Back to GetFilings.com

Table of Contents

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Indicate by check mark whether the 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.

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.

As of June 4, 2003, there were 5,118,278 shares of ShoLodge, Inc. common stock outstanding.

Table of Contents

ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets

(1)  Derived from fiscal year ended December 29, 2002 audited financial statements.

     See accompanying notes.

Table of Contents

ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets

(1)  Derived from fiscal year ended December 29, 2002 audited financial statements.

     See accompanying notes.

Table of Contents

ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Earnings (unaudited)

See accompanying notes.

Table of Contents

ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)

See accompanying notes.

Table of Contents

SHOLODGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In Management’s opinion, the information and amounts furnished in this report reflect all adjustments which are necessary for the fair presentation of the financial position and results of operations for the periods presented. All adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002.

The fiscal year consists of a 52/53 week year ending the last Sunday of the year. The Company’s fiscal quarters have 16, 12, 12, and 12 weeks in the first, second, third and fourth quarters, respectively, in each fiscal year. When the 53rd week occurs in a fiscal year, it is added to the fourth fiscal quarter, making it 13 weeks in length.

The Company has historically reported lower earnings in the first and fourth quarters of the year due to the seasonality of the Company’s business. The results of operations for the quarters ended April 20, 2003 and April 21, 2002 are not necessarily indicative of the operating results for the entire year.

EXCHANGE OF PROPERTIES

The Company opened a new AmeriSuites hotel in October 2001 and another in February 2002. In accordance with the July 2000 agreement in which the Company sold its operating interests in 27 AmeriSuites hotels, the Company was obligated to exchange either one or both of the AmeriSuites hotels with the purchaser, at its landlord’s option, for one or two specific existing hotels of the same brand and number of rooms previously operated by the Company prior to July 2000. The exchange option was exercised on both hotels, and the exchanges were completed in the first quarter of 2002. The exchanges were accounted for as the acquisitions of businesses, and the hotels received in the exchanges were recorded at their fair value in the first quarter of 2002.

LEASE ABANDONMENT INCOME

The Company leased three hotels to Prime Hospitality Corp. (“Prime”) in July of 2000. In the first quarter of 2003, Prime abandoned the lease of the three hotels and the Company resumed operations of the hotels on April 5, 2003. Due to the terms of the lease agreement, the Company had recorded a liability and a deferred credit in July of 2000. Due to the lease abandonment by Prime in the first quarter of 2003, the remaining deferred amounts totaling $4,913,836 and $415,668 in cash received from Prime upon the abandonment, were recognized as lease abandonment income totaling $5,329,504 in the first quarter of 2003.

DISCONTINUED OPERATIONS

Discontinued operations resulted from the sale of one hotel in the second quarter of 2002, the sale of one and transfer of five hotels in the fourth quarter of 2002, and the reclassification of five hotels to assets of hotels held for sale in the first quarter of 2003.

Table of Contents

The five hotels reclassified to assets of hotels held for sale in the first quarter of 2003 was based upon the Company’s decision to sell the five hotels to cash purchasers as part of a plan to divest all of the remaining Company-owned hotels other than its AmeriSuites hotels and one GuestHouse Inn which is leased. Subsequent to the decision in late January of 2003, contracts for the sale of all five of the hotels were executed by the end of the Company’s first fiscal quarter and the sales are expected to be consummated by the end of its second fiscal quarter of 2003. Based upon these sales contracts, three of the five hotels are expected to sell, net of sales commissions, for $1,768,559 less than their carrying values. Accordingly, the carrying values of these three hotels have been written down by this impairment amount in the first quarter of 2003.

The effects of these twelve hotels’ operations, the gain or loss on the sale and transfer of the hotels, and the impairment of the hotels classified as held for sale, have been removed from operating earnings for the first quarter of 2003 and 2002 in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The following table summarizes the results of operations for the twelve properties sold, transferred, or classified as held for sale (amounts in thousands):

Table of Contents

The assets and liabilities of the properties transferred and held for sale presented in the accompanying consolidated balance sheets are as follows (amounts in thousands):

Table of Contents

EARNINGS PER SHARE

Earnings per share was computed by dividing net income by the weighted average number of common shares outstanding. The following table reconciles earnings and weighted average shares used in the earnings per share calculations for the fiscal quarters ended April 20, 2003, and April 21, 2002:

Table of Contents

OPERATING SEGMENT INFORMATION

The Company’s significant operating segments are hotel operations, franchising, management and reservation services, and construction and development. None of the Company’s segments conduct foreign operations. Operating profit includes the operating revenues and expenses directly identifiable with the operating segment. Identifiable assets are those used directly in the operations of each segment. A summary of the Company’s operations by segment follows (in thousands of dollars):

CURRENT AND LONG-TERM DEBT

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 April 20, 2003, 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

Table of Contents

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 April 20, 2003, 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 April 20, 2003.

The total amount of debt classified as current liabilities due to the circumstances discussed above was $63.6 million as of April 20, 2003. Since April 20, 2003, the Company has reduced that amount by $3.7 million, including $200,000 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 $40.0 million within the next 60 days from the sale of the properties serving as collateral under nine notes receivable, and the sale of five unencumbered properties. Negotiations are currently in progress relative to the sale of four additional hotels, with net proceeds of approximately $28.0 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.

CONTINGENCIES

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

STOCK BASED COMPENSATION

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

Table of Contents

The Company has adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation-Transition and Disclosure. The Company’s pro forma net earnings (loss) would not be materially different in the first quarter of 2003 or 2002 under the fair value method.

RELATED PARTY TRANSACTION

The chairman and chief executive officer renewed his non-interest bearing, unsecured, full-recourse promissory note in the amount of $937,500 that came due on February 11, 2002 with the Company for one year at an interest rate of prime plus 250 basis points. He paid the note and all accrued interest in full in December of 2002 and January of 2003.

The chairman and chief executive officer is personally involved in various real estate development activities. He utilizes the Company’s wholly-owned construction and development subsidiary for this purpose. Revenues earned by the Company from these projects were $2,944,623 in the first quarter of 2003 and $10,131 in the first quarter of 2002.

Table of Contents

ShoLodge, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial
Condition and Results of Operations

Overview

          The following discussion should be read in conjunction with the Company’s condensed consolidated financial statements and notes thereto appearing elsewhere in this quarterly report.

          The Company is an operator and the exclusive franchisor of Shoney’s Inns. As of April 20, 2003, the Shoney’s Inn lodging system consists of 35 Shoney’s Inns containing 3,491 rooms of which one containing 115 rooms is owned and operated by the Company. Shoney’s Inns are currently located in ten states with a concentration in the Southeast. Shoney’s Inns operate in the upper economy limited-service segment and are designed to appeal to both business and leisure travelers, with rooms usually priced between $40 and $65 per night. The typical Shoney’s Inn includes 60 to 120 rooms and, in most cases, meeting rooms.

          On May 2, 2002, the Company became the exclusive franchisor of GuestHouse Inns & Suites, which as of April 20, 2003, consisted of 81 properties containing 6,057 rooms open and operating in twenty states, including eight states in which Shoney’s Inns operate. GuestHouse Inns & Suites operate 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 plans to convert the name of the Shoney’s Inn chain to the GuestHouse brand as soon as practical. As of April 20, 2003, 24 of the GuestHouse Inns & Suites of the 81 noted above, which contain 2,277 rooms, had been converted from Shoney’s Inns to the GuestHouse brand during the past year.

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

          The Company has historically reported lower earnings in the first and fourth quarters of the year due to the seasonality of the Company’s business. The results of operations for the quarters ended April 20, 2003 and April 21, 2002 are not necessarily indicative of the operating results for the entire year.

Table of Contents

Results of Operations

For the Fiscal Quarters Ended April 20, 2003 and April 21, 2002

          Total operating revenues for the quarter ended April 20, 2003, were $7.5 million, or 3.0% more than the total operating revenues of $7.3 million reported for the first quarter of 2002. The net increases were due to increases in hotel, franchising and reservation revenues, partially offset by decreases in construction and development revenues and rent income.

          Revenues from hotel operations in the first fiscal quarter increased by $655,000, or 66.6%, to $1.6 million from the $983,000 reported for the same period last year. For the one hotel opened for all of both quarterly periods, a decrease of 5.8% in average daily room rates, from $51.32 in the first quarter of 2002 to $48.33 in the first quarter of 2003, and a decrease in average occupancy rates on this hotel from 60.7% to 60.6% this year, were the primary causes of a decrease in same hotel revenues of 6.8% from $347,000 in the first quarter of 2002 to $323,000 in the first quarter of 2003. The Company owns and operates five AmeriSuites hotels, two of which were acquired in the first quarter of 2002 in an exchange transaction, and three of which the Company began operating in the first quarter of 2003 upon the abandonment of an operating lease by the lessee. The Company owned and operated a total of six hotels included in continuing operations at the end of its first fiscal quarter of 2003 (one GuestHouse Inns & Suites and the five AmeriSuites hotels). RevPAR (revenue per available room) for all six of these Company-owned hotels decreased by 2.9% from $36.73 in the first quarter of 2002 to $35.66 in the first quarter of 2003.

          The Company sold one Shoney’s Inn in June of 2002, sold a Baymont Inn & Suites in December of 2002, and transferred two Shoney’s Inns and three GuestHouse Inns & Suites in December of 2002. The revenue effect of these seven hotels sold in 2002 is reflected in discontinued operations. During the first quarter of 2003, the Company decided to sell five additional hotels (one Shoney’s Inn and four GuestHouse Inns & Suites). The revenue effects of these five hotels are also reflected in discontinued operations.

          Franchising, reservation and management service revenues increased by $394,000, or 23.4%, in the first quarter of 2003 from the first quarter of 2002. Initial and termination franchise fees increased by $13,000, royalty fees increased by $199,000, and reservation fees increased by $182,000 from the first quarter of last year. Initial franchise and termination fee revenue varies from quarter to quarter depending on the level of franchise sales activities and terminations. As of April 20, 2003, a total of 685 lodging facilities were served by the Company’s reservation center.

          Revenues from construction and development activities were $3.0 million in the first quarter of 2003, versus $3.5 million in the first quarter of 2002. These revenues include $2.9 million in the first quarter of 2003 and $10,000 in the first quarter of 2002

Table of Contents

earned from entities controlled by the Company’s chief executive officer. 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 in the first quarter of both 2003 and 2002.

          Rent income in the first quarter of 2003 decreased by $230,000, to $817,000, from $1.0 million, in the first quarter of 2002. The primary source of rent income is from the lease of three AmeriSuites hotels which were being operated by Prime Hospitality Corp. until April of 2003 when Prime abandoned the lease, at which time the Company took back the operations of these three properties. The decrease in the first quarter rent income was due to the abandonment of the lease by Prime and the sale of some restaurants to the lessees.

          Operating expenses from hotel operations of the six Company-owned hotels included in continuing operations for the first quarter of 2003 increased by $389,000, or 56.9%, from $683,000 in the first quarter of 2002. The operating expenses as a percentage of operating revenues for this activity decreased from 69.4% in the first quarter of 2002 to 65.4% in the first quarter of 2003, improving gross operating profit margin from 30.6% in the first quarter of 2002 to 34.6% in the first quarter of 2003. Profit margins are generally greater on AmeriSuites hotels than on GuestHouse Inns & Suites, and the greatest increases in revenues from the first quarter of 2002 to the first quarter of 2003 were from the AmeriSuites hotels.

          Franchising, reservation and management service operating expenses increased by $641,000, or 61.9%, from the first quarter of 2002 to the first quarter of 2003. The increases were primarily in reservation center expenses incurred in order to support the additional revenues earned from services provided to additional chains and independent hotel properties since the first quarter of 2002, and to expenses related to the franchising of GuestHouse Inns & Suites, the franchising rights of which were not acquired until the second quarter of 2002.

          Construction and development costs in the first quarter of 2003 and 2002 were $3.4 million and $3.5 million, respectively, on construction contracts in progress during those quarters.

          Rent expense decreased by $9,000 in the first quarter of this year from last year’s first quarter. The Company leased only one hotel property in both years.

          General and administrative expenses increased by $66,000, or 3.4%, from the first quarter of 2002. The increases were due primarily to increased legal fees and insurance costs.

Table of Contents

          Depreciation and amortization expense increased by $75,000, or 10.7%, from the first quarter of 2002, and was due to the increase in the weighted average number of hotels owned in the first quarter of 2003 over the first quarter of 2002.

          In the first quarter of 2003, the Company wrote off $6,000 of pre-development costs and $13,000 of accounts receivable deemed to be of doubtful collectibility.

          The gain of $595,000 recognized on sale of property in the first quarter of 2003 was primarily from the sale of a restaurant to the lessee and the recognition of previously deferred gains on the sale of a hotel and two restaurants. The deferred gain on a hotel sold in 2002 was recognized in full in the first quarter of 2003 due to the collection in full of the seller-financed note.

          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 $644,000 of its 7.50% subordinated debentures in the first quarter of 2003 at a discount, and also repurchased $739,000 of its outstanding senior subordinated notes at a discount, recognizing a gain of $283,000 on these transactions in the first quarter of 2003. In the first quarter of 2002, the Company repurchased $900,000 of its 7.50% subordinated debentures at a discount, recognizing a gain of $252,000. 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 further discussion in “Liquidity and Capital Resources” below.

          Interest expense increased by $389,000, or 15.6%, while interest income decreased by $241,000, or 14.0%, from the first quarter of 2002. The increase in interest expense was due primarily to higher levels of borrowing on the Company’s bank credit facilities in the first quarter of 2003 than in the first quarter of 2002. Interest income decreased due to decreases in the interest rates charged on notes receivable due to the general decline in interest rates and the interest rate terms of those notes, and to the collection of two seller-financed notes receivable which were refinanced by the borrowers in the first quarter of 2003.

          The Company leased three hotels to Prime in July of 2000. In the first quarter of 2003, Prime abandoned the lease of the three hotels and the Company resumed operations of the hotels on April 5, 2003. Due to the terms of the lease agreement, the Company had recorded a liability and a deferred credit in July of 2000. Due to the lease abandonment by Prime in the first quarter of 2003, the remaining deferred amounts totaling $4.9 million, and $416,000 in cash received from Prime upon the abandonment, were recognized as lease abandonment income totaling $5.3 million in the first quarter of 2003.

          The zero effective tax rate in the first quarter of 2003 is due to the utilization of net operating loss carryforwards that had previously been fully reserved. The

Table of Contents

effective tax rate in the first quarter of 2002 differs from the federal and state statutory rates as a result of interest on deferred gains.

          Discontinued operations resulted from the sale of one hotel in the second quarter of 2002, the sale of one and transfer of five hotels in the fourth quarter of 2002, and the reclassification of five hotels to assets of hotels held for sale in the first quarter of 2003. The effects of these hotels’ operations, the gain or loss on the sale and transfer of the hotels, and the impairment of the hotels classified as held for sale, have been removed from operating earnings in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Liquidity and Capital Resources

          The Company’s cash flows used in operating activities were $2.0 million in the first quarter of 2003, compared with $3.7 million used in operating activities in the first quarter of 2002.

          The Company’s cash flows provided by investing activities were $25.0 million in the first quarter of 2003, compared with cash flows used in investing activities of $3.5 million for the comparable period in 2002. The Company’s capital expenditures are principally for the construction and acquisition of new lodging facilities and the purchase of equipment and leasehold improvements. Capital expenditures for such purposes were $164,000 in the first quarter of 2003 and $4.9 million in the first quarter of 2002. Proceeds from the sale of property and leasehold interests were $7.5 million in the first quarter of 2003 versus $212,000 for the comparable period in 2002. The Company received $17.3 million from the collection of notes receivable in the first quarter of 2003.

          Net cash used in financing activities was $7.4 million in the first quarter of 2003 compared with $5.0 million provided by financing activities in the first quarter of 2002. Repayments, net of borrowings, on long-term debt obligations were $8.1 million in the first quarter of 2003 versus $5.0 million borrowings in excess of repayments in the first quarter of 2002. The repayments in the first quarter of 2003 and the first quarter of 2002 include $1.4 million and $900,000, respectively, of long-term debt repurchased in the open market or in privately negotiated transactions. In the first quarter of 2002, the Company repurchased 25,000 shares of its common stock for $148,000 pursuant to a plan to repurchase up to $23.0 million of the Company’s outstanding common stock.

          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

Table of Contents

facilities in the third quarter of 1998. The borrowing base is the lower of (a) 85% of the outstanding principal amount of the pledged notes, (b) 65% of the appraised market value of the underlying real property collateral securing the pledged notes and of the real property collateral, (c) a multiple of the trailing twelve months’ net operating income of the underlying real property collateral securing the pledged notes and of the real property collateral, or (d) $30 million. Effective October 3, 2001, the interest rate on the term loan is at the lender’s base rate plus 100 basis points, and the interest rate on the revolving line of credit is at the lender’s base rate plus 250 basis points, with a floor of 7.00% on both portions of the facility. The Company is to pay commitment fees on the unused portion of the facility at .50% per annum. The credit facility also contains covenants which limit or prohibit the incurring of certain additional indebtedness in excess of a specified debt to total capital ratio, prohibit additional liens on the collateral, restrict mergers and the payment of dividends and restrict the Company’s ability to place liens on unencumbered assets. The credit facility contains financial covenants as to the Company’s minimum net worth. As of April 20, 2003, the Company had $17.4 million in borrowings outstanding under this credit facility, consisting of the $10 million term loan and $7.4 million on the revolving line of credit.

          The Company also has a loan secured by its corporate aircraft with a balance of $5.7 million as of April 20, 2003. This loan currently bears interest at 8.19% per annum and is amortized to its maturity of December 29, 2010. The interest rate was fixed for the first five years ending January 1, 2006, and is adjustable to a new rate for the second five years of the 10-year term equal to 325 basis points over 5-year Treasury rates.

          The Company’s outstanding 7.50% Convertible Subordinated Debentures in the face amount of $12.5 million mature in May of 2004. Its outstanding Series A Senior Subordinated Notes in the face amount of $25.5 million mature in November of 2006 and its Series B Senior Subordinated Notes in the face amount of $18.8 million mature in September of 2007.

          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 December 1, 1999. On December 1, 2002, approximately $3.2 million of these notes were redeemed under this provision.

          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 April 20, 2003, 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

Table of Contents

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 April 20, 2003, 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 April 20, 2003.

          The total amount of debt classified as current liabilities due to the circumstances discussed above was $63.6 million as of April 20, 2003. Since April 20, 2003, the Company has reduced that amount by $3.7 million, including $200,000 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 $40.0 million within the next 60 days from the sale of the properties serving as collateral under nine notes receivable, and the sale of five unencumbered properties. Negotiations are currently in progress relative to the sale of four additional hotels, with net proceeds of approximately $28.0 million expected. Additionally, the Company anticipates refunds of approximately $8.5 million of previously paid income taxes by mid-2003, and at least three parcels of undeveloped land are expected to be sold in 2003 for approximately $5.6 million. The Company expects to cure any default declared by the senior subordinated note holders within the 60 day cure period, but if not, is confident that it will have sufficient cash available from the above-listed sources and cash from other sources to pay its debt in full in 2003.

          The Company’s Board of Directors has previously authorized the use of up to $23.0 million for the repurchase of shares of the Company’s common stock. The purchases, including block purchases, are to be made from time to time in the open market at prevailing market prices, or in privately negotiated transactions at the Company’s discretion. No time limit has been placed on the duration of the stock repurchase plan, and the Company may discontinue the plan at any time. As of the end of the first fiscal quarter of 2003, approximately 3.6 million shares had been repurchased at a cost of $20.5 million.

          The Company is investigating various alternatives to maximize shareholder value. These alternatives could include, without limitation, the franchising and operation of additional GuestHouse Inns & Suites, a sale of the remaining Company-owned hotels, negotiating new credit arrangements, developing hotels for other owners, the repurchase of additional shares of the Company’s common stock or outstanding debt securities, or any combination of these or other strategies. The pending Exchange Offer, if consummated, would allow the Company more flexibility in purchasing its outstanding debt and common stock. The Company believes that a combination of existing cash, proceeds from the sale of properties, the collection of notes receivable, net cash provided

Table of Contents

by operations, and borrowings under existing credit facilities or mortgage debt, will be sufficient to fund its capital expenditures, stock repurchase plan, debt repayments and operations for at least the next twelve months.

Market Risk

          There have been no material changes in the Company’s exposure to market risk in the first fiscal quarter ended April 20, 2003.

Forward-looking Statement Disclaimer

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

PART I

Item 4. Controls and Procedures

	(a)		Within the ninety day period prior to the 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 designed 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.

Table of Contents

CERTIFICATION

          I, Leon Moore, certify that:

          1.     I have reviewed this quarterly report on Form 10-Q of ShoLodge, Inc.

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

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

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

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

               b)     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

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

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

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

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

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

-1-

Table of Contents

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