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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

SHOLODGE, INC.

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 12, 2002, was approximately $9,500,000. The market value calculation was determined using the last sale price of registrant’s common stock on July 12, 2002, as reported on The Nasdaq Stock Market, and assumes that all shares beneficially held by executive officers and directors of the registrant are shares owned by “affiliates,” a status which each of the officers and directors individually disclaims.

Shares of common stock, no par value, outstanding on April 4, 2003, were 5,118,778.

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DOCUMENTS INCORPORATED BY REFERENCE

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PART I

ITEM 1.    BUSINESS.

General

      The Company develops and owns 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 29, 2002, the Shoney’s Inn /GuestHouse lodging system consisted of 118 properties containing 9,747 rooms of which six containing 686 rooms are owned by the Company. Shoney’s Inns and GuestHouse Inns & Suites are currently located in 19 states.

      The Company also owns and operates five AmeriSuites hotels and is currently negotiating for the sale of these hotels.

      Shoney’s Inns and GuestHouse Inns & Suites operate in the economy limited-service segment and are designed to appeal to both business and leisure travelers, with rooms usually priced between $40 and $65 per night. The typical property includes 60 to 120 rooms and, in most cases, meeting rooms. Although they do not offer full food service, most offer continental breakfast, and most of the inns are located adjacent or in close proximity to free-standing restaurants. Management believes that its strategy of locating most of its inns in close proximity to free-standing restaurants has given it a competitive advantage over many other limited-service lodging chains by offering guest services approximating those of full-service facilities without the additional capital expenditures, operating costs or higher room rates.

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

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

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

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Growth Strategy

      The Company’s strategy is to increase cash flow and earnings by (i) increasing Revenue Per Available Room (“REVPAR”) in Company-owned inns while maintaining the Company’s attractive room price/value relationships 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”).

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

      Expansion of GuestHouse Inns & Suites System. In 2002, the Company has focused on expanding the GuestHouse Inns & Suites system principally through the addition of new franchises and the conversion of Shoney’s Inns to GuestHouse. As of 2002 fiscal year-end, there were 118 Shoney’s Inns and GuestHouse Inns (of which 6 are Company owned) with a total of 9,747 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, no Sumner Suites hotels are owned, under construction, or planned for the future. The Company has developed and opened two AmeriSuites hotels for Prime on sites that it owned. The Company plans to continue to develop all-suite hotels for third parties in the future as the opportunities arise.

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

      In addition to the strategies described above, the Company may from time to time investigate various alternatives to maximize shareholder value. These alternatives could include, without limitation, the franchising and operation of additional Guest 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.

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Shoney’s Inns/GuestHouse Concept

      Shoney’s Inns and GuestHouse Inns & Suites are 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 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, the 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.

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

Construction and Development

      The Company’s construction subsidiary has a full time staff who manage, supervise, control and perform the construction of hotels and other real estate projects being developed by the Company or for third parties. 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 significant resources to the identification and evaluation of potential sites for hotels. The Company has typically targeted markets with populations of 500,000 or more that have high levels of business development and multiple sources of room demand. The site selection process focuses on the competitive environment, including room and occupancy rates and proximity to business parks, office buildings, and other demand generators. The Company’s franchisees focus on sites for their inns in proximity to interstate highway access roads and major streets and highways providing convenient access to local business establishments and tourist attractions.

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

Sales and Marketing

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

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

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

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

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

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

      Travel Agents. The Company has a policy of paying travel agents a commission, standard in the hotel industry, on all revenue booked by them. The Company, with respect to both owned and franchised inns, has joined the TACS-Lite Program administered by Perot Systems. TACS-Lite (Travel Agent Commission Settlement) is a program where each hotel property reports to the Company each week by fax (or by electronic transmission if capable) all of its room sales generated through travel agents. The Company in turn forwards this information to Perot Systems which automatically generates checks each month to travel agents across the country for the

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total commissions earned. The Company believes that travel agents are more likely to book guests into a property knowing that their commissions will be paid by Perot Systems without the travel agent having to go to the trouble and expense of billing each separate location.

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 after approximately seven years of operation.

      Training. The Company utilizes the services of an “opening team” to assist with hiring and training new staff and opening new Company-owned hotels. The opening team trains local hotel personnel in front desk operations, operational policies, hotel accounting and cash handling procedures, record-keeping, housekeeping and laundry, maintenance and repair, marketing, personnel management, purchasing, quality assurance and sales. Sales training includes a team of direct sales personnel that assists the local staff in the actual pre-selling of rooms. An opening team generally remains on site for one to four weeks depending on the prior experience of the local general manager.

Franchise Operations

      Franchise Sales. The Company markets the GuestHouse franchise principally to existing Shoney’s Inn and GuestHouse franchisees, other hotel brand developers and other prospects known through management’s contacts in the lodging industry. The Company employs two full-time licensed franchise salesmen. The Company also markets franchises through advertisements in trade publications and participation in trade shows and franchising conventions. The Company no longer markets the Shoney’s Inns franchises.

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      Management believes that the Company attracts potential new franchisees by offering a comparable level of franchisee support services at a lower price than its competitors. Management periodically monitors the initial fee, royalty fee, advertising fee, reservation fee and other charges imposed by other franchisors with whom the Company competes and believes that the fees charged by the Company are competitive and, in most cases, lower than such other franchisors.

      Fees. Under the standard GuestHouse franchise arrangement offered to prospective franchisees, a potential franchisee pays a $2,500 application fee. Upon approval of the application, the Company and the franchisee enter into a 5-year license agreement, and the franchisee generally pays a license fee equal to the greater of $250 per room or $15,000. The application fee is applied against the license fee.

      Under the standard GuestHouse franchise arrangement offered to prospective franchisees, the franchisee pays monthly royalties of $1.25 per available room per day during the term of the license agreement. Additionally, a marketing cooperative fee of $0.30 per available room per day and a fee for participation in the central reservation system are charged at 8% of revenue generated by voice communications and 5% of revenue generated by electronic communication plus $5.00 per reservation.

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

      Once an inn is constructed, the Company requires the franchisee to send the site general manager to a management training class conducted by the Company covering topics including human resources, sales and marketing, yield management and cost controls. Currently, the Company does not charge for the training program but reserves the right to do so in the future.

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

      The Company offers to provide management services to franchisees pursuant to contractual arrangements. The Company’s fee for these services is a percentage of the managed hotel’s gross revenues. Currently, the Company manages eighteen hotels under contract arrangement.

Lodging Industry

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

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

(1)

Room revenues divided by the number of rented rooms.

Competition

      The lodging industry is highly competitive. In franchising the GuestHouse brand and managing its own lodging facilities, the Company encounters competition from numerous lodging companies, many of which have greater industry experience, name recognition, and financial and marketing resources than the Company. While the actual competition for individual lodging facilities varies by location, the primary competition for GuestHouse Inns & Suites includes lodging chains such as Holiday Inn Express, La Quinta, Comfort Inns, Drury Inns, Fairfield Inns and Travelodge. Each of the Company’s hotels is located in a developed area that includes competing lodging facilities, and the Company expects that most of its future hotels which it constructs will be located in similar areas. Management believes that the principal competitive factors in its lodging operations are room rates, quality of accommodations, name recognition, supply and availability of alternative lodging facilities, service levels, reputation, reservation systems and convenience of location. In its franchising operations, the principal competitive factors are fee structure and support services. Management further believes that the Company is presently competitive in all these respects.

Government Regulation

      The Company is subject to various federal, state and local laws, regulations and administrative practices affecting its business. The Company’s lodging operations must comply with provisions relating to health, sanitation and safety standards, equal employment, minimum wages, building codes and zoning ordinances, and licenses to operate lodging facilities. The sale of franchises is regulated by various state laws as well as by the Federal Trade Commission (“FTC”) Rules on Franchising. The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration or disclosure in connection with franchise offers and sales. In addition, several states have “franchise relationship laws” that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements.

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      Federal and state environmental regulations are not expected to have a material effect on the Company’s operations, but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay construction of lodging facilities and add to their cost. A significant portion of the Company’s personnel are paid at rates related to federal minimum wages and, accordingly, increases in the minimum wage could adversely affect the Company’s operating results.

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

Service Marks

      The Company owns the right to use the “GuestHouse Inns & Suites” service marks in its lodging operations. The Company believes that its ability to use the GuestHouse mark is material to its business. The Company has registered the service mark “InnLink,” which it uses in connection with its reservation system, with the United States Patent and Trademark Office. The Company has registered the service mark “Raylogic” which it uses in connection with computer game software, with the United States Patent and Trademark Office.

Insurance

      The Company maintains general liability insurance and property insurance for all its locations and operations, as well as specialized coverage, including guest property and liquor liability insurance, in connection with its lodging business. The costs of insurance coverage and the availability of liability insurance coverage have varied widely in recent years. While the Company believes that its present insurance coverage is adequate for its current operations, there can be no assurance that the coverage is sufficient for all future claims or will continue to be available in adequate amounts or at a reasonable cost.

Employees

      As of December 29, 2002 the Company had approximately 420 employees, including approximately 230 in the Company’s corporate headquarters. The Company’s employees are not represented by a labor union. The Company considers its relationships with employees to be good.

ITEM 2.     PROPERTIES.

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

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      Four of the five Company-owned GuestHouse Inns & Suites, the Company owned 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 3.     LEGAL PROCEEDINGS.

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

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

      No matters were submitted to a vote of security holders in the fourth quarter of 2002.

PART II

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

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

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      On April 4, 2003, the last reported sale price for the Company’s Common 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.

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

ITEM 6.     SELECTED FINANCIAL DATA.

      The selected financial data set forth on the following page as of and for each of the five fiscal years in the period ended December 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.

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

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Notes to Selected Financial Data

(A)

Fluctuations in hotel revenues, hotel operating costs and expenses, and depreciation expense are due primarily to fluctuations in the number of hotels operated by the Company. At the end of 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.

(B)

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

(C)

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

(D)

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

(E)

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

(F)

Losses in 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)

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.

(H)

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

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

Overview

      The Company derives revenue 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

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the exclusive franchiser of the GuestHouse Inns & Suites brand (“GuestHouse”). GuestHouse operates in the mid-market limited 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.

      The Company’s hotel operations have historically been seasonal in nature, reflecting higher occupancy rates during spring and summer months, which may be expected to cause fluctuations in the Company’s quarterly revenues and earnings from hotel operations. The Company’s fiscal year ends on the last Sunday of the calendar year.

      The Company’s hotel operations have been supplemented 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 recognized on the percentage of completion basis.

Fourth Quarter Adjustments

      The Company reported a net loss in the fourth quarter of 2002 of $27.0 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 $21.2 million of the losses are from the write-down of 18 notes receivable totaling $67.8 million secured by first mortgages on 18 hotel properties. Fifteen of the mortgages totaling $58.8 million are cross-collateralized and cross-defaulted and mature on July 30, 2003. Even though all first mortgage payments on these 15 hotels have been timely received, in late December of 2002 the owner notified the Company that it is highly unlikely that it will be able to refinance the properties by the notes’ maturity dates. Consequently, since the Company does not desire to extend the maturity dates, the Company anticipates that it will be necessary to resume title to the properties. The owner of the properties agreed in late December of 2002 to transfer the hotels back to the Company by deeds in lieu of foreclosure. In anticipation of this, the Company began midway through the fourth fiscal quarter to find cash purchasers of the properties in the event the Company re-acquired ownership. The Company has been greatly disappointed in offers received recently for the fifteen hotels securing the notes receivable. Since the Company does not desire to take back ownership and operate the properties, it is likely to sell the properties at values

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significantly below 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.

      Separately 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.

      The Company constructed two hotels for third parties from which it has been unable to collect the balances due. One of the contracts receivable is for approximately $2.0 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 Company has incurred development costs related to several sites upon which hotel development for third parties was planned. In early 2002, the lodging industry anticipated an economic upturn in the second half of the year. The upturn failed to materialize. Consequently, new hotel development opportunities eroded in late 2002 and the development opportunities on all of these sites were lost. These development costs, which had been previously capitalized, were charged off in the fourth quarter since none of the costs improved the value of the land upon which they were incurred. The amount of these charge-offs in the fourth quarter totaled approximately $1.9 million.

Results of Operations

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

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For the Fiscal Years Ended December 29, 2002 and December 30, 2001

      For the fiscal year ended December 29, 2002, total revenues decreased 34.2% to $28.3 million from $43.0 million for the fiscal year ended December 30, 2001.

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      The Company owned and operated two hotel brands (Shoney’s Inns and GuestHouse) beginning in the second quarter of fiscal 2002, and Shoney’s Inns during 2001 and the first quarter of 2002. The Company owned and operated one AmeriSuites hotel 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, reservation and management revenues in fiscal 2002 increased by 53.2% from 2001, to $6.1 million in 2002 from $4.0 million in 2001. In fiscal 2002 and 2001, initial franchise and franchise termination fees totaled $185,000 and $314,000, respectively. The remaining franchising, management and reservation revenues increased by $2.2 million, or 61.3%, from 2001 to 2002, including an increase in royalty fee revenues of $369,000, a decrease in management fees of $946,000, and an increase in reservation fee revenues of $2.8 million. At the end of fiscal 2002 there were 112 franchised Shoney’s Inns / GuestHouse in operation compared with 58 at the end of fiscal 2001; this increase was due primarily to the acquisition of GuestHouse International Franchise Systems, Inc. on May 2, 2002. Reservation fee revenues increased dramatically due to the addition of GuestHouse in mid-2002 and additional significant contracts with other lodging chains and independent lodging facilities.

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

      Rent revenue was $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.

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      Hotel operating expenses for fiscal 2002 increased by $1.3 million, or 21.4%, to $7.1 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, 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, reservation and management operating expenses increased by $2.1 million, or 95.1%, from 2001 to 2002. This was due to increased reservation expenses, principally payroll and payroll-related, to support the increased reservation revenues earned and increased franchise activity due to the acquisition of the GuestHouse franchising rights.

      Construction and development costs in 2002 were $12.1 million compared with $25.7 million in 2001. The costs incurred were directly related to the revenues earned from the third party construction contracts in progress in 2002, including contracts with related parties, compared with the third party construction contracts in progress in 2001. The Company was unable to reduce its construction and development overhead expenses in 2002 in relation to its significant decrease in construction and development revenues from 2001.

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

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

      Depreciation and amortization expenses decreased by $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.

      The Company has incurred development costs related to several sites upon which hotel development for third parties was planned. Due to the failure of an upturn in the hotel development industry in 2002, as had been previously anticipated, these previously capitalized development costs were charged off since they did not improve the value of the land upon which they were incurred. The impact of these development cost charge-offs was approximately $1.9 million in 2002. (Also, see “Fourth Quarter Adjustments” above.)

      Additionally, in 2002 approximately $3.0 million of contracts receivable on two third party construction contracts were written off as uncollectible. One of the contracts receivable is for approximately $2.0 million, and the Company received an arbitration award for substantially all of its claim, but the owner of the hotel filed

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Chapter 11 bankruptcy on January 3, 2003. The other contract receivable is for approximately $1.0 million, and arbitration proceedings were initiated on January 15, 2003; the owner of the hotel claims damages in excess of the amount owed. Any recovery from these two contracts will be recorded as earned when received. Various other construction contracts receivable totaling approximately $600,000 were also written off in 2002. (Also, see “Fourth Quarter Adjustments” above.)

      Unsecured accounts receivable from the 15 hotels securing the 15 first mortgage notes discussed below and various other accounts receivable were written off as uncollectible in the amount of approximately $1.3 million in 2002. (Also, see “Fourth Quarter Adjustments” above.)

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

      The Company 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

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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. (Also, see “Fourth Quarter Adjustments” above.)

      The Company tested its real estate owned as of December 29, 2002, for impairment in accordance with SFAS No. 144. One of the hotels owned and operated by 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 value of this land parcel was written down in 2002 to the net proceeds subsequently realized, thus reporting an impairment loss of $77,000 on this parcel. Due to the current condition of the economy and of the lodging industry, it is reasonably possible that a change in the estimate of the fair value of other real estate, particularly hotels, owned by the Company may occur in the near future, resulting in additional impairment charges.

      The gain recognized on the sale of property in 2002 was $628,000 compared with $3.8 million in 2001. The net gain recognized in 2002 included gains of $447,000 on the sale of two restaurants to the operator/lessees, and gains of $395,000 on the sale of excess land, partially offset by a loss of $232,000 due to costs incurred on the disposal of two hotels. The gain of $3.8 million in 2001 included $3.6 million from the Company’s sale of one hotel and three restaurants. Another hotel was sold in 2001, but the gain was deferred and is being recognized under the installment method of accounting until full accrual accounting is warranted. Approximately $175,000 of the gain on the sale of two of the restaurants was also deferred and is being recognized under the installment method of accounting, including approximately $15,000 recognized in 2002.

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

      Pursuant to a plan adopted in 1999 to repurchase a portion of the Company’s outstanding subordinated indebtedness in the open market and in negotiated transactions, the Company repurchased $1.6 million of its 7.50% subordinated debentures in 2002 at a discount, recognizing a gain of $375,000. In 2001, the Company repurchased $3.4 million of its 7.50% subordinated debentures at a discount, recognizing a gain of $1.0 million. Additionally, in 2002, the Company, in a negotiated transaction, exchanged $8.2 million face value of its senior subordinated notes previously purchased for $5.3 million, for $7.5 million of its outstanding 7.50% subordinated debentures, recognizing a gain of $2.2 million. The Company adopted Statement of Financial Accounting Standards No. 145 at the beginning of fiscal 2002. Accordingly, gains and losses from debt extinguishments are no longer classified in the statement of earnings as extraordinary items. See the further discussion in “Liquidity and Capital Resources” below.

      Interest expense in 2002 increased from 2001 by $501,000, or 6.1%, while interest income decreased by $1.4 million, or 21.3%. The increase in interest expense was due primarily to higher levels of borrowing on the Company’s bank credit facilities in 2002 than in 2001. Interest income increased due to seller financing of a portion of the sales price of two Shoney’s Inns sold to franchisees in April of 2001, and one Shoney’s Inn sold in June of 2002, but was more than offset by decreases in the interest rates charged on other notes receivable due to the general decline in interest rates and the interest rate terms of those notes.

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

      The effective tax rate differs from the federal and state statutory rates as a result of interest on deferred gains and the non-deductibility of the write-off of certain intangible assets in 2002.

      Discontinued operations resulted from the sale and/or transfer of seven hotels in 2002. The effect of these hotels’ operations and the losses on the sales of the hotels have been removed from operating earnings and from the gain on sale of property and leasehold interests in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. (Also, see “Fourth Quarter Adjustments” above.)

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

      For the 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.

      The Company owned and operated two hotel brands (Sumner Suites and Shoney’s Inns) until mid-2000, and primarily one brand (Shoney’s Inns) in the last two quarters of 2000 and during fiscal 2001. The Company owned and operated one AmeriSuites hotel beginning in late 2001. Revenues from hotel operations in fiscal 2001 decreased by 80.9% to $7.8 million: from $40.7 million for fiscal year 2000. For the 6 hotels opened for all of both years (same hotels), average daily room rates in 2001 increased 1.8% to $52.30 from $51.39 in 2000, and average occupancy rates increased from 46.0% in 2000 to 51.4% in 2001, resulting in an increase in same hotel revenues per available room (RevPAR) of 13.8%, from $23.63 in 2000 to $26.90 in 2001. RevPAR for all Company-owned Shoney’s Inns increased by 10.5% in 2001 from 2000: from $24.29 to $26.83. The increases in the Shoney’s Inns RevPAR were due primarily to the improved economic conditions in the Houston, Texas, market area where three of the Company-owned Shoney’s Inns are located. The remaining (non-same) hotels contributed $867,000 to hotel revenues in 2001 compared with $34.7 million in 2000. The $867,000 revenues from non-same hotels in 2001 were from two hotels in which the Company sold its interests in the first quarter of 2001 and one new hotel which opened in the third quarter of 2001. The $34.7 million revenues from non-same hotels in 2000 were from 28 hotels in which the Company sold its interests in the second quarter of 2000 and the two hotels sold in the first quarter of 2001.

      Franchising, reservation and management revenues in fiscal 2001 increased by 10.1% from 2000, to $4.0 million in 2001 from $3.6 million in 2000. In fiscal 2001 and 2000, initial franchise and franchise termination fees totaled $314,000 and $615,000, respectively. Exclusive of these non-recurring franchise revenues, the remaining

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franchising, reservation and management revenues increased by $666,000, or 22.3%, from 2000 to 2001, including an increase in management fee revenues of $891,000 which was due entirely to 17 new management contracts which became effective in April 2001. At the end of fiscal 2001 there were 58 franchised Shoney’s Inns in operation compared with 59 at the end of fiscal 2000; this decrease was due to five terminations, two new franchised Inns added, and two Company-owned Inns sold to franchisees during 2001. As of December 30, 2001, there were no franchised Shoney’s Inns under construction.

      Revenues from construction and development activities in 2001 were $27.5 million compared with $12.0 million in fiscal 2000. The 2001 revenues earned were primarily from four hotel construction contracts being performed for third parties, two of which were still in progress at year-end, while 2000 revenues earned were from three hotel construction contracts being performed for third parties, two of which were still in progress at year-end. Revenues from construction and development can vary widely from period to period depending upon the volume of outside contract work and the timing of those projects.

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

      Hotel operating expenses for fiscal 2001 decreased by $23.7 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.

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

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

      Rent expense decreased by $9.8 million, or 94.4%, in 2001 from 2000. The decrease was due to (1) the Company’s sale of its leasehold interest in 24 of its Sumner Suites hotels on July 9, 2000, which had previously been sold and leased back,

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(2) the lease of another Sumner Suites hotel on July 9, 2000, to a tenant who assumed a land lease on that hotel, and (3) the sale of a Shoney’s Inn in June, 2000, on which the purchaser assumed the existing land lease. As of December 30, 2001, the Company was obligated on only one hotel lease; in 2001, rent expense on this lease was $582,000.

      General and administrative expenses increased by $849,000, or 17.0%, from 2000 to 2001. The increase was due primarily to increased insurance costs, professional fees, and travel expenses.

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

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

      The gains from early extinguishments of debt in 2001 and 2000 were the result of the repurchase of $3.4 million and $29.8 million, respectively, of the Company’s previously issued subordinated debt at a discount from face value, net of the write-off of related unamortized deferred financing costs.

      Interest expense decreased by $2.0 million, while interest income decreased by $21,000 from 2000 to 2001, for a total decrease of $2.0 million in net interest expense. The decrease in interest expense resulted primarily from interest expense reductions from the extinguishments of debt from the repurchase of $45.8 million of the Company’s outstanding subordinated debt in the open market and in privately negotiated transactions beginning October 1, 1999 and continuing through 2001, of which $33.2 million of these extinguishments occurred in 2000 and 2001. Additional debt reductions, including a pay down of $7.5 million of the Company’s outstanding debt using a portion of the $38.4 million gross proceeds from the sale-leaseback of four hotels in May of 2000, further reduced interest expense. Partially offsetting these reductions in interest expense was interest incurred to the Internal Revenue Service due to a tax payment deficiency for 1997, assessed based upon an audit by the Service (see Footnote 9 to the consolidated financial statements). The decrease in interest income in 2001 from 2000 was due primarily to the net effect of a reduction in the interest rate on 15 mortgage notes receivable in mid-2001, and an increase in interest earned on mortgage notes receivable from the seller-financed portion of the proceeds of the sale of one hotel in June 2000 and two hotels in April 2001.

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      The Company’s effective tax rate of 36.1% for the year ended December 30, 2001 differed from the federal statutory rate primarily as a result of interest on deferred gains and a reduction due to previously accrued income taxes. This $451,000 reduction in 2001 income taxes resulted from a settlement with taxing authorities on amounts previously provided for disputes on the 1997 tax year. The Company’s effective tax rate of 55.5% for the year ended December 31, 2000 differed from the federal statutory rate primarily as a result of interest on deferred gains.

Critical Accounting Policies and Practices

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

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

      Collectibility of Accounts and Notes Receivable: The Company continuously monitors collections from its customers and debtors under notes receivable and maintains allowances for doubtful accounts based upon historical experience and any specific customer collection issues that are identified. While such credit losses have historically been within the Company’s expectations, there can be no assurance that the historical experience will continue at the same level in the future. Notes receivable are generally secured by first mortgages on the underlying assets. The majority of these are from a group of companies that are affiliated with one another, creating a concentration of credit risk. The Company determined in the fourth quarter of 2002 that the fair values of the underlying assets were less than the balances of the first mortgage notes and that the notes receivable were under-collateralized. The Company, accordingly, recorded a write-down of $21.2 million as previously discussed.

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

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

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

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

Liquidity and Capital Resources

      The Company’s cash flows used in operating activities were $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

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operations were $1.4 million in 2001 and $978,000 in 2000. Depreciation and amortization was $3.3 million, $3.4 million, and $4.5 million in 2002, 2001, and 2000, respectively, the declines in 2001 and 2002 being the result of the sale of properties in excess of new properties being opened during these years. The Company recognized $628,000, $3.8 million, and $4.9 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, 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 gain on sale of property in 2000 represented $4.4 million from the sale of the Company’s interest in 25 lodging facilities and $207,000 from the sale of other real estate. The gains on early extinguishment of debt were all due to the repurchase by the Company of its outstanding public debt at a discount from face value. Decreases in accounts payable and accrued expenses used $3.5 million cash in 2002 and $5.4 million in 2000, respectively, as compared with 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 in trade receivables using cash of $926,000 in 2001. 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.

      The Company’s cash flows provided 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 $550,000. In 2001, three restaurants and two hotels were sold for a combination of cash and seller-financed notes, resulting in cash proceeds of $2.9 million. The 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

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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 the Company announced its plan to use up to $15 million of its Company funds to repurchase a portion of its outstanding $67.7 million senior subordinated notes. In 2000, the Company repurchased $8.8 million of these debt securities at a cost of $6.2 million.

      The Company established a three-year credit facility with a financial institution effective August 27, 1999. An amendment to the credit facility became effective October 3, 2001, which, among other changes, extended the maturity to September 30, 2004. A second amendment to the credit facility became effective November 26, 2002, which, among other changes, added real property collateral for the purpose of increasing the borrowing base. The credit facility is for $30 million (a $10 million term loan and a $20 million revolving line of credit), secured by a pledge of certain promissory notes payable to the Company received in connection with the sale of 16 of the Company’s lodging facilities in the third quarter of 1998 and 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 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 is at the lender’s base rate plus 100 basis points, and the interest rate on the revolving line of credit is at the lender’s base rate plus 250 points, with a floor of 7.00% on both portions of the facility. The Company is to pay commitment fees on the unused portion of the facility at .50% per annum. The credit facility also contains covenants which limit or prohibit the incurring of certain additional indebtedness in excess of a specified debt to total capital ratio, prohibit additional liens on the collateral, restrict mergers and the payment of dividends and restrict the Company’s ability to place liens on unencumbered assets. The credit facility contains financial covenants as to the Company’s minimum net worth. As of December 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 Company also maintains a $1.0 million unsecured line of credit with another bank, bearing interest at the lender’s prime rate, maturing May 31, 2003. As of December 29, 2002, the Company had $500,000 outstanding under this credit facility.

      The Company also has a loan secured by its corporate aircraft with a balance of $5.8 million as of December 29, 2002. This loan currently bears interest at 8.19% per annum and is amortized to its maturity of December 29, 2010. The interest rate was fixed for the first five years ending January 1, 2006, and is adjustable to a new rate for the second five years of the 10-year term equal to 325 basis points over 5-year Treasury rates.

      The Company’s outstanding 7.50% Convertible Subordinated Debentures in the face amount of $16.5 million mature in May of 2004. Its outstanding Series A Senior Subordinated Notes in the face amount of $26.0 million mature in November of 2006 and its Series B Notes in the face amount of $19.3 million mature in September of 2007.

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      Under the terms of the trust indenture governing the senior subordinated notes issued in 1996 and 1997, the Company is obligated to redeem at par up to 5% annually of the notes issued under the indenture beginning in 1999. Approximately $3.2 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.

      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 $75.0 million. 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 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 of notice to cure the default. A minimum of 51% of the outstanding principal amount of the notes outstanding may waive any covenant non-compliance default declared by the 25% or more holders. The Company is in the process of completing 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 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 total amount 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 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.

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      The Company is evaluating various alternatives to maximize shareholder value. These alternatives could include, without limitation, the franchising and operation of additional GuestHouse Inns & Suites, a sale of the remaining Company-owned hotels, negotiating new credit arrangements, developing hotels for other owners, the repurchase of additional shares of the Company’s common stock or outstanding debt securities, or any combination of these or other strategies, including, as announced on January 16, 2003, the possible spin-off of its reservation services subsidiary (InnLink) to the Company’s shareholders. The Exchange Offer, if consummated, will allow the Company more flexibility in purchasing its outstanding debt and common stock. The Company believes that a combination of existing cash, the liquidation of notes receivable, the sale of hotel properties and leasehold rights, net cash provided by operations, and borrowings under existing credit facilities or mortgage debt, will be sufficient to fund its capital expenditures, debt repayments and operations for at least the next twelve months.

Recently Issued Accounting Pronouncements

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

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

During 2002, the Company performed the first of the required impairment tests of goodwill and indefinite lived intangible assets and has recorded the effect of these tests in 2002. The Company wrote off $6.4 million of goodwill and intangible assets relating to the Shoney’s Inns concept due to the acquisition of GuestHouse International in the second quarter of 2002 and the decision to convert all Shoney’s Inns to the GuestHouse brand as soon a practical.

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

      In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Since the issuance of Statement 4, the use of debt extinguishment has become part of the risk management strategy of many companies, including the Company. These debt extinguishments 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.

      SFAS No. 148, Accounting for Stock-Based Compensation-Transition 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.

      SFAS 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.

      SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, 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

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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.

Forward-looking Statement Disclaimer

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

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

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

      The Company is exposed to market risk from changes in interest rates. The Company holds notes receivable that earn interest at variable rates. A hypothetical one-percentage point change in interest rates would change annual interest income by $715,000 based on the balances of these variable-rate notes receivable at December 29, 2002. Changes in interest rates also impact interest expense on long-term variable-rate debt. A hypothetical one-percentage point change in interest rates would change annual interest expense by $269,000 based on the balances of variable-rate long-term debt at December 29, 2002.

      Management believes that market risk as a result of interest rate changes would have a minimal effect on the fair value of the Company’s fixed-rate debt because the fair value of the Company’s debt is traded based more on the public’s perception of the nature of the debt than on any fundamental changes in the debt markets.

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

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

      The Financial Statements required by Item 8 are filed as a separate section of this Report.

      None.

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PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

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

ITEM 11.     EXECUTIVE COMPENSATION.

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

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

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

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

ITEM 14.     CONTROLS AND PROCEDURES

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

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

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PART IV

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

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

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