority interests in (earnings) loss of consolidated subsidiaries and partnerships					(0.1	)%		(0.1	)%		0.7	%
Earnings (loss) from continuing operations					1.7	%		3.2	%		(87.1	)%
Discontinued operations:
		Operations of hotels disposed of and transferred			(0.7	)%		(1.1	)%		(2.3	)%
		Loss on disposal and transfer of discontinued operations			0.0	%		0.0	%		(10.3	)%
Net earnings (loss)					1.0	%		2.1	%		(99.7	)%

- 15 -

ForTable theof Fiscal Years Ended December 29, 2002 and December 30, 2001 Contents

~~For~~full-recourse promissory note in the ~~fiscal~~amount ~~year~~of ~~ended~~$937,500 ~~December 29~~that came due February 11, 2002, ~~total~~with ~~revenues~~the ~~decreased~~Company for one year at an interest rate of prime plus 250 34basis points.2% He paid the note and all accrued interest in full in December of 2002 and January of 2003 prior to ~~$28.3~~its maturity date of February ~~million~~11, ~~from~~2003. Another of the notes in the amount of $~~43.0~~124,999 matured on December ~~million~~7, ~~for~~2003 and was paid at that time. He paid the ~~fiscal~~remaining ~~year~~notes ~~ended~~in ~~December~~full in 2003 prior to ~~30,~~their ~~2001~~scheduled maturity dates.

-During 152002 -the Company purchased three vehicles from a corporation owned by the president and chief executive officer and a director of the Company, for an aggregate purchase price of approximately $74,000. During 2001 the Company purchased five vehicles for an aggregate purchase price of $120,000 from the same corporation. The Company’s chief executive officer sold that corporation in November of 2002.

~~Table~~Construction and development revenue for the years ended December 28, 2003 and December 29, 2002 includes $21,978,398 and $5,687,874, respectively, on contracts with outside businesses controlled by the Company’s chairman and chief executive officer. Construction contracts receivable at December 28, 2003, include $22,668,784 due on these contracts. Of this amount, $20,730,495 was incurred on one development, of ~~Contents~~which $3,001,230 has been collected by the Company subsequent to the balance sheet date.

~~The~~Results ~~Company owned and operated two hotel brands (Shoney’s Inns and GuestHouse) beginning in the second quarter~~ of ~~fiscal 2002, and Shoney’s Inns~~Operations ~~during 2001 and the first quarter of 2002. The Company owned and operated one~~ ~~AmeriSuites hotel beginning in late 2001 and two AmeriSuites hotels throughout~~ ~~most of 2002. Revenues from hotel operations in fiscal 2002 increased by 14.0%~~ to $8.9 million from $7.8 million for fiscal year 2001. For the 6 hotels opened for all of both years (same hotels), average daily room rates in 2002 decreased 1.6% to $51.46 from $52.30 in 2001, and average occupancy rates decreased from 51.4% in 2001 to 44.4% in 2002, resulting in a decrease in same hotel revenues per available room (RevPAR) of 15.0%, from $26.90 in 2001 to $22.87 in 2002. RevPAR for all Company-owned Shoney’s Inns / GuestHouse decreased by 14.8% in 2002 from 2001, from $26.83 to $22.87. The decreases in the Shoney’s Inns / GuestHouse RevPAR were due primarily to the declining economic conditions in the Houston, Texas, market area where three of the six Company-owned Inns are located. The remaining (non-same) hotels contributed $3.1 million to hotel revenues in 2002 compared with $867,000 in 2001. The $3.1 million revenues from non-same hotels in 2002 were from two AmeriSuites hotels which the Company operated for most of the year and continues to operate currently. The $867,000 revenues from non-same hotels in 2001 were from one new AmeriSuites hotel which opened in the third quarter of 2001 and two Shoney’s Inns sold in the first quarter of 2001.

~~Franchising,~~The ~~reservation~~following ~~and~~table ~~management~~sets ~~revenues in fiscal 2002 increased by 53.2% from 2001~~forth, tofor ~~$6.1 million~~the inperiods ~~2002 from $4.0 million in 2001. In fiscal 2002 and 2001~~indicated, ~~initial~~the ~~franchise and franchise termination fees totaled~~percentage ~~$185,000~~relationship ~~and $314,000, respectively. The remaining franchising, management and reservation revenues increased by $2.2 million, or 61.3%, from 2001 to 2002, including an increase in royalty fee revenues~~ of ~~$369,000,~~certain aitems ~~decrease in management fees~~ of ~~$946,000,~~revenue and anexpense increase in reservation fee revenues of $2.8 million. At the end of fiscal 2002 there were 112 franchised Shoney’s Inns / GuestHouse in operation compared with 58 at the end of fiscal 2001; this increase was due primarily to the ~~acquisition~~total ~~of GuestHouse International Franchise Systems, Inc. on May 2, 2002. Reservation fee~~ revenues ~~increased~~of ~~dramatically due to~~ the ~~addition of GuestHouse in mid-2002 and additional significant contracts with other lodging chains and independent lodging facilities~~Company.

Revenues from construction and development activities in 2002 were $9.9 million compared with $27.5 million in fiscal 2001. The 2002 revenues earned were primarily from various construction contracts being performed for third parties of which several non-hotel projects for related parties were still in progress at year-end 2002, while 2001 revenues earned were from four hotel construction contracts being performed for third parties, two of which were still in progress at year-end 2001. Revenues from construction and development activities earned from related parties in 2002 totaled $5.7 million of the total of $9.9 million earned in 2002. Revenues from construction and development can vary widely from period to period depending upon the volume of outside contract work and the timing of those projects. The events of September 11, 2001, have had a significantly negative impact on the Company’s construction and development opportunities.


	Fiscal Year Ended
	Dec. 30,			Dec. 29,			Dec. 28,
	2001			2002			2003
Revenues:
Hotel		5.7	%		10.9	%		10.7	%
Franchising, reservation and management		11.3	%		30.8	%		21.2	%
Construction and development – related parties		0.1	%		28.8	%		61.0	%
Construction and development – other		78.1	%		21.4	%		5.6	%
Rent income		4.2	%		7.2	%		1.1	%
Other income		0.6	%		0.9	%		0.4	%

Total revenues		100.0	%		100.0	%		100.0	%

Cost and expenses:
Hotel		3.5	%		7.3	%		8.4	%
Franchising, reservation and management		6.2	%		21.6	%		18.0	%
Construction and development		73.1	%		61.3	%		56.4	%
Rent expense		1.7	%		3.0	%		1.4	%
General and administrative		16.7	%		40.4	%		13.8	%
Depreciation and amortization		4.7	%		7.9	%		4.8	%
Write-off of pre-development costs		0.0	%		9.4	%		0.0	%
Write-off of construction contracts		0.0	%		18.4	%		0.2	%
Write-off of accounts receivable		0.0	%		6.6	%		1.8	%
Write-off of goodwill		0.0	%		12.1	%		0.0	%
Write-off of trademarks and franchise rights		0.0	%		22.4	%		0.0	%
Write-down of notes receivable		0.0	%		107.1	%		2.8	%
Impairment of real estate		0.0	%		0.4	%		0.0	%

~~Rent~~- ~~revenue~~16 ~~was $3.4 million in 2002, compared with $3.5 million in 2001.~~- The decrease was due to the sale of some restaurants to the lessees. Other income decreased by $270,000 in 2002 from 2001. Other income can vary widely from period to period due to the nature of this income and its varied sources. Miscellaneous income in 2001 represented an unusually high level of revenue of this nature.

-Table 16of - Contents


	Fiscal Year Ended
	Dec. 30,			Dec. 29,			Dec. 28,
	2001			2002			2003

Total cost and expenses		105.9	%		317.9	%		107.6	%

Operating loss		(5.9	)%		(217.9	)%		(7.6	)%
Gain on sale of property and leasehold interests		10.8	%		3.4	%		3.5	%
Gain on sale of available-for-sale securities		0.0	%		1.6	%		0.0	%
Gain on early extinguishments of debt		2.6	%		13.1	%		3.7	%
Interest expense		(23.4	)%		(44.4	)%		(21.5	)%
Interest income		17.8	%		25.3	%		6.2	%
Lease abandonment income		0.0	%		0.0	%		14.8	%
Arbitration award		0.0	%		45.0	%		0.0	%

Earnings (loss) before income taxes and minority interests		1.9	%		(173.9	)%		(0.9	)%
Income tax (expense) benefit		(0.5	)%		46.4	%		6.2	%
Minority interests in (earnings) loss of consolidated subsidiaries and partnerships		(0.2	%)		0.9	%		(0.3	)%

Earnings (loss) from continuing operations		1.2	%		(126.6	)%		5.0	%
Discontinued operations:
Operations of hotels disposed of and transferred		1.4	%		0.3	%		1.2	%
Loss on disposal and transfer of discontinued operations		0.0	%		(16.6	)%		(5.4	)%

Net earnings (loss)		2.6	%		(142.9	)%		0.8	%

~~Hotel~~For ~~operating~~the ~~expenses~~Fiscal ~~for~~Years ~~fiscal~~Ended ~~2002 increased by $1.3~~December ~~million~~28, ~~or 21.4%,~~2003 toand ~~$7.1~~December ~~million from $5.8 million in 2001. Hotel operating expenses on the two non-same hotels operated for most of 2002 were $2.1 million in 2002. Hotel operating expenses on the hotel added in late 2001~~29, ~~and the two hotels sold in early 2001 were $577,000 in 2001. Hotel operating expenses on the 6 same-hotels decreased by $194,000, or 3.7%, in~~ 2002 ~~from 2001. The operating~~ ~~expenses as a percentage of operating revenues for this activity increased from~~ ~~75.3% in 2001 to 80.1% in 2002. Operating expenses as a percentage of~~ ~~operating revenues on the 6 same-hotels increased from 76.3% to 88.2% from 2001~~ ~~to 2002. Hotel operating expenses on same-hotels were not reduced as much as the decline in hotel revenues, thus reducing gross operating profit margin on these hotels.~~

~~Franchising,~~ For ~~reservation~~the ~~and~~fiscal ~~management~~year ~~operating~~ended ~~expenses increased by $2.1~~December ~~million~~28, ~~or 95.1%~~2003, ~~from~~total ~~2001~~revenues ~~to 2002~~increased 82.4% ~~This was due~~ to ~~increased reservation~~$36.1 million ~~expenses,~~from ~~principally~~$19.8 million ~~payroll~~for ~~and payroll-related, to support~~ the ~~increased~~ ~~reservation~~fiscal ~~revenues~~year ~~earned~~ended ~~and increased franchise activity due to~~December ~~the~~29, ~~acquisition of the GuestHouse franchising rights~~2002.

~~Construction~~ For the first quarter of 2002, the Company owned and ~~development~~operated ~~costs~~Shoney’s Inns. Beginning in the second quarter of 2002, ~~were~~the Company owned and operated two hotel brands (Shoney’s Inns and GuestHouse). The Company operated one hotel as either a Shoney’s Inn or GuestHouse for fiscal years 2003 and 2002. The Company owned and operated one AmeriSuites hotel throughout most of 2002 and two AmeriSuites hotels throughout most of 2003. Revenues from hotel operations in fiscal 2003 increased by 77.8% to $123.18 million ~~compared with~~from $252.72 million for infiscal ~~2001~~year 2002. ~~The~~For ~~costs~~the ~~incurred~~one ~~were~~hotel ~~directly~~(GuestHouse) ~~related~~opened tofor ~~the revenues~~all ~~earned~~of ~~from~~both years ~~the~~(same ~~third~~hotel), ~~party~~average ~~construction~~daily ~~contracts~~room rates in ~~progress~~2003 indecreased 6.8% to $52.54 from $56.34 in 2002, ~~including~~and ~~contracts~~average ~~with~~occupancy ~~related~~rates ~~parties~~decreased from 64.6% in 2002 to 61.7% in 2003, ~~compared~~resulting ~~with~~in ~~the~~a ~~third~~decrease ~~party~~in same hotel revenues per available ~~construction~~room ~~contracts~~(RevPAR) of 10.9%, from $36.37 in ~~progress~~2002 to $32.40 in ~~2001~~2003. The ~~Company~~remaining (non-same) ~~was~~hotels ~~unable~~contributed $2.7 million to ~~reduce its~~hotel ~~construction~~revenues ~~and~~in ~~development~~2003 ~~overhead~~compared with ~~expenses~~$854,000 in 2002. inThe ~~relation~~$2.7 million torevenues ~~its significant~~from ~~decrease~~non-same hotels in ~~construction~~2003 were from two AmeriSuites hotels which the Company operated for most of the year and ~~development~~continued to operate as of December 28, 2003. The $854,000 revenues from non-same hotels in 2002 were from ~~2001~~one AmeriSuites hotel operated beginning in April of 2002.

~~Rent~~ Franchising, ~~expense~~reservation ~~increased~~and management revenues in fiscal 2003 increased by $26.2% from 2002,~~000,~~ orto 0$7.~~3%,~~7 million in ~~2002~~2003 from ~~2001~~$6.1 million Asin of2002. In ~~December 29,~~fiscal 2003 and 2002, initial franchise and ~~December 30,~~franchise ~~2001~~termination fees totaled $227,000 ~~the~~and ~~Company~~$185,000, ~~was~~respectively. ~~obligated~~The onremaining ~~only~~franchising, ~~one~~reservation and ~~hotel~~management ~~lease.~~revenues increased

~~General~~- ~~and~~17 ~~administrative expenses increased by $2.1 million, or 36.2%,~~- from 2001 to 2002. The increase was due primarily to increased insurance costs, professional fees and litigation expenses. The increase in professional fees was due primarily to legal fees incurred in the arbitration proceeding against Prime (see discussion of arbitration award below), a litigation settlement of $625,000, and state tax planning services for recovery of taxes paid.

DepreciationTable and amortization expenses decreased by $57,000, or 1.7%, from 2001 to 2002. The Company sold two hotels in April of 2001 and opened one new Company-owned hotel in October of 2001. One new hotel was under construction at the end of 2001 and opened in the first quarter of 2002. A reduction of $421,000 was due to the adoption of Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets effective with the 2002 fiscal year. Contents

~~The~~by ~~Company~~$1.5 million, ~~has~~or ~~incurred~~26.3%, ~~development~~from ~~costs~~2002 ~~related~~ to ~~several sites upon~~2003, ~~which~~including ~~hotel~~an ~~development~~increase ~~for~~in ~~third~~royalty ~~parties~~fee ~~was~~revenues ~~planned.~~of ~~Due~~$83,000, toa ~~the~~decrease ~~failure of~~in anmanagement ~~upturn~~fees inof ~~the~~$31,000, ~~hotel~~and ~~development~~an ~~industry~~increase in ~~2002,~~reservation asfee ~~had~~revenues ~~been~~of ~~previously~~$1.5 ~~anticipated,~~million. ~~these~~At ~~previously~~the ~~capitalized~~end ~~development~~of ~~costs~~fiscal 2003 there were ~~charged~~90 ~~off~~franchised Shoney’s Inns / ~~since~~GuestHouse ~~they~~in ~~did~~operation ~~not~~compared ~~improve~~with 112 at the ~~value~~end of fiscal 2002; this decrease was due primarily to the ~~land~~termination ~~upon~~of ~~which~~franchises ~~they~~in ~~were~~excess ~~incurred.~~of new ~~The~~franchises ~~impact~~since the acquisition of ~~these~~GuestHouse ~~development~~International ~~cost~~Franchise ~~charge-offs~~Systems, Inc. ~~was~~on ~~approximately~~May 2, $12002.9 Reservation fee revenues increased dramatically due to ~~million~~the addition of GuestHouse in mid-2002. ~~(Also,~~and ~~see~~additional ~~“Fourth~~significant ~~Quarter~~contracts with ~~Adjustments”~~other ~~above~~lodging chains and independent lodging facilities.)

~~Additionally,~~ Revenues from construction and development activities in ~~2002~~2003 ~~approximately~~were $324.0 million compared with $9.9 million ofin ~~contracts~~fiscal ~~receivable~~2002. The 2003 and 2002 revenues onearned ~~two~~were ~~third~~primarily ~~party~~from various construction contracts being performed for third parties of which several non-hotel projects for related parties were still ~~written~~in ~~off~~progress asat ~~uncollectible~~year-end 2003. Revenues from construction and development ~~One~~activities ofearned ~~the~~from ~~contracts~~related ~~receivable~~parties isin ~~for~~2003 ~~approximately~~ and 2002 totaled $222.0 million and $5.7 million, respectively. Revenues from construction and development can vary widely from period to period depending upon the volume of outside contract ~~Company~~work ~~received~~and anthe ~~arbitration~~timing ~~award~~of ~~for~~those ~~substantially~~projects. ~~all~~The events of ~~its~~September 11, ~~claim~~2001, ~~but~~have ~~the~~had ~~owner~~a ofsignificantly negative impact on the Company’s ~~hotel~~construction ~~filed~~and development opportunities.

- Rent 17revenue -was $400,000 in 2003, compared with $1.4 million in 2002. The decrease was due primarily to the abandonment of the lease of three AmeriSuites hotels by Prime Hospitality Corp. (“Prime”) in April of 2003. The Company took back the operations of these hotels and on June 13, 2003, filed a lawsuit against Prime for an amount in excess of $10.0 million for its violation of the lease agreement. Two of these hotels were classified as held for sale as of December 28, 2003, and the rent revenue relative to these two hotels has been reclassified to discontinued operations for all periods presented. Rent income in the future is not expected to be material.

~~Table~~ Other income decreased by $24,000, or 13.6%, in 2003 from 2002. Other income can vary widely from period to period due to the nature of ~~Contents~~this income and its varied sources.

~~Chapter 11~~ Hotel ~~bankruptcy~~operating onexpenses ~~January 3,~~for fiscal 2003. ~~The other~~increased ~~contract~~by ~~receivable~~$1.6 million, isor 108.9%, ~~for~~to ~~approximately~~$3.0 million from $1.04 million, ~~and~~in ~~arbitration proceedings~~2002. ~~were~~Hotel ~~initiated~~operating expenses on the ~~January 15,~~non-same hotels operated in 2003; ~~the~~were ~~owner~~$2.2 million ofin ~~the~~2003 ~~hotel~~and ~~claims damages~~$620,000 in 2002. ~~excess~~Hotel ofoperating ~~the~~expenses ~~amount~~on ~~owed.~~the ~~Any~~one ~~recovery~~same-hotel ~~from~~decreased ~~these~~by ~~two~~$23,000, ~~contracts~~or ~~will~~2.7%, beto ~~recorded~~$800,000 asin ~~earned~~2003 ~~when~~from ~~received~~$823,000 in 2002. ~~Various~~The ~~other~~operating ~~construction~~expenses ~~contracts~~as a ~~receivable~~percentage ~~totaling~~of ~~approximately~~operating ~~$600,000~~revenues ~~were~~for ~~also~~this ~~written~~activity ~~off~~increased from 66.8% in 2002 to 78.5% in 2003. Operating expenses as a percentage of operating revenues on ~~(Also,~~the ~~see~~one ~~“Fourth~~same-hotel ~~Quarter~~increased ~~Adjustments”~~from ~~above~~63.)0% to 68.9% from 2002 to 2003.

~~Unsecured~~ Franchising, ~~accounts~~reservation ~~receivable~~and management operating expenses increased by $2.2 million, or 51.5%, from ~~the~~2002 15to ~~hotels~~2003. ~~securing~~This ~~the~~was 15due ~~first~~to increased ~~mortgage~~reservation ~~notes~~expenses, ~~discussed~~principally ~~below~~payroll and ~~various~~payroll-related, ~~other~~to ~~accounts~~support ~~receivable were~~the ~~written~~increased ~~off~~reservation asrevenues ~~uncollectible~~earned inand ~~the~~increased ~~amount~~franchise ofactivity ~~approximately~~due ~~$1.3 million in~~to ~~2002.~~the ~~(Also,~~acquisition ~~see~~of ~~“Fourth~~the ~~Quarter~~GuestHouse ~~Adjustments”~~franchising ~~above~~rights.)

~~The~~ Construction ~~Company~~and ~~sold~~development ~~its~~costs ~~interests~~ in 272003 ~~Sumner~~were ~~Suites hotels in 2000 to Prime Hospitality Corp~~$20.,3 million ~~who subsequently converted all of them to their AmeriSuites~~compared ~~hotel brand. The Company continued to hold the “Sumner Suites” trademark~~ with ~~the~~ possibility of using it to brand future hotels it might develop or acquire. In the second quarter of 2002, management made the decision to abandon the trademark since the use of the name by the Company in the future is highly unlikely. Consequently, the remaining balance of $~~376,000 for the Sumner Suites trademark was written off in the second quarter~~12. ~~The Company carried intangible assets (deferred charges and goodwill) related to the acquisition and modifications of the franchising rights for Shoney’s Inns and Shoney’s Inns & Suites at $6.4~~1 million. ~~The Company has been unsuccessful~~ in ~~its efforts to sell new franchises for at least a year, and existing franchisees have exited the Shoney’s Inn system for the past several years. In the second quarter of~~ 2002~~, the Company acquired the exclusive franchising rights for the GuestHouse International Inns & Suites brand~~. The ~~Company~~costs ~~has~~incurred ~~decided~~were todirectly ~~convert~~related ~~all existing Shoney’s Inns~~ to the ~~GuestHouse brand and to franchise only the~~ ~~GuestHouse~~revenues ~~brand~~earned ~~in the future. No more attempts will be made to franchise the~~from ~~Shoney’s Inn brand. As a result, the value of the Shoney’s Inn franchising~~ ~~rights and related goodwill has been determined to be worthless. Consequently,~~ ~~the balance of $6.4 million was written off in the second quarter of 2002.~~

~~The~~- ~~Company holds~~ 18 first mortgage notes receivable totaling $67.8 million resulting from the sale of hotels in 1998, 2000 and 2001, providing seller financing for a portion of the selling price at the time of the sale. The owners of 15 of the properties are affiliated with each other. The 15 mortgage notes are cross-~~collateralized and cross-defaulted and mature July 30,~~ 2003. Even though all first mortgage payments on these 15 hotels were timely received through the end of 2002, the common owner has notified the Company that it is unlikely that it will be able to refinance the properties by the notes’ maturity dates. The Company does not desire to extend the maturity dates and, therefore, 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 quarter to find cash purchasers of the properties in the event the Company re-acquired ownership. Offers received recently have been disappointing, but the Company does not desire to take back ownership and operate the properties. Therefore, it is likely to sell the properties at values significantly below the balances of the notes receivable and as of December 29, 2002, wrote down the notes receivable to the estimated net selling price of the properties. The Company is negotiating with the common owner of the other three hotels secured by first mortgage notes receivable held by the Company, and has agreed to discount the notes in order to accelerate payment by its refinancing of at least two of

-Table 18of - Contents

~~Table~~the ofthird ~~Contents~~party construction contracts in progress in 2003, including contracts with related parties, compared with the third party construction contracts in progress in 2002.

~~the hotels.~~ Rent ~~The~~expense ~~Company~~decreased ~~wrote~~by ~~these~~$66,000, ~~notes~~or ~~down~~11.3%, toin ~~their~~2003 ~~estimated~~from ~~collectible balances as of December 29,~~ 2002. ~~The~~As ~~total write-downs~~ of ~~all 18 notes~~ ~~receivable~~December 28, at2003, ~~the~~and ~~end~~December 29, of2002, the Company’s ~~2002~~was ~~fiscal~~obligated ~~year~~on ~~were~~only ~~$21.2 million.~~one ~~(Also,~~hotel ~~see “Fourth Quarter Adjustments” above~~lease.)

~~The~~ General ~~Company~~and ~~tested~~administrative ~~its~~expenses ~~real~~decreased ~~estate~~by ~~owned as of December~~$3.0 29million, ~~2002,~~or ~~for impairment in accordance with SFAS No~~37. ~~144. One of the hotels owned and~~7%, ~~operated~~from by2002 ~~the Company was determined~~ to be impaired in value as measured against its carrying value. The amount of the impairment was determined to be $567,000; therefore, the carrying value of this hotel was written down in 2002 to its estimated fair value. The Company also sold a parcel of undeveloped land which it owned in early 2003 ~~at net proceeds of less than the carrying value at the end of 2002~~. The ~~carrying~~decrease ~~value of this land parcel~~ was ~~written down~~due inprimarily ~~2002~~ to ~~the~~reduced ~~net proceeds subsequently realized, thus reporting an~~administrative ~~impairment~~costs ~~loss~~as ~~of $77,000 on this parcel. Due to the current condition of the economy and of the lodging industry, it is reasonably possible that~~ a ~~change~~result ~~in the estimate~~ of the ~~fair~~sale ~~value~~ of ~~other real estate, particularly~~ hotels, ~~owned by~~during ~~the Company may occur in the near future, resulting in additional impairment charges~~2003.

~~The~~ Depreciation ~~gain~~and ~~recognized~~amortization onexpense ~~the~~increased ~~sale~~by ~~of property in 2002 was~~ $~~628~~170,000, ~~compared with~~or $310.~~8 million~~9%, from ~~in 2001. The net gain recognized in~~ 2002 ~~included~~to ~~gains of $447~~2003,~~000~~ ondue ~~the~~primarily ~~sale of two restaurants~~ to ~~the~~additions ~~operator/lessees, and gains of $395,000 on the sale of excess land, partially offset by a loss of $232,000 due~~ to ~~costs incurred on~~ the ~~disposal~~reservation ~~of two hotels. The gain of $3.8 million in 2001 included $3.6 million from the Company~~center’s ~~sale of one hotel and three~~ ~~restaurants.~~capitalized ~~Another~~computer ~~hotel~~hardware ~~was sold in 2001, but the gain was deferred~~ and ~~is being~~software ~~recognized~~to ~~under~~accommodate ~~the~~its ~~installment~~expanded ~~method of accounting until full accrual~~customer ~~accounting is warranted~~base. ~~Approximately $175,000 of the gain on the sale of two~~ ~~of the restaurants was also deferred and is being recognized under the~~ ~~installment method of accounting, including approximately $15,000 recognized in~~ ~~2002.~~

In The ~~the~~Company incurred development costs related to several sites upon which hotel development for third ~~quarter~~parties was planned. Due to the failure of an upturn in the hotel development industry in 2002, ~~the~~as ~~Company~~had ~~sold~~been ~~all~~previously anticipated, these previously capitalized development costs were charged off in 2002 since they did not improve the value of ~~its~~the land upon which they were ~~available~~incurred. The impact of these development cost charge-~~for-sale~~offs ~~securities,~~was ~~recognizing~~approximately $1.9 million ain ~~gain~~2002. ofAn additional $~~315~~6,000 of such expenditures was charged off in 2003.

~~Pursuant~~ Additionally, toin a2002 ~~plan~~approximately ~~adopted~~$3.0 million inof ~~1999~~contracts toreceivable on ~~repurchase~~two athird ~~portion~~party construction contracts were written off as uncollectible. One of the contracts receivable was for approximately $2.0 million, and the Company’s ~~outstanding~~received ~~subordinated~~an ~~indebtedness~~arbitration inaward ~~the~~for ~~open~~substantially ~~market~~all ~~and~~of ~~in negotiated~~its ~~transactions~~claim, but the ~~Company~~owner ~~repurchased~~of ~~$1.6~~the hotel filed Chapter ~~million~~11 ofbankruptcy ~~its~~on 7January 3, 2003.~~50%~~ The ~~subordinated~~bankruptcy ~~debentures~~was inoverturned ~~2002~~by atthe ~~a discount~~court, ~~recognizing~~but athe ~~gain~~owner of the hotel still did ~~$375,000. In~~not ~~2001,~~pay the award. The Company ~~repurchased~~purchased ~~$3.4 million~~the offirst ~~its~~mortgage ~~7.50%~~in ~~subordinated~~2003, ~~debentures~~foreclosed on the property, and acquired the hotel at a foreclosure ~~discount~~sale, ~~recognizing~~operating ait ~~gain~~with ofthe $1intent to resell it.~~0 million.~~ ~~Additionally,~~The inCompany ~~2002,~~expects ~~the~~to ~~Company,~~resell it in 2004 at a ~~negotiated~~price ~~transaction,~~that ~~exchanged~~is ~~$8.2 million~~expected ~~face value~~to recover a portion of ~~its~~the ~~senior~~amount ~~subordinated~~charged ~~notes~~off ~~previously~~in ~~purchased~~2002. The other contract receivable was for approximately $51.30 million, ~~for~~ ~~$7.5 million~~and ofarbitration ~~its~~proceedings ~~outstanding~~were ~~7.50%~~initiated ~~subordinated debentures~~on January 15, ~~recognizing a~~2003; ~~gain~~the owner of ~~$2.2 million.~~the ~~The~~hotel ~~Company~~claims ~~adopted~~damages ~~Statement~~in excess of ~~Financial~~the ~~Accounting~~amount ~~Standards No~~owed. ~~145~~ atAny ~~the~~recovery ~~beginning~~from ofthis ~~fiscal~~contract ~~2002.~~will ~~Accordingly,~~also ~~gains~~be recorded as earned when and ~~losses~~if ~~from~~received. ~~debt~~Various ~~extinguishments~~other ~~are~~construction nocontracts ~~longer~~receivable ~~classified~~totaling approximately in$600,000 ~~the~~were ~~statement~~also ~~of earnings~~written asoff ~~extraordinary~~in ~~items~~2002. ~~See~~Miscellaneous construction ~~the~~contracts ~~further~~receivable ~~discussion~~totaling in$61,000 ~~“Liquidity~~were ~~and Capital~~written ~~Resources”~~off ~~below~~in 2003.

~~Interest~~ Unsecured ~~expense~~accounts inreceivable ~~2002 increased~~ from ~~2001~~the by15 ~~$501,000,~~hotels orsecuring ~~6.1%,~~15 ~~while~~first ~~interest~~mortgage ~~income~~notes ~~decreased~~discussed bybelow ~~$1.4 million,~~and orvarious ~~21.3%.~~other ~~The~~accounts ~~increase~~receivable ~~in interest~~were ~~expense~~written ~~was~~off ~~due~~as ~~primarily~~uncollectible ~~to higher levels of borrowing on the Company’s bank credit facilities~~ in ~~2002 than in 2001. Interest income increased due to seller financing of a portion of~~ the ~~sales~~amount ~~price~~ of ~~two~~approximately ~~Shoney’s~~$650,000 ~~Inns~~and ~~sold to~~$1.3 ~~franchisees~~million in ~~April~~2003 ~~of 2001,~~ and ~~one Shoney’s Inn sold in June of~~ 2002, ~~but was more than offset by decreases in the interest rates charged on other notes receivable due to the general decline in interest rates and the interest rate terms of those notes~~respectively.

- The 19Company -sold its interests in 27 Sumner Suites hotels in 2000 to Prime Hospitality Corp., who subsequently converted all of them to their AmeriSuites hotel brand. The Company continued to hold the “Sumner Suites” trademark with the possibility of using it to brand future hotels it might develop or acquire. In the second quarter of 2002, management made the decision to abandon the trademark since the use of the name by the Company in the future is highly unlikely. Consequently, the

~~Table~~- of19 ~~Contents~~-

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

remaining balance of $376,000 for the Sumner Suites trademark was written off in the second quarter of 2002. The ~~effective~~Company carried ~~tax~~intangible ~~rate~~assets ~~differs~~(deferred ~~from~~charges and goodwill) related to the acquisition ~~federal~~and modifications of the franchising rights for Shoney’s Inns and Shoney’s ~~state~~Inns ~~statutory~~& ~~rates~~Suites at $6.4 million. The Company had been unsuccessful in asits efforts to sell new franchises for at least a ~~result~~year, and existing franchisees have exited the Shoney’s Inn system for the past several years. In the second quarter of ~~interest~~2002, onthe ~~deferred~~Company ~~gains~~acquired the exclusive franchising rights for the GuestHouse International Inns & Suites brand. The Company decided to convert all existing Shoney’s Inns to the GuestHouse brand and to franchise only the ~~non-deductibility~~GuestHouse brand in the future. No more attempts will be made to franchise the Shoney’s Inn brand. As a result, the value of the ~~write-off~~Shoney’s Inn franchising rights and related goodwill had been determined to be worthless. Consequently, the balance of ~~certain~~$6.4 million ~~intangible~~was ~~assets~~written off in the second quarter of 2002.

~~Discontinued~~ The ~~operations~~Company ~~resulted~~held 18 first mortgage notes receivable totaling $67.8 million resulting from the sale of hotels in 1998, 2000 and~~/or~~ ~~transfer~~2001, ofproviding ~~seven~~seller ~~hotels~~financing infor ~~2002~~a portion of the selling price at the time of the sale. The owners ~~effect~~of 15 of the properties were affiliated with each other. The 15 mortgage notes were cross-collateralized and cross-defaulted and matured July 30, 2003. Even though all first mortgage payments on these 15 hotels were timely received through the end of 2002, the common owner had notified the Company that it was unlikely that it would be able to refinance the properties by the notes’ maturity ~~operations~~dates. ~~and~~The Company did not desire to extend the ~~losses~~maturity ondates and, therefore, anticipated that it would be necessary to resume title to the ~~sales~~properties. The owner of the properties agreed in late December of 2002 to transfer the hotels ~~have~~back to the Company by deeds in lieu of foreclosure. In anticipation of this, the Company began midway through the fourth quarter to find cash purchasers of the properties in the event the Company re-acquired ownership. Offers received had been ~~removed~~disappointing, ~~from~~but ~~operating~~the ~~earnings~~Company did not desire to take back ownership and ~~from~~operate the ~~gain~~properties. Therefore, it has been selling the properties at values significantly below the balances of the notes receivable and as of December 29, 2002, wrote down the notes receivable by $18.1 million to the estimated net selling price of the properties. During 2003, the Company negotiated contracts to sell 13 of the 15 hotels, took deeds in lieu of foreclosure on ~~sale~~these properties, and sold them at the negotiated prices. Two of ~~property~~these notes receivable remained outstanding at the end of 2003, and ~~leasehold~~the ~~interests~~Company intends to find buyers, take the hotels by deed in ~~accordance~~lieu of foreclosure, and sell them in 2004. The Company negotiated with ~~Statement~~the common owner of the other three hotels secured by first mortgage notes receivable held ~~Financial~~by ~~Accounting~~the ~~Standards~~Company, Noand agreed to discount the notes in order to accelerate payment by its refinancing of the hotels. The Company wrote these notes down to their estimated collectible balances as of December ~~144~~29, ~~Accounting~~2002. ~~for~~Two of these three notes receivable were refinanced by the ~~Impairment~~owner orin 2003 and paid the Company the ~~Disposal~~proceeds; the third note was still outstanding at the end of ~~Long~~2003, and the owner was continuing to seek refinancing to pay the Company the proceeds. On January 30, 2004, this hotel was refinanced and the proceeds from the refinancing were paid to the Company resulting in no additional gain or loss. The total write-~~Lived~~downs ~~Assets~~of all 18 notes receivable at the end of the Company’s 2002 fiscal year were $21.2 million. ~~(Also~~An additional $738,000 ~~see~~was ~~“Fourth~~written ~~Quarter~~off ~~Adjustments”~~in 2003 on these notes due to the insufficient net proceeds from the resale of the properties to cover the carrying value of the notes. Additionally, the Company wrote down $143,000 of other notes receivable in 2003 due from the three hotels with common ownership discussed above.) Various other notes receivable totaling approximately $134,000 were written off in 2003.

~~For~~- ~~the~~20 ~~Fiscal Years Ended December 30, 2001 and December 31, 2000~~-

ForTable theof fiscal year ended December 30, 2001, total revenues decreased 26.2% to $43.0 million from $58.3 million for the fiscal year ended December 31, 2000. Contents

The Company ~~owned~~tested ~~and~~its ~~operated~~real ~~two~~estate ~~hotel~~owned ~~brands~~as ~~(Sumner~~of ~~Suites~~December 28, 2003 and ~~Shoney’s~~December 29, ~~Inns) until mid-2000~~2002, ~~and~~for ~~primarily~~impairment ~~one brand (Shoney’s Inns)~~ in ~~the last~~accordance ~~two~~with ~~quarters~~SFAS ~~of 2000 and during fiscal 2001~~No. 144. The Company ~~owned and~~ ~~operated~~sold ~~one~~a ~~AmeriSuites~~parcel ~~hotel~~of ~~beginning~~undeveloped inland ~~late~~which ~~2001.~~it ~~Revenues~~owned ~~from hotel operations~~ in ~~fiscal~~early ~~2001~~2003 ~~decreased~~at bynet ~~80.9% to $7.8 million: from $40.7~~proceeds ~~million~~of ~~for~~less ~~fiscal~~than ~~year~~the ~~2000.~~carrying ~~For~~value at the 6end ~~hotels~~of ~~opened~~2002. ~~for~~The ~~all~~carrying value of ~~both years~~this ~~(same~~land ~~hotels),~~parcel ~~average~~was ~~daily~~written ~~room~~down ~~rates~~ in ~~2001~~2002 ~~increased 1.8%~~ to ~~$52.30~~the ~~from $51.39~~net inproceeds ~~2000,~~subsequently ~~and average occupancy rates increased from 46.0% in 2000 to~~realized, ~~51.4%~~thus inreporting ~~2001, resulting in~~ an ~~increase~~impairment inloss ~~same hotel revenues per available room (RevPAR)~~ of ~~13.8%~~$77,000 ~~from~~on ~~$23.63~~this ~~in 2000 to $26~~parcel.90 inNo ~~2001. RevPAR for all~~additional ~~Company-owned~~impairment ~~Shoney’s~~of ~~Inns~~real ~~increased~~estate bywas ~~10.5%~~recorded in ~~2001~~2003. ~~from~~Due ~~2000: from $24.29~~ to ~~$26.83. The increases in~~ the ~~Shoney’s~~current ~~Inns RevPAR were due primarily to the~~condition ~~improved~~of ~~economic conditions in~~ the ~~Houston,~~economy ~~Texas,~~and ~~market area where three~~ of the ~~Company-owned~~lodging ~~Shoney’s Inns are located. The remaining (non-same) hotels contributed $867~~industry,~~000~~ toit ~~hotel~~is ~~revenues~~reasonably inpossible ~~2001~~that ~~compared with $34.7 million in~~a ~~2000.~~change ~~The $867,000 revenues from non-same hotels~~ in ~~2001 were from two hotels in which~~ the ~~Company~~estimate ~~sold its interests in the first quarter~~ of ~~2001 and one new hotel which opened in~~ the ~~third~~fair ~~quarter~~value of ~~2001.~~other ~~The~~real ~~$34.7 million~~estate, ~~revenues~~particularly ~~from non-same~~ hotels, inowned ~~2000~~by ~~were from 28 hotels in which~~ the Company ~~sold~~may ~~its interests~~occur in the ~~second~~near ~~quarter~~future, ofresulting ~~2000 and the two hotels sold~~ in ~~the first~~ ~~quarter~~additional ofimpairment ~~2001~~charges.

~~Franchising,~~ The ~~reservation~~gain ~~and~~recognized ~~management~~on ~~revenues~~the sale of property in ~~fiscal~~2003 ~~2001~~was ~~increased~~$1.3 million bycompared 10with $677,000 in 2002.1% ~~from~~The ~~2000,~~gain toof $41.03 million in ~~2001~~2003 included $657,000 from the sale of undeveloped land, $~~3.6 million~~537,000 infrom ~~2000.~~the ~~In fiscal~~sale ~~2001~~of one hotel and ~~2000,~~two ~~initial~~restaurants ~~franchise~~previously deferred and ~~franchise~~reported ~~termination~~on ~~fees~~the ~~totaled~~installment method of accounting, and $~~314~~58,000 ~~and~~from the sale of a restaurant to the lessee in 2003. The net gain recognized in 2002 included gains of $~~615~~447,000 on the sale of two restaurants to the operator/lessees, ~~respectively.~~and ~~Exclusive~~gains of ~~these~~$395,000 ~~non-recurring~~on ~~franchise~~the sale of ~~revenues~~excess land, partially offset by a loss of $232,000 due to costs incurred on the ~~remaining~~disposal of two hotels.

- In 20the third quarter of 2002, the Company sold all of its available-for-sale securities, recognizing a gain of $315,000.

~~Table~~ Pursuant to a plan adopted in 1999 to repurchase a portion of ~~Contents~~the Company’s outstanding subordinated indebtedness in the open market and in negotiated transactions, the Company repurchased $5.7 million of its 7.50% subordinated debentures in 2003 at a discount, recognizing a gain of $1.1 million. The Company also repurchased $6.6 million of its senior subordinated notes in 2003, recognizing a gain of $942,000. The Company terminated its credit facility with a financial institution in 2003, resulting in the write-off of $472,000 in unamortized deferred financing costs. The Company also paid off its outstanding industrial revenue bonds in 2003, resulting in the write-off of $176,000 in unamortized deferred financing costs.

~~franchising~~ In 2002, ~~reservation~~the ~~and~~Company ~~management~~repurchased ~~revenues increased by~~ $~~666,000,~~1.6 million orof 22its 7.350%, ~~from~~subordinated debentures ~~2000~~at toa ~~2001~~discount, ~~including~~recognizing ana ~~increase~~gain ~~in management fee revenues~~ of $~~891~~375,000. ~~which~~Additionally, ~~was due entirely to 17 new management contracts~~in ~~which~~2002, ~~became~~the ~~effective~~Company, in ~~April 2001.~~a Atnegotiated ~~the~~transaction, ~~end~~exchanged of$8.2 million ~~fiscal 2001 there were 58~~face ~~franchised~~value ~~Shoney’s~~of ~~Inns~~its insenior ~~operation~~subordinated ~~compared~~notes ~~with~~previously 59purchased atfor ~~the~~$5.3 million, for ~~end~~$7.5 million of ~~fiscal 2000;~~its ~~this~~outstanding ~~decrease~~7.50% ~~was~~subordinated ~~due to five terminations~~debentures, ~~two new franchised Inns~~recognizing ~~added,~~a ~~and~~gain ~~two~~of ~~Company-owned Inns sold to franchisees during 2001~~$2. ~~As of December~~2 ~~30,~~million. ~~2001,~~See ~~there~~the ~~were~~further nodiscussion ~~franchised~~in ~~Shoney’s~~“Liquidity ~~Inns~~and ~~under~~Capital Resources” ~~construction~~below.

~~Revenues~~ Interest ~~from~~expense ~~construction~~in ~~and~~2003 ~~development~~decreased ~~activities~~from in2002 ~~2001~~by ~~were~~ $271.5 0 million, ~~compared~~or ~~with~~11.4%, while interest income decreased by $122.07 million, inor ~~fiscal 2000~~54.9%. The ~~2001~~decrease ~~revenues earned~~in ~~were~~interest ~~primarily~~expense ~~from~~was ~~four~~due ~~hotel~~primarily ~~construction~~to ~~contracts~~the ~~being~~reductions ~~performed~~in ~~for~~outstanding ~~third~~debt from ~~parties~~debt repurchases, ~~two~~debt ofpayoffs, ~~which~~and ~~were~~other ~~still~~debt reductions. Interest income decreased due to decreases in ~~progress~~the atinterest ~~year-end,~~rates ~~while~~charged ~~2000~~on ~~revenues~~notes receivable ~~earned~~due ~~were~~to ~~from~~the ~~three~~general ~~hotel~~decline ~~construction~~in ~~contracts~~interest ~~being~~rates ~~performed~~and ~~for~~the ~~third~~interest rate terms of ~~parties~~those notes, ~~two~~to ofthe ~~which~~collections ~~were~~of ~~still~~notes inreceivable ~~progress~~from atthe ~~year-end.~~proceeds ~~Revenues~~of ~~from~~the ~~construction~~sales ~~and~~of ~~development~~the ~~can~~underlying ~~vary~~collateral, ~~widely~~and ~~from~~to ~~period~~the tocollection ~~period~~of ~~depending~~two ~~upon~~seller-financed ~~the~~notes ~~volume~~receivable ofwhich ~~outside~~were ~~contract~~refinanced ~~work~~by ~~and~~the borrowers in the first ~~timing~~quarter of ~~those projects~~2003.

~~Rent~~- ~~revenue~~21 ~~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.

HotelTable operating expenses for fiscal 2001 decreased by $23.7 million, or 80.2%, to $5.9 million from $30.0 million in 2000. The sale of the Company’s interest in one Shoney’s Inn and all 27 of its Sumner Suites hotels in the second quarter of 2000 and the sale of two Shoney’s Inns in the first quarter of 2001 accounted for a decrease of $24.3 million in hotel operating expenses from 2000 to 2001. Hotel operating expenses on the hotel added in late 2001 were $121,000. Hotel operating expenses on the 6 same-hotels increased by $458,000, or 9.5%, in 2001 over 2000. The operating expenses as a percentage of operating revenues for this activity increased from 72.7% in 2000 to 75.3% in 2001. Operating expenses as a percentage of operating revenues on the 6 same-hotels decreased from 80.0% to 76.3% from 2000 to 2001. Increases in hotel operating expenses on same hotels were primarily in the areas of payroll-related costs, utilities, and insurance. Contents

~~Franchising~~ The Company leased three hotels to Prime in July of 2000. In the first quarter of 2003, ~~reservation~~Prime ~~and~~abandoned ~~management~~the ~~services~~lease ~~operating~~of ~~expenses~~the three hotels and the Company ~~decreased~~resumed byoperations ~~$268,000,~~of orthe ~~10.9%~~hotels on April 5, ~~from~~2003. ~~2000~~Due to ~~2001.~~the ~~This~~terms ~~was~~of ~~due~~the lease ~~primarily~~agreement, tothe Company had recorded a liability and a deferred credit in ~~reduced~~July ~~central~~of ~~reservation~~2000. ~~center~~Due ~~expenses~~to ~~caused~~the lease abandonment by Prime in the ~~cancellation~~first quarter of ~~reservation~~2003, ~~services~~the remaining deferred amounts totaling $4.9 million, and $416,000 in cash ~~November~~received offrom ~~2000~~Prime onupon the 27abandonment, ~~hotels~~were ofrecognized ~~which~~as lease abandonment income totaling $5.3 million in the first quarter of 2003. On June 13, 2003, the Company’s ~~operating~~filed ~~interests~~a ~~had~~complaint ~~been~~against ~~sold~~Prime for its default under the lease, claiming damages to the Company in ~~mid-2000~~excess of $10.0 million.

~~Construction~~ The ~~and~~Company ~~development~~had ~~costs~~filed inan ~~2001~~arbitration ~~were~~claim ~~$25.7 million~~against ~~compared with~~Prime ~~$12.6 million~~ in ~~2000.~~June ~~The~~of ~~costs~~2001 seeking ~~incurred~~monetary ~~were~~damages ~~directly~~ related to the ~~revenues~~ ~~earned~~non-use ~~from~~of the ~~third~~Company’s ~~party~~reservation center ~~construction~~as ~~contracts~~agreed. inIn ~~progress~~June inof ~~2001~~2002, the Arbitrator ruled that Prime’s material ~~compared~~breach ~~with~~of contract caused the ~~third~~Company ~~party~~to ~~construction~~lose ~~contracts~~$8.9 million in ~~progress~~anticipated profit inunder ~~2000,~~the ~~two~~ terms of ~~which~~the ~~were~~agreement, ~~still~~and inaccordingly ~~progress~~awarded atthe ~~year-end~~Company its ~~2000~~full ~~and~~damages ~~two~~ of ~~which~~$8.9 million. ~~were~~Prime ~~still~~paid ~~in progress~~the ataward ~~year-end~~to ~~2001~~the Company on August 1, 2002.

~~Rent~~ A ~~expense~~zero ~~decreased~~effective bytax ~~$9.8 million,~~rate orfor ~~94.4%,~~2003 inis ~~2001~~due ~~from~~to ~~2000.~~utilization ~~The~~of net operating ~~decrease~~loss ~~was~~carryforwards ~~due~~that tohad ~~(1) the~~a ~~Company’s~~full ~~sale~~valuation reserve; however, the tax benefit of ~~its~~$2.3 million ~~leasehold~~is ~~interest~~primarily indue 24to ~~of its~~additional ~~Sumner~~taxes ~~Suites~~receivable ~~hotels~~recorded onfrom an ~~July 9,~~amendment ~~2000,~~of ~~which~~income ~~had~~tax ~~previously~~returns ~~been~~for ~~sold~~taxes ~~and leased~~previously ~~back,~~paid.

- Discontinued 21operations resulted from the sale of one hotel in the second quarter of 2002, the sale of one and transfer of five hotels in the fourth quarter of 2002, the reclassification of five hotels to assets of hotels held for sale in the first quarter of 2003 (of which four have been sold), the acquisition of one hotel in the second quarter of 2003 with the intention to resell it, the sale of one hotel in the fourth quarter of 2003, and the reclassification of two hotels to assets of hotels held for sale in the fourth quarter of 2003 which are expected to be sold in the first half of 2004. The effects of these 16 hotels’ operations, the gain or loss on the sale and transfer of the hotels, and the impairment of the hotels classified as held for sale and assets of hotels transferred, have been removed from operating earnings in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

~~Table~~For ofthe ~~Contents~~Fiscal Years Ended December 29, 2002 and December 30, 2001

~~(2)~~ For the ~~lease~~fiscal ofyear ~~another~~ended ~~Sumner Suites hotel on July~~December 929, ~~2000~~2002, tototal ~~a tenant~~revenues ~~who assumed a land lease on that hotel, and (3) the sale of a Shoney’s~~decreased ~~Inn~~43.8% into ~~June, 2000, on which the purchaser assumed the existing land lease~~$19.8 million ~~As of~~from ~~December~~$35.1 ~~30,~~million ~~2001,~~for the ~~Company~~fiscal ~~was~~year ~~obligated~~ended ~~on only one hotel lease; in~~December ~~2001~~30, ~~rent expense on this lease was $582,000~~2001.

~~General~~ The Company owned and ~~administrative~~operated ~~expenses~~two hotel brands (Shoney’s Inns and GuestHouse) beginning in the second quarter of fiscal 2002, and Shoney’s Inns during 2001 and the first quarter of 2002. The Company owned and operated one AmeriSuites hotel throughout most of 2002. Revenues from hotel operations in fiscal 2002 increased by 8.8% to $~~849,000,~~2.2 million orfrom 17$2.0% million for fiscal year 2001. For the one hotel opened for all of both years (same hotel), ~~from~~average ~~2000~~daily room rates in 2002 increased 6.8% to ~~2001~~$56.34 ~~The~~from ~~increase~~$52.74 ~~was~~in ~~due~~2001, ~~primarily~~and average occupancy rates decreased from 70.5% in 2001 to ~~increased~~64.6% ~~insurance~~in ~~costs~~2002, ~~professional~~resulting ~~fees~~in a decrease in same hotel revenues per available room (RevPAR) of 2.2%, ~~and~~from ~~travel~~$37.17 ~~expenses~~in 2001 to $36.37 in 2002. RevPAR for all Company-owned Shoney’s Inns

Depreciation and amortization expenses decreased by $1.1 million, or 24.6%, 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~~22 ~~in October of 2001. One new hotel was under~~- ~~construction at the end of the year.~~

TheTable 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. Contents

~~The~~/ ~~gains~~GuestHouse increased by 11.4% in 2002 from ~~early~~2001, ~~extinguishments~~from of$32.66 ~~debt~~to $36.37. The increases in ~~2001~~the ~~and~~Shoney’s ~~2000~~Inns / GuestHouse RevPAR were ~~the~~due ~~result~~primarily to the sale of two of the ~~repurchase~~hotels in June of $32001 which had lower RevPAR than the one remaining hotel.~~4 million~~ ~~and~~The remaining (non-same) hotels contributed $~~29.8 million~~854,000 ~~respectively~~to hotel revenues in 2002 compared with $638,000 ofin 2001. ~~the~~The ~~Company’s~~$854,000 ~~previously~~revenues ~~issued~~from ~~subordinated~~non-same ~~debt~~(AmeriSuites) athotels ain ~~discount~~2002 were from ~~face~~one ~~value,~~AmeriSuites ~~net~~hotel which the Company operated for most of the ~~write~~year and continues to operate currently. The $638,000 revenues from non-~~off~~same ofhotels ~~related~~in ~~unamortized~~2001 ~~deferred~~were from ~~financing~~two ~~costs~~Shoney’s Inns which were sold in the second quarter of 2001.

~~Interest~~ Franchising, ~~expense~~reservation ~~decreased~~and bymanagement ~~$2.0 million,~~revenues ~~while~~in ~~interest~~fiscal ~~income decreased~~2002 increased by ~~$21,000~~53.2% from ~~2000 to~~ 2001, ~~for~~to a$6.1 million ~~total~~in ~~decrease~~2002 offrom $24.0 million in ~~net~~ ~~interest expense~~2001. ~~The decrease in interest expense resulted primarily from~~In ~~interest~~fiscal ~~expense~~2002 ~~reductions~~and ~~from~~2001, ~~the~~initial ~~extinguishments~~franchise ofand ~~debt~~franchise ~~from~~termination ~~the~~fees totaled ~~repurchase~~$185,000 ofand $45314,000, respectively.~~8 million~~ ofThe ~~the~~remaining ~~Company’s~~franchising, ~~outstanding~~management ~~subordinated~~and ~~debt~~reservation inrevenues ~~the~~increased ~~open~~by ~~market and in privately negotiated transactions beginning October~~$2.2 1million, ~~1999~~ ~~and~~or ~~continuing~~61.3%, ~~through~~from 2001, ofto ~~which~~2002, ~~$33.2 million~~including ofan ~~these~~increase ~~extinguishments occurred~~ in ~~2000~~royalty ~~and~~fee ~~2001.~~revenues ~~Additional~~of ~~debt reductions~~$369, ~~including~~000, a ~~pay~~decrease ~~down~~in ofmanagement ~~$7.5 million~~fees of ~~the~~$946,000, and ~~Company’s~~an ~~outstanding~~increase ~~debt~~in ~~using~~reservation ~~a portion~~fee revenues of ~~the~~ $382.48 million. ~~gross~~At ~~proceeds from~~ the ~~sale-leaseback~~end of ~~four~~ ~~hotels~~fiscal in2002 ~~May~~there ofwere ~~2000,~~112 ~~further~~franchised ~~reduced~~Shoney’s ~~interest~~Inns ~~expense.~~/ ~~Partially~~GuestHouse ~~offsetting these reductions~~ in ~~interest~~operation compared ~~expense~~with ~~was~~58 ~~interest~~at ~~incurred to~~ the ~~Internal Revenue~~end ~~Service~~of ~~due~~fiscal to2001; athis ~~tax~~increase ~~payment~~was ~~deficiency~~due ~~for~~primarily ~~1997, assessed based upon~~to ~~an audit by~~ the ~~Service~~acquisition ~~(see~~of ~~Footnote~~GuestHouse 9International toFranchise ~~the~~Systems, ~~consolidated~~Inc. ~~financial~~on May 2, ~~statements)~~2002. ~~The~~Reservation ~~decrease~~fee inrevenues ~~interest~~increased ~~income~~dramatically ~~in 2001 from 2000 was~~ due ~~primarily~~ to the ~~net~~addition ~~effect~~ of ~~a reduction in the interest rate on 15 mortgage~~ ~~notes~~GuestHouse ~~receivable~~ in mid-~~2001,~~2002 and anadditional ~~increase~~significant incontracts ~~interest~~with ~~earned~~other ~~on mortgage~~lodging ~~notes~~chains ~~receivable from the seller-financed portion of the proceeds of the sale of one hotel in June 2000~~ and ~~two~~independent ~~hotels~~lodging ~~in April 2001~~facilities.

Revenues from construction and development activities in 2002 were $9.9 million compared with $27.5 million in fiscal 2001. The 2002 revenues earned were primarily from various construction contracts being performed for third parties of which several non-hotel 22projects for related parties were still in progress at year-end 2002, while 2001 revenues earned were from four hotel construction contracts being performed for third parties, two of which were still in progress at year-end 2001. Revenues from construction and development activities earned from related parties in 2002 totaled $5.7 million of the total of $9.9 million earned in 2002. Revenues from construction and development can vary widely from period to period depending upon the volume of outside contract work and the timing of those projects. The events of September 11, 2001, have had a significantly negative impact on the Company’s construction and development opportunities.

~~Table~~ Rent revenue was $1.4 million in 2002 and $1.5 million in 2001. Other income decreased by $50,000 in 2002 from 2001. Other income can vary widely from period to period due to the nature of ~~Contents~~this income and its varied sources.

~~The~~ Hotel ~~Company’s~~operating ~~effective~~expenses ~~tax~~for ~~rate~~fiscal of2002 36increased by $193,000, or 15.14%, to ~~for~~$1.4 million ~~the~~from ~~year~~$1.2 million ~~ended~~in ~~December 30,~~ 2001. ~~differed~~Hotel ~~from~~operating expenses on the non-same ~~federal~~hotel ~~statutory~~operated ~~rate~~in ~~primarily~~2002 aswere a$620,000 ~~result~~in of2002. ~~interest~~Hotel operating expenses on ~~deferred~~the ~~gains~~two ~~and~~non-same ahotels ~~reduction~~sold ~~due~~in toearly ~~previously~~2001 ~~accrued~~were ~~income~~$498,000 ~~taxes~~in 2001. Hotel ~~This~~operating expenses on the one same-hotel increased by $71,000, or 9.5%, to $~~451~~823,000 ~~reduction~~in 2002 from $752,000 in 2001. ~~income~~The ~~taxes~~operating ~~resulted~~expenses ~~from~~as a percentage ~~settlement~~of ~~with~~operating ~~taxing authorities~~revenues onfor ~~amounts~~this ~~previously~~activity ~~provided~~increased ~~for~~from ~~disputes~~63.0% onin ~~the~~2001 to ~~1997~~66.8% ~~tax~~in ~~year~~2002. ~~The~~ ~~Company’s~~Operating ~~effective~~expenses ~~tax~~as ~~rate~~a percentage of operating revenues on the one same-hotel increased from 55.58% ~~for~~to ~~the~~63.0% ~~year~~from ~~ended~~2001 ~~December 31,~~to ~~2000~~2002. Hotel ~~differed~~operating ~~from~~expenses on the ~~federal~~same-hotel ~~statutory~~were ~~rate~~not ~~primarily~~reduced as amuch ~~result~~as ofthe ~~interest~~decline onin ~~deferred~~hotel ~~gains~~revenues and maintenance and repair costs increased significantly in 2002 over 2001, thus reducing gross operating profit margin on this hotel.

~~Critical~~- ~~Accounting~~23 ~~Policies and Practices~~-

TheTable 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. Contents

~~Impairment~~ Franchising, ofreservation ~~Long-Lived~~and ~~Assets:~~management ~~The~~operating ~~Company~~expenses ~~records~~increased ~~impairment losses on~~by ~~long-lived~~$2.1 million, ~~assets~~or ~~used~~95.1%, infrom ~~operations~~2001 ~~and finite-lived intangibles when indicators of impairment are present and the undiscounted cash flows related~~ to ~~those~~ ~~assets are less than their carrying amounts~~2002. ~~The~~This ~~Company~~was ~~records impairment~~due ~~losses~~to ~~on long-lived assets under development or held for sale when~~increased ~~indications~~reservation ofexpenses, ~~impairment~~principally ~~are~~payroll ~~present~~ and ~~the~~payroll-related, ~~estimated fair value less costs~~ to ~~sell~~support ~~is less than~~ the ~~carrying amount. The Company’s impairment review~~ ~~process~~increased ~~relies~~reservation onrevenues ~~management’s~~earned ~~judgment~~and ~~regarding~~increased ~~the~~franchise ~~indicators~~activity ofdue ~~impairment, the remaining lives of assets used~~ to ~~generate assets’ undiscounted cash flows,~~ ~~and~~ the ~~fair~~acquisition ~~value~~ of ~~assets at a particular point in time. Under different assumptions or conditions,~~ the ~~asset~~GuestHouse ~~impairment~~franchising ~~analysis may yield a different result, which would alter the gain or loss on the eventual disposition of the asset~~rights.

~~Collectibility~~ Construction ~~of Accounts~~ and ~~Notes~~development ~~Receivable:~~costs ~~The~~in ~~Company~~2002 ~~continuously monitors~~were ~~collections~~$12.1 million ~~from its customers and debtors under notes receivable and~~compared ~~maintains~~with ~~allowances~~$25.7 million ~~for~~in ~~doubtful accounts based upon historical experience and any specific customer collection issues that are identified~~2001. ~~While~~The ~~such~~costs ~~credit losses~~incurred ~~have~~were ~~historically~~directly ~~been~~related ~~within~~to the ~~Company’s expectations, there can be~~ norevenues ~~assurance~~earned ~~that~~from the ~~historical~~third ~~experience~~party ~~will~~construction ~~continue~~contracts atin ~~the~~progress ~~same level~~ in ~~the~~2002, ~~future.~~including ~~Notes~~contracts ~~receivable~~with ~~are~~related ~~generally~~parties, ~~secured~~compared bywith ~~first~~the ~~mortgages~~third ~~on the~~party ~~underlying~~construction ~~assets.~~contracts ~~The~~in ~~majority~~progress ofin ~~these~~2001. ~~are~~The ~~from~~Company awas ~~group~~unable ofto ~~companies that~~reduce ~~are~~its ~~affiliated~~construction ~~with~~and ~~one~~development ~~another,~~overhead ~~creating~~expenses ~~a concentration of credit risk. The Company determined~~ in ~~the fourth quarter of~~ 2002 ~~that~~in ~~the~~relation ~~fair~~to ~~values of the~~its ~~underlying~~significant ~~assets~~decrease ~~were~~in ~~less~~construction ~~than the balances of the first mortgage notes~~ and ~~that~~ ~~the~~development ~~notes~~revenues ~~receivable~~from ~~were under-collateralized~~2001. ~~The Company, accordingly,~~ ~~recorded a write-down of $21.2 million as previously discussed.~~

- Rent 23expense -increased by $2,000, or 0.3%, in 2002 from 2001. As of December 29, 2002, and December 30, 2001, the Company was obligated on only one hotel lease.

~~Table~~ General and administrative expenses increased by $2.1 million, or 36.2%, from 2001 to 2002. The increase was due primarily to increased insurance costs, professional fees and litigation expenses. The increase in professional fees was due primarily to legal fees incurred in the arbitration proceeding against Prime (see discussion of ~~Contents~~arbitration award below), a litigation settlement of $625,000, and state tax planning services for recovery of taxes paid.

~~Percentage~~ Depreciation ~~of Completion Accounting for Construction Contracts: Construction~~ and ~~development~~amortization ~~revenues~~expenses ~~earned~~decreased onby ~~fixed~~$73,000, ~~price~~or ~~contracts are recognized based upon the percentage of completion method~~4.4%, ~~measured by the~~from ~~percentage~~2001 ~~of cost incurred~~ to ~~total estimated cost for each contract~~2002. The ~~total~~ ~~estimated~~Company ~~cost~~sold oftwo ~~each~~hotels ~~contract~~in ~~involves~~April ~~the use~~ of ~~various estimating techniques to project costs of completion~~2001. ~~These~~A ~~percentage~~reduction of ~~completion and~~ ~~cost~~$421,000 ~~estimates~~was ~~involve~~due ~~various assumptions and projections relative~~ to the ~~outcome~~ adoption of ~~future~~Statement ~~events, such as price and timing~~ of ~~construction~~Financial ~~materials, labor~~Accounting ~~costs~~Standard No. 142, ~~and~~Goodwill ~~overhead costs. The Company reevaluates its contract cost estimates periodically~~ and ~~reflects~~Other ~~changes~~Intangible inAssets ~~estimates~~effective inwith the ~~current~~2002 ~~and~~fiscal ~~future periods~~year.

~~Profit~~ The ~~Recognition~~Company onhas ~~Sale~~incurred ~~Transactions:~~development Ascosts ~~prescribed~~related byto ~~Financial Accounting~~several ~~Standards~~sites ~~Board~~upon which ~~(“FASB”)~~hotel ~~Statement~~development ~~No. 66, Accounting~~ for ~~Sales~~third ~~of Real~~parties ~~Estate,~~was ~~profit~~planned. ~~from~~Due to the ~~sale~~failure of ~~land and hotel properties is recognized at~~ ~~the~~an ~~time~~upturn ~~the~~in ~~sale is consummated,~~ the ~~minimum~~hotel ~~down~~development ~~payment~~industry isin ~~received~~2002, ~~and there~~as ishad nobeen ~~significant continuing involvement. When the sale involves a~~previously ~~leaseback~~anticipated, ~~and~~these ~~otherwise~~previously ~~qualifies~~capitalized ~~for~~development ~~sale-leaseback~~costs ~~accounting,~~were ascharged ~~defined by~~off ~~FASB~~since ~~Statement~~they ~~No. 98,~~did ~~Accounting~~not ~~for~~improve ~~Leases,~~ the ~~profit~~value isof ~~then~~the ~~accounted~~land ~~for in~~upon ~~accordance~~which ~~with~~they ~~FASB~~were ~~Statements No~~incurred. ~~13, Accounting for Leases and No. 28,~~ ~~Accounting~~The ~~for~~impact ~~Sales~~of ~~with~~these ~~Leasebacks,~~development ~~which~~cost ~~generally~~charge-offs ~~require~~was ~~deferral~~approximately ~~and~~$1.9 ~~amortization~~million ofin ~~profits ratably over the related lease terms~~2002.

~~Nonmonetary~~ Additionally, ~~Transactions: The Company accounts for nonmonetary transactions involving its hotels~~ in ~~accordance~~2002 ~~with~~approximately ~~Accounting Principles Board (“APB”) Opinion No~~$3.0 ~~29,~~million ~~Accounting~~of ~~for~~contracts ~~Nonmonetary Transactions, FASB~~receivable ~~Statement~~on ~~No. 141,~~two ~~Business~~third ~~Combinations,~~party ~~and~~construction ~~Emerging~~contracts ~~Issues~~were ~~Task~~written ~~Force (“EITF”)~~off ~~Issues~~as Nouncollectible. ~~98-3, Determining Whether a Nonmonetary Transaction Involves~~ ~~Receipt~~One of ~~Productive~~the ~~Assets~~contracts orreceivable awas ~~Business~~for ~~and~~approximately No$2.0 ~~01-2~~million, ~~Interpretations~~and ofthe ~~APB~~Company ~~Opinion~~received ~~No. 29.~~an Ifarbitration ~~the~~award ~~hotel~~for ~~received~~substantially inall aof ~~nonmonetary~~its ~~exchange~~claim, ~~of hotels~~but ~~meets~~ the ~~definition~~owner of athe ~~business,~~hotel itfiled isChapter 11 ~~accounted~~bankruptcy ~~for~~on asJanuary 3, a2003 ~~purchase at fair~~(See ~~value.~~further Ifdiscussion ~~the~~above ~~hotel~~for ~~received~~2003 ~~does~~compared ~~not~~with ~~meet~~2002). ~~the~~The ~~definition~~other ~~of a business, the~~contract ~~guidance~~receivable ofis ~~APB~~for Noapproximately $1.0 29million, asand ~~interpreted~~arbitration byproceedings ~~EITF~~were initiated ~~01-2~~on January 15, is2003; ~~followed. Under~~ the ~~general~~ ~~guidelines~~owner of ~~APB~~the ~~No. 29,~~hotel anclaims ~~exchange~~damages ofin ~~nonmonetary assets is~~excess ~~accounted~~of ~~for~~the atamount ~~fair~~owed. ~~value,~~Any ~~unless~~recovery ~~the~~from ~~assets~~these ~~are~~two ~~“similar”~~contracts ~~and~~will ~~the~~be ~~other~~recorded as ~~conditions~~earned ofwhen ~~APB No~~received. 29 ~~and~~Various ~~EITF~~other ~~01-2~~construction ~~are~~contracts ~~met,~~receivable ~~whereby the transaction is~~totaling ~~accounted~~approximately ~~for~~$600,000 atwere ~~historical~~also ~~cost,~~written ~~resulting~~off in ~~no gain recognition~~2002.

~~Income~~ Unsecured ~~Taxes:~~accounts ~~The~~receivable ~~Company~~from ~~uses~~ the ~~liability~~15 ~~method~~hotels tosecuring ~~account for income taxes. The preparation of consolidated financial statements involves estimating~~ the ~~Company’s~~15 ~~current tax exposure together with assessing temporary~~first ~~differences~~mortgage ~~resulting~~notes ~~from~~discussed ~~differing~~below ~~treatment~~and ofvarious ~~items~~other ~~for~~accounts ~~tax~~receivable ~~and accounting~~were ~~purposes.~~written ~~These~~off ~~differences~~as ~~result~~uncollectible in ~~deferred tax assets and liabilities, which are included within~~ the ~~consolidated~~amount ~~balance sheet. An assessment~~ of ~~the recoverability~~approximately of$1.3 million ~~the deferred tax assets is made, and a valuation allowance~~in ~~may be established based upon this assessment~~2002.

~~Liquidity~~- ~~and~~24 ~~Capital Resources~~-

The Company’sTable cash flows used in operating activities were $8.7 million in 2002, compared with cash flows provided by operating activities of $8.0 million in 2001 and cash flows used in operating activities of $1.1 million in 2000. Losses from continuing operations were $24.7 million in 2002, while earnings from continuing Contents

- The 24Company -sold its interests in 27 Sumner Suites hotels in 2000 to Prime Hospitality Corp., who subsequently converted all of them to their AmeriSuites hotel brand. The Company continued to hold the “Sumner Suites” trademark with the possibility of using it to brand future hotels it might develop or acquire. In the second quarter of 2002, management made the decision to abandon the trademark since the use of the name by the Company in the future is highly unlikely. Consequently, the remaining balance of $376,000 for the Sumner Suites trademark was written off in the second quarter. The Company carried intangible assets (deferred charges and goodwill) related to the acquisition and modifications of the franchising rights for Shoney’s Inns and Shoney’s Inns & Suites at $6.4 million. The Company has been unsuccessful in its efforts to sell new franchises for at least a year, and existing franchisees have exited the Shoney’s Inn system for the past several years. In the second quarter of 2002, the Company acquired the exclusive franchising rights for the GuestHouse International Inns & Suites brand. The Company has decided to convert all existing Shoney’s Inns to the GuestHouse brand and to franchise only the GuestHouse brand in the future. No more attempts will be made to franchise the Shoney’s Inn brand. As a result, the value of the Shoney’s Inn franchising rights and related goodwill has been determined to be worthless. Consequently, the balance of $6.4 million was written off in the second quarter of 2002.

~~Table~~ The Company held 18 first mortgage notes receivable totaling $67.8 million resulting from the sale of ~~Contents~~hotels in 1998, 2000 and 2001, providing seller financing for a portion of the selling price at the time of the sale. The owners of 15 of the properties were affiliated with each other. The 15 mortgage notes were cross-collateralized and cross-defaulted and matured July 30, 2003. Even though all first mortgage payments on these 15 hotels were timely received through the end of 2002, the common owner notified the Company that it was unlikely that it would be able to refinance the properties by the notes’ maturity dates. The Company did not desire to extend the maturity dates and, therefore, anticipated that it would be necessary to resume title to the properties. The owner of the properties agreed in late December of 2002 to transfer the hotels back to the Company by deeds in lieu of foreclosure. In anticipation of this, the Company began midway through the fourth quarter to find cash purchasers of the properties in the event the Company re-acquired ownership. Offers received were disappointing, but the Company did not desire to take back ownership and operate the properties. Therefore, it was likely to sell the properties at values significantly below the balances of the notes receivable and as of December 29, 2002, wrote down the notes receivable to the estimated net selling price of the properties. The Company was negotiating with the common owner of the other three hotels secured by first mortgage notes receivable held by the Company, and had agreed to discount the notes in order to accelerate payment by its refinancing of at least two of the hotels. The Company wrote these notes down to their estimated collectible balances as of December 29, 2002. The total write-downs of all 18 notes receivable at the end of the Company’s 2002 fiscal year were $21.2 million.

~~operations~~ The ~~were~~Company ~~$1.4 million~~tested inits ~~2001~~real ~~and~~estate ~~$978,000~~owned inas ~~2000. Depreciation~~of ~~and amortization was $3.3~~December ~~million~~29, ~~$3.4 million, and $4.5 million in~~ 2002, ~~2001, and 2000, respectively, the declines in 2001 and 2002 being the~~for ~~result~~impairment ~~of the sale of properties~~ in ~~excess~~accordance ofwith ~~new~~SFAS ~~properties being opened during these years~~No. ~~The Company recognized $628,000, $3.8~~ ~~million, and $4~~144.~~9 million~~ ~~from gains on sale of property during 2002, 2001 and 2000, respectively.~~ The ~~gain of $3.8 million in 2001 included $3.6 million from the~~ Company’s ~~sale of one hotel and three restaurants. Another hotel was~~ sold ~~in 2001,~~a ~~but~~parcel ~~the gain was deferred and is being recognized under the installment~~of ~~method~~undeveloped ofland ~~accounting~~which ~~until~~it ~~full~~owned ~~accrual~~in ~~accounting~~early is2003 ~~warranted.~~at ~~Approximately $175,000~~net ofproceeds ~~the gain on the sale~~ of ~~two~~less ofthan the ~~restaurants was also deferred~~ ~~and~~carrying isvalue ~~being~~at ~~recognized under~~ the ~~installment~~end ~~method~~ of ~~accounting~~2002. The ~~$4.9 million~~carrying ~~gain~~value ~~on sale~~ of ~~property~~this inland ~~2000~~parcel ~~represented $4.4 million from the sale~~was ofwritten ~~the~~down ~~Company’s interest~~ in 252002 ~~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~~net byproceeds ~~the~~subsequently ~~Company of its outstanding public debt at a discount from face value. Decreases in accounts payable and accrued expenses used $3.5 million cash in 2002 and $5.4 million in 2000~~realized, ~~respectively,~~thus ~~as compared with~~reporting ~~cash provided of $6.7 million in 2001. A decrease in trade receivables of $162,000 and $2.2 million in 2002 and 2000, respectively, provided cash compared with~~ an ~~increase~~impairment inloss ~~trade receivables using cash~~ of $~~926~~77,000 inon ~~2001.~~this ~~The changes in trade receivables 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~~parcel.

The ~~Company’s~~ ~~cash~~gain ~~flows~~recognized ~~provided~~on ~~by investing activities were $3.9 million in 2002 and $28.6 million in 2000 in contrast to $4.7 million used in investing activities in 2001. Proceeds from~~ the sale of property ~~and leasehold interests were $6.4 million, $2.9 million, and $53.5 million~~ in 2002, 2001, and 2000, respectively. These amounts in 2000 include the net proceeds from the sale/leaseback of four hotels in 2000. In addition to the sale/leaseback transaction in 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~~677,000~~. In~~ ~~2001, three restaurants and two hotels were sold for a combination of cash~~compared ~~and seller-financed notes, resulting in cash proceeds of $2.9 million. The~~with ~~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 $3.9 million, $20.9 million, and $8.8 million in 2002, 2001, and 2000, respectively. As of the end of 2002, no hotels were under construction. The Company sold all of its available-for-sale securities in 2002 for $428,000, and invested $1.8 million in the acquisition of GuestHouse International Franchise Systems, Inc. and two hotel exchange transactions.

~~Net~~- ~~cash provided by financing activities was $3.7 million in 2002, compared with $6.0 million and $~~25~~.5 million~~ ~~used in financing activities in~~- 2001 and 2000, respectively. In 1999, the Company adopted a plan to repurchase up to $12.5 million of the Company’s outstanding common stock. In July of 1999 the Company increased the authorized amount to repurchase an additional $7.5 million of common stock pursuant to the plan, increasing the total amount authorized to $20.0 million. In 2000, 238,000 shares were repurchased for $1.2 million. In November of 2001 the Company increased the authorized amount to repurchase an additional $3.0 million of common stock pursuant to the plan, increasing the total amount authorized to $23.0 million. In 2002, 25,000 shares were repurchased for $148,000, and in 2001, 457,000 shares were repurchased for $1.9 million. In the second quarter of 1999 the Company announced its plan to use up to $12.0 million of its Company funds to repurchase a portion of its $54.0 million outstanding convertible subordinated debentures. In the third quarter of 2000 the

-Table 25of - Contents

~~Table~~$3.8 million in 2001. The net gain recognized in 2002 included gains of $447,000 ~~Contents~~on the sale of two restaurants to the operator/lessees, and gains of $395,000 on the sale of excess land, partially offset by a loss of $232,000 due to costs incurred on the disposal of two hotels. Other miscellaneous gains on sales of properties recognized in 2002 totaled $67,000, including gains deferred from previous years being recognized under the installment method of accounting. The gain of $3.8 million in 2001 included $3.6 million from the Company’s sale of one hotel and three restaurants. Another hotel was sold in 2001, but the gain was deferred and is being recognized under the installment method of accounting until full accrual accounting is warranted. Approximately $175,000 of the gain on the sale of two of the restaurants was also deferred and is being recognized under the installment method of accounting, including approximately $15,000 recognized in 2002.

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 $1.6 million of this debt was repurchased for $1.2 million in 2002 and $3.4 million of this debt was repurchased for $2.3 million in 2001. In the third quarter of ~~1999~~2002, the Company ~~announced~~sold ~~its~~all ~~plan to use up to $15 million~~ of its ~~Company funds to repurchase a portion of its outstanding~~ ~~$67.7 million~~available-for-sale ~~senior subordinated notes. In 2000~~securities, ~~the~~recognizing ~~Company repurchased $8.8 million of these debt securities at~~ a ~~cost~~gain of $6315,000.~~2 million.~~

~~The~~ Pursuant ~~Company~~to ~~established~~ a ~~three-year~~plan ~~credit~~adopted ~~facility~~in ~~with a financial institution effective August 27,~~ 1999. Anto ~~amendment~~repurchase toa ~~the~~portion ~~credit~~of ~~facility~~the ~~became~~Company’s ~~effective~~outstanding ~~October 3,~~subordinated ~~2001,~~indebtedness ~~which,~~in ~~among~~the ~~other~~open ~~changes,~~market ~~extended~~and ~~the~~in ~~maturity~~negotiated ~~to September 30~~transactions, ~~2004. A second amendment to~~ the ~~credit~~Company ~~facility became~~repurchased ~~effective November~~$1.6 ~~26,~~million ~~2002, which, among other changes, added real property collateral for the purpose~~ of ~~increasing~~its ~~the borrowing base~~7. ~~The~~50% ~~credit~~subordinated ~~facility~~debentures isin ~~for~~2002 ~~$30 million~~at (a ~~$10 million term loan and a $20 million revolving line of credit)~~discount, ~~secured~~recognizing by a ~~pledge~~gain of ~~certain promissory notes~~$375,000. ~~payable~~In to2001, the Company ~~received~~repurchased in$3.4 million ~~connection with the sale~~ of 16its ~~of the Company’s lodging facilities in the third quarter of 1998 and real property collateral (one hotel) added in 2002 by the second amendment~~7.50% ~~The borrowing~~subordinated ~~base~~debentures isat ~~the~~a ~~lower~~discount, ofrecognizing (a~~) 85%~~ ofgain ~~the outstanding principal amount~~ of ~~the~~$913,000. ~~pledged notes~~Additionally, ~~(b) 65% of the appraised market value of the underlying real property~~in ~~collateral~~2002, ~~securing~~ the ~~pledged~~Company, ~~notes~~in ~~and~~a ofnegotiated ~~the real property collateral~~transaction, ~~(c) a~~exchanged ~~multiple~~$8.2 million ~~of the trailing twelve months’ net operating income of the real~~face ~~property~~value ~~collateral and~~ of ~~the~~its ~~underlying~~senior ~~properties~~subordinated ~~securing the pledged~~ notes ~~serving~~ aspreviously ~~collateral,~~purchased orfor ~~(d)~~ $~~30 million~~5. ~~Effective October~~ 3 million, ~~2001, the~~ ~~interest~~for ~~rate~~$7.5 million ~~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~~its isoutstanding at7.50% ~~the lender’s~~subordinated ~~base rate plus 250 points~~debentures, ~~with~~ recognizing a ~~floor~~gain of 7$2.~~00% on both portions of the facility~~2 million. The Company isadopted toStatement ~~pay~~of ~~commitment~~Financial ~~fees on the unused portion of~~Accounting ~~the~~Standards ~~facility~~No. 145 at ~~.50% per annum. The credit facility also contains covenants which limit or prohibit~~ the ~~incurring~~beginning of ~~certain~~fiscal ~~additional~~2002. ~~indebtedness~~Accordingly, ingains and ~~excess~~losses offrom ~~a specified~~ debt toextinguishments ~~total~~are ~~capital~~no ~~ratio,~~longer ~~prohibit~~classified ~~additional~~in ~~liens on~~ the ~~collateral,~~statement ~~restrict mergers and the payment~~ of ~~dividends and restrict the~~ ~~Company’s~~earnings ~~ability to place liens on unencumbered assets. The credit facility contains financial covenants~~ as toextraordinary ~~the Company’s minimum net worth~~items. AsSee ~~of December 29, 2002,~~ the ~~Company~~further ~~had~~discussion ~~$21.7 million~~ in ~~borrowings~~“Liquidity ~~outstanding under this credit facility, consisting of the $10 million term loan~~ and ~~$11.7~~ ~~million~~Capital onResources” ~~the revolving line of credit~~below.

~~The~~ Interest ~~Company~~expense ~~also~~in ~~maintains~~2002 aincreased from 2001 by $560,000, or 6.8%, while interest income decreased by $1.03 million, ~~unsecured~~or ~~line~~20.3%. ofThe ~~credit~~increase ~~with~~in interest ~~another~~expense ~~bank,~~was ~~bearing~~due ~~interest~~primarily atto higher levels of borrowing on the ~~lender~~Company’s ~~prime~~bank credit ~~rate,~~facilities ~~maturing~~in ~~May 31~~2002 than in 2001, partially offset by the effects of the ~~2003~~continuing repurchases of the Company’s public debt. AsInterest income increased due to seller financing of ~~December 29~~a portion of the sales price of two Shoney’s Inns sold to franchisees in April of 2001, and one Shoney’s Inn sold in June of 2002, but was more than offset by decreases in the ~~Company~~interest ~~had~~rates ~~$500,000~~charged ~~outstanding~~on other ~~under~~notes ~~this~~receivable due to the general decline in interest rates and the ~~credit~~interest ~~facility~~rate terms of those notes.

The Company ~~also~~had ~~has~~filed aan ~~loan~~arbitration ~~secured~~claim byagainst ~~its~~Prime ~~corporate~~in ~~aircraft~~June ~~with~~of a2001 ~~balance~~seeking ofmonetary ~~$5.8 million~~damages asrelated ofto ~~December 29,~~the ~~2002.~~non-use ~~This~~of ~~loan~~the ~~currently~~Company’s ~~bears~~reservation ~~interest~~center atas 8agreed.~~19%~~ ~~per~~In ~~annum~~June ~~and~~of is2002, ~~amortized~~the toArbitrator ~~its~~ruled ~~maturity~~that ofPrime’s ~~December 29,~~material ~~2010.~~breach ~~The~~of ~~interest~~contract ~~rate~~caused ~~was fixed for~~ the ~~first~~Company ~~five~~to ~~years~~lose ~~ending January~~$8.9 1,million in anticipated ~~2006,~~profit ~~and~~under isthe ~~adjustable~~terms toof athe ~~new~~agreement, ~~rate~~and ~~for~~accordingly awarded the ~~second~~Company its ~~five~~full ~~years~~damages of ~~the~~$8.9 million. ~~10-year term~~Prime ~~equal~~paid tothe ~~325~~award ~~basis~~to ~~points~~the ~~over~~Company ~~5-year~~on August 1, ~~Treasury rates~~2002.

The ~~Company’s~~effective ~~outstanding~~tax ~~7.50%~~rate ~~Convertible~~differs ~~Subordinated~~from ~~Debentures in~~ the ~~face~~ ~~amount~~federal ofand ~~$16.5 million~~state ~~mature~~statutory inrates as ~~May~~a result of ~~2004.~~interest ~~Its~~on ~~outstanding~~deferred ~~Series A Senior~~gains ~~Subordinated~~and ~~Notes in~~ the ~~face~~non-deductibility ~~amount~~ of ~~$26.0 million mature in~~the ~~November~~write-off of ~~2006~~certain ~~and~~intangible ~~its~~assets ~~Series B Notes~~ in ~~the face amount of $19~~2002.~~3 million~~ ~~mature in September of 2007.~~

- Discontinued 26operations -resulted from 16 hotels sold, transferred, and/or

~~Table~~- of26 ~~Contents~~-

UnderTable 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 $3.2 million, $3.1 million, and $2.9 million of these notes were redeemed under this provision on December 1, 2002, December 1, 2001 and December 1, 2000, respectively. Contents

~~The~~reclassified ~~trust indenture applicable~~ to ~~the~~hotels ~~Series A~~held ~~and~~for ~~Series B~~sale ~~senior subordinated~~in ~~notes~~2002 ~~contains~~and a2003. ~~financial~~The ~~covenant~~effect ~~requiring a minimum consolidated net worth~~ of ~~$75.0 million. As of December 29, 2002, the~~these ~~Company~~hotels’s ~~consolidated~~operations ~~net~~and ~~worth was less than~~ the ~~required~~losses ~~amount.~~on ~~This covenant violation, as specified in~~ the ~~indenture,~~sales ~~allows~~and ~~the~~transfer ~~holders~~ of ~~a minimum of 25% of~~ the ~~outstanding~~hotels ~~principal amount of the notes to declare a~~have ~~default.~~been Inremoved ~~the event that a default is declared, the Company, upon receipt of written notice by certified mail~~ from ~~the~~operating ~~trustee,~~earnings ~~has~~and ~~60 days~~ from ~~receipt of notice to cure~~ the ~~default.~~gain Aor ~~minimum~~loss ofon ~~51%~~sale of ~~the outstanding principal~~ ~~amount~~property ofand ~~the~~leasehold ~~notes~~interests ~~outstanding may waive any covenant non-compliance default declared by the 25% or more holders. The Company is~~ in ~~the process~~accordance ofwith ~~completing~~Statement ~~an Exchange Offer and Consent Solicitation (“Exchange Offer”), which is expected to be completed within the 60-day cure period. The terms~~ of ~~the Exchange Offer contain a modification of~~Financial ~~the~~Accounting ~~financial~~Standards ~~covenants reducing the minimum consolidated net worth, which is expected to cure the default, if declared, without any further action~~No. ~~However~~ 144, ~~there~~Accounting ~~can~~for ~~be no assurance that~~ the ~~Exchange~~Impairment ~~Offer~~or ~~will~~Disposal ~~be completed. Because~~ of ~~the covenant violation at December 29, 2002, the Company has~~ ~~classified all of the Series A and Series B senior subordinated notes as a current liability. Additionally, due to cross~~Long-~~default~~Lived provisions in the Company’s convertible subordinated debentures and a loan secured by the Company’s aircraft, these debt instruments have also been classified as current liabilities as of December 29, 2002Assets.

~~The~~Critical ~~total~~Accounting ~~amount~~Policies of debt classified as current liabilities due to the circumstances discussed above was $67.5 million as of December 29, 2002. As of April 4, 2003, the Company had reduced that amount by $2.2 million, including $838,000 of the senior subordinated notes. The Company currently maintains approximately $11.0 million in cash and ~~is currently expecting to collect cash~~Practices ~~proceeds of approximately $40 million within the next~~ ~~60 days from the collection of two notes receivable, the sale of~~ ~~the properties serving as collateral under ten notes receivable, and~~ the sale of three unencumbered properties. See “Fourth Quarter Adjustments” above. Negotiations are currently in progress relative to the sale of an additional twelve hotels, five of which collateralize notes receivable, with net proceeds of approximately $53 million expected. Additionally, the Company anticipates refunds of approximately $8.5 million of previously paid income taxes by mid-2003, and at least three parcels of undeveloped land are expected to be sold in 2003 for approximately $5.6 million. The Company expects to cure any default declared by the senior subordinated note holders within the 60 day cure period, but if not, is confident that it will have sufficient cash available from the above-listed sources and cash from other sources to pay its debt in full in 2003.

- The 27Company 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.

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

~~The~~ Collectibility ~~Company~~of isAccounts ~~evaluating~~and ~~various~~Notes ~~alternatives~~Receivable: toThe ~~maximize~~Company ~~shareholder~~continuously ~~value.~~monitors ~~These~~collections ~~alternatives~~from ~~could~~its ~~include,~~customers ~~without~~and ~~limitation,~~debtors ~~the~~under ~~franchising and~~notes ~~operation~~receivable ofand maintains ~~additional~~allowances ~~GuestHouse~~for ~~Inns~~doubtful &accounts ~~Suites,~~based aupon ~~sale~~historical ofexperience ~~the remaining~~and ~~Company-owned~~any ~~hotels,~~specific ~~negotiating~~customer ~~new~~collection ~~credit~~issues ~~arrangements,~~that ~~developing~~are ~~hotels for~~identified. ~~other~~Notes ~~owners,~~receivable are ~~the~~generally ~~repurchase~~secured ofby ~~additional~~first ~~shares~~mortgages ofon the ~~Company’s~~underlying ~~common~~assets. The ~~stock~~majority orof ~~outstanding~~these ~~debt~~are ~~securities,~~from ora ~~any~~group ~~combination~~ of ~~these~~companies orthat ~~other strategies,~~are ~~including,~~affiliated aswith ~~announced on January 16~~one another, ~~2003,~~creating ~~the~~a ~~possible~~concentration ~~spin-off~~ of ~~its~~credit ~~reservation services subsidiary (InnLink) to the Company’s shareholders~~risk. The ~~Exchange Offer, if consummated, will allow the~~ Company ~~more~~determined ~~flexibility~~ in ~~purchasing~~the ~~its~~fourth ~~outstanding~~quarter ~~debt~~of ~~and~~2002 ~~common~~that ~~stock.~~the ~~The~~fair ~~Company~~values ~~believes~~of ~~that~~the ~~a combination~~underlying ofassets ~~existing~~were less ~~cash,~~than the ~~liquidation~~balances of ~~notes receivable,~~ the ~~sale~~first ~~of hotel~~mortgage ~~properties~~notes and ~~leasehold~~that ~~rights,~~the ~~net~~notes receivable ~~cash~~were ~~provided~~under-collateralized. byThe ~~operations~~Company, ~~and borrowings under existing credit facilities or mortgage debt~~accordingly, ~~will~~recorded bea ~~sufficient~~write-down toof ~~fund~~$21.2 million ~~its~~in ~~capital~~2002 ~~expenditures, debt repayments~~ and ~~operations~~$881,000 ~~for at~~in ~~least~~2003, ~~the~~as ~~next twelve months~~previously discussed.

~~Recently~~ Percentage ~~Issued~~of Completion Accounting ~~Pronouncements~~for Construction Contracts: Construction and

In- ~~June 2001,~~27 ~~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 was effective January 1, 2002. Under the new rules in SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized effective January 1, 2002, but are subject to annual impairment tests. Other intangible assets continue to be amortized over their useful lives.

TheTable Company has applied the new rules on accounting for goodwill and intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of SFAS No. 142 resulted in an increase in net income of approximately $261,000 ($0.05 per share) per year. A reconciliation of previously reported net income to the pro forma amounts adjusted for the exclusion of goodwill and indefinite lived intangible assets amortization, net of income tax effect, follows (in thousands of dollars): Contents

		Fiscal Year Ended
		Dec. 29,			Dec. 30,		Dec. 31,
		2002			2001		2000
Reported net (loss) earnings		$	(28,248	)	$	912	$	578
	Add: Goodwill and indefinite lived assets amortization, net of tax		—			261		261
	Pro forma adjusted net earnings	$	(28,248	)	$	1,173	$	839

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.

~~During~~ Profit ~~2002,~~Recognition ~~the~~on ~~Company~~Sale ~~performed~~Transactions: ~~the~~As ~~first~~prescribed ofby ~~the~~Financial Accounting ~~required~~Standards ~~impairment~~Board ~~tests~~ (“FASB”) Statement No. 66, Accounting for Sales of Real ~~goodwill~~Estate, ~~and~~profit ~~indefinite~~from ~~lived~~the ~~intangible~~sale ~~assets~~of land and ~~has~~hotel ~~recorded~~properties ~~the~~is ~~effect~~recognized at ofthe ~~these~~time ~~tests~~the insale ~~2002.~~is ~~The~~consummated, ~~Company~~the ~~wrote~~minimum ~~off~~down ~~$6.4 million~~payment ofis ~~goodwill~~received, and ~~intangible~~there ~~assets~~is ~~relating~~no tosignificant continuing involvement. When the ~~Shoney’s~~sale ~~Inns~~involves ~~concept~~a leaseback, ~~due~~and tootherwise ~~the~~qualifies ~~acquisition~~for sale-leaseback accounting, as defined by ofFASB ~~GuestHouse~~Statement ~~International~~No. 98, inAccounting for Leases, the ~~second~~profit ~~quarter~~is ofthen ~~2002~~accounted ~~and~~for in ~~the~~accordance ~~decision~~with toFASB Statements No. 13, Accounting for Leases and No. 28, ~~convert~~Accounting ~~all~~for ~~Shoney’s~~Sales ~~Inns~~with toLeasebacks, ~~the~~which ~~GuestHouse~~generally ~~brand~~require asdeferral ~~soon~~and amortization aof ~~practical~~profits ratably over the related lease terms.

Nonmonetary Transactions: The Company accounts for nonmonetary transactions involving its hotels in accordance with Accounting Principles Board (“APB”)Opinion No. 29, Accounting for Nonmonetary Transactions, FASB Statement No. 141, Business Combinations, and Emerging Issues Task Force (“EITF”)Issues No. 98-3, 28Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or a Business and 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.

~~Table~~ Income Taxes: The Company uses the liability method to account for income taxes. The preparation of ~~Contents~~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.

InLiquidity 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~~Capital ~~Assets to be Disposed Of, (“SFAS No. 121”), and the accounting and~~Resources ~~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.

In The Company’s ~~April 2002,~~cash ~~the~~flows ~~FASB~~used ~~issued~~in ~~SFAS~~operating ~~No. 145,~~activities ~~Rescission~~were ~~of FASB Statements No~~$12.8 4,million in 442003, ~~and~~compared ~~64,~~with ~~Amendment~~cash offlows ~~FASB~~used ~~Statement~~in ~~No. 13,~~operating ~~and~~activities ~~Technical Corrections.~~of ~~SFAS No~~$8.7 ~~145 rescinds Statement 4, which required all gains and~~million ~~losses~~in ~~from~~2002 ~~extinguishment of debt to be aggregated~~ and, ifcash ~~material, classified~~flows asprovided anby ~~extraordinary~~operating ~~item,~~activities ~~net~~ of ~~related income tax effect~~$8.0 million ~~Since~~in ~~the~~2001. ~~issuance~~Earnings offrom ~~Statement~~continuing 4,operations ~~the~~were ~~use~~$1.8 million ofin ~~debt~~2003 ~~extinguishment has become part of~~and ~~the~~$426,000 ~~risk~~in ~~management~~2001, ~~strategy~~while oflosses ~~many~~from ~~companies,~~continuing ~~including~~operations ~~the~~were ~~Company~~$25.0 million ~~These~~in ~~debt~~2002. ~~extinguishments~~Depreciation ~~will~~and ~~not~~amortization bewas ~~classified as extraordinary after the adoption of SFAS No~~$1.7 ~~145.~~million, ~~Adoption of SFAS No~~$1.6 ~~145~~million, isand ~~required for fiscal years~~$1.6 ~~beginning~~million ~~after~~in ~~May 15~~2003, 2002, ~~but~~and ~~earlier~~2001, ~~application is encouraged~~respectively. The Company ~~elected~~recognized to$1.3 million, ~~adopt~~$677,000, ~~the~~and ~~provisions of SFAS No~~$3.8 ~~145~~million atfrom ~~the beginning of fiscal 2002. The~~ gains on ~~extinguishment~~sale of ~~debt for all periods~~ ~~presented, previously classified as an extraordinary item in prior periods,~~ ~~have been reclassified to conform with the provisions of Statement 145.~~

~~SFAS No. 148, Accounting for Stock~~-~~Based~~ ~~Compensation-Transition~~28 ~~and Disclosure, issued in December 2002, which amends SFAS No. 123, Accounting for Stock~~-~~Based Compensation, provides an alternative method of transition for a~~ voluntary change to the fair value-based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition provisions of SFAS No. 148 are effective for financial reports containing financial statements for years ending after December 15, 2002, while certain additional disclosure requirements of SFAS No. 148 are effective for interim periods beginning after December 15, 2002. The Company has elected to account for its stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to Employees, and does not utilize the fair value method. However, the Company has adopted the disclosure requirements of SFAS No. 123 and has adopted the additional disclosure requirements as specified in SFAS No. 148 in fiscal 2002.

SFASTable No. 143, Accounting for Asset Retirement Obligations, issued in June 2001, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated retirement costs. SFAS No. 143, which applies to all entities that have a legal obligation associated with the retirement of tangible long-lived assets, is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company’s financial position or results of operations. Contents

~~SFAS~~property Noduring 2003, 2002 and 2001, respectively. The gain of $3.8 ~~146~~million in 2001 included $3.6 million from the Company’s sale of one hotel and three restaurants. Another hotel was sold in 2001, ~~Accounting~~but ~~for~~the ~~Costs~~gain ~~Associated~~was ~~with~~deferred ~~Exit~~and oris ~~Disposal~~being recognized under ~~Activities~~the installment method of accounting until full accrual accounting is warranted. Approximately $175,000 ~~issued~~of the gain on the sale of two of the restaurants was also deferred and is being recognized under the installment method of accounting. The gains on early extinguishment of debt were all due to the repurchase by the Company of its outstanding public debt at a discount from face value. Decreases in ~~June~~accounts payable and accrued expenses used $1.8 million cash in 2003 and $3.5 million in 2002, ~~requires~~respectively, ~~that~~as acompared ~~liability~~with cash ~~for~~provided ~~the~~of ~~cost~~$6.7 million in 2001. An increase in trade receivables of ~~associated~~$893,000 ~~with~~and an$926,000 ~~exit~~in or2003 ~~disposal~~and ~~activity~~2001, berespectively, ~~recognized~~used ~~when~~cash, ~~the~~whereas ~~liability~~a isdecrease ~~incurred~~in trade receivables of $162,000 provided cash in 2002. ~~SFAS~~Construction contracts Noreceivable used cash of $17.8 ~~146~~million, ~~also~~$5.4 million, and $1.6 million, in 2003, 2002 and 2001, respectively.

- The Company’s cash flows provided by investing activities were $61.1 million in 2003 and $3.9 million in 2002 in contrast to $4.7 million used in investing activities in 2001. Payments received on notes receivable were $39.5 million, $971,000, and $681,000 in 2003, 2002 and 2001, respectively. Proceeds from the sale of properties were $29.9 million, $6.4 million and $2.9 million in 2003, 2002 and 2001, respectively; these properties include hotels, restaurants and land. The Company has required capital principally for the construction and acquisition of lodging facilities and the purchase of equipment and leasehold improvements. Capital expenditures for such purposes were $7.8 million, $3.9 million, and $20.9 million in 2003, 2002, and 2001, respectively. As of the end of 2003, no hotels were under construction. The Company sold all of its available-for-sale securities in 2002 for $428,000, and invested $1.8 million in the acquisition of GuestHouse International Franchise Systems, Inc. and two hotel exchange transactions.

~~Table~~ Net cash used in financing activities was $37.4 million in 2003, compared with $3.7 million provided by financing activities in 2002 and $6.0 million used in financing activities 2001. The Company collected notes receivable from its chief executive officer in the amounts of ~~Contents~~$1.3 million and $250,000 in 2003 and 2002, respectively, representing all of these notes receivable. In 1999, the Company adopted a plan to repurchase up to $12.5 million of the Company’s outstanding common stock. In July of 1999 the Company increased the authorized amount to repurchase an additional $7.5 million of common stock pursuant to the plan, increasing the total amount authorized to $20.0 million. In 2000, 238,000 shares were repurchased for $1.2 million. In November of 2001 the Company increased the authorized amount to repurchase an additional $3.0 million of common stock pursuant to the plan, increasing the total amount authorized to $23.0 million. In 2003, 125,500 shares were repurchased for $452,000, in 2002, 25,000 shares were repurchased for $148,000, and in 2001, 457,000 shares were repurchased for $1.9 million. In the second quarter of 1999 the Company announced its plan to use up to $12.0 million of its Company funds to repurchase a portion of its $54.0 million outstanding convertible subordinated debentures. In the third quarter of 2000 the Company increased the total amount authorized to $20.0 million, and repurchased $21.0 million of this debt for $15.4 million in 2000. The Company increased the total amount authorized to $25.0 million in November of 2001. An additional $5.7 million of this debt was repurchased for $4.7 million in 2003, $1.6 million of this debt was repurchased for $1.2 million in 2002, and $3.4 million of this debt was repurchased for $2.3 million in 2001. In the third quarter of 1999 the

~~establishes~~- ~~that~~29 ~~fair value is the objective~~- for initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company expects that the adoption of SFAS No. 146 during 2003 will not materially impact the Company’s financial position and results of operations.

Forward-lookingTable Statementof Disclaimer Contents

~~The statements appearing in this report which are not historical facts are~~Company ~~forward-looking~~announced ~~statements~~its ~~within~~plan ~~the~~to ~~meaning~~use ofup ~~Section 27A~~to ~~of the Securities Act of 1933, as amended, and Section~~$15 ~~21E~~million of ~~the~~its ~~Securities~~Company ~~Exchange~~funds ~~Act of 1934, as amended, and are subject~~ to ~~risks and uncertainties that could cause~~repurchase ~~actual~~a ~~results~~portion toof ~~differ~~its ~~materially~~outstanding ~~from~~$67.7 million ~~those~~senior ~~set~~subordinated ~~forth~~notes. inIn ~~the forward-looking statements~~2003, ~~including delays in concluding or the inability to conclude~~ ~~transactions,~~ the ~~establishment~~Company ofrepurchased ~~competing~~$6.6 million ~~facilities and services, cancellation~~ of ~~leases~~these ~~or contracts, collectibility of notes receivable, changes in applicable laws and regulation, in margins, demand fluctuations, access to~~ debt orsecurities ~~equity~~at ~~financing,~~a ~~adverse~~cost ~~uninsured~~of ~~determinations in~~$5.5 ~~existing or future litigation or regulatory proceedings and other risks~~million.

~~ITEM~~ The 7ACompany established a three-year credit facility with a financial institution effective August 27, 1999. ~~QUANTITATIVE~~ ~~AND~~An ~~QUALITATIVE~~amendment ~~DISCLOSURES~~to ~~ABOUT~~the ~~MARKET~~credit ~~RISK~~facility became effective October 3, 2001, which, among other changes, extended the maturity to September 30, 2004. A second amendment to the credit facility became effective November 26, 2002, which, among other changes, added real property collateral for the purpose of increasing the borrowing base. The credit facility was for $30 million (a $10 million term loan and a $20 million revolving line of credit), secured by a pledge of certain promissory notes payable to the Company received in connection with the sale of 16 of the Company’s lodging facilities in the third quarter of 1998 and real property collateral (one hotel) added in 2002 by the second amendment. The borrowing base was the lower of (a) 85% of the outstanding principal amount of the pledged notes, (b) 65% of the appraised market value of the underlying real property collateral securing the pledged notes and of the real property collateral, (c) a multiple of the trailing twelve months’ net operating income of the real property collateral and of the underlying properties securing the pledged notes serving as collateral, or (d) $30 million. Effective October 3, 2001, the interest rate on the term loan was at the lender’s base rate plus 100 basis points, and the interest rate on the revolving line of credit was at the lender’s base rate plus 250 points, with a floor of 7.00% on both portions of the facility. The Company was to pay commitment fees on the unused portion of the facility at .50% per annum. The credit facility also contained covenants which limited or prohibited the incurring of certain additional indebtedness in excess of a specified debt to total capital ratio, prohibited additional liens on the collateral, restricted mergers and the payment of dividends and restricted the Company’s ability to place liens on unencumbered assets. The credit facility contained financial covenants as to the Company’s minimum net worth. In the fourth quarter of 2003, the Company decided that the credit facility no longer served the Company’s needs, terminated the facility, and has received all of its collateral back from the financial institution. On January 6, 2004, the Company filed a complaint against the financial institution for its breach of the loan agreement, claiming damages to the Company in excess of $25 million

The Company ~~has~~also ~~not~~maintained ~~entered~~a ~~into~~$1.0 million ~~any~~unsecured ~~transactions~~line ~~using~~of ~~derivative~~credit with ~~financial~~another ~~instruments~~bank, bearing interest at the lender’s prime rate, maturing May 31, 2003. This line of credit was paid off in the first quarter of 2003 and was not renewed.

The Company isalso ~~exposed~~has toa ~~market~~loan ~~risk~~secured ~~from~~by ~~changes~~its incorporate ~~interest~~aircraft ~~rates.~~with ~~The~~a ~~Company~~balance ~~holds~~of ~~notes~~$5.3 million ~~receivable~~as ~~that~~of ~~earn~~December 28, ~~interest at variable rates~~2003. ~~A hypothetical~~This ~~one-percentage~~loan ~~point~~currently ~~change in~~ bears interest ~~rates~~at ~~would~~8.19% ~~change~~per ~~annual interest~~annum ~~income~~and byis ~~$715,000~~amortized ~~based~~to onits ~~the~~maturity ~~balances~~ of ~~these variable-rate notes receivable at~~ December 29, ~~2002~~ 2010. ~~Changes~~The in interest ~~rates~~rate ~~also~~was ~~impact~~fixed ~~interest expense~~for onthe ~~long-term~~first ~~variable-rate~~five ~~debt.~~years Aending ~~hypothetical one-percentage point~~January 1, ~~change~~2006, inand ~~interest~~is ~~rates~~adjustable ~~would~~to ~~change~~a ~~annual~~new ~~interest~~rate ~~expense~~for bythe ~~$269,000~~second ~~based on~~five ~~the~~years ~~balances~~ of ~~variable-rate~~the ~~long~~10-year term ~~debt~~equal atto ~~December 29,~~325 ~~2002~~basis points over 5-year Treasury rates.

~~Management~~ The ~~believes~~Company’s ~~that~~outstanding ~~market~~7.50% ~~risk~~Convertible asSubordinated aDebentures ~~result~~in ofthe face ~~interest~~amount ~~rate~~of ~~changes would~~$10.8 million ~~have~~mature ain ~~minimal~~May ~~effect~~of on2004. ~~the~~Its ~~fair~~outstanding ~~value~~Series A and ofSeries A-1 ~~the~~Senior ~~Company’s~~Subordinated ~~fixed-rate~~Notes ~~debt because~~in the ~~fair~~face ~~value~~amount of ~~the~~$22.2 million mature ~~Company’s~~in ~~debt~~November isof ~~traded~~2006 ~~based~~and ~~more~~its onSeries B ~~the public’s~~and ~~perception~~Series B-1 ofSenior ~~the~~Subordinated Notes ~~nature~~in of the ~~debt~~face ~~than~~amount onof ~~any~~$16.4 million ~~fundamental~~mature ~~changes~~ in ~~the~~September ~~debt~~of ~~markets~~2007.

~~There~~- ~~were~~30 ~~no significant changes in the Company’s market risk in the~~- ~~fiscal year ended December 29, 2002, and management foresees no significant changes in the Company’s exposure to fluctuations in interest rates in the near future.~~

ITEMTable 8. FINANCIALof STATEMENTS AND SUPPLEMENTARY DATA. Contents

The ~~Financial~~Company ~~Statements~~is ~~required~~evaluating byvarious ~~Item 8~~alternatives ~~are~~to ~~filed~~maximize asshareholder value. These alternatives could include, without limitation, the franchising and operation of additional GuestHouse Inns & Suites, a ~~separate~~sale of the remaining ~~section~~Company-owned hotels, negotiating new credit arrangements, developing hotels for other owners, the repurchase of ~~this~~additional ~~Report~~shares of the Company’s common stock or outstanding debt securities, or any combination of these or other strategies. The Company believes that a combination of existing cash, the liquidation of notes receivable, the sale of hotel properties, and net cash provided by operations, will be sufficient to fund its capital expenditures, debt repayments and operations for at least the next twelve months.

~~ITEM~~ The 9following table represents the Company’s outstanding contractual obligations as of December 28, 2003 excluding standby letters of credit of $625,000 outstanding at December 28, 2003. ~~CHANGES~~The INletters ~~AND~~of ~~DISAGREEMENTS~~credit ~~WITH~~are maintained ~~ACCOUNTANTS~~primarily ONto ~~ACCOUNTING~~support ~~AND~~the ~~FINANCIAL~~Company’s ~~DISCLOSURE~~workers’ compensation insurance program.

None.


	Payments due by period (in thousands of dollars)
			Less than		1 to 2		2 to 4		4 to 5		More than
	Total		1 year		years		years		years		5 years
7.50% convertible subordinated debentures	$	10,772	$	10,772	$	—	$	—	$	—	$	—
9.75% Series A and 10.15% Series A-1 senior subordinated notes		20,403		—		—		20,403		—		—
9.55% Series B and 9.95% Series B-1 senior subordinated notes		16,270		—		—		16,270		—		—
Notes payable - other		5,273		—		573		1,296		1,526		1,878
Operating lease obligations		642		350		292		—		—		—

Total	$	53,360	$	11,122	$	865	$	37,969	$	1,526	$	1,878

-Recently 30Issued -Accounting Pronouncements

~~Table~~ In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of ~~Contents~~Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (“FIN No. 46”). FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 required the Company to apply the provisions of FIN No. 46 immediately to any special purpose entities and variable interest entities created after January 31, 2003. Application of the provisions will be required for all other variable interest entities in financial statements for periods ending after March 15, 2004. The adoption of FIN No. 46 is not expected to have a material impact on the Company’s financial position or results of operations.

~~PART~~- ~~III~~31 -

ITEMTable 10. DIRECTORSof AND EXECUTIVE OFFICERS OF THE REGISTRANT. Contents

~~The~~ In ~~information~~May 2003, ~~concerning~~ the ~~directors~~FASB ~~and~~issued ~~officers~~Statement of ~~the~~Financial ~~Company~~Accounting ~~under~~Standards ~~the~~(“SFAS”) ~~heading~~No. 150, ~~“Election~~Accounting for Certain Financial Instruments with Characteristics of ~~Director”~~Both toLiabilities beand ~~contained~~Equity. inSFAS ~~the~~No. 150 ~~Company’s~~establishes standards ~~Proxy~~for how an issuer classifies and measures certain financial ~~Statement~~instruments with ~~respect~~characteristics toof ~~the~~both ~~next~~liabilities ~~Annual~~and ~~Meeting~~equity. It requires that an issuer classify a financial instrument within its scope as a liability though many of ~~Shareholders~~these instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after ~~incorporated~~May 31, ~~herein~~2003, byand ~~reference~~otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position or results of operations.

~~ITEM~~Forward-looking ~~11. EXECUTIVE~~Statement ~~COMPENSATION.~~Disclaimer

The ~~information~~statements ~~under~~appearing in this report which are not historical facts are forward-looking statements within the ~~heading~~meaning ~~“Executive~~of ~~Compensation”~~Section 27A ~~and~~of the Securities ~~information~~Act ~~under~~of 1933, as amended, and Section 21E of the ~~heading~~Securities ~~“Performance~~Exchange ~~Graph”~~Act of 1934, as amended, and are subject to berisks ~~contained~~and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking ~~Company’s~~statements, ~~Proxy~~including ~~Statement~~delays ~~with~~in ~~respect~~concluding or the inability to conclude transactions, the ~~next~~establishment ~~Annual~~of ~~Meeting~~competing facilities and services, cancellation of leases or contracts, collectibility of notes receivable, ~~Shareholders~~changes ~~are~~in ~~incorporated~~applicable ~~herein~~laws byand ~~reference~~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 127A. ~~SECURITY~~ ~~OWNERSHIP~~QUANTITATIVE OFAND ~~CERTAIN~~QUALITATIVE ~~BENEFICIAL~~DISCLOSURES ~~OWNERS~~ABOUT ~~AND~~MARKET ~~MANAGEMENT~~RISK.

The ~~information under the heading “Security Ownership of Certain Beneficial Owners and Management” to be contained in the~~ Company’s ~~Proxy~~has ~~Statement~~not ~~with respect~~entered tointo ~~the~~any ~~next~~transactions ~~Annual~~using ~~Meeting of Shareholders is incorporated herein by~~derivative ~~reference~~financial instruments.

~~ITEM~~ The 13Company is exposed to market risk from changes in interest rates. ~~CERTAIN~~ ~~RELATIONSHIPS~~The Company ~~AND~~holds ~~RELATED~~notes ~~TRANSACTIONS~~receivable that earn interest at variable rates. A hypothetical one-percentage point change in interest rates would change annual interest income by $90,000 based on the balances of these variable-rate notes receivable at December 28, 2003. Changes in interest rates would not impact interest expense since there was no long-term variable-rate debt at December 28, 2003.

~~The~~ Management ~~information~~believes ~~under~~that ~~the~~market ~~heading~~risk ~~“Certain~~as ~~Transactions”~~a toresult beof ~~contained~~interest inrate 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 ~~Proxy~~debt ~~Statement~~is ~~with~~traded ~~respect~~based tomore on the public’s ~~next~~perception ~~Annual~~of ~~Meeting~~the nature of ~~Shareholders~~ isthe ~~incorporated~~debt ~~herein~~than byon ~~reference~~any fundamental changes in the debt markets.

~~ITEM~~ There ~~14. CONTROLS~~were ~~AND~~no ~~PROCEDURES~~significant changes in the Company’s market risk in the fiscal year ended December 28, 2003, and management foresees no significant changes in the Company’s exposure to fluctuations in interest rates in the near future.

~~(a) Within~~ITEM the ninety day period prior to the filing date of this 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)8. ~~Based~~FINANCIAL ~~upon~~STATEMENTS ~~that~~AND ~~evaluation,~~SUPPLEMENTARY 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 filingsDATA.

~~(b) There~~ The ~~have~~Financial ~~been~~Statements norequired ~~significant~~by ~~changes~~Item 8 inare ~~our~~filed ~~internal~~as ~~controls~~a ~~or in~~separate ~~other~~section ~~factors~~of ~~that could significantly affect internal controls subsequent to the date we carried out~~ this ~~evaluation~~Report.

- 3132 -

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

~~ITEM 15~~ None. ~~EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.~~

			Page
(a)	1.	Financial Statements:
		The following Financial Statements are included herein:
		Report of Independent Auditors	F-1
		Consolidated Balance Sheets at December 29, 2002 and December 30, 2001	F-2 – F-3
		Consolidated Statements of Operations for each of the three years in the period ended December 29, 2002	F-4 – F-5
		Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 29, 2002	F-6 – F-7
		Consolidated Statements of Cash Flows for each of the three years in the period ended December 29, 2002	F-8 – F-9
		Notes to Consolidated Financial Statements	F-10 – F-43
	2.	Financial Statement Schedules:
		Report of Independent Auditors	F-1
		Schedule II – Valuation and Qualifying Accounts	S-1
		All other schedules required by Regulation S-X are omitted as the required information is inapplicable or the information requested thereby is set forth in the financial statements or the notes thereto.
	3.	Exhibits:
		The exhibits required by Item 601 of Regulation S-K and paragraph (c) of this Item 14 are listed below. Management contracts and compensatory plans and arrangements required to be filed as exhibits to this form are:
		10(9) – 1991 Stock Option Plan
		10(10) – First Amendment to 1991 Stock Option Plan
		10(11) – Second Amendment to 1991 Stock Option Plan
		10(12) – Key Employee Supplemental Income Plan

ITEM 9A. CONTROLS AND PROCEDURES

(a) As of December 28, 2003, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14(c) 32and 15d-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, our management, including our principal executive officer and our principal financial officer, concluded that the design and operation of these disclosure controls and procedures were effective as of December 28, 2003.

~~Table~~ (b) There were no significant changes in our internal controls over financial reporting during the fourth quarter of ~~Contents~~2003.

Exhibit
Number		Exhibit
3(1)	—	Amended and Restated Charter. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991
3(2)	—	Articles of Amendment to Charter creating Series A Subordinated Preferred Stock. Incorporated by reference to the Company’s Registration Statement on Form 8-A filed with the Commission on July 3, 1997
3(3)	—	Articles of Amendment to Amended and Restated Charter dated September 8, 1997. Incorporated by reference to the Company’s Annual Report on Form 10-K, filed with the Commission on April 13, 1998
3(4)	—	Amended and Restated Bylaws. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991
3(5)	—	Amendment to the Amended and Restated Bylaws adopted on July 31, 1996. Incorporated by reference to the Company’s Annual Report on Form 10-K, filed with the Commission on April 13, 1998
4(1)	—	Amended and Restated Charter. Section 6 of the Amended and Restated Charter is included in Exhibit 3(1)
4(2)	—	Indenture dated as of June 6, 1994, by and between the Registrant and Third National Bank in Nashville, Tennessee, Trustee, relating to $54,000,000 in 7 1/2 Convertible Subordinated Debentures due 2004. Incorporated by reference to the Company’s Registration Statement on Form S-3, Commission File No. 33-77910, filed with the Commission on April 19, 1994
4(3)	—	Indenture dated as of November 15, 1996, by and between the Registrant and Bankers Trust Company, Trustee, relating to Senior Subordinated Notes. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 20, 1996
4(4)	—	First Supplemental Indenture dated as of November 15, 1996 by and between the Registrant and Bankers Trust Company, Trustee, relating to 9 3/4% Senior Subordinated Notes due 2006, Series A. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 20, 1996
4(5)	—	Second Supplemental Indenture dated as of September 25, 1997 by and between the Registrant and Bankers Trust Company, Trustee, relating to 9.55% Senior Subordinated Notes due 2007, Series B. Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Commission on September 30, 1997

PART III

~~The~~ITEM 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%. ofDIRECTORS ~~the~~AND ~~total~~EXECUTIVE ~~assets~~OFFICERS ofOF ~~the~~THE ~~Registrant and its subsidiaries on a consolidated basis~~REGISTRANT.

- The 33information -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.

~~Table~~ITEM of11. ~~Contents~~EXECUTIVE COMPENSATION.

Exhibit
Number		Exhibit
10(1)	—	Amended and Restated Partnership Agreement of Demonbreun Hotel Associates, Ltd., dated October 22, 1991. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991
10(2)	—	Agreement of Limited Partnership of Shoney’s Inn North, Ltd., dated December 31, 1987. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991
10(3)	—	Partnership Agreement of Shoney’s Inn of Atlanta, N.E., dated December 26, 1988. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991
10(4)	—	Partnership Agreement of Shoney’s Inn of Stockbridge, dated December 26, 1988. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991
10(5)	—	Joint Venture Agreement of Atlanta Shoney’s Inns Joint Venture, dated May 4, 1988. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991
10(6)	—	Amended and Restated Limited Partnership Agreement of Shoney’s 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, 1991
10(7)	-–	Second Amended and Restated Limited Partnership Agreement of Shoney’s Inn of Bossier City, Ltd., dated January 1, 1987. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991
10(8)	—	Second Amended and Restated Limited Partnership Agreement of Shoney’s 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, 1991
10(9)	—	1991 Stock Option Plan. Incorporated by reference to the Company’s Registration statement on Form S-8, filed with the Commission on June 24, 1997
10(10)	—	First Amendment to 1991 Stock Option Plan. Incorporated by reference to the Company’s Registration statement on Form S-8, filed with the Commission on June 24, 1997
10(11)	—	Second Amendment to 1991 Stock Option Plan. Incorporated by reference to the Company’s Registration statement on Form S-8, filed with the Commission on June 24, 1997
10(12)	—	Key Employee Supplemental Income Plan. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991

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 3412. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

~~Table~~ The information under the heading “Security Ownership of ~~Contents~~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.

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

* The ~~Filed~~information ~~herewith~~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.

~~(b)~~ITEM No14. ~~reports~~PRINCIPAL onACCOUNTANT ~~Form~~FEES ~~8-K~~AND ~~were filed during the fourth quarter ended December 29, 2002.~~SERVICES

~~(c)~~ The ~~Exhibits~~information ~~required~~under bythe ~~Item~~heading ~~601~~“2003 Auditor Fees” with respect to principal accountant fees and services, to be contained in the Company’s Proxy Statement with respect to the next Annual Meeting of ~~Regulation~~Shareholders ~~S-K~~is incorporated ~~are~~herein ~~listed~~by ~~above~~reference.

~~(d) All financial statement schedules required by Regulation S~~-X ~~are~~33 ~~filed following the Financial Statements listed above.~~-

-Table 35of - Contents

~~Table~~PART ~~of Contents~~IV

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

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.

Page

)

Financial Statements:

The following Financial Statements are included herein:

Report of Independent Auditors

F-1

Consolidated Balance Sheets at December 28, 2003 and December 29, 2002

F-2 - F-3

Consolidated Statements of Operations for each of the three years in the period ended December 28, 2003

F-4 - F-5

Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 28, 2003

F-6 - F-7

Consolidated Statements of Cash Flows for each of the three years in the period ended December 28, 2003

F-8 - F-9

Notes to Consolidated Financial Statements

F-10 - F-39

Financial Statement Schedules:

Report of Independent Auditors

F-1

Schedule II - Valuation and Qualifying Accounts

S-1

All other schedules required by Regulation S-X are omitted as the required information is inapplicable or the information requested thereby is set forth in the financial statements or the notes thereto.

Exhibits:

The exhibits required by Item 601 of Regulation S-K and paragraph (c) of this Item 15 are listed below. Management contracts and compensatory plans and arrangements required to be filed as exhibits to this form are:

10(9) — 1991 Stock Option Plan

10(10) — First Amendment to 1991 Stock Option Plan

10(11) — Second Amendment to 1991 Stock Option Plan

10(12) — Key Employee Supplemental Income Plan

		SHOLODGE, INC.
Date: April 11, 2003		/s/ Leon Moore
		Leon Moore
		Chief Executive Officer

- 34 -

PursuantTable 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. Contents

Signature	Title	Date
Exhibit
/s/ Leon Moore Leon Moore	President, Chief Executive Officer, Principal Executive Officer, Director	April 11, 2003
Number	Exhibit
/s/ Bob Marlowe Bob Marlowe	Secretary, Treasurer, Chief Financial Officer, Chief Accounting Officer, Principal Accounting Officer, Director	April 11, 2003
3(1)	—	Amended and Restated Charter. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991
/s/ Richard L. Johnson Richard L. Johnson	Executive Vice President, Director	April 11, 2003
3(2)	—	Articles of Amendment to Charter creating Series A Subordinated Preferred Stock. Incorporated by reference to the Company’s Registration Statement on Form 8-A filed with the Commission on July 3, 1997
/s/ Earl H. Sadler Earl H. Sadler	Director	April 11, 2003
3(3)	—	Articles of Amendment to Amended and Restated Charter dated September 8, 1997. Incorporated by reference to the Company’s Annual Report on Form 10-K, filed with the Commission on April 13, 1998
/s/ Helen L. Moskovitz Helen L. Moskovitz	Director	April 11, 2003
3(4)	—	Amended and Restated Bylaws. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991
/s/ David M. Resha David M. Resha	Director	April 11, 2003
3(5)	—	Amendment to the Amended and Restated Bylaws adopted on July 31, 1996. Incorporated by reference to the Company’s Annual Report on Form 10-K, filed with the Commission on April 13, 1998
4(1)	—	Amended and Restated Charter. Section 6 of the Amended and Restated Charter is included in Exhibit 3(1)
4(2)	—	Indenture dated as of June 6, 1994, by and between the Registrant and Third National Bank in Nashville, Tennessee, Trustee, relating to $54,000,000 in 7 1/2 Convertible Subordinated Debentures due 2004. Incorporated by reference to the Company’s Registration Statement on Form S-3, Commission File No. 33-77910, filed with the Commission on April 19, 1994
4(3)	—	Indenture dated as of November 15, 1996, by and between the Registrant and Bankers Trust Company, Trustee, relating to Senior Subordinated Notes. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 20, 1996
4(4)	—	First Supplemental Indenture dated as of November 15, 1996 by and between the Registrant and Bankers Trust Company, Trustee, relating to 9 3/4% Senior Subordinated Notes due 2006, Series A. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 20, 1996
4(5)	—	Second Supplemental Indenture dated as of September 25, 1997 by and between the Registrant and Bankers Trust Company, Trustee, relating to 9.55% Senior Subordinated Notes due 2007, Series B. Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Commission on September 30, 1997
4(6)	—	Third Supplemental Indenture dated July 1, 2003 between Registrant and Deutsche Bank Trust Company Americas (formerly Bankers Trust Company), as Trustee, relating to 10.15% Senior Subordinated Notes due 2006, Series A-1. Incorporated by reference to the Company’s Registration Statement on Form S-4/A, Commission File No. 333-98789, filed with the Commission on May 30, 2003.
4(7)	—	Fourth Supplemental Indenture dated July 1, 2003 between Registrant and Deutsche Bank Trust Company Americas (formerly Bankers Trust Company), as Trustee, relating to 9.95% Senior Subordinated Notes due 2007, Series B-1. Incorporated by reference to the Company’s Registration Statement on Form S-4/A, Commission File No. 333-98789, filed with the Commission on May 30, 2003.
4(8)	—	Fifth Supplemental Indenture dated July 1, 2003 between Registrant and Deutsche Bank Trust Company Americas (formerly Bankers Trust Company). Incorporated by reference to the Company’s Registration Statement on Form S-4/A, Commission File No. 333-98789, filed with the Commission on May 30, 2003.

-The 36Registrant agrees to furnish to the Securities and Exchange Commission, upon request, any and all instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries, the total amount of which does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis.

~~Table~~- of35 ~~Contents~~-

CERTIFICATION Table of Contents

I, Leon Moore, certify that:


Exhibit
Number	Exhibit
10(1)	—	Amended and Restated Partnership Agreement of Demonbreun Hotel Associates, Ltd., dated October 22, 1991. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991

10(2)	—	Agreement of Limited Partnership of Shoney’s Inn North, Ltd., dated December 31, 1987. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991

10(3)	—	Partnership Agreement of Shoney’s Inn of Atlanta, N.E., dated December 26, 1988. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991

10(4)	—	Partnership Agreement of Shoney’s Inn of Stockbridge, dated December 26, 1988. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991

10(5)	—	Joint Venture Agreement of Atlanta Shoney’s Inns Joint Venture, dated May 4, 1988. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991

10(6)	—	Amended and Restated Limited Partnership Agreement of Shoney’s 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, 1991

10(7)	—	Second Amended and Restated Limited Partnership Agreement of Shoney’s Inn of Bossier City, Ltd., dated January 1, 1987. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991

10(8)	—	Second Amended and Restated Limited Partnership Agreement of Shoney’s 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, 1991

10(9)	—	1991 Stock Option Plan. Incorporated by reference to the Company’s Registration statement on Form S-8, filed with the Commission on June 24, 1997

10(10)	—	First Amendment to 1991 Stock Option Plan. Incorporated by reference to the Company’s Registration statement on Form S-8, filed with the Commission on June 24, 1997

10(11)	—	Second Amendment to 1991 Stock Option Plan. Incorporated by reference to the Company’s Registration statement on Form S-8, filed with the Commission on June 24, 1997

10(12)	—	Key Employee Supplemental Income Plan. Incorporated by reference to the Company’s Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991

~~1. I have reviewed this annual report on Form 10~~-K of36 ~~ShoLodge, Inc.~~-

2. BasedTable 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; Contents

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;


Exhibit
Number	Exhibit
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, 1997

10(14)	—	Loan and Security Agreement by and among The Hotel Group, Inc., as Borrower, the Registrant, as Holdings, and the financial institutions that are signatories thereto, the Lenders, and Foothill Capital Corporation, as Agent, dated as of August 27, 1999. Incorporated by reference to the Company’s Current Report on Form 8-K dated September 15, 1999, filed with the Commission on September 28, 1999.

10(15)	—	Amendment Number One to Loan and Security Agreement between and among The Hotel Group, Inc., as Borrower, the Registrant, as Holdings, and the financial institutions that are signatories thereto, the Lenders, and Foothill Capital Corporation, as Agent, dated as of October 3, 2001. Incorporated by reference to the Company’s Annual Report on Form 10-K, filed with the Commission on April 1, 2002.

10(16)	—	Amendment Number Two to Loan and Security Agreement between and among The Hotel Group, Inc., as Borrower, the Registrant, as Holdings, and the financial institutions that are signatories thereto, the Lenders, and Foothill Capital Corporation, as Agent, dated as of November 26, 2002. Incorporated by reference to the Company’s Annual Report on Form 10-K, filed with the Commission on April 14, 2003.

10(17)	—	Lease Agreement by and between Southeast Texas Inns, Inc., ad landlord, and May-Ridge, L.P., as tenant, dated as of July 9, 2000. Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on July 24, 2000.

10(18)	—	Amended and Restated License Agreement entered into September 27, 2000 by and between Shoney’s Inc., ShoLodge Franchise Systems, Inc and the Company. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 15, 2000.

10(19)	—	Purchase and Sale Agreement dated as of April 30, 2002, by and among ShoLodge, Inc., GuestHouse Franchise Systems, LLC and Surburban Franchise Holding Company LLC. Incorporated by reference to the Company’s Current Report on Form 8-K/A filed with the Commission on July 16, 2002.

21	—	Subsidiaries of the Registrant*

23(1)	—	Consent of Ernst & Young LLP*

31.1	—	Certifications required by Section 404 of the Sarbanes-Oxley Act of 2002.*

32.1	—	Certifications required by Section 906 of the Sarbanes-Oxley Act of 2002.*

~~4. The~~* ~~registrant’s~~Filed ~~other certifying officer and I are responsible for~~herewith ~~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~~37 ~~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)Table 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 Contents

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

~~5. The~~- ~~registrant’s~~38 ~~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)Table 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 Contents

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

~~6. The~~ Pursuant ~~registrant’s~~to ~~other~~the ~~certifying~~requirements ~~officers~~of ~~and~~Section 13 Ior ~~have~~15(d) ~~indicated~~of inthe ~~this~~Securities ~~annual~~Exchange ~~report~~Act ~~whether~~of ~~there~~1934, ~~were~~the ~~significant~~registrant ~~changes~~has induly ~~internal~~caused ~~controls~~this orreport into be signed ~~other~~on ~~factors~~its ~~that~~behalf ~~could~~by the undersigned, thereunto duly authorized.


		SHOLODGE, INC.

Date: April 5, 2004		/s/ Leon Moore

		Leon Moore
		Chief Executive Officer

~~significantly~~ Pursuant ~~affect~~to ~~internal~~the ~~controls~~requirements ~~subsequent~~of to the ~~date~~Securities Exchange Act of ~~our~~1934, ~~most~~this report ~~recent~~has ~~evaluation,~~been ~~including~~signed ~~any~~below ~~corrective~~by ~~actions~~the ~~with~~following persons on behalf of the ~~regard~~registrant toand ~~significant~~in ~~deficiencies~~the capacities and ~~material~~on ~~weaknesses~~the dates indicated.

Dated: April 11, 2003	/s/ Leon Moore
Signature	Title	Date
	[signature]
/s/ Leon Moore Leon Moore	Chairman, Chief Executive Officer, Principal Executive Officer, Director	April 5, 2004
	Chairman, Chief Executive Officer, Principal Executive Officer
/s/ Bob Marlowe Bob Marlowe	Secretary, Treasurer, Chief Financial Officer, Chief Accounting Officer, Principal Accounting Officer, Director	April 5, 2004
/s/ Richard L. Johnson Richard L. Johnson	Executive Vice President, Director	April 5, 2004
/s/ Earl H. Sadler Earl H. Sadler	Director	April 5, 2004
/s/ Helen L. Moskovitz Helen L. Moskovitz	Director	April 5, 2004
/s/ David M. Resha David M. Resha	Director	April 5, 2004

~~Table~~- of39 ~~Contents~~-

CERTIFICATION Table of Contents

I,Report ~~Bob~~of ~~Marlowe,~~Independent ~~certify that:~~Auditors

~~1. I~~Shareholders ~~have~~and ~~reviewed~~Board ~~this annual report on Form 10-K~~ of Directors ShoLodge, Inc.

2We have audited the accompanying consolidated balance sheets of ShoLodge, Inc. and subsidiaries as of December ~~Based~~28, on2003 myand ~~knowledge~~December 29, ~~this~~2002, ~~annual~~and ~~report~~the ~~does~~related consolidated ~~not~~statements ~~contain~~of ~~any~~operations, ~~untrue~~shareholders’ equity and cash flows for ~~statement~~each of athe ~~material~~three ~~fact~~years orin ~~omit~~the toperiod ~~state~~ended aDecember 28, ~~material~~2003. ~~fact~~Our ~~necessary~~audits ~~to make~~also included the ~~statements~~financial ~~made,~~statement inschedule ~~light~~listed ofin the ~~circumstances~~index ~~under~~at ~~which~~Item 15(a). These ~~such~~financial statements ~~were~~ ~~made,~~and ~~not~~schedule ~~misleading~~are ~~with~~the ~~respect~~responsibility toof the ~~period~~Company’s management. ~~covered~~Our byresponsibility ~~this~~is ~~annual~~to express an opinion on these financial ~~report;~~statements and schedule based on our audits.

~~3. Based~~We onconducted myour ~~knowledge,~~audits ~~the~~in ~~financial~~accordance ~~statements,~~with ~~and~~auditing ~~other~~standards ~~financial~~generally ~~information~~accepted ~~included~~ in ~~this~~the ~~annual~~United ~~report,~~States. ~~fairly~~Those ~~present~~standards inrequire ~~all~~that ~~material~~we plan and perform ~~respects~~the audit to obtain reasonable assurance about whether the financial ~~condition,~~statements are ~~results~~free of ~~operations~~material ~~and~~misstatement. ~~cash~~An ~~flows~~audit ofincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial ~~registrant~~statements. asAn ~~of,~~audit also includes assessing the accounting principles used and significant ~~for~~estimates made by management, as well as evaluating the ~~periods~~overall financial ~~presented~~statement inpresentation. ~~this~~We ~~annual~~believe ~~report;~~that our audits provide a reasonable basis for our opinion.

4In 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 ~~The~~28, ~~registrant’s~~2003 ~~other~~and ~~certifying~~December 29, ~~officer~~2002, and Ithe consolidated ~~are~~results ~~responsible~~of their operations and their cash flows for each of the ~~establishing~~three ~~and~~years ~~maintaining~~in ~~disclosure~~the ~~controls~~period ~~and~~ended ~~procedures~~December 28, ~~(as~~2003, ~~defined~~in conformity with accounting principles generally accepted in the United States. Also, in our ~~Exchange~~opinion, ~~Act~~the ~~Rules 13a-14~~related ~~and~~financial ~~15d-14)~~statement ~~for~~schedule, when considered in relation to the ~~registrant~~basic ~~and~~financial ~~have:~~statements taken as a whole, presents fairly in all material respects the information set forth therein.

a)As ~~designed~~discussed ~~such~~in ~~disclosure~~Note ~~controls~~l ~~and procedures~~ to ~~ensure that material information relating to~~ the ~~registrant,~~consolidated ~~including~~financial ~~its consolidated subsidiaries~~statements, isin ~~made~~2002 ~~known to us by others within those entities, particularly~~the ~~during~~Company ~~the~~changed ~~period~~its inmethod ~~which~~of ~~this~~accounting ~~annual~~for ~~report~~goodwill isand ~~being~~other ~~prepared;~~intangible assets.

~~b) evaluated the effectiveness of the registrant’~~/s/ ~~disclosure~~Ernst ~~controls~~& ~~and procedures~~Young ~~as of a date within 90 days prior to the filing date of this annual~~LLP ~~report (the “Evaluation Date”); and~~

c)Nashville, ~~presented in this annual report our conclusions about the effectiveness~~Tennessee ofMarch 31, ~~the disclosure controls and procedures based on our evaluation as of the~~2004 ~~Evaluation Date;~~

~~5. The registrant’s other certifying officers and I have disclosed, based~~F-1 ~~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)Table 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 Contents

~~b) any fraud~~ShoLodge, ~~whether~~Inc. orand ~~not material, that involves management or other~~Subsidiaries ~~employees who have a significant role in the registrant’s internal controls;~~ ~~and~~

~~6. The~~Consolidated ~~registrant’s~~Balance ~~other certifying officers and I have indicated in this~~Sheets ~~annual report whether there were significant changes in internal controls or in~~ ~~other factors that could~~


	December 28,			December 29,
	2003			2002
Assets
Current assets:
Cash and cash equivalents	$	12,491,736		$	1,534,942
Restricted cash		—			100,000
Accounts receivable :
Trade, net of allowance for doubtful accounts of $653,632 and $394,480 for 2003 and 2002, respectively		2,188,312			1,944,357
Construction contracts		837,714			136,865
Construction contracts due from related parties		22,668,784			5,671,892
Costs and estimated earnings in excess of billings on construction contracts		39,832			—
Income taxes receivable		3,908,041			9,900,782
Prepaid expenses		314,967			319,595
Notes receivable, net		6,641,598			44,823,055
Assets of hotels transferred under contractual agreements (notes receivable)		4,352,000			11,571,564
Assets of hotels held for sale		16,139,477			9,485,357
Assets of other hotels in discontinued operations		—			21,563,804
Other current assets		45,352			68,302

Total current assets		69,627,813			107,120,515
Notes receivable, net		4,702,058			7,065,318
Property and equipment		40,369,304			41,123,778
Less accumulated depreciation and amortization		(6,922,065	)		(6,387,327	)

		33,447,239			34,736,451
Land under development or held for sale		10,644,991			14,114,353
Deferred charges, net		437,353			1,790,320
Goodwill		765,711			765,711
Trademarks and franchise rights, net		473,366			703,366
Other assets		1,921,596			983,124

	$	122,020,127		$	167,279,158

~~significantly affect internal controls subsequent to~~F-2 ~~the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.~~

Dated: April 11, 2003		/s/ Bob Marlowe
		[signature]
		Secretary, Treasurer, Chief Accounting Officer, Principal Accounting Officer, Chief Financial Officer

~~Table~~ShoLodge, ofInc. ~~Contents~~and Subsidiaries

~~Report~~Consolidated ofBalance ~~Independent~~Sheets ~~Auditors~~(continued)

Shareholders and Board of Directors ShoLodge, Inc.


	December 28,		December 29,
	2003		2002
Liabilities
Current liabilities:
Accounts payable and accrued expenses	$	5,450,275	$	10,623,527
Taxes payable other than on income		344,179		609,259
Current portion of long-term debt		11,344,902		67,548,511

Total current liabilities		17,139,356		78,781,297
Long-term debt, less current portion		41,373,383		24,381,276
Deferred tax liability		783,485		—
Deferred credits		153,106		2,314,922
Minority interests in equity of consolidated subsidiaries and partnerships		388,699		607,493

Total liabilities		59,838,029		106,084,988
Shareholders’ equity:
Preferred stock (no par value; 1,000,000 shares authorized; no shares issued)		—		—
Series A redeemable nonparticipating stock (no par value; 1,000 shares authorized; no shares issued)		—		—
Common stock (no par value; 20,000,000 shares authorized, 4,993,278 and 5,118,778 shares issued and outstanding as of December 28, 2003 and December 29, 2002, respectively)		1,000		1,000
Additional paid-in capital		23,127,821		23,579,621
Retained earnings		39,053,277		38,753,965
Notes receivable from officer, net of discount of $140,833 as of December 29, 2002		—		(1,140,416	)

Total shareholders’ equity		62,182,098		61,194,170

	$	122,020,127	$	167,279,158

WeSee ~~have audited the~~ accompanying ~~consolidated balance sheets of ShoLodge, Inc~~notes. ~~and subsidiaries as of December 29, 2002 and December 30, 2001, and the related~~ ~~consolidated statements of operations, shareholders’ equity and cash flows for~~ ~~each of the three years in the period ended December 29, 2002. 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~~F-3 accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

InTable 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 29, 2002 and December 30, 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 29, 2002, 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. Contents

~~As discussed in Note l to the consolidated financial statements~~ShoLodge, inInc. ~~2002 the Company changed its method of accounting for goodwill~~ and ~~other intangible~~Subsidiaries ~~assets.~~

~~/s/~~Consolidated ~~Ernst~~Statements &of ~~Young LLP~~Operations

Nashville, Tennessee April 11, 2003


	Year ended
	December 28,			December 29,			December 30,
	2003			2002			2001
Revenues:
Hotel	$	3,841,825		$	2,160,261		$	1,985,551
Franchising, reservation and management		7,674,896			6,083,606			3,970,821
Construction and development – related parties		21,978,398			5,687,874			34,992
Construction and development – other		2,007,192			4,224,408			27,444,893
Rent		399,969			1,431,443			1,485,759
Other income		152,508			176,454			227,134

Total revenues		36,054,788			19,764,046			35,149,150
Costs and expenses:
Hotel		3,014,318			1,442,757			1,250,107
Franchising, reservation and management		6,476,765			4,275,949			2,191,659
Construction and development		20,333,598			12,119,271			25,691,829
Rent expense		518,022			583,904			581,900
General and administrative		4,978,228			7,987,192			5,858,623
Depreciation and amortization		1,740,793			1,570,360			1,643,273
Write-off of pre-development costs		5,993			1,863,628			—
Write-off of construction contracts receivable		61,475			3,631,267			—
Write-off of trade receivables		649,543			1,296,558			—
Write-off of goodwill		—			2,387,100			—
Write-off of trademarks and franchise rights		—			4,421,535			—
Write-down of notes receivable		1,014,890			21,167,013			—
Impairment of real estate		—			76,903			—

Total expenses		38,793,625			62,823,437			37,217,391

Operating loss		(2,738,837	)		(43,059,391	)		(2,068,241	)
Gain on sale of properties		1,251,371			676,653			3,791,288
Gain on sale of available-for-sale securities		—			314,988			—
Gain on early extinguishments of debt		1,344,474			2,592,038			912,719
Interest expense		(7,775,244	)		(8,780,185	)		(8,219,985	)
Interest income		2,249,343			4,990,654			6,262,572
Lease abandonment income		5,329,504			—			—
Arbitration award		—			8,900,000			—

Earnings (loss) from continuing operations before income taxes and minority interests		(339,389	)		(34,365,243	)		678,353
Income tax benefit (expense)		2,256,352			9,167,859			(194,000	)
Minority interests in (earnings) loss of consolidated subsidiaries and partnerships		(106,206	)		178,986			(58,255	)

Earnings (loss) from continuing operations		1,810,757			(25,018,398	)		426,098

F-14

ShoLodge, Inc. and Subsidiaries

Consolidated ~~Balance~~Statements ~~Sheets~~of Operations (continued)

				December 29,				December 30,
		Year ended
				2002				2001
		December 28,				December 29,				December 30,
Assets
		2003				2002				2001
Current assets:
Discontinued operations:
	Cash and cash equivalents			$	1,534,942			$	2,704,161
Operations of hotels disposed of and transferred, net of income tax effect of $263,000, $41,000, and $298,000 for 2003, 2002 and 2001, respectively		$	430,376			$	67,019			$	485,447
	Restricted cash				100,000				200,000
Loss on disposal and transfer of discontinued operations, net of income tax benefit of $1,190,000 and $2,020,000 for 2003 and 2002, respectively			(1,941,821	)			(3,296,185	)			—
	Accounts receivable:
Net earnings (loss)		$	299,312			$	(28,247,564	)		$	911,545
		Trade, net of allowance for doubtful accounts of $394,480 and $184,404 for 2002 and 2001, respectively			1,944,357				3,218,766
Net earnings (loss) per common share:
		Construction contracts			136,865				4,016,502
Basic:
		Construction contracts due from related parties			5,671,892				—
Continuing operations		$	0.36			$	(4.89	)		$	0.08
		Costs and estimated earnings in excess of billings on construction contracts			—				3,063,747
Discontinued operations:
	Income taxes receivable				9,900,782				–
Operations of hotels disposed of and transferred			0.08				0.01				0.08
	Prepaid expenses				319,595				365,849
Loss on disposal and transfer of discontinued operations			(0.38	)			(0.64	)			—
	Notes receivable, net				44,823,055				2,067,165
Net earnings (loss)		$	0.06			$	(5.52	)		$	0.16
	Assets of hotels transferred under contractual agreements (notes receivable)				11,571,564				18,204,682
Diluted:
	Other current assets				121,777				110,491
Continuing operations		$	0.36			$	(4.89	)		$	0.08
Total current assets					76,124,829				33,951,363
Discontinued operations:
Restricted cash					—				1,781,747
Operations of hotels disposed of and transferred			0.08				0.01				0.08
Notes receivable, net					7,065,318				68,227,306
Loss on disposal and transfer of discontinued operations			(0.38	)			(0.64	)			—
Property and equipment					81,882,722				98,619,837
Net (loss) earnings		$	0.06			$	(5.52	)		$	0.16
Less accumulated depreciation and amortization					(16,297,988	)			(15,522,304	)
Weighted average common shares outstanding:
					65,584,734				83,097,533
Basic			5,071,198				5,113,953				5,464,533
Land under development or held for sale					14,114,353				9,254,986
Diluted			5,071,198				5,113,953				5,529,825
Deferred charges, net					1,790,320				2,087,512
Goodwill, net					765,711				2,387,100
Trademarks and franchise rights, net					703,366				4,421,741
Other assets					1,130,527				1,377,361
				$	167,279,158			$	206,586,649

~~F-2~~See accompanying notes

~~Table of Contents~~F-5

ShoLodge,Table Inc.of and Subsidiaries Contents

~~Consolidated~~ShoLodge, ~~Balance~~Inc. ~~Sheets~~and ~~(continued)~~Subsidiaries

			December 29,			December 30,
			2002			2001
Liabilities
Current liabilities:
	Accounts payable and accrued expenses		$	10,623,527		$	14,171,631
	Taxes payable other than on income			609,259			476,809
	Income taxes payable			–			3,859,873
	Current portion of long-term debt			67,548,511			4,058,700
Total current liabilities				78,781,297			22,567,013
Long-term debt, less current portion				24,381,276			86,293,381
Deferred income taxes				–			992,275
Deferred gain on sale/leaseback				–			4,129,962
Deferred credits				2,314,922			2,545,004
Minority interests in equity of consolidated subsidiaries and partnerships				607,493			786,477
Total liabilities				106,084,988			117,314,112
Shareholders’ equity:
	Preferred stock (no par value; 1,000,000 shares authorized; no shares issued)			–			–
	Series A redeemable nonparticipating stock (no par value; 1,000 shares authorized; no shares issued)			–			–
	Common stock (no par value; 20,000,000 shares authorized, 5,118,778 and 5,088,278 shares issued and outstanding as of December 29, 2002 and December 30, 2001, respectively)			1,000			1,000
	Additional paid-in capital			23,579,621			23,519,506
	Retained earnings			38,753,965			67,001,529
	Unrealized gain on securities available-for-sale, net of income taxes			–			100,307
	Notes receivable from officer, net of discount of $140,833 and $181,444 as of December 29, 2002 and December 30, 2001, respectively			(1,140,416	)		(1,349,805	)
		Total shareholders’ equity		61,194,170			89,272,537
			$	167,279,158		$	206,586,649

Consolidated Statements of Shareholders’ Equity

~~See~~Years ~~accompanying~~ended ~~notes.~~December 28, 2003, December 29, 2002 and December 30, 2001

F-3


						Notes			Additional
	Common Stock					Receivable From			Paid-In
	Shares			Amount		Officer			Capital
Balance, December 31, 2000		5,544,211		$	1,000	$	(1,247,750	)	$	25,425,175
Exercise of stock options, net		1,067			—		—			4,001
Interest accreted on notes receivable from officer for exercise of options to purchase common stock		—			—		(102,055	)		—
Net earnings		—			—		—			—
Change in unrealized gain on securities available-for-sale, net of income taxes		—			—		—			—
Comprehensive earnings
Common stock repurchased		(457,000	)		—		—			(1,909,670	)

Balance, December 30, 2001		5,088,278			1,000		(1,349,805	)		23,519,506
Exercise of stock options, net		55,500			—		—			208,125
Payment received on notes receivable from officer		—			—		250,000			—
Interest accreted on notes receivable from officer for exercise of options to purchase common stock		—			—		(40,611	)		—
Net loss		—			—		—			—
Change in unrealized gain on securities available-for-sale, net of income taxes		—			—		—			—
Comprehensive loss
Common stock repurchased		(25,000	)		—		—			(148,010	)

Balance, December 29, 2002		5,118,778			1,000		(1,140,416	)		23,579,621
Payment received on notes receivable from officer		—			—		1,281,249			—
Interest accreted on notes receivable from officer for exercise of options to purchase common stock		—			—		(140,833	)		—
Net loss		—			—		—			—
Common stock repurchased		(125,500	)		—		—			(451,800	)

Balance, December 28, 2003		4,993,278		$	1,000	$	—		$	23,127,821

~~Table of Contents~~F-6

ShoLodge,Table Inc.of and Subsidiaries Contents

~~Consolidated~~ShoLodge, ~~Statements~~Inc. ofand ~~Operations~~Subsidiaries

				Year ended
				December 29,			December 30,			December 31,
				2002			2001			2000
Revenues:
	Hotel			$	8,872,656		$	7,782,732		$	40,677,658
	Franchising, reservation and management				6,083,606			3,970,821			3,606,243
	Construction and development				9,912,282			27,479,885			12,036,744
	Rent				3,397,640			3,467,744			1,955,324
	Other income				66,993			336,595			48,982
		Total revenues			28,333,177			43,037,777			58,324,951
Costs and expenses:
	Hotel				7,108,274			5,856,870			29,553,596
	Franchising, reservation and management				4,275,949			2,191,659			2,459,801
	Construction and development				12,119,271			25,691,829			12,571,160
	Rent expense				583,904			581,900			10,332,830
	General and administrative				7,982,733			5,859,873			5,010,455
	Depreciation and amortization				3,335,750			3,392,385			4,501,517
	Write-off of pre-development costs				1,863,628			–			–
	Write-off of construction contracts receivable				3,631,267			–			–
	Write-off of trade receivables				1,296,558			–			–
	Write-off of goodwill				2,387,100			–			–
	Write-off of trademarks and franchise rights				4,421,535			–			–
	Write-down of notes receivable				21,167,013			–			–
	Impairment of real estate				644,195			–			–
			Total expenses		70,817,177			43,574,516			64,429,359
Operating loss					(42,484,000	)		(536,739	)		(6,104,408	)
Gain on sale of land and leasehold interests					627,635			3,761,090			4,901,523
Gain on sale of available-for-sale securities					314,988			–			–
Gain on early extinguishment of debt					2,592,038			912,719			7,306,645
Interest expense					(8,782,207	)		(8,281,034	)		(10,245,276	)
Interest income					5,016,345			6,376,068			6,396,819
Arbitration award					8,900,000			–			–
(Loss) earnings from continuing operations before income taxes and minority interests					(33,815,201	)		2,232,104			2,255,303
Income tax benefit (expense)					8,958,859			(785,000	)		(1,220,000	)
Minority interests in loss (earnings) of consolidated subsidiaries and partnerships					178,986			(58,255	)		(57,246	)
(Loss) earnings from continuing operations					(24,677,356	)		1,388,849			978,057

Consolidated Statements of Shareholders’ Equity (continued)

~~F-4~~Years ended December 28, 2003, December 29, 2002, and December 30, 2001


				Accumulated
				Other
	Retained			Comprehensive
	Earnings			Income			Total
Balance, December 31, 2000	$	66,089,984		$	53,231		$	90,321,640
Exercise of stock options, net		—			—			4,001
Interest accreted on notes receivable from officer for exercise of options to purchase common stock		—			—			(102,055	)
Net earnings		911,545			—			911,545
Change in unrealized gain on securities available-for-sale, net of income taxes		—			47,076			47,076

Comprehensive earnings								958,621

Common stock repurchased		—			—			(1,909,670	)

Balance, December 30, 2001		67,001,529			100,307			89,272,537
Exercise of stock options, net		—			—			208,125
Payment received on notes receivable from officer		—			—			250,000
Interest accreted on notes receivable from officer for exercise of options to purchase common stock		—			—			(40,611	)
Net loss		(28,247,564	)		—			(28,247,564	)
Change in unrealized gain on securities available-for-sale, net of income taxes		—			(100,307	)		(100,307	)

Comprehensive loss								(28,347,871	)

Common stock repurchased		—			—			(148,010	)

Balance, December 29, 2002		38,753,965			—			61,194,170
Payment received on notes receivable from officer		—			—			1,281,249
Interest accreted on notes receivable from officer for exercise of options to purchase common stock		—			—			(140,833	)
Net earnings		299,312			—			299,312
Common stock repurchased		—			—			(451,800	)

Balance, December 28, 2003	$	39,053,277		$	—		$	62,182,098

~~ShoLodge,~~See ~~Inc.~~accompanying ~~and Subsidiaries~~notes.

~~Consolidated Statements of Operations (continued)~~F-7

					Year ended
					December 29,			December 30,			December 31,
					2002			2001			2000
Discontinued operations:
	Operations of hotels disposed of and transferred, net of income tax benefit of $402,000, $293,000, and $245,000 for 2002, 2001 and 2000, respectively					(656,333	)		(477,304	)		(400,395	)
	Loss on disposal and transfer of discontinued operations, net of income tax benefit of $1,786,000					(2,913,875	)		–			–
Net (loss) earnings					$	(28,247,564	)	$	911,545		$	577,662
Net (loss) earnings per common share:
	Basic:
			Continuing operations		$	(4.83	)	$	0.25		$	0.18
			Discontinued operations:
				Operations of hotels disposed of and transferred		(0.12	)		(0.09	)		(0.07	)
				Loss on disposal and transfer of discontinued operations		(0.57	)		–			-
			Net (loss) earnings		$	(5.52	)	$	0.16		$	0.11
	Diluted:
			Continuing operations		$	(4.83	)	$	0.25		$	0.18
			Discontinued operations:
				Operations of hotels disposed of and transferred		(0.12	)		(0.09	)		(0.08	)
				Loss on disposal and transfer of discontinued operations		(0.57	)		–			–
			Net (loss) earnings		$	(5.52	)	$	0.16		$	0.10
Weighted average common shares outstanding:
		Basic				5,113,953			5,464,533			5,471,962
		Diluted				5,113,953			5,529,825			5,553,852

~~See~~ShoLodge, ~~accompanying notes~~Inc. and Subsidiaries

~~F-5~~Consolidated Statements of Cash Flows


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

Net cash (used in) provided by operating activities		(12,770,591	)		(8,739,503	)		8,048,518

~~ShoLodge, Inc. and Subsidiaries~~F-8

ConsolidatedTable Statements of Shareholders’ Equity Contents

~~Years ended December 29~~ShoLodge, ~~2002,~~Inc. ~~December 30, 2001~~ and ~~December 31, 2000~~Subsidiaries

								Notes Receivable
			Common Stock					From			Additional Paid-In
			Shares			Amount		Officer			Capital
Balance, December 26, 1999				5,372,578		$	1,000	$	—		$	25,284,696
	Exercise of stock options, net			1,067			–		–			4,001
	Notes receivable from officer for exercise of options to purchase common stock			408,333			–		(1,247,750	)		1,352,603
	Net earnings			–			–		–			–
	Change in unrealized gain on securities available-for-sale, net of income taxes			–			–		–			–
	Comprehensive earnings
	Common stock repurchased			(237,767	)		–		–			(1,216,125	)
Balance, December 31, 2000				5,544,211			1,000		(1,247,750	)		25,425,175
	Exercise of stock options, net			1,067			–		–			4,001
	Interest accreted on notes receivable from officer for exercise of options to purchase common stock			–			–		(102,055	)		–
	Net earnings			–			–		–			–
	Change in unrealized gain on securities available-for-sale, net of income taxes			–			–		–			–
	Comprehensive earnings
	Common stock repurchased			(457,000	)		–		–			(1,909,670	)
Balance, December 30, 2001				5,088,278			1,000		(1,349,805	)		23,519,506
	Exercise of stock options, net			55,500			–		–			208,125
	Payment received on notes receivable from officer			–			–		250,000			–
	Interest accreted on notes receivable from officer for exercise of options to purchase common stock			–			–		(40,611	)		–
		Net loss		–			–		–			–
	Change in unrealized gain on securities available-for-sale, net of income taxes			–			–		—			–
	Comprehensive loss
	Common stock repurchased			(25,000	)		–		—			(148,010	)
Balance, December 29, 2002				5,118,778		$	1,000	$	(1,140,416	)	$	23,579,621

Consolidated Statements of Cash Flows (continued)

F-6


	Year ended
	December 28,			December 29,			December 30,
	2003			2002			2001
Cash flows from investing activities
Restricted cash	$	100,000		$	1,881,747		$	12,624,732
Payments received on notes receivable		39,529,827			971,074			681,433
Capital expenditures		(807,815	)		(3,946,415	)		(20,931,949	)
Purchase of assets of hotel held for sale		(6,981,432	)		—			—
Purchase of other assets		(1,050,000	)		—			—
Proceeds from sale of properties		29,949,612			6,364,023			2,907,258
Proceeds from sale of available-for-sale securities		—			428,415			—
Proceeds from lease abandonment		415,668			—			—
Acquisitions		(20,000	)		(1,839,491	)		—

Net cash provided by (used in) investing activities		61,135,860			3,859,353			(4,718,526	)
Cash flows from financing activities
Payments received on notes receivable from officer		1,281,249			250,000			—
Deferred loan costs		(225,623	)		(415,687	)		(474,068	)
Proceeds from long-term debt		6,726,904			32,093,000			7,500,000
Payments on long-term debt		(44,414,205	)		(28,276,497	)		(11,085,783	)
Distributions to minority interests		(325,000	)		—			—
Exercise of stock options		—			208,125			4,001
Purchases of treasury stock		(451,800	)		(148,010	)		(1,909,670	)

Net cash (used in) provided by financing activities		(37,408,475	)		3,710,931			(5,965,520	)

Net increase (decrease) in cash and cash equivalents		10,956,794			(1,169,219	)		(2,635,528	)
Cash and cash equivalents – beginning of year		1,534,942			2,704,161			5,339,689

Cash and cash equivalents – end of year	$	12,491,736		$	1,534,942		$	2,704,161

~~Table~~See ofaccompanying ~~Contents~~notes.

~~ShoLodge, Inc. and Subsidiaries~~F-9

ConsolidatedTable Statements of Shareholders’ Equity (continued) Contents

~~Years ended December 29~~ShoLodge, ~~2002,~~Inc. ~~December 30, 2001,~~ and ~~December 31, 2000~~Subsidiaries

				Retained			Accumulated Other
				Earnings			Comprehensive Income			Total
Balance, December 26, 1999				$	65,512,322		$	80,321		$	90,878,339
		Exercise of stock options, net			—			—			4,001
		Notes receivable from officer for exercise of options to purchase common stock			–			–			104,853
		Net earnings			577,662			–			577,662
		Change in unrealized gain on securities available-for-sale, net of income taxes			–			(27,090	)		(27,090	)
		Comprehensive earnings									550,572
		Common stock repurchased			–			–			(1,216,125	)
Balance, December 31, 2000					66,089,984			53,231			90,321,640
		Exercise of stock options, net			–			–			4,001
		Interest accreted on notes receivable from officer for exercise of options to purchase common stock			–			–			(102,055	)
		Net earnings			911,545			–			911,545
		Change in unrealized gain on securities available-for-sale, net of income taxes			–			47,076			47,076
		Comprehensive earnings									958,621
		Common stock repurchased			–			–			(1,909,670	)
Balance, December 30, 2001					67,001,529			100,307			89,272,537
		Exercise of stock options, net			–			–			208,125
		Payment received on notes receivable from officer			–			–			250,000
			Interest accreted on notes receivable from officer for exercise of options to purchase common stock		–			–			(40,611	)
	Net loss				(28,247,564	)		–			(28,247,564	)
	Change in unrealized gain on securities available-for-sale, net of income taxes				–			(100,307	)		(100,307	)
		Comprehensive loss									(28,347,871	)
		Common stock repurchased			–			–			(148,010	)
Balance, December 29, 2002				$	38,753,965		$	–		$	61,194,170

Notes to Consolidated Financial Statements

~~See~~Years ~~accompanying~~ended ~~notes.~~December 28, 2003, December 29, 2002 and December 30, 2001

~~F-7~~1. Summary of Significant Accounting Policies

~~Table~~The business activities of ~~Contents~~ShoLodge, Inc. and subsidiaries (the “Company”) are composed primarily of owning, franchising, operating, and leasing lodging facilities, providing reservation services to franchisees and other hotel chains, and commercial construction. Presently, the Company operates three hotel brands: Shoney’s Inns, GuestHouse Inns & Suites, and AmeriSuites. As of December 28, 2003, the Company derived its hotel revenues from three owned properties located in three states across the United States. Of these three properties, one is located in Texas, one in Georgia, and one in Virginia. One of the properties is a GuestHouse Inn & Suites and the other two are AmeriSuites hotels.

~~ShoLodge,~~The ~~Inc~~Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries and partnerships. All significant intercompany items and ~~Subsidiaries~~transactions have been eliminated. The Company is the managing general partner in the partnership entities.

~~Consolidated~~The ~~Statements~~Fiscal Year of ~~Cash~~the ~~Flows~~Company consists of 52/53 weeks ending the last Sunday of the calendar year.

			Year ended
			December 29,			December 30,			December 31
			2002			2001			2000
Cash flows from operating activities
Net (loss) earnings			$	(28,247,564	)	$	911,545		$	577,662
Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities:
	Loss from discontinued operations			3,570,208			477,304			400,395
	Depreciation and amortization			3,335,750			3,392,385			4,501,517
	Write-off of pre-development costs			1,863,628			—			—
	Write-off of construction contracts receivable			3,631,267			—			—
	Write-off of trade receivables			1,296,558			—			—
	Write-off of goodwill and other intangible assets			6,808,635			—			—
	Write-down of notes receivable			21,167,013			—			—
	Impairment of real estate			644,195			—			—
	Amortization of deferred charges recorded as interest expense			567,800			603,385			713,275
	Accretion of debt recorded as interest expense			353,241			—			—
	Recognition of previously deferred gains			(230,082	)		(305,391	)		(2,684,184	)
	Gain on sale of land and leasehold interests			(627,635	)		(3,761,090	)		(4,901,523	)
	Gain on sale of available-for-sale securities			(314,988	)		—			—
	Gain on early extinguishments of debt			(2,592,038	)		(912,719	)		(7,306,645	)
	Deferred income tax (benefit) expense			(992,275	)		(3,298,148	)		2,201,125
	Minority interest in (loss) earnings of consolidated subsidiaries and partnerships			(178,984	)		58,255			57,246
	Stock-based compensation			—			—			151,955
	Changes in assets and liabilities:
		Trade receivables		162,140			(926,097	)		2,221,758
		Construction contracts receivable		248,370			(1,610,873	)		5,268,475
		Construction contracts receivable from related parties		(5,671,892	)		—			—
		Costs and estimated earnings in excess of billings on construction contracts		3,063,747			(3,020,903	)		3,545,227
		Income taxes receivable and payable and taxes payable other than on income		(13,226,205	)		9,480,496			(1,560,619	)
		Prepaid expenses		46,254			(54,336	)		261,551
		Other assets		92,185			361,395			829,049
		Accounts payable and accrued expenses		(3,508,831	)		6,653,310			(5,419,990	)
Net cash (used in) provided by operating activities				(8,739,503	)		8,048,518			(1,143,726	)

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.

~~F-8~~Risks and Uncertainties. As discussed in Note 10, the Company derived significant amounts of its construction and development revenues in 2002 and 2003 from related parties. The Company’s operations would be significantly impacted by a decline in services provided to these related parties. Consequently, any such decline could have a detrimental effect on the financial position and results of operations of the Company.

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

~~ShoLodge, Inc. and Subsidiaries~~F-10

ConsolidatedTable Statements of Cash Flows (continued) Contents

			Year ended
			December 29,			December 30,			December 31,
			2002			2001			2000
Cash flows from investing activities
	Restricted cash			1,881,747			12,624,732			(12,788,021	)
	Payments received on notes receivable			971,074			681,433			418,098
	Capital expenditures			(3,946,415	)		(20,931,949	)		(8,830,699	)
	Proceeds from sale of equipment			—			—			538,725
	Proceeds from sale of land and leasehold interests			6,364,023			2,907,258			53,513,105
	Proceeds from sale of available-for-sale securities			428,415			—			—
	Deposits on sale/leaseback of hotels			—			—			(4,295,000	)
		Acquisitions		(1,839,491	)		—			—
Net cash provided by (used in) investing activities				3,859,353			(4,718,526	)		28,556,208
Cash flows from financing activities
	Payments received on notes receivable from officer			250,000			—			—
	Deferred loan costs			(415,687	)		(474,068	)		(201,424	)
	Proceeds from long-term debt			32,093,000			7,500,000			22,500,500
	Payments on long-term debt			(28,276,497	)		(11,085,783	)		(46,095,258	)
	Payments on capitalized lease obligations			—			—			(189,590	)
	Distributions to minority interests			—			—			(261,834	)
	Exercise of stock options			208,125			4,001			4,001
	Purchases of treasury stock			(148,010	)		(1,909,670	)		(1,216,125	)
Net cash provided by (used in) financing activities				3,710,931			(5,965,520	)		(25,459,730	)
Net (decrease) increase in cash and cash equivalents				(1,169,219	)		(2,635,528	)		1,952,752
Cash and cash equivalents — beginning of year				2,704,161			5,339,689			3,386,937
Cash and cash equivalents — end of year			$	1,534,942		$	2,704,161		$	5,339,689

ShoLodge, Inc. and Subsidiaries

~~See~~Notes ~~accompanying~~to ~~notes.~~Consolidated Financial Statements

~~F-9~~Accounts Receivable from Construction Contracts includes billed amounts earned on construction contracts open at the date of the balance sheet. Costs and estimated earnings in excess of billings on construction contracts represent amounts earned, but not billed to customers at the balance sheet date.

~~Table~~Property and Equipment is recorded at cost and is evaluated for impairment as described below. Depreciation is computed primarily on the straight-line method over the estimated useful lives of ~~Contents~~the related assets, generally forty years for buildings and improvements and seven years for furniture, fixtures and equipment. Significant improvements are capitalized while maintenance and repairs are expensed as incurred. The Company capitalizes direct and indirect costs of construction and interest during the construction period. Interest costs capitalized during the years ended December 30, 2001, December 29, 2002 and December 28, 2003 were approximately $858,000, $80,000 and $0, respectively. Pre-opening costs are expensed as incurred. The Company recognized no impairment losses in 2001, 2002, nor 2003 on hotels owned and operated by the Company included in continuing operations.

~~ShoLodge~~Land Under Development or Held For Sale consists of land adjacent to hotels developed by the Company, ~~Inc~~land adjoining the Company’s corporate headquarters and other commercial tracts which are being developed for sale or are held for sale. Such amounts are recorded at cost and ~~Subsidiaries~~are evaluated for impairment as described below. The Company recognized approximately $77,000 of impairment losses on land under development or held for sale parcels in 2002. There were no impairment losses on land under development or held for sale in 2001 nor 2003. The Company capitalizes direct costs related to specific future projects (“pre-development costs”) when they are deemed probable. Such amounts are expensed to operations when the related project is no longer considered probable. The Company expensed approximately $0, $1,864,000, and $6,000 of pre-development costs in 2001, 2002 and 2003, respectively.

~~Notes~~Deferred toCharges ~~Consolidated~~represent ~~Financial~~loan ~~Statements~~costs incurred in obtaining financing and are amortized using the interest method over the respective terms of the related debt. Accumulated amortization totaled approximately $2,637,000 and $1,405,000 as of December 29, 2002 and December 28, 2003, respectively.

~~Years~~Investments. ~~ended~~The ~~December 29,~~Company’s ~~2002~~investment securities were classified as available-for-sale and were included in other assets in the accompanying balance sheets. Available-for-sale securities were carried at fair value with unrealized holding gains and losses, ~~December 30~~net of tax effects, ~~2001~~reported as a separate component of shareholders’ equity. The Company disposed of its investment in these securities in 2002 and, ~~December 31~~accordingly, ~~2000~~recognized a gain

~~1. Summary of Significant Accounting Policies~~F-11

TheTable business activities of ShoLodge, Inc. and subsidiaries (the “Company”) are composed primarily of owning, franchising, operating, and leasing lodging facilities, providing reservation services to franchisees and other hotel chains, and commercial construction. Presently, the Company operates three hotel brands: Shoney’s Inns, GuestHouse Inns & Suites, and AmeriSuites. As of December 29, 2002, the Company derived its hotel revenues from eight owned properties located in six states across the United States. Of these eight properties, three are located in Texas, one in Mississippi, one in Georgia, one in New Mexico, one in Virginia and one in Alabama. One of the properties is a Shoney’s Inn, five are GuestHouse Inns & Suites, and two are AmeriSuites hotels. Contents

~~The~~ShoLodge, ~~Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries and partnerships~~Inc. ~~All significant intercompany items~~ and ~~transactions have been eliminated. The Company is the managing~~Subsidiaries ~~general partner in the partnership entities.~~

~~The~~Notes ~~Fiscal~~to ~~Year~~Consolidated ofFinancial ~~the Company consists of 52/53 weeks ending the last Sunday~~Statements ~~of the calendar year.~~

~~Accounting Estimates. The preparation~~ of ~~financial statements in conformity~~approximately ~~with~~$315,000 ~~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~~year. ~~Estimates also affect the reported~~ ~~amounts of revenue and expenses during the reporting period. Actual results~~ ~~could differ from those estimates.~~

~~Risks~~Goodwill ~~and~~includes ~~Uncertainties.~~excess Asof ~~discussed~~cost inover ~~Note~~fair ~~10,~~value ~~the Company has historically derived significant amounts~~ of ~~its~~net ~~construction~~assets ~~and~~acquired ~~development revenues~~in ~~from related parties. The Company’s operations would be significantly~~the ~~impacted~~amount byof aapproximately ~~decline~~$766,000 inat ~~services provided to these related parties. Consequently~~December 29, ~~any~~2002 ~~such decline could have a detrimental effect on the financial position~~ and ~~results~~December 28, ~~of operations of the Company~~2003.

~~Cash~~In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations and ~~Cash~~SFAS ~~Equivalents~~No. 142, ~~include~~Goodwill ~~highly~~and ~~liquid~~Other ~~investments~~Intangible Assets. ~~with~~SFAS ~~original~~No. 141 was effective July 1, 2001, and SFAS No. 142 was ~~maturities~~effective January 1, 2002. Under the new rules in SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized effective January 1, 2002, but are subject to annual impairment tests. Other intangible assets continue to be amortized over their useful lives. The Company has applied the new rules on accounting for goodwill and intangible assets beginning in the first quarter of ~~three~~2002. ~~months~~Application orof ~~less~~the non-amortization provisions of SFAS No. 142 resulted in an increase in net income of approximately $261,000 ($0.05 per share) per year. A reconciliation of previously reported net income to the pro forma amounts adjusted for the exclusion of goodwill and indefinite lived intangible assets amortization, net of income tax effect, follows:

F-10


			Year ended
	December 28,		December 29,			December 30,
	2003		2002			2001
Reported net earnings (loss)	$	299,312	$	(28,247,564	)	$	911,545
Add: Goodwill and indefinite lived assets amortization, net of tax		—		—			260,840

Pro forma adjusted net earnings (loss)	$	299,312	$	(28,247,564	)	$	1,172,385

Pro forma adjusted earnings per share basic	$	0.06	$	(5.52	)	$	0.21
Pro forma adjusted earnings per share diluted	$	0.06	$	(5.52	)	$	0.21

~~Table~~Trademark, Franchise Costs and Reservation Rights include costs of ~~Contents~~GuestHouse International Franchise Systems, Inc., franchise rights acquired on May 3, 2002, for $750,000. These franchise rights are being amortized on a straight-line basis over a period of three years. As of December 28, 2003, the franchise rights on GuestHouse were approximately $333,000 net of accumulated amortization of approximately $417,000. At December 28, 2003, trademark and franchise costs also include costs in the amount of approximately $120,000 incurred on June 3, 2002 in the acquisition of USInns license rights and $20,000 incurred on January 22, 2003 in the acquisition of travel portal domain Itravel.com. The life of these rights are indefinite. All franchise rights are included in the franchising, reservation, and management segment.

~~ShoLodge~~Other Assets include cash surrender value of life insurance, ~~Inc.~~non-current portion ~~and~~of ~~Subsidiaries~~direct

~~Notes to Consolidated Financial Statements~~F-12

RestrictedTable Cash at December 29, 2002 represents a $100,000 cash collateral account at one of the Company’s major banks. This amount is held by the bank to facilitate the transaction clearing process. Contents

~~Accounts~~ShoLodge, ~~Receivable from Construction Contracts includes billed amounts earned on construction contracts open at the date of the balance sheet~~Inc. ~~Costs~~ and ~~estimated~~ ~~earnings in excess of billings on construction contracts represent~~Subsidiaries ~~amounts earned, but not billed to customers at the balance sheet date.~~

~~Property~~Notes ~~and~~to ~~Equipment~~Consolidated isFinancial ~~recorded at cost and is evaluated for impairment as~~Statements ~~described below. Depreciation is computed primarily on the straight-line method~~ ~~over the estimated useful lives of the related assets, generally forty years~~ ~~for buildings and improvements and seven years for furniture, fixtures and~~ ~~equipment. Significant improvements are capitalized while maintenance and~~ repairs are expensed as incurred. The Company capitalizes direct and indirect costs of construction and interest during the construction period. Interest costs capitalized during the years ended December 31, 2000, December 30, 2001 and December 29, 2002 were approximately $349,000, $858,000 and $80,000, respectively. Pre-opening costs are expensed as incurred. The Company recognized approximately $568,000 of impairment losses on a hotel owned and operated by the Company at December 29, 2002.

~~Land~~financing ~~Under Development or Held For Sale consists of land adjacent to hotels developed by the Company~~leases, ~~land adjoining the Company’s corporate headquarters~~ and ~~other~~base ~~commercial~~linens ~~tracts which are being developed for sale or are held for sale~~stock. ~~Such amounts are recorded at cost and are evaluated for impairment as~~ ~~described below. The Company recognized approximately $76,000 of impairment~~ ~~losses on land under development or held for sale parcels in 2002. There were~~ no impairment losses on land under development or held for sale in 2001 or 2000. The Company capitalizes direct costs related to specific future projects (“pre-development costs”) when they are deemed probable. Such amounts are expensed to operations when the related project is no longer considered probable. The Company expensed approximately $0, $0, and $1,864,000 of pre-development costs in 2000, 2001 and 2002, respectively.

~~Deferred~~Impairment. ~~Charges~~The ~~represent~~Company ~~loan~~records ~~costs~~impairment ~~incurred~~losses on long-lived assets used in operations ~~obtaining~~when ~~financing~~indicators of impairment are present and the undiscounted cash flows related to those assets are less than their carrying amounts. The ~~amortized~~Company ~~using~~records ~~the~~impairment ~~interest~~losses ~~method~~on ~~over~~long-lived ~~the~~assets ~~respective~~under ~~terms~~development or held for sale when indicators of impairment are present and the ~~related~~estimated fair ~~debt.~~value ~~Accumulated~~less ~~amortization~~costs ~~totaled~~to ~~approximately~~sell ~~$2,651,000~~is ~~and~~less ~~$2,637,000~~than their carrying amount. Subsequent to the asdate ofthat ~~December 30,~~an ~~2001~~asset ~~and~~is ~~December 29,~~held ~~2002~~for sale, ~~respectively~~depreciation expense is not recorded.

~~F-11~~Advertising. The Company charges the costs of advertising to expense as incurred. Advertising expense was approximately $486,000, $520,000 and $611,000 for the years ended December 30, 2001, December 29, 2002 and December 28, 2003, respectively.

~~Table~~Income ofTaxes. ~~Contents~~The Company uses the liability method to account for income taxes.

~~ShoLodge,~~Hotel ~~Inc.~~Revenues ~~and~~are ~~Subsidiaries~~recognized as services are rendered.

~~Notes~~Construction and Development Revenues from fixed-price and cost-plus construction contracts are recognized based on the percentage of completion method, measured by the percentage of cost incurred to ~~Consolidated~~total ~~Financial~~estimated ~~Statements~~cost for each contract. This method is used because management considers costs incurred to be the best available measure of progress on these contracts. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability (including those arising from contract penalty provisions) and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. No material amounts were recognized due to revisions in 2001, 2002 or 2003.

~~Investments.~~Claims ~~The~~are ~~Company’s~~amounts ~~investment~~in ~~securities~~excess ~~were~~of ~~classified~~the asagreed contract price that a contractor ~~available-~~seeks to collect from customers or others for customer-~~sale~~caused delays, errors in specifications and ~~were~~designs, ~~included~~contract terminations, change orders in dispute or unapproved as to both scope and price, or other ~~assets~~causes of unanticipated additional costs. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the ~~accompanying~~amount can be ~~balance~~reliably ~~sheets~~estimated. ~~Available-for-sale~~Those ~~securities~~two ~~were~~requirements ~~carried~~are atsatisfied ~~fair~~by ~~value with~~management’s ~~unrealized~~determination ~~holding~~of ~~gains~~the ~~and~~existence ~~losses,~~of ~~net~~all of ~~tax~~the ~~effects,~~following ~~reported~~conditions: asthe contract or other evidence provides a ~~separate~~legal basis for the claim; additional costs are ~~component~~caused ofby ~~shareholders’~~circumstances ~~equity.~~that ~~The~~were ~~Company~~unforeseen ~~disposed~~at ofthe ~~its~~contract ~~investment~~date inand are not ~~these~~the ~~securities~~result of deficiencies in ~~2002~~the ~~and,~~contractor’s ~~accordingly,~~performance; ~~recognized~~costs aassociated with ~~gain~~the claim are identifiable or otherwise determinable and are reasonable in view of ~~approximately~~the work performed; ~~$315,000.~~

~~Goodwill includes excess of cost over fair value of net assets acquired in the~~F-13 amount of approximately $2,387,000 and $766,000 at December 30, 2001 and December 29, 2002, respectively. The amount reported is net of accumulated amortization of approximately $1,362,000 as of December 30, 2001.

TrademarkTable and Franchise Rights include costs of the Sumner Suites trademark of approximately $389,000 as of December 30, 2001, which was amortized on a straight-line basis over a period of twenty years until written off as worthless in 2002. This amount is net of accumulated amortization of $104,000 as of December 30, 2001. In addition, trademarks and franchise rights included cost incurred in amending the Company’s franchise license agreement, which was being amortized on the straight-line method over twenty years, and was written off as worthless in the second quarter of 2002. 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 was being amortized on a straight-line basis over a period of five years until the one Baymont hotel was sold in 2002. Also included in trademark and franchise rights is GuestHouse International Franchise Systems, Inc., franchise rights acquired on May 3, 2002, for $750,000. These franchise rights are being amortized on a straight-line basis over a period of three years. As of December 29, 2002, the franchise rights on GuestHouse were approximately $583,000 net of accumulated amortization of approximately $167,000. At December 29, 2002, trademark and franchise costs also include costs in the amount of approximately $120,000 incurred on June 3, 2002 in the acquisition of USInns license rights. The life of these rights are indefinite. All franchise rights are included in the franchising, reservation, and management segment. Contents

~~Other Assets include cash surrender value of life insurance~~ShoLodge, ~~non-current portion~~Inc. ~~of direct financing leases,~~ and ~~base linens stock.~~Subsidiaries

~~Impairment.~~Notes ~~The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows related~~ to ~~those~~Consolidated ~~assets~~Financial ~~are less than their carrying amounts. The~~Statements ~~Company records impairment losses on long-lived assets under development or~~ ~~held for sale when indicators of impairment are present and the estimated fair~~ ~~value less costs to sell is less than their carrying amount. Subsequent to the~~ ~~date that an asset is held for sale, depreciation expense is not recorded.~~

~~F-12~~and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim is recorded to the extent that contract costs relating to the claim have been incurred. Costs attributable to claims are treated as costs of contract performance as incurred. No material amounts were recognized due to claims in 2001, 2002, or 2003.

~~Table~~Franchising, ofReservation ~~Contents~~and Management Revenues are recognized as earned.

~~ShoLodge~~Gains from the Sale of Land and Hotel Properties is recognized at the time the sale is consummated, ~~Inc~~the minimum down payment is received, and there is no significant continuing involvement. Losses on the sale or transfer of land and hotel ~~Subsidiaries~~properties are recognized at the time the sale or transfer occurs to the extent that such losses have not already been recognized through impairment or otherwise.

~~Notes~~Earnings toPer ~~Consolidated~~Common Share for all periods has been computed in accordance with Statement of Financial ~~Statements~~Accounting Standards (“SFAS”) No. 128, Earnings per Share. Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed by dividing earnings by the weighted average number of common shares outstanding during the year plus incremental shares that would have been outstanding upon the assumed exercise of dilutive options and the assumed conversion of dilutive debentures. See Note 5 for a reconciliation of basic and diluted earnings per share.

~~Advertising~~Stock-Based Compensation. The Company ~~charges~~uses the ~~costs~~intrinsic ofvalue ~~advertising~~method tofor valuing ~~expense~~its ~~as incurred.~~awards ~~Advertising~~of ~~expense~~stock ~~was~~options ~~approximately~~and ~~$1,117,000,~~recording ~~$486,000~~the ~~and~~related compensation ~~$520~~expense,~~000~~ ~~for~~if ~~the~~any. ~~years~~This ~~ended~~compensation ~~December 31,~~expense ~~2000,~~is ~~December 30,~~included ~~2001~~in ~~and~~general ~~December~~and ~~29,~~administrative ~~2002, respectively~~expense.

~~Income~~The ~~Taxes~~Company has adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. The ~~Company~~following ~~uses~~table presents a summary of the ~~liability~~pro ~~method~~forma effects to ~~account~~reported ~~for~~net ~~income~~earnings (loss) as if the Company had ~~taxes~~elected to recognize compensation costs based on the fair value of the options granted as prescribed by SFAS No. 123.

~~Hotel Revenues are recognized as services are rendered.~~F-14

ConstructionTable and Development Revenues from 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 2000, 2001 or 2002. Contents

~~Claims are amounts in excess of the agreed contract price that a contractor seeks to collect from customers or others for customer-caused delays~~ShoLodge, ~~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~~Inc. ~~An amount equal to contract costs attributable to claims is included in revenues when realization is probable~~ and ~~the amount can be~~Subsidiaries ~~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. No material amounts were recognized due to claims in 2000, 2001, or 2002.

~~Franchising,~~Notes ~~Reservation~~to ~~and~~Consolidated ~~Management~~Financial ~~Revenues are recognized as earned.~~Statements

F-13


			Year ended
	December 28,		December 29,			December 30,
	2003		2002			2001
Net earnings (loss)	$	299,312	$	(28,247,564	)	$	911,545
Less: total stock-based employee compensation expense determined under fair value based method for all awards granted since January 1, 1995		—		(18,732	)		(95,685	)

Pro forma net earnings (loss)	$	299,312	$	(28,266,296	)	$	815,860

Pro forma earnings (loss) per share-basic	$	0.06	$	(5.53	)	$	.15
Pro forma earnings (loss) per share-diluted		0.06		(5.53	)		.15

~~Table~~There were no grants of ~~Contents~~stock-based compensation in 2001, 2002 or 2003.

~~ShoLodge~~The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options and shares that have no vesting restrictions and are fully transferable. In addition, ~~Inc~~valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and ~~Subsidiaries~~because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

~~Notes~~Concentrations toof ~~Consolidated~~Credit Risk. Financial ~~Statements~~instruments which potentially subject the Company to concentrations of credit risk consist principally of cash investments, trade receivables, construction contracts receivable, and notes receivable. The Company places its cash investments with high credit quality financial institutions which are members of the FDIC thus reducing any potential risk. Concentrations of credit risk with respect to trade receivables are limited due to the Company’s large number of customers and their dispersion across many geographic areas. Concentrations of credit risk with respect to construction contracts receivable and notes receivable are increased due to the smaller number of contracts and notes and their higher dollar amounts. The Company performs credit evaluations of its customers and generally does not require collateral or other security to support customer receivables.

~~Gains~~As of December 29, 2002, approximately $58,762,000 of notes receivable were from a group of companies affiliated with one another, which acquired and operated 16 of the ~~Sale~~hotels ordescribed ~~Transfer~~in Note 13. Although notes receivable generally consist of ~~Land~~first ~~and~~mortgage ~~Hotel~~notes ~~Properties~~that isare ~~recognized~~cross-collateralized atand ~~the~~cross-defaulted, ~~time~~in the ~~sale~~event orthe ~~transfer~~fair isvalues ~~consummated,~~of the ~~minimum~~underlying ~~down~~assets ~~payment~~were isto ~~received,~~be ~~and~~less ~~there~~than isbalances noof ~~significant~~the ~~continuing~~first ~~involvement.~~mortgage ~~Losses~~notes, on the notes receivable could ~~sale~~be orunder-collateralized; ~~transfer~~as of ~~land~~December 29, ~~and~~2002, ~~hotel~~these ~~properties~~notes ~~are~~receivable totaling ~~recognized~~approximately at$58,762,000 ~~the~~were ~~time~~written ~~the~~down to approximately ~~sale~~$40,564,000 orbased ~~transfer~~upon ~~occurs~~the toestimated fair values of the ~~extent~~underlying ~~that~~properties and ~~such~~the ~~losses~~Company’s ~~have~~anticipation ~~not~~of ~~already~~taking ~~been recognized~~ownership ~~through~~of ~~impairment~~the orproperties ~~otherwise.~~by deeds in lieu of

~~Earnings Per Common Share for all periods has been computed in accordance with~~F-15 Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share. Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed by dividing earnings by the weighted average number of common shares outstanding during the year plus incremental shares that would have been outstanding upon the assumed exercise of dilutive options and the assumed conversion of dilutive debentures. See Note 5 for a reconciliation of basic and diluted earnings per share.

Stock-BasedTable Compensation. The Company uses the intrinsic value method for valuing its awards of stock options and recording the related compensation expense, if any. This compensation expense is included in general and administrative expense. Contents

~~The Company has adopted the disclosure provisions of SFAS No. 123~~ShoLodge, ~~Accounting for Stock-Based Compensation and SFAS No~~Inc. ~~148,~~ ~~Accounting for Stock-Based Compensation-Transition~~ and ~~Disclosure. The following table presents a summary~~Subsidiaries ~~of the pro forma effects to reported net earnings (loss) as if the Company had~~ ~~elected to recognize compensation costs based on the fair value of the options~~ ~~granted as prescribed by SFAS No. 123.~~

				Year ended
	December 29,			December 30,			December 31,
	2002			2001			2000
Net (loss) earnings	$	(28,247,564	)	$	911,545		$	577,662
Less: total stock-based employee compensation expense determined under fair value based method for all awards granted since January 1, 1995		(18,732	)		(95,685	)		(559,057	)
Pro forma net (loss) earnings	$	(28,266,296	)	$	815,860		$	(18,605	)
Pro forma (loss) earnings per share-basic	$	(5.53	)	$	.15		$	.00
Pro forma (loss) earnings per share-diluted		(5.53	)		.15			.00

Notes to Consolidated Financial Statements

~~There~~foreclosure ~~were~~due noto ~~grants~~the notes’ maturity in July of ~~stock-based~~2003 ~~compensation~~and the owner’s indicated inability to pay the notes at maturity. During 2003, the Company took ownership of all but two of the underlying properties by deeds in lieu ~~2000~~of foreclosure and immediately resold them, ~~2001~~writing ordown ~~2002~~the carrying value of the notes by an additional $867,000 since the net proceeds were insufficient by that amount to pay the then carrying value of the notes in full. As of December 28, 2003, the two remaining first mortgage notes were carried at $3,493,000, representing the estimate fair value of the two underlying hotel properties.

~~F-14~~Reclassifications. Certain reclassifications have been made in the 2001 and 2002 consolidated financial statements to conform to the classifications used in 2003. These reclassifications had no impact on net income (loss) as previously reported.

~~Table~~Recently Issued Accounting Pronouncements. In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of ~~Contents~~Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (“FIN No. 46”). FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 required the Company to apply the provisions of FIN No. 46 immediately to any special purpose entities and variable interest entities created after January 31, 2003. Application of the provisions will be required for all other variable interest entities in financial statements for periods ending after March 15, 2004. The adoption of FIN No. 46 is not expected to have a material impact on the Company’s financial position or results of operations.

~~ShoLodge~~In May 2003, ~~Inc~~the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and ~~Subsidiaries~~Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument within its scope as a liability though many of these instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position or results of operations.

~~Notes to Consolidated Financial Statements~~F-16

TheTable Black-Scholes option valuation model was developed for use in estimating the fair value of traded options and shares that have no vesting restrictions and are fully transferable. In addition, valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. Contents

~~Concentrations of Credit Risk. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash investments~~ShoLodge, ~~trade receivables, construction contracts receivable, and notes receivable~~Inc. 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~~Subsidiaries ~~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 30, 2001, and December 29, 2002, approximately $58,799,000 and $58,762,000, respectively, of notes receivable are from a group of companies affiliated with one another, which acquired and operate 16 of the hotels described in Note 13. Although notes receivable generally consist of first mortgage notes that are cross-collateralized and cross-defaulted, in the event the fair values of the underlying assets were to be less than balances of the first mortgage notes, the notes receivable could be under-collateralized; as of December 29, 2002, these notes receivable totaling approximately $58,762,000 were written down to approximately $40,564,000 based upon the estimated fair values of the underlying properties and the Company’s anticipation of taking ownership of the properties by deeds in lieu of foreclosure due to the notes’ maturity in July of 2003 and the owner’s indicated inability to pay the notes at maturity.

~~Reclassifications.~~Notes ~~Certain reclassifications have been made in the 2000 and 2001 consolidated financial statements~~ to ~~conform~~Consolidated toFinancial ~~the classifications used~~Statements ~~in 2002. These classifications had no impact on net income as previously~~ ~~reported.~~

~~Recently Issued Accounting Pronouncements~~2. InProperty ~~June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations~~ and ~~SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 was~~Equipment ~~effective July 1, 2001, and SFAS No. 142 was effective January 1, 2002. Under~~ ~~the new rules in SFAS No. 142,~~

~~F-15~~Property and equipment consists of:


	December 28,			December 29,
	2003			2002
Land and improvements	$	3,679,677		$	3,690,864
Buildings and improvements		21,693,326			22,589,633
Furniture, fixtures, equipment and software		14,996,301			14,843,281

		40,369,304			41,123,778
Less accumulated depreciation and amortization		(6,922,065	)		(6,387,327	)

	$	33,447,239		$	34,736,451

~~ShoLodge, Inc~~3. ~~and~~Long-Term ~~Subsidiaries~~Debt

~~Notes~~Long-term todebt ~~Consolidated~~consists ~~Financial Statements~~of:

goodwill and indefinite lived intangible assets are no longer amortized effective January 1, 2002, but are subject to annual impairment tests. Other intangible assets continue to be amortized over their useful lives.


	December 28,			December 29,
	2003			2002
Industrial revenue bonds, due in varying amounts through 2017	$	—		$	2,820,000
7.50% Convertible subordinated debentures		10,772,000			16,520,000
9.75% Series A senior subordinated notes		7,323,260			23,657,419
10.15% Series A-1 senior subordinated notes		13,080,000			—
9.55% Series B senior subordinated notes		7,744,120			19,064,942
9.95% Series B-1 senior subordinated notes		8,526,000			—
Bank credit facilities		—			22,156,276
Note payable – bank, bearing interest at 8.19%, due in varying amounts through 2010		5,272,905			7,711,150

		52,718,285			91,929,787
Less current portion		(11,344,902	)		(67,548,511	)

	$	41,373,383		$	24,381,276

The ~~Company~~bank ~~has~~note ~~applied~~payable ~~the~~is ~~new~~collateralized ~~rules~~by onequipment ~~accounting~~with ~~for~~a ~~goodwill~~net ~~and~~book ~~intangible assets~~value ~~beginning in the first quarter~~ of ~~2002. Application of the~~ ~~non-amortization~~approximately ~~provisions of SFAS No~~$7.5 ~~142~~million ~~resulted~~at ~~in an increase in net income of approximately $261~~December 28,~~000~~ ~~($0~~2003.~~05 per share) per year. A reconciliation~~ ~~of previously reported net income to the pro forma amounts adjusted for the~~ ~~exclusion of goodwill and indefinite lived intangible assets amortization, net~~ ~~of income tax effect, follows:~~

				Year ended
	December 29,			December 30,		December 31,
	2002			2001		2000
Reported net (loss) earnings	$	(28,247,564	)	$	911,545	$	577,662
Add: Goodwill and indefinite lived assets amortization, net of tax		—			260,840		260,840
Pro forma adjusted net (loss) earnings	$	(28,247,564	)	$	1,172,385	$	838,502
Pro forma adjusted earnings per share basic	$	(5.52	)	$	0.21	$	0.15
Pro forma adjusted earnings per share diluted	$	(5.52	)	$	0.21	$	0.15

F-17

TheTable Company sold its interests in 27 Sumner Suites hotels in 2000 to Prime Hospitality Corp., who subsequently converted all of them to their AmeriSuites hotel brand. The Company continued to hold the “Sumner Suites” trademark with the possibility of using it to brand future hotels it might develop or acquire. In the second quarter of 2002, management made the decision to abandon the trademark since the use of the name by the Company in the future is highly unlikely. Consequently, the remaining balance of $376,000 for the Sumner Suites trademark, which was included in the franchising, reservation and management segment, was written off in the second quarter. Contents

The Company carried intangible assets (deferred charges of $4.0 million and goodwill of $2.4 million) related to the acquisition and modification of the franchising rights for Shoney’s Inns and Shoney’s Inns & Suites at $6.4 millionShoLodge, ~~which was included in the franchising, reservation and management segment~~Inc. ~~The Company has been unsuccessful in its efforts to sell new franchises for at least a year,~~ and ~~existing franchises have exited the~~Subsidiaries ~~Shoney’s Inn system for several years. In the second quarter of 2002, the~~ ~~Company acquired the exclusive franchising rights for the GuestHouse~~ ~~International Inns & Suites brand. The Company has decided to convert all~~ existing Shoney’s Inns to the GuestHouse brand and to franchise only the GuestHouse brand in the future. No more attempts will be made to franchise the Shoney’s Inn brand. As a result, the value of the Shoney’s Inn franchising rights has been determined to be worthless. Consequently, the balance of $6.4 million was written off in the second quarter.

~~F-16~~Notes to Consolidated Financial Statements

~~Table~~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 ~~Contents~~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.

~~ShoLodge~~During November 1996, ~~Inc~~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 ~~Subsidiaries~~subordinated in right of payment to the prior payment in full of all existing and future senior indebtedness of the Company. Additionally, in September 1997, the Company issued $35,000,000 of 9.55% senior subordinated notes, Series B, also under the aggregate $125,000,000 senior subordinated indenture agreement. The notes mature in September 2007, with interest payable quarterly. The notes are unsecured and subordinated in right of payment to the prior payment in full of all other senior indebtedness of the Company and will be senior in right of payment to, or pari passu with all other subordinated indebtedness of the Company, including the Series A notes. Both Series A and Series B of the senior subordinated notes were subject to annual redemptions at the option of the holder of the notes in the amount of 5% of the original aggregate amount issued under the indenture, which is $3,407,500 per year beginning December 1, 1999. The note holders exercised this option in each of the years through 2002. Accordingly, the annual redemption amount has been included in current portion of long-term debt in these financial statements through 2002. In 2003, the Company completed an Exchange Offer and Consent Solicitation (“Exchange Offer”), which contained modifications of the financial covenants, including the elimination of the annual redemption rights. Additionally, the Exchange Offer resulted in the Company’s exchanging Series A-1 and Series B-1 notes for a portion of the Series A and Series B notes, respectively. The only difference between the Series A-1 and Series B-1 notes from the Series A and Series B notes is that they bear a 40 basis point higher interest rate.

~~Notes~~The Company established a three-year credit facility with a financial institution effective August 27, 1999. An amendment to ~~Consolidated~~the ~~Financial~~credit ~~Statements~~facility became effective October 3, 2001, which, among other changes, extended the maturity to September 30, 2004. A second amendment to the credit facility became effective November 26, 2002, which, among other changes, added real property collateral for the purpose of increasing the borrowing base. The credit facility was for $30 million (a $10 million term loan and a $20 million revolving line of credit), secured by a pledge of certain promissory notes payable to the

~~In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long~~F-~~Lived Assets, which supercedes SFAS No. 121, Accounting for~~18 the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, 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.

InTable 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 will 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 gains on extinguishment of debt for all periods presented, previously classified as an extraordinary item in prior periods, have been reclassified to conform with the provisions of Statement 145. Contents

~~SFAS No. 148~~ShoLodge, ~~Accounting for Stock-Based Compensation-Transition and Disclosure, issued in December 2002, which amends SFAS No~~Inc. ~~123,~~ ~~Accounting for Stock-Based Compensation, provides an alternative method of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation~~ and ~~amends the disclosure requirements of SFAS No. 123 to~~Subsidiaries ~~require more prominent and more frequent disclosures in financial statements~~ ~~about the effects of stock-based compensation. The transition provisions of~~ ~~SFAS No. 148 are effective for financial reports containing financial~~ statements for years ending after December 15, 2002, while certain additional disclosure requirements of SFAS No.148 are effective for interim periods beginning after December 15, 2002. The Company has elected to account for its stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and does not utilize the fair value method. However, the Company has adopted the disclosure requirements of SFAS No. 123 and has adopted the additional disclosure requirements as specified in SFAS No. 148 in fiscal 2002.

~~F-17~~Notes to Consolidated Financial Statements

~~Table~~Company received in connection with the sale of ~~Contents~~16 of the Company’s lodging facilities in the third quarter of 1998 (Note 13) and the real property collateral (one hotel) added in 2002 by the second amendment. The borrowing base was the lower of (a) 85% of the outstanding principal amount of the pledged notes, (b) 65% of the appraised market value of the underlying real property collateral securing the pledged notes, and of the real property collateral (c) a multiple of the trailing twelve months’ net operating income of the real property collateral and the underlying properties securing the pledged notes serving as collateral, or (d) $30 million. Effective October 3, 2001, the interest rate on the term loan was at the lender’s base rate plus 100 basis points, and the interest rate on the revolving line of credit was at the lender’s base rate plus 250 basis points, with a floor of 7.00% on both portions of the facility. The Company was to pay commitment fees on the unused portion of the facility at .50% per annum. The credit facility also contained covenants which limited or prohibited the incurring of certain additional indebtedness in excess of a specified debt to total capital ratio, prohibited additional liens on the collateral, restricted mergers and the payment of dividends and restricted the Company’s ability to place liens on unencumbered assets. The credit facility contained financial covenants as to the Company’s minimum net worth. In 2003, the Company decided that the credit facility no longer served the Company’s needs, terminated the facility, and has received all of its collateral back from the financial institution. The Company wrote off related unamortized deferred financing costs of $472,000 in 2003.

~~ShoLodge~~The Company also maintained a $1.0 million unsecured line of credit with another bank, ~~Inc~~bearing interest at the lender’s prime rate, maturing May 31, 2003. This line of credit was paid off in the first quarter of 2003 and ~~Subsidiaries~~was not renewed since it was determined that it was not needed in the foreseeable future.

~~Notes~~In tothe ~~Consolidated~~years ~~Financial~~ended ~~Statements~~December 30, 2001, December 29, 2002, and December 28, 2003, the Company repurchased $3,412,000, $1,590,000, and $12,301,000, respectively, of the Company’s previously issued subordinated debt at a discount from face value. These repurchases resulted in pretax gains, net of the write-off of related unamortized deferred financing costs of $913,000, $375,000, and $1,993,000 in 2001, 2002, and 2003, respectively. Additionally in 2002, the Company, in a negotiated transaction, exchanged $8,233,000 face value of its senior subordinated notes previously purchased for $5,269,000, for $7,486,000 of its outstanding 7.50% subordinated debentures, resulting in a net pretax gain of $2,217,000.

~~SFAS~~The ~~No. 143,~~Company ~~Accounting~~paid ~~for~~off ~~Asset~~the ~~Retirement~~industrial ~~Obligations,~~revenue ~~issued~~bonds in ~~June 2001, addresses~~2003 ~~financial~~prior ~~accounting~~to ~~and reporting for obligations associated with~~their ~~the~~maturity ~~retirement of tangible long-lived assets~~ and ~~for~~wrote ~~the~~off ~~associated retirement costs. SFAS No. 143, which applies to all entities that have a legal obligation associated with~~ the ~~retirement~~related ofunamortized ~~tangible~~deferred ~~long-lived~~financing ~~assets,~~costs isof ~~effective for fiscal years beginning after June 15~~$176,000 ~~2002.~~in ~~The adoption of SFAS No~~2003. ~~143 is not expected to have a material impact on the Company’s financial~~ ~~position or results of operations.~~

~~SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,~~F-19 issued in June 2002, requires that a liability for the cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company expects that the adoption of SFAS No. 146 during 2003 will not materially impact the Company’s financial position and results of operations.

2. PropertyTable andof Equipment Contents

~~Property~~ShoLodge, Inc. and ~~equipment consists of:~~Subsidiaries

	December 29,			December 30,
	2002			2001
Land and improvements	$	10,364,197		$	16,187,365
Buildings and improvements		50,531,502			52,021,759
Furniture, fixtures, equipment and software		20,987,023			22,564,043
Construction in progress		—			7,846,670
		81,882,722			98,619,837
Less accumulated depreciation and amortization		(16,297,988	)		(15,522,304	)
	$	65,584,734		$	83,097,533

Notes to Consolidated Financial Statements

FMaturities of long-18term debt are as follows:


2004	$	11,344,902
2005		621,624
2006		21,077,751
2007		17,001,973
2008		794,094
Thereafter		1,877,941

	$	52,718,285

~~ShoLodge, Inc~~4. Commitments and ~~Subsidiaries~~Contingencies

~~Notes~~The toCompany ~~Consolidated~~and ~~Financial~~its ~~Statements~~subsidiaries lease certain property and equipment under non-cancelable operating lease agreements. Total rental expense under operating leases for the years ended December 30, 2001, December 29, 2002 and December 28, 2003 was approximately $582,000, $584,000 and $518,000, respectively.

~~3. Long-Term~~Future ~~Debt~~minimum rental payments are as follows:

Long-term debt consists of:


2004	$	350,000
2005		291,667
Thereafter		-

	$	641,667

	December 29,			December 30,
	2002			2001
Industrial revenue bonds, due in varying amounts through 2017	$	2,820,000		$	2,905,000
7.50% Convertible subordinated debentures		16,520,000			25,596,000
9.75% Series A senior subordinated notes		23,657,419			20,167,000
9.55% Series B senior subordinated notes		19,064,942			20,341,000
Bank credit facilities		22,156,276			13,000,000
Notes payable – bank and other, bearing interest at 2.01% to 8.19%, due in varying amounts through 2010		7,711,150			8,343,081
		91,929,787			90,352,081
Less current portion		(67,548,511	)		(4,058,700	)
	$	24,381,276		$	86,293,381

The Company is self-insured for workers’ compensation benefits up to $500,000 annually in the aggregate and $250,000 per occurrence and has recorded an accrual for all expected and outstanding claims at December 28, 2003. While the Company’s ultimate liability may exceed or be less than the amount accrued, the Company believes that it is unlikely that it would experience losses that would be materially in excess of such estimated amounts. In addition to the recorded accruals, the Company had outstanding letters of credit in the amount of $512,000 as of December 29, 2002 and December 28, 2003 to satisfy workers’ compensation self-insurance security deposit requirements.

The ~~Industrial~~Company ~~Revenue~~is ~~Bonds~~or ~~(“IRBs”)~~has ~~and~~been ~~substantially~~a ~~all~~party ~~notes~~to ~~payable~~legal ~~are collateralized~~proceedings byincidental ~~property~~to ~~and~~its business. ~~equipment~~In ~~with~~the aopinion ~~net book value~~ of ~~approximately $15.2 million at December 29~~management, ~~2002.~~any ~~Additionally,~~ultimate ~~the~~liability ~~IRBs,~~with ~~are~~respect ~~collateralized~~to bythese ~~irrevocable~~actions ~~letters~~will ofnot ~~credit~~materially ~~and~~affect ~~are~~the ~~guaranteed~~consolidated byfinancial ~~the~~position ~~Company. The~~or ~~interest~~results ~~rate~~of onoperations ~~the~~of ~~IRBs is a variable rate reset weekly by~~ the ~~remarketing agent (1~~Company.~~97% at December 29, 2002).~~

The ~~Company’s~~construction ~~7.50%~~of ~~convertible~~a ~~subordinated~~hotel ~~debentures~~was ~~mature~~completed infor ~~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~~third ~~price~~party ofduring ~~$23.31 per share~~2001, ~~subject to adjustment. The debentures are unsecured~~ and ~~subordinated in right of payment to the prior~~a ~~payment~~balance ~~in full~~ of ~~all~~approximately ~~existing and future senior indebtedness~~$2, ~~as defined in the debentures. The Company~~000,000 atremained ~~its~~uncollected ~~option,~~as ~~can redeem the bonds beginning in May 1997 at 105.25%~~ of ~~par~~December 29, ~~declining~~ 2002.~~75%~~ ~~each year thereafter to par in May~~The ~~2004.~~

~~During November 1996, the Company issued $33,150,000 of 9.75% senior~~F-20 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

F-19 Table of Contents

~~Table~~ShoLodge, ofInc. ~~Contents~~and Subsidiaries

~~ShoLodge,~~Notes ~~Inc.~~to ~~and~~Consolidated ~~Subsidiaries~~Financial Statements

~~Notes~~Company had a lien against the property and filed an arbitration claim against the owner. The Company received an arbitration award of substantially all of its claim in the fourth quarter of 2002 to ~~Consolidated~~be ~~Financial~~paid ~~Statements~~within 30 days of the October 30, 2002 award date. The owner of the hotel failed to pay the award when due, and on January 3, 2003 filed Chapter 11 bankruptcy. As a result, the Company charged the entire balance off in the fourth quarter of 2002. The bankruptcy was subsequently deemed by the court to be in bad faith and was set aside. The Company acquired the first mortgage on this hotel in 2003 and foreclosed on the mortgage, acquiring the hotel at a foreclosure sale, with the intent to operate the hotel until a purchaser was found. A prospective buyer has been located to purchase the hotel. The Company expects to recover all or a portion of the 2002 write-off in 2004 when the sale is consummated.

~~September 1997,~~Another ~~the~~contract ~~Company issued~~receivable ~~$35,000,000~~is offor ~~9.55%~~approximately ~~senior subordinated notes, Series B, also under the aggregate~~ $~~125~~1,000,000, ~~senior~~and ~~subordinated~~arbitration proceedings ~~indenture~~were ~~agreement.~~initiated ~~The~~on ~~notes mature in September~~January ~~2007~~15, ~~with interest payable quarterly~~2003. The ~~notes~~owner ~~are unsecured and subordinated in right~~ of ~~payment to~~ the ~~prior~~hotel ~~payment~~claims damages in ~~full~~excess of ~~all~~ ~~other~~the ~~senior~~amount ~~indebtedness~~owed. ofConsequently, the Company ~~and~~charged ~~will~~the entire beamount ~~senior~~off in ~~right~~its ~~of payment~~fourth ~~to,~~quarter orof ~~pari~~2002. ~~passu~~Any ~~with~~recovery ~~all~~from ~~other~~this contract ~~subordinated~~will ~~indebtedness~~be ofrecorded ~~the Company,~~as ~~including~~earned ~~the~~when ~~Series A notes~~received. ~~Both~~Approximately ~~Series A~~$600,000 ~~and Series B~~ of ~~the~~ ~~senior~~other ~~subordinated~~construction ~~notes~~contracts ~~are~~receivable ~~subject~~was toalso ~~annual~~charged ~~redemptions~~off atas ~~the option of~~uncollectible ~~the holder of the notes~~ in the ~~amount~~fourth ofquarter 5% of ~~the original aggregate amount issued under the indenture, which is $3,407,500 per year beginning December 1, 1999~~2002. ~~The~~Charge-offs ~~note holders exercised this option in each~~ of ~~the~~construction ~~last three years~~contracts ~~and~~receivable ~~are~~then ~~expected~~totaled ~~to do so again in fiscal 2003~~$3.6 million ~~Accordingly, the annual redemption amount has been included~~ in ~~current portion of long-term debt in these financial statements~~2002.

~~The Company established a three-year credit facility with a financial institution effective August 27, 1999~~5. AnEarnings amendment to the credit facility became effective October 3, 2001, which, among other changes, extended the maturity to September 30, 2004. A second amendment to the credit facility became effective November 26, 2002, which, among other changes, added real property collateral for the purpose of increasing the borrowing base. The credit facility is for $30 million (~~a $10 million term loan and a $20 million revolving line of credit~~Loss), ~~secured~~Per ~~by a pledge of certain promissory notes~~Share ~~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 14) and the~~ real property collateral (one hotel) added in 2002 by the second amendment. 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, and of the real property collateral (c) a multiple of the trailing twelve months’ net operating income of the real property collateral and the underlying properties securing the pledged notes serving as collateral, or (d) $30 million. Effective October 3, 2001, the interest rate on the term loan 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 29, 2002, the Company had $21.7 million in borrowings outstanding under this credit facility, consisting of the $10 million term loan and $11.7 million on the revolving line of credit. The balances of notes receivable collateralizing this credit facility totaled approximately $40,616,000 as of December 29, 2002.

~~F-20~~The following table reconciles earnings and weighted average shares used in the earnings (loss) per share (“EPS”) calculations for fiscal years 2003, 2002 and 2001.


	Year ended
	December 28,			December 29,			December 30,
	2003			2002			2001
Numerator:
Earnings (loss) from continuing operations	$	1,810,757		$	(25,018,398	)	$	426,098
(Loss) earnings from discontinued operations		(1,511,445	)		(3,229,166	)		485,447

Net earnings (loss)	$	299,312		$	(28,247,564	)	$	911,545

Denominator:
Denominator for basic earnings (loss) per share – weighted-average shares		5,071,198			5,113,953			5,464,533
Effect of dilutive securities:
Options		—			—			65,292

Denominator for diluted (loss) earnings per share – adjusted weighted-average shares		5,071,198			5,113,953			5,529,825

Basic earnings (loss) per share:
Earnings (loss) from continuing operations	$	0.36		$	(4.89	)	$	0.08

~~ShoLodge, Inc. and Subsidiaries~~F-21

NotesTable toof Consolidated Financial Statements Contents

~~The Company also maintains a $1.0 million unsecured line of credit with another bank~~ShoLodge, ~~bearing interest at the lender’s prime rate, maturing May 31, 2003~~Inc. ~~As of~~and ~~December 29, 2002, the Company had $500,000 outstanding under this credit~~Subsidiaries ~~facility.~~

InNotes ~~May 2000,~~to ~~the~~Consolidated ~~Company~~Financial ~~repaid approximately $7,458,000 of debt with a portion~~Statements ~~of the proceeds of the sale of four hotels (Note 12). 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 31, 2000, December 30, 2001, and December 29, 2002, the Company repurchased $29,784,000, $3,412,000, and $1,590,000, respectively, of the Company’s previously issued subordinated debt at a discount from face value. These repurchases resulted in pretax gains, net of the write-off of related unamortized deferred financing costs of $7,307,000, $913,000, and $375,000 in 2000, 2001, and 2002, respectively. Additionally in 2002, the Company, in a negotiated transaction, exchanged $8,233,000 face value of its senior subordinated notes previously purchased for $5,269,000, for $7,486,000 of its outstanding 7.50% subordinated debentures, resulting in a net pretax gain of $2,217,000.


	Year ended
	December 28,			December 29,			December 30,
	2003			2002			2001
(Loss) earnings from discontinued operations		(0.30	)		(0.63	)		0.08

Net earnings (loss)	$	0.06		$	(5.52	)	$	0.16

Diluted earnings (loss) per share:
Earnings (loss) from continuing operations	$	0.36		$	(4.89	)	$	0.08
(Loss) earnings from discontinued operations		(0.30	)		(0.63	)		0.08

Net earnings (loss)	$	0.06		$	(5.52	)	$	0.16

~~Maturities~~The Company’s 7.5% debentures were convertible into 1,098,069, 708,709, and 462,119 shares of ~~long-term~~common ~~debt~~stock ~~are~~at December 30, 2001, December 29, 2002 and December 28, 2003, respectively, but were not included in the computation of diluted EPS, as ~~follows:~~such securities were anti-dilutive.

2003	$	67,548,511
2004		21,761,276
2005		115,000
2006		125,000
2007		137,500
Thereafter		2,242,500
	$	91,929,787

6. Fair Value of Financial Instruments

The ~~three-year~~carrying ~~credit~~value ~~facility contains~~of ~~financial~~cash ~~covenants~~and ~~requiring~~cash aequivalents, ~~minimum~~accounts ~~consolidated~~receivable, ~~net~~and ~~worth,~~borrowings asunder ~~defined,~~lines of ~~$65,000,000.~~credit Atapproximates ~~December~~fair ~~29,~~values ~~2002,~~due to the ~~Company~~short-term ~~was~~maturities ~~not~~of inthese ~~compliance~~instruments. ~~with~~The ~~these~~carrying ~~covenants.~~value ~~Subsequent~~of tonotes ~~year-end,~~receivable ~~the~~approximates ~~Company~~fair ~~obtained~~value andue ~~amendment~~ to the ~~credit~~write-down ~~facility~~to ~~reducing~~net ~~the~~realizable value at ~~required~~December 29, ~~minimum~~2002 ~~consolidated~~(see ~~net~~Note ~~worth~~13), ~~retroactive~~and the annual adjustment to ~~December~~market ~~29,~~interest ~~2002,~~rates. ~~and~~Notes ~~waiving,~~payable ~~through~~carrying value approximates fair value due to the recent ~~remainder~~borrowing. ofThe ~~fiscal~~convertible ~~2003,~~subordinated ~~the~~debentures ~~facility’s~~and ~~cross-default~~senior subordinated ~~provisions.~~notes ~~Accordingly,~~have the ~~three-year~~following ~~credit~~estimated ~~facility~~fair ~~has~~values ~~been classified~~based asupon aquoted ~~noncurrent~~market ~~liability~~prices as inof ~~the~~December 28, ~~2002~~2003 ~~consolidated~~and ~~balance~~December 29, 2002: ~~sheet.~~

The trust indenture applicable to the Series A and Series B senior subordinated notes contains a financial covenant requiring a minimum consolidated net worth of $75,000,000. As of December 29, 2002, the Company’s consolidated net worth was less than the required amount. This covenant violation, as specified in the indenture, allows the holders of a minimum of 25% of the outstanding principal amount of the notes outstanding to declare a default. In the event that a default is declared, the Company, upon receipt of written notice by certified mail from the trustee, has 60 days from receipt


	2003				2002
	Fair Value		Carrying Value		Fair Value		Carrying Value
Convertible subordinated debentures	$	10,125,680	$	10,772,000	$	11,440,100	$	16,520,000
Senior subordinated notes		35,537,760		36,673,380		29,466,450		42,722,361

	$	45,663,440	$	47,445,380	$	40,906,550	$	59,242,361

~~F-21~~7. Stock Option Plan

~~Table~~The Company’s 1991 Stock Option Plan, as amended, (the “Plan”), authorizes the grant to key employees of ~~Contents~~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.

~~ShoLodge, Inc. and Subsidiaries~~F-22

NotesTable toof Consolidated Financial Statements Contents

ofShoLodge, ~~notice to cure the default~~Inc. Aand ~~minimum of 51% of the outstanding principal amount of the notes~~Subsidiaries ~~outstanding may waive any default declared by the 25% or more holders.~~

~~The~~Notes ~~Company is in the process of completing an Exchange Offer and Consent Solicitation (“Exchange Offer”), which is expected~~ to beConsolidated ~~completed~~Financial ~~within the~~Statements ~~60 day cure period. The terms of the Exchange Offer contain a modification of~~ ~~the financial covenants reducing the minimum consolidated net worth, which is~~ ~~expected to cure the default, if declared, without any further action. However~~ ~~there can be no assurance that the Exchange Offer will be completed. Because~~ ~~of the covenant violation at December 29, 2002, the Company has classified all~~ of the Series A and Series B senior subordinated notes as a current liability. Additionally, due to cross-default provisions in the Company’s convertible subordinated debentures and a loan secured by the Company’s aircraft, these debt instruments have also been classified as current liabilities as of December 29, 2002.

~~The~~Under ~~total amount of debt classified as current liabilities due to~~ the ~~circumstances~~ ~~discussed above was $67.5 million as of December 29~~Plan, ~~2002. As of~~ ~~April 4, 2003,~~ the ~~Company~~options ~~had~~are ~~reduced~~exercisable ~~that~~at ~~amount~~various byperiods ~~$2.2 million,~~from ~~including $838,000~~one ~~of the senior subordinated notes. The Company currently maintains approximately $11.0 million in cash and is currently expecting~~ to ~~collect~~five ~~cash proceeds~~years ofafter ~~approximately $40 million within~~ the ~~next~~ ~~60 days~~date ~~from the collection~~ of ~~two~~grant ~~notes~~and ~~receivable,~~expire ~~the sale of the properties serving as collateral under~~ ten ~~notes~~years ~~receivable,~~after ~~and~~ the ~~sale~~date of ~~three unencumbered properties~~grant. ~~Negotiations~~The ~~are~~Plan ~~currently~~has ~~in progress~~now ~~relative to the sale of an additional 12 hotels~~expired, five of which collateralize notes receivable, with net proceeds of approximately $53 million expected. Additionally, the Company anticipates refunds of approximately $8.5 million of previously paid income taxes by mid-2003, and atno ~~least~~more ~~three~~options ~~parcels~~will ~~of undeveloped land are expected to~~ be ~~sold~~granted inunder ~~2003~~this ~~for approximately $5~~Plan.~~6 million. The Company expects~~ ~~to cure any default declared by the senior subordinated note holders within the~~ ~~60 day cure period, but if not, is confident that it will have sufficient cash~~ ~~available from the above-listed sources and cash from other sources to pay its debt in full in 2003.~~

~~The~~A ~~Company~~summary isof ~~evaluating various alternatives to maximize shareholder value. These alternatives could include, without limitation,~~ the ~~franchising and~~status ~~operation~~ of ~~additional GuestHouse Inns & Suites, a sale of~~ the ~~remaining Company-owned~~Plan ~~hotels, negotiating new credit arrangements, developing hotels~~ for ~~other owners,~~ the ~~repurchase~~years ofended ~~additional shares of the Company’s common stock or outstanding debt securities~~December 30, ~~or any combination of these or other~~2001, ~~strategies~~December 29, ~~including,~~2002 asand ~~announced on January~~December 1628, 2003, ~~the possible spin-off~~follows: ~~of its reservation services subsidiary (InnLink) to the~~ ~~Company’s shareholders. The Exchange Offer, if consummated will~~

F-22


	Shares Subject to Option
	Available for						Weighted Average
	Grant			Outstanding			Exercise Price
December 31, 2000		149,645			283,034		$	3.78
Exercised		—			(1,067	)		3.75
Plan expired for grants		(149,645	)		—			-

December 30, 2001		—			281,967			3.78
Exercised		—			(55,500	)		3.75
Canceled		—			(5,000	)		5.50

December 29, 2002		—			221,467			3.75
Exercised		—			(13,333	)		3.75
Canceled		—			(65,634	)		3.75

December 28, 2003		—			142,500			3.75

~~Table~~The 13,333 options exercised in 2003 occurred on December 11, 2003, but the shares were not issued until January of ~~Contents~~2004 when payment was made for the shares in accordance with the provisions of the Plan; therefore, the increase in outstanding shares and the resulting increase in shareholders’ equity did not occur until the Company’s 2004 fiscal year.

~~ShoLodge, Inc. and Subsidiaries~~F-23

NotesTable toof Consolidated Financial Statements Contents

~~allow~~ShoLodge, ~~the Company more flexibility in purchasing its outstanding debt and common stock~~Inc. ~~The~~ ~~Company believes that a combination of existing cash, the liquidation of notes receivable, the sale of hotel properties~~ and ~~leasehold rights, net cash~~Subsidiaries ~~provided by operations, and borrowings under existing credit facilities or~~ ~~mortgage debt, will be sufficient to fund its capital expenditures, stock~~ ~~repurchase plan, debt repayments and operations for at least the next twelve~~ ~~months.~~

~~4. Commitments~~Notes ~~and~~to ~~Contingencies~~Consolidated Financial Statements

The ~~Company~~following ~~and~~table ~~its~~summarizes ~~subsidiaries~~information ~~lease~~relating ~~certain~~to ~~property~~the ~~and~~stock ~~equipment under~~options ~~non-cancelable~~outstanding ~~operating~~as ~~lease~~of ~~agreements. Total rental expense under operating leases for the years ended~~ December 3128, ~~2000, December 30, 2001 and~~2003: ~~December 29, 2002 was approximately $12,987,000, $582,000 and $584,000,~~ ~~respectively.~~

Future minimum rental payments are as follows:


		Options Outstanding						Options Exercisable
		Number		Weighted-				Number
		Outstanding		Average		Weighted-		Exercisable		Weighted-
		at		Remaining		Average		at		Average
Exercise		December 28,		Contractual		Exercise		December 28,		Exercise
Price		2003		Life		Price		2003		Price
$	3.75		32,500		1.33	$	3.75		32,500	$	3.75
	3.75		50,000		2.59		3.75		50,000		3.75
	3.75		60,000		3.42		3.75		60,000		3.75

			142,500						142,500

2003	$	350,000
2004		350,000
2005		291,667
Thereafter		-
	$	991,667

8. Shareholders’ Equity

~~The~~In ~~Company~~2001 ~~is self-insured for workers’ compensation benefits up to $500,000 annually in the aggregate~~ and ~~$250,000~~prior ~~per occurrence and has recorded an accrual for all expected and outstanding claims at December 29~~years, ~~2002. While~~ the Company’s ~~ultimate~~Board ~~liability~~of ~~may~~Directors ~~exceed~~authorized ~~or be less than~~ the ~~amount accrued,~~ ~~the~~repurchase ~~Company~~of ~~believes~~various ~~that~~amounts itof isits ~~unlikely~~common ~~that~~stock, itso ~~would experience losses~~ that ~~would~~ bethrough ~~materially in excess of such estimated amounts. In addition to the~~December 28, ~~recorded accruals~~2003, the ~~Company~~total ~~had~~authorized ~~outstanding~~amount ~~letters~~ of ~~credit~~common instock ~~the~~repurchases ~~amount of~~was $~~125~~23,000 ~~and $512~~,000. The ascumulative number of ~~December 30,~~shares ~~2001~~repurchased ~~and~~as of December 2928, ~~2002~~2003, was ~~respectively~~3,742,567 toshares ~~satisfy~~at ~~workers’~~a ~~compensation~~cost ~~self-insurance~~of ~~security deposit requirements~~$20,925,184.

~~The Company is or has been a party to legal proceedings incidental to its business~~9. InIncome ~~the opinion of management, any ultimate liability with respect to~~Taxes ~~these actions will not materially affect the consolidated financial position or~~ ~~results of operations of the Company.~~

The ~~construction~~provision ~~of a hotel was completed~~ for aincome ~~third~~taxes ~~party~~from ~~during~~continuing ~~2001,~~operations ~~and~~consists ~~a balance~~ of ~~approximately $2,000,000 remained uncollected as of December 29, 2002. The Company had a lien against~~ the ~~property and filed an arbitration~~ ~~claim against the owner.~~following:

F-23


	2003			2002			2001
Current expense (benefit):
Federal	$	(4,033,797	)	$	(7,225,546	)	$	3,247,760
State		993,960			(950,038	)		244,388

		(3,039,837	)		(8,175,584	)		3,492,148
Deferred expense (benefit)		783,485			(992,275	)		(3,298,148	)

	$	(2,256,352	)	$	(9,167,859	)	$	194,000

~~Table of Contents~~F-24

ShoLodge,Table Inc.of and Subsidiaries Contents

~~Notes~~ShoLodge, toInc. ~~Consolidated~~and ~~Financial Statements~~Subsidiaries

~~The~~Notes ~~Company received an arbitration award of substantially all its claim in the fourth quarter of 2002~~ to beConsolidated ~~paid~~Financial ~~within 30~~Statements ~~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. Another contract receivable is for approximately $1,000,000, and arbitration proceedings were initiated on January 15, 2003. The owner of the hotel claims damages in excess of the amount owed. Consequently, the Company has charged the entire amount off in its fourth quarter of 2002. Any recovery from these contracts will be recorded as earned when received. Approximately $600,000 of other construction contracts receivable was also charged off as uncollectible in the fourth quarter of 2002. Charge-offs of construction contracts receivable then totaled $3.6 million.

~~5. Earnings~~The ~~(Loss)~~difference ~~Per~~between ~~Share~~income taxes using the effective income tax rate and the statutory federal income tax rate is as follows:

The following table reconciles earnings and weighted average shares used in the earnings (loss) per share (“EPS”) calculations for fiscal years 2002, 2001 and 2000.


	2003			2002			2001
Federal income tax based on the statutory rate	$	(115,392	)	$	(11,684,183	)	$	230,640
State income taxes, less federal income tax benefit		1,327,455			(1,926,826	)		7,829
Minority interest		36,110			(60,855	)		(19,807	)
Interest on deferred gain		(682,513	)		99,000			373,560
Previously accrued income taxes		(445,787	)		—			(451,465	)
Change in valuation allowance		(3,500,000	)		3,812,000			—
Permanent differences & other		1,123,775			593,005			53,243

	$	(2,256,352	)	$	(9,167,859	)	$	194,000

		Year ended
		December 29, 2002			December 30, 2001			December 31, 2000
Numerator:
(Loss) earnings from continuing operations		$	(24,677,356	)	$	1,388,849		$	978,057
(Loss) earnings from discontinued operations			(3,570,208	)		(477,304	)		(400,395	)
Net (loss) earnings		$	(28,247,564	)	$	911,545		$	577,662
Denominator:
Denominator for basic (loss) earnings per share — weighted-average shares			5,113,953			5,464,533			5,471,962
Effect of dilutive securities:
	Options		—			65,292			81,890
Denominator for diluted (loss) earnings per share – adjusted weighted-average shares			5,113,953			5,529,825			5,553,852
Basic (loss) earnings per share:
(Loss) earnings from continuing operations		$	(4.83	)	$	0.25		$	0.18
(Loss) earnings from discontinued operations			(0.69	)		(0.09	)		(0.07	)
Net (loss) earnings		$	(5.52	)	$	0.16		$	0.11
Diluted (loss) earnings per share:
(Loss) earnings from continuing operations		$	(4.83	)	$	0.25		$	0.18
(Loss) earnings from discontinued operations			(0.69	)		(0.09	)		(0.08	)
Net (loss) earnings		$	(5.52	)	$	0.16		$	0.10

The Company reevaluated its tax exposure during the quarters ended December 28, 2003 and December 30, 2001 and, as a result of the resolution of certain tax issues, reduced previously accrued income tax liabilities by $445,787 and $451,465, respectively.

F-2425

ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

~~The~~Deferred ~~Company’s~~tax ~~7.5%~~(liabilities) assets ~~debentures~~are ~~were~~comprised ~~convertible into 1,244,444, 1,098,069, and 708,709 shares~~ of ~~common stock at December 31, 2000, December 30, 2001 and December 29, 2002, respectively, but were not included in~~ the ~~computation of~~following: ~~diluted EPS, as such securities were anti-dilutive.~~

6. Fair Value of Financial Instruments


	2003			2002
Deferred tax liabilities:
Differences between book and tax basis of property	$	(2,447,000	)	$	(2,407,000	)
Profits on installment sales		(474,000	)		(3,354,000	)
Other		(499,000	)		(465,000	)

Total deferred tax liabilities		(3,420,000	)		(6,226,000	)
Deferred tax assets:
Deferred profit on sales of hotels		—			3,703,000
Direct financing leases		—			88,000
Differences between book and tax losses recognized by minority interests		—			339,000
Allowance for doubtful accounts		312,000			149,000
Alternative minimum tax credits		420,000			281,000
Net operating losses		5,188,000			8,352,000
Other		114,515			212,000

Total deferred tax assets		6,034,515			13,124,000
Valuation allowance		(3,398,000	)		(6,898,000	)

Deferred tax assets, net		2,636,515			6,226,000

Net deferred tax liability	$	(783,485	)	$	—

~~The~~During ~~carrying~~September 2000, ~~value~~the ofInternal ~~cash~~Revenue ~~and~~Service ~~cash~~(the ~~equivalents,~~“Service”) ~~accounts~~issued ~~receivable, and~~a ~~borrowings~~Revenue ~~under~~Agent’s ~~lines~~Report ofto ~~credit~~the ~~approximates~~Company ~~fair~~asserting ~~values~~income ~~due~~tax deficiencies and additions to tax relating to the ~~short-term maturities~~tax ofyear ~~these~~ended ~~instruments~~December 28, 1997. The ~~carrying~~Company filed ~~value~~a ofprotest ~~notes~~to ~~receivable approximates~~the ~~fair~~Service’s ~~value~~asserted ~~due~~deficiencies and additions to tax. The amounts of the ~~write-down~~income totax ~~net~~deficiencies ~~realizable~~and ~~value~~additions atto tax asserted does ~~December 29,~~not ~~2002~~include ~~(see~~interest ~~Note~~which ~~14),~~accrues ~~and~~from the ~~annual~~dates ~~adjustment~~the totaxes ~~market~~were ~~interest~~due until the ~~rates.~~date ~~Notes~~of ~~payable~~the ~~carrying~~payment. ~~value~~The ~~approximates~~asserted ~~fair~~deficiencies ~~value~~are ~~due~~related solely to ~~(1) a~~the ~~recent~~timing ~~borrowing~~of ~~and~~taxable ~~(2) variable~~income ~~rates~~between onthe ~~earlier~~four ~~borrowings~~years from fiscal 1997 through fiscal 2000, in which year the Company provided taxes thereon. The ~~carrying~~Service submitted ~~value~~a ofproposed ~~industrial~~agreement ~~revenue~~on ~~bonds~~August 6, ~~approximates~~2001, ~~fair~~and ~~value~~the ~~due~~Company toaccepted the ~~variable~~agreement ~~interest~~on ~~rate~~September 20, of2001. ~~these~~On ~~instruments.~~March 22, ~~The~~2002, ~~convertible~~the ~~subordinated~~Company ~~debentures~~received ~~and~~a notice from ~~senior~~the ~~subordinated~~Service ~~notes~~of ~~have~~tax ~~the~~due ~~following~~for ~~estimated~~fiscal ~~fair~~1997 ~~values~~in ~~based~~the ~~upon quoted~~amount ~~market~~of ~~prices~~$2,493,807 asplus statutory interest of ~~December 29~~$724,812 ~~2002~~(no penalties). Both the income tax due and ~~December 30,~~the statutory ~~2001:~~interest

	2002				2001
	Fair Value		Carrying Value		Fair Value		Carrying Value
Convertible subordinated debentures	$	11,440,100	$	16,520,000	$	16,253,460	$	25,596,000
Senior subordinated notes		29,466,450		42,722,361		25,719,970		40,508,000
	$	40,906,550	$	59,242,361	$	41,973,430	$	66,104,000

F-26

AsTable of December 30, 2001, the aggregate fair value of securities available-for-sale was $279,506. These securities were sold in 2002. Contents

7ShoLodge, Inc. ~~Stock~~ ~~Option~~and ~~Plan~~Subsidiaries

~~The~~Notes ~~Company’s 1991 Stock Option Plan, as amended, (the “Plan”), authorizes the grant~~ to ~~key~~Consolidated ~~employees~~Financial ~~of options to purchase up to an aggregate of 900,000~~Statements ~~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

~~F-25~~were accrued at December 30, 2001 and were paid in 2002.

~~Table~~The Company has federal net operating loss carryforwards of ~~Contents~~approximately $4,496,000 and $12,831,000 as of December 28, 2003 and December 29, 2002, respectively. In addition, the Company has state net operating loss carryforwards of approximately $99,000,000 and $109,000,000 at December 28, 2003 and December 29, 2002, respectively. These losses expire from tax years 2004 through 2023. The Company also has available alternative minimum tax credit carryforwards of $420,000 that can be used to offset future taxes in years in which the alternative minimum tax credit does not apply. The credit can be carried forward indefinitely.

~~ShoLodge~~The Company has evaluated the need for a valuation allowance on its net deferred tax assets. Because of the uncertainty of the ultimate realization of its net state deferred tax assets, ~~Inc~~the Company has provided a valuation allowance of $3,398,000. In 2002, the Company had established a valuation allowance for its entire net deferred tax asset of $6,898,000. The valuation allowance decreased by $3,500,000 during 2003 and ~~Subsidiaries~~increased by $3,812,000 during 2002.

~~Notes~~10. toRelated ~~Consolidated~~Party ~~Financial Statements~~Transactions

On July 5, 2000, the ~~date~~Board of ~~grant~~Directors ~~and~~accelerated ~~expire~~the ~~ten~~vesting ~~years~~of ~~after~~certain options held by the Company’s chief executive officer to purchase 40,000 shares of common stock. He was expected to become fully vested under the original terms of the options; the options had no intrinsic value on the date of acceleration and, therefore, additional compensation expense was not incurred as a result of the accelerated vesting. Immediately thereafter, the chief executive officer of the Company exercised vested employee stock options for 408,333 shares of the Company’s common stock, at the exercise price of $3.75 per share. He executed non-interest bearing, unsecured, full-recourse promissory notes totaling $1,531,249 with maturity dates coinciding with the expiration dates of each option grant, ranging from February 11, 2002, to May 30, 2007. The ~~Plan~~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 ~~now~~been recorded as paid-in capital, and the notes receivable are ~~expired~~recorded as a deduction from shareholders’ equity. The Company has accreted $102,055, $40,611 and no$140,833 ~~more~~of ~~options~~discount ~~will~~on bethese ~~granted~~notes ~~under~~as ~~this~~interest ~~Plan~~income in 2001, 2002, and 2003, respectively. The chief executive officer renewed his non-interest bearing, unsecured, full-recourse promissory note in the amount of $937,500 that came due February 11, 2002 with the Company for one year at an interest rate of prime plus 250 basis points. He paid the note and all accrued interest in full in December of 2002 and January of 2003 prior to its

~~A summary of the status of the Plan for the years ended December 31, 2000,~~F-27 ~~December 30, 2001 and December 29, 2002, follows:~~

		Shares Subject to Option
		Available for						Weighted Average
		Grant			Outstanding			Exercise Price
December 26, 1999			146,744			695,335		$	3.76
	Granted		—			—			-
	Exercised		—			(409,400	)		3.75
	Canceled		2,901			(2,901	)		3.75
December 31, 2000			149,645			283,034			3.78
	Granted		—			—			-
	Exercised		—			(1,067	)		3.75
	Canceled		—			—			-
Plan expired for grants			(149,645	)		—			-
December 30, 2001			—			281,967			3.78
	Granted		—			—			-
	Exercised		—			(55,500	)		3.75
	Canceled		—			(5,000	)		5.50
December 29, 2002			—			221,467			3.75

~~The~~ShoLodge, ~~following~~Inc. ~~table~~and ~~summarizes information relating to the stock options~~Subsidiaries ~~outstanding as of December 29, 2002:~~

		Options Outstanding						Options Exercisable
		Number		Weighted-				Number
		Outstanding		Average		Weighted-		Exercisable		Weighted-
		at		Remaining		Average		at		Average
Exercise		December 29,		Contractual		Exercise		December 29,		Exercise
Price		2002		Life		Price		2002		Price
$	3.75		29,467		0.93	$	3.75		29,467	$	3.75
	3.75		41,000		2.33		3.75		41,000		3.75
	3.75		68,000		3.59		3.75		68,000		3.75
	3.75		83,000		4.42		3.75		83,000		3.75
			221,467						221,467

Notes to Consolidated Financial Statements

F-maturity date of February 11, 2003. Another of the notes in the amount of $124,999 matured on December 7, 2003 and was paid at that time. The remaining notes totaling $468,750 were scheduled to mature subsequent to 2003, but the chief executive officer paid them in full on December 26, 2003. As of December 28, 2003, all of these notes due from the chief executive officer had been paid in full.

~~Table~~During 2002 the Company purchased three vehicles from a corporation owned by the president and chief executive officer and a director of ~~Contents~~the Company, for an aggregate purchase price of approximately $74,000. During 2001 the Company purchased five vehicles for an aggregate purchase price of $120,000 from the same corporation. The Company’s chief executive officer sold that corporation in November of 2002.

~~ShoLodge~~Construction and development revenue for the years ended December 28, ~~Inc~~2003 and December 29, 2002 includes $21,978,398 and $5,687,874, respectively, on contracts with outside businesses controlled by the Company’s president and chief executive officer. Construction contracts receivable at December 28, 2003 and ~~Subsidiaries~~December 29, 2002, include $22,668,784 and $5,671,892, respectively, due on these contracts. Of these amounts, $20,730,495 was incurred on one development in 2003 and $5,506,002 on that development in 2002, of which $3,001,230 was collected by the Company in March of 2004 and $4,982,000 was collected by the Company in 2003.

~~Notes~~11. ~~to Consolidated Financial Statements~~Acquisitions

8On May 3, 2002, the Company acquired all of the common stock of GuestHouse International Franchise Systems, Inc. ~~Shareholders’~~ ~~Equity~~(GuestHouse) for $1.6 million of cash and incurred $100,000 transaction costs. The estimated fair values of assets acquired were $184,000 for accounts receivable, $750,000 for franchise rights with an estimated useful life of three years, and $766,000 for goodwill. The gross carrying amount of franchise rights was $750,000 as of December 28, 2003, and accumulated amortization was $417,000. Amortization expense for the fiscal year ended December 28, 2003, was $250,000. Franchise rights will be amortized in the amounts of $250,000 in 2004 and $83,000 in 2005. All goodwill is in the franchising, reservation and management segment. The results of operations of GuestHouse are included in the consolidated statement of earnings from the acquisition date forward.

InThe ~~2001~~only ~~and~~material ~~prior~~intangible ~~years,~~assets held by the Company’s ~~Board~~are ~~of Directors authorized~~ the intangible ~~repurchase~~assets ofacquired ~~various~~in ~~amounts~~the ofGuestHouse ~~its common stock~~acquisition, soas ~~that~~all ~~through~~other ~~December 29, 2002,~~material ~~the total authorized amount of common stock repurchases was $23,000,000.~~intangible ~~The~~assets ~~cumulative~~were ~~number~~written ofoff ~~shares repurchased~~ as ofdiscussed ~~December 29,~~in ~~2002,~~Note ~~was 3,617,067 shares at a cost of $20,473,384~~1.

~~9. Income~~GuestHouse ~~Taxes~~is the exclusive franchisor of the GuestHouse Inns & Suites hotel brand,

~~The provision for income taxes from continuing operations consists of the~~F-28 ~~following:~~

		2002			2001			2000
Current expense (benefit):
	Federal	$	(7,028,355	)	$	3,872,152		$	(981,125	)
	State		(938,229	)		210,996			–
			(7,966,584	)		4,083,148			(981,125	)
Deferred expense (benefit)			(992,275	)		(3,298,148	)		2,201,125
		$	(8,958,859	)	$	785,000		$	1,220,000

~~The~~ShoLodge, ~~difference~~Inc. ~~between income taxes using the effective income tax rate~~ and ~~the~~Subsidiaries ~~statutory federal income tax rate is as follows:~~

	2002			2001			2000
Federal income tax based on the statutory rate	$	(11,497,168	)	$	758,915		$	766,803
State income taxes, less federal income tax benefit		(1,904,841	)		70,554			262,557
Minority interest		(60,855	)		(19,807	)		(20,036	)
Interest on deferred gain		99,000			373,560			466,000
Previously accrued income taxes		—			(451,465	)		—
Change in valuation allowance		3,812,000			—			—
Permanent differences & other		593,005			53,243			(255,324	)
	$	(8,958,859	)	$	785,000		$	1,220,000

Notes to Consolidated Financial Statements

~~The~~consisting of 73 properties open and operating (including 25 converted from Shoney’s Inns). As a result of the acquisition, the Company ~~reevaluated~~will ~~its~~now ~~tax~~be in ~~exposure~~charge ~~during~~of the ~~quarter~~operation and ~~ended~~growth ~~December~~of the GuestHouse brand. On May 3021, ~~2001~~ ~~and~~2002, asthe aCompany ~~result~~announced its plan to convert the name of the ~~resolution~~Shoney’s Inns and Shoney’s Inns & Suites hotel chain to GuestHouse International Inns & Suites as soon as practical. All of the ~~certain~~Company-owned ~~tax~~Shoney’s ~~issues,~~Inns ~~reduced~~have been converted to the GuestHouse brand. ~~previously~~All ~~accrued~~but ~~income~~18 ~~tax~~franchised ~~liabilities~~Shoney’s Inns have been converted to the GuestHouse brand

Filing Compare · SHOLODGE INC