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 11, 2003, was approximately $6,400,000. The market value calculation was determined using the last sale price of registrant’s common stock on July 11, 2003, as reported on The Nasdaq Stock Market, and assumes that all shares beneficially held by executive officers and directors of the registrant are shares owned by “affiliates,” a status which each of the officers and directors individually disclaims.

Shares of common stock, no par value, outstanding on April 1, 2004, were 5,006,611.

DOCUMENTS INCORPORATED BY REFERENCE

Table of Contents

PART I

ITEM 1. BUSINESS.

General

     The Company develops, owns, operates and is 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 28, 2003, the Shoney’s Inn /GuestHouse lodging system consisted of 91 properties containing 7,108 rooms of which one containing 98 rooms is owned by the Company. Shoney’s Inns and GuestHouse Inns & Suites are currently located in 20 states. As of December 28, 2003, the Company also owned and operated two AmeriSuites hotels.

     Except for three owned hotel properties which the Company intends to continue to operate at present, all of the Company’s remaining owned hotel properties are held for sale at December 28, 2003. The Company’s present strategy does not include the ownership of additional hotel properties.

     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.

     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 $45 and $85 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 the location of the inns in close proximity to free-standing restaurants gives 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.

     A significant portion of the Company’s operations have been generated in recent years by contract revenues from construction and development of hotels and other real estate projects for third parties, including 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 generally recognized on the percentage of completion basis, but construction and development for related parties are generally performed on a cost-plus basis.

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

Growth Strategy

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

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real estate, (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”).

     Expansion of GuestHouse Inns & Suites Franchise System. In 2003, the Company has focused on expanding the GuestHouse Inns & Suites system principally through the addition of new franchises and the conversion of franchised Shoney’s Inns to GuestHouse. As of 2003 fiscal year-end, there were 91 Shoney’s Inns and GuestHouse Inns (of which one is Company owned) with a total of 7,108 rooms. The Company targets existing Shoney’s Inn and GuestHouse franchisees, other hotel brand developers and contacts within the industry as potential franchisees for additional GuestHouse Inns & Suites.

     Development of Additional All-Suite Hotels. Except for the two owned all-suite hotel properties which the Company intends to continue to operate at present, the Company’s remaining owned all-suite hotel properties are held for sale at December 28, 2003. The Company’s present strategy does not include the ownership of additional all-suite hotel properties. 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, serving approximately 949 hotels as of December 28, 2003, as compared with approximately 680 hotels a year ago. The Company is continuing to aggressively market this service, capitalizing on its state of the art technology.

     In addition to the strategies described above, the Company may from time to time investigate various alternatives to maximize shareholder value. These alternatives could include, without limitation, the franchising and operation 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 shares of the Company’s common stock or outstanding debt securities, or any combination of these or other strategies.

Shoney’s Inns/GuestHouse Franchisor Concept

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

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

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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, color television and coffeemaker. Many conversion properties reflect the architecture and personality of its locale.

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

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

     The Vice President 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, 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 minimum 10% discount on the standard room rate to any traveler age 55 or older.

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

     The Company 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 rack rate revenue booked by them. The Company, with respect to both owned and franchised inns, has joined the TACS-Classic Program administered by Perot Systems. TACS-Classic (Travel Agent Commission Settlement) is a

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program where each hotel property reports by electronic transmission to Perot Systems all of its commissionable room sales generated through travel agents. Perot Systems automatically generates checks each month to travel agents across the country for the total commissions earned. The Company believes that travel agents are more likely to book guests into a 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.

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

     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.

     The Company constructed no new hotels in 2003 and currently has no contracts to construct any hotels for itself or for third parties, but will pursue any future opportunities to do so in the future.

Lodging Operations

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

     Reservation System. The Company’s proprietary central reservation system,

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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 Americinns International. InnLink operates 24 hours a day, 7 days a week. The InnLink system may be accessed by individual travelers as well as by travel agents, tour and group booking agents at 1-800-552-4667. Electronically, InnLink is accessed through numerous global distribution systems (e.g., SABRE Travel Information Network, Galileo International, Amadeus and WorldSpan). The reservation system includes specially designed hotel reservation software, with adequate capacity, and state of the art hardware and telecommunications devices.

     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. In addition, the quality assurance consultants provide on-site housekeeping and maintenance training, utilizing a combination of classroom and hands-on training.

     Training. The Company utilizes the services of an “opening team” to assist with hiring and training new staff and opening new hotels. The opening team trains local hotel personnel in front desk operations, operational policies, hotel accounting and cash handling procedures, record-keeping, 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. The Company currently has no plans to open any new Company-owned hotels.

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 three 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.

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

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$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 fund 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 to cover GDS and electronic “pass through fees”.

     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. As of December 28, 2003, the Company managed six 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.

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

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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 any future hotels which it constructs will be located in similar areas. Management believes that the principal competitive factors in its lodging operations are room rates, quality of accommodations, name recognition, supply and availability of alternative lodging facilities, service levels, reputation, reservation systems and convenience of location. In its franchising operations, the principal competitive factors are fee structure and support services. Management further believes that the Company is presently competitive in all these respects.

Government Regulation

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

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

     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

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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 28, 2003 the Company had approximately 491 employees, including approximately 136 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.

     The two Company-owned and operated AmeriSuites hotels at December 28, 2003, are located on sites owned by the Company either directly or through subsidiaries. One of the Company-owned and operated AmeriSuites hotels is located in Alpharetta, Georgia and the other one is located in Grand Prairie, Texas. 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.

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.

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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 2003.

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PART II

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

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

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

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

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Equity Compensation Plan Information

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 28, 2003 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 28, 2003, 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 costs and expenses, and depreciation and amortization expense are due primarily to fluctuations in the number of hotels operated by the Company. At the end of 1999, 2000, 2001, 2002 and 2003, there were 29, 1, 1, 2, and 3 hotels, respectively, being owned and operated and included in continuing operations by the Company. In July of 2000, the Company sold its operating interest in 27 hotels to Prime Hospitality Corp. (“Prime”) by selling its leasehold interest in 24 of them and leasing the remaining three to them. The three hotels leased to Prime in 2000 were taken back in April of 2003 due to the lease abandonment by Prime, and are currently operated by the Company. One of these three hotels is included in continuing operations, while the other two are classified as held for sale and are included in discontinued operations.
(B)		Construction and development revenues and cost and expenses vary widely from year to year depending upon the number of third party construction contracts in progress. Prior to 1999, construction and development was done primarily on the Company’s own hotels. In 2002 and 2003 construction and development included a significant amount earned from related parties.
(C)		Rental revenues increased significantly in 2000 due to the lease of the three hotels to Prime as discussed in (A) above, increasing rent income beginning in July of 2000 and ending in April of 2003. In April of 2003, Prime abandoned the lease and the Company resumed operating the hotels, one of which is included in continuing operations and the other two are included in discontinued operations since these two are classified as held for sale as of fiscal year-end 2003.
(D)		Rent expense fluctuations are due primarily to rent paid to the landlord on 24 hotels sold and leased back in 1997, 1999, and 2000, prior to the sale of these leasehold interests to Prime in July of 2000. Fourteen hotels were sold and leased back in November of 1997; six hotels were sold and leased back in June of 1999; and four hotels were sold and leased back in May of 2000.
(E)		The unusually high gain on sales of property and leasehold interests in 1999 was due to the sale of the sixteen hotels in July of 1998, a portion of which was recognized in 1998 and the remainder in 1999 due to the installment method

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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 Company-owned GuestHouse Inn & Suites hotel. 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 the exclusive franchiser of the GuestHouse Inns & Suites brand (“GuestHouse”). GuestHouse operates in the mid-market limited service segment, with rooms typically priced between $45 and $85 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.

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

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Certain Discontinued Operations

     Except for three owned hotel properties which the Company intends to continue to operate at present, all of the Company’s remaining owned hotel properties are held for sale at December 28, 2003. The Company’s present strategy does not include the ownership of additional hotel properties.

     The Company 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 have been carried on the Company’s balance sheet as assets of hotels transferred under contractual agreements (notes receivable) pending their sale. The buyer intended to resell the hotels. The operations and gains or losses on disposal of these hotels have been reported in discontinued operations. Three of the properties were resold by the buyer in 2003 and the net proceeds were used to pay the notes. The proceeds from the sales approximated the balance of the notes. One of the remaining two hotels was resold by the buyer in the first quarter of 2004, with net proceeds to be used to apply to the note. The note was written down by $528,000 in the fourth quarter of 2003 based upon the net proceeds received subsequent to December 28, 2003. The proceeds from the sale of the remaining property are expected to approximate the balance of the note.

     Contracts for the sale of two of the Company’s AmeriSuites hotels owned and operated at December 28, 2003, at estimated net proceeds in excess of their carrying values, resulted in the reclassification of these properties to “held for sale”, and their operations for all periods presented have been reclassified to discontinued operations. These hotels had been included in continuing operations prior to the fourth quarter.

Related Party Transactions

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

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full-recourse promissory note in the amount of $937,500 that came due February 11, 2002 with the Company for one year at an interest rate of prime plus 250 basis points. He paid the note and all accrued interest in full in December of 2002 and January of 2003 prior to its maturity date of February 11, 2003. Another of the notes in the amount of $124,999 matured on December 7, 2003 and was paid at that time. He paid the remaining notes in full in 2003 prior to their scheduled maturity dates.

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

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

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 28, 2003 and December 29, 2002

     For the fiscal year ended December 28, 2003, total revenues increased 82.4% to $36.1 million from $19.8 million for the fiscal year ended December 29, 2002.

     For the first quarter of 2002, the Company owned and operated Shoney’s Inns. Beginning in the second quarter of 2002, the Company owned and operated two hotel brands (Shoney’s Inns and GuestHouse). The Company operated one hotel as either a Shoney’s Inn or GuestHouse for fiscal years 2003 and 2002. The Company owned and operated one AmeriSuites hotel throughout most of 2002 and two AmeriSuites hotels throughout most of 2003. Revenues from hotel operations in fiscal 2003 increased by 77.8% to $3.8 million from $2.2 million for fiscal year 2002. For the one hotel (GuestHouse) opened for all of both years (same hotel), average daily room rates in 2003 decreased 6.8% to $52.54 from $56.34 in 2002, and average occupancy rates decreased from 64.6% in 2002 to 61.7% in 2003, resulting in a decrease in same hotel revenues per available room (RevPAR) of 10.9%, from $36.37 in 2002 to $32.40 in 2003. The remaining (non-same) hotels contributed $2.7 million to hotel revenues in 2003 compared with $854,000 in 2002. The $2.7 million revenues from non-same hotels in 2003 were from two AmeriSuites hotels which the Company operated for most of the year and continued to operate as of December 28, 2003. The $854,000 revenues from non-same hotels in 2002 were from one AmeriSuites hotel operated beginning in April of 2002.

     Franchising, reservation and management revenues in fiscal 2003 increased by 26.2% from 2002, to $7.7 million in 2003 from $6.1 million in 2002. In fiscal 2003 and 2002, initial franchise and franchise termination fees totaled $227,000 and $185,000, respectively. The remaining franchising, reservation and management revenues increased

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by $1.5 million, or 26.3%, from 2002 to 2003, including an increase in royalty fee revenues of $83,000, a decrease in management fees of $31,000, and an increase in reservation fee revenues of $1.5 million. At the end of fiscal 2003 there were 90 franchised Shoney’s Inns / GuestHouse in operation compared with 112 at the end of fiscal 2002; this decrease was due primarily to the termination of franchises in excess of new franchises since 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 2003 were $24.0 million compared with $9.9 million in fiscal 2002. The 2003 and 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 2003. Revenues from construction and development activities earned from related parties in 2003 and 2002 totaled $22.0 million and $5.7 million, respectively. Revenues from construction and development can vary widely from period to period depending upon the volume of outside contract 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 $400,000 in 2003, compared with $1.4 million in 2002. The decrease was due primarily to the abandonment of the lease of three AmeriSuites hotels by Prime Hospitality Corp. (“Prime”) in April of 2003. The Company took back the operations of these hotels and on June 13, 2003, filed a lawsuit against Prime for an amount in excess of $10.0 million for its violation of the lease agreement. Two of these hotels were classified as held for sale as of December 28, 2003, and the rent revenue relative to these two hotels has been reclassified to discontinued operations for all periods presented. Rent income in the future is not expected to be material.

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

     Hotel operating expenses for fiscal 2003 increased by $1.6 million, or 108.9%, to $3.0 million from $1.4 million in 2002. Hotel operating expenses on the non-same hotels operated in 2003 were $2.2 million in 2003 and $620,000 in 2002. Hotel operating expenses on the one same-hotel decreased by $23,000, or 2.7%, to $800,000 in 2003 from $823,000 in 2002. The operating expenses as a percentage of operating revenues for this activity increased from 66.8% in 2002 to 78.5% in 2003. Operating expenses as a percentage of operating revenues on the one same-hotel increased from 63.0% to 68.9% from 2002 to 2003.

     Franchising, reservation and management operating expenses increased by $2.2 million, or 51.5%, from 2002 to 2003. 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 2003 were $20.3 million compared with $12.1 million in 2002. The costs incurred were directly related to the revenues earned from

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

     Rent expense decreased by $66,000, or 11.3%, in 2003 from 2002. As of December 28, 2003, and December 29, 2002, the Company was obligated on only one hotel lease.

     General and administrative expenses decreased by $3.0 million, or 37.7%, from 2002 to 2003. The decrease was due primarily to reduced administrative costs as a result of the sale of hotels during 2003.

     Depreciation and amortization expense increased by $170,000, or 10.9%, from 2002 to 2003, due primarily to additions to the reservation center’s capitalized computer hardware and software to accommodate its expanded customer base.

     The Company 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 in 2002 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. An additional $6,000 of such expenditures was charged off in 2003.

     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 was 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 Chapter 11 bankruptcy on January 3, 2003. The bankruptcy was overturned by the court, but the owner of the hotel still did not pay the award. The Company purchased the first mortgage in 2003, foreclosed on the property, and acquired the hotel at a foreclosure sale, operating it with the intent to resell it. The Company expects to resell it in 2004 at a price that is expected to recover a portion of the amount charged off in 2002. The other contract receivable was 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 this contract will also be recorded as earned when and if received. Various other construction contracts receivable totaling approximately $600,000 were also written off in 2002. Miscellaneous construction contracts receivable totaling $61,000 were written off in 2003.

     Unsecured accounts receivable from the 15 hotels securing 15 first mortgage notes discussed below and various other accounts receivable were written off as uncollectible in the amount of approximately $650,000 and $1.3 million in 2003 and 2002, respectively.

     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

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remaining balance of $376,000 for the Sumner Suites trademark was written off in the second quarter of 2002. 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 had 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 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 had been determined to be worthless. Consequently, the balance of $6.4 million was written off in the second quarter of 2002.

     The Company held 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 were affiliated with each other. The 15 mortgage notes were cross-collateralized and cross-defaulted and matured July 30, 2003. Even though all first mortgage payments on these 15 hotels were timely received through the end of 2002, the common owner had notified the Company that it was unlikely that it would be able to refinance the properties by the notes’ maturity dates. The Company did not desire to extend the maturity dates and, therefore, anticipated that it would be necessary to resume title to the properties. The owner of the properties agreed in late December of 2002 to transfer the hotels back to the Company by deeds in lieu of foreclosure. In anticipation of this, the Company began midway through the fourth quarter to find cash purchasers of the properties in the event the Company re-acquired ownership. Offers received had been disappointing, but the Company did not desire to take back ownership and operate the properties. Therefore, it has been selling the properties at values significantly below the balances of the notes receivable and as of December 29, 2002, wrote down the notes receivable by $18.1 million to the estimated net selling price of the properties. During 2003, the Company negotiated contracts to sell 13 of the 15 hotels, took deeds in lieu of foreclosure on these properties, and sold them at the negotiated prices. Two of these notes receivable remained outstanding at the end of 2003, and the Company intends to find buyers, take the hotels by deed in lieu of foreclosure, and sell them in 2004. The Company negotiated with the common owner of the other three hotels secured by first mortgage notes receivable held by the Company, and agreed to discount the notes in order to accelerate payment by its refinancing of the hotels. The Company wrote these notes down to their estimated collectible balances as of December 29, 2002. Two of these three notes receivable were refinanced by the owner in 2003 and paid the Company the proceeds; the third note was still outstanding at the end of 2003, and the owner was continuing to seek refinancing to pay the Company the proceeds. On January 30, 2004, this hotel was refinanced and the proceeds from the refinancing were paid to the Company resulting in no additional gain or loss. The total write-downs of all 18 notes receivable at the end of the Company’s 2002 fiscal year were $21.2 million. An additional $738,000 was written off in 2003 on these notes due to the insufficient net proceeds from the resale of the properties to cover the carrying value of the notes. Additionally, the Company wrote down $143,000 of other notes receivable in 2003 due from the three hotels with common ownership discussed above. Various other notes receivable totaling approximately $134,000 were written off in 2003.

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     The Company tested its real estate owned as of December 28, 2003 and December 29, 2002, for impairment in accordance with SFAS No. 144. The Company 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. No additional impairment of real estate was recorded in 2003. 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 2003 was $1.3 million compared with $677,000 in 2002. The gain of $1.3 million in 2003 included $657,000 from the sale of undeveloped land, $537,000 from the sale of one hotel and two restaurants previously deferred and reported on the installment method of accounting, and $58,000 from the sale of a restaurant to the lessee in 2003. 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.

     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 $5.7 million of its 7.50% subordinated debentures in 2003 at a discount, recognizing a gain of $1.1 million. The Company also repurchased $6.6 million of its senior subordinated notes in 2003, recognizing a gain of $942,000. The Company terminated its credit facility with a financial institution in 2003, resulting in the write-off of $472,000 in unamortized deferred financing costs. The Company also paid off its outstanding industrial revenue bonds in 2003, resulting in the write-off of $176,000 in unamortized deferred financing costs.

     In 2002, the Company repurchased $1.6 million of its 7.50% subordinated debentures at a discount, recognizing a gain of $375,000. 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. See the further discussion in “Liquidity and Capital Resources” below.

     Interest expense in 2003 decreased from 2002 by $1.0 million, or 11.4%, while interest income decreased by $2.7 million, or 54.9%. The decrease in interest expense was due primarily to the reductions in outstanding debt from debt repurchases, debt payoffs, and other debt reductions. 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, to the collections of notes receivable from the proceeds of the sales of the underlying collateral, and to the collection of two seller-financed notes receivable which were refinanced by the borrowers in the first quarter of 2003.

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     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. On June 13, 2003, the Company filed a complaint against Prime for its default under the lease, claiming damages to the Company in excess of $10.0 million.

     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.

     A zero effective tax rate for 2003 is due to utilization of net operating loss carryforwards that had a full valuation reserve; however, the tax benefit of $2.3 million is primarily due to additional taxes receivable recorded from an amendment of income tax returns for taxes previously paid.

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

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

     For the fiscal year ended December 29, 2002, total revenues decreased 43.8% to $19.8 million from $35.1 million for the fiscal year ended December 30, 2001.

     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 throughout most of 2002. Revenues from hotel operations in fiscal 2002 increased by 8.8% to $2.2 million from $2.0 million for fiscal year 2001. For the one hotel opened for all of both years (same hotel), average daily room rates in 2002 increased 6.8% to $56.34 from $52.74 in 2001, and average occupancy rates decreased from 70.5% in 2001 to 64.6% in 2002, resulting in a decrease in same hotel revenues per available room (RevPAR) of 2.2%, from $37.17 in 2001 to $36.37 in 2002. RevPAR for all Company-owned Shoney’s Inns

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/ GuestHouse increased by 11.4% in 2002 from 2001, from $32.66 to $36.37. The increases in the Shoney’s Inns / GuestHouse RevPAR were due primarily to the sale of two of the hotels in June of 2001 which had lower RevPAR than the one remaining hotel. The remaining (non-same) hotels contributed $854,000 to hotel revenues in 2002 compared with $638,000 in 2001. The $854,000 revenues from non-same (AmeriSuites) hotels in 2002 were from one AmeriSuites hotel which the Company operated for most of the year and continues to operate currently. The $638,000 revenues from non-same hotels in 2001 were from two Shoney’s Inns which were sold in the second 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 $1.4 million in 2002 and $1.5 million in 2001. Other income decreased by $50,000 in 2002 from 2001. Other income can vary widely from period to period due to the nature of this income and its varied sources.

     Hotel operating expenses for fiscal 2002 increased by $193,000, or 15.4%, to $1.4 million from $1.2 million in 2001. Hotel operating expenses on the non-same hotel operated in 2002 were $620,000 in 2002. Hotel operating expenses on the two non-same hotels sold in early 2001 were $498,000 in 2001. Hotel operating expenses on the one same-hotel increased by $71,000, or 9.5%, to $823,000 in 2002 from $752,000 in 2001. The operating expenses as a percentage of operating revenues for this activity increased from 63.0% in 2001 to 66.8% in 2002. Operating expenses as a percentage of operating revenues on the one same-hotel increased from 55.8% to 63.0% from 2001 to 2002. Hotel operating expenses on the same-hotel were not reduced as much as the decline in hotel revenues and maintenance and repair costs increased significantly in 2002 over 2001, thus reducing gross operating profit margin on this hotel.

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     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 $73,000, or 4.4%, from 2001 to 2002. The Company sold two hotels in April of 2001. 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.

     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 was 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 Chapter 11 bankruptcy on January 3, 2003 (See further discussion above for 2003 compared with 2002). 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.

     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.

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

     The Company tested its real estate owned as of December 29, 2002, for impairment in accordance with SFAS No. 144. The Company 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.

     The gain recognized on the sale of property in 2002 was $677,000 compared with

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$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. Other miscellaneous gains on sales of properties recognized in 2002 totaled $67,000, including gains deferred from previous years being recognized under the installment method of accounting. The gain of $3.8 million in 2001 included $3.6 million from the Company’s sale of one hotel and three restaurants. Another hotel was sold in 2001, but the gain was deferred and is being recognized under the installment method of accounting until full accrual accounting is warranted. Approximately $175,000 of the gain on the sale of two of the restaurants was also deferred and is being recognized under the installment method of accounting, including approximately $15,000 recognized in 2002.

     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 $913,000. 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 $560,000, or 6.8%, while interest income decreased by $1.3 million, or 20.3%. 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, partially offset by the effects of the continuing repurchases of the Company’s public debt. 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.

     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 16 hotels sold, transferred, and/or

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reclassified to hotels held for sale in 2002 and 2003. The effect of these hotels’ operations and the losses on the sales and transfer of the hotels have been removed from operating earnings and from the gain or loss 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.

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. 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 in 2002 and $881,000 in 2003, as previously discussed.

     Percentage of Completion Accounting for Construction Contracts: Construction and

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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 $12.8 million in 2003, compared with cash flows used in operating activities of $8.7 million in 2002 and cash flows provided by operating activities of $8.0 million in 2001. Earnings from continuing operations were $1.8 million in 2003 and $426,000 in 2001, while losses from continuing operations were $25.0 million in 2002. Depreciation and amortization was $1.7 million, $1.6 million, and $1.6 million in 2003, 2002, and 2001, respectively. The Company recognized $1.3 million, $677,000, and $3.8 million from gains on sale of

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property during 2003, 2002 and 2001, 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 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 $1.8 million cash in 2003 and $3.5 million in 2002, respectively, as compared with cash provided of $6.7 million in 2001. An increase in trade receivables of $893,000 and $926,000 in 2003 and 2001, respectively, used cash, whereas a decrease in trade receivables of $162,000 provided cash in 2002. Construction contracts receivable used cash of $17.8 million, $5.4 million, and $1.6 million, in 2003, 2002 and 2001, respectively.

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

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

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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 2003, the Company repurchased $6.6 million of these debt securities at a cost of $5.5 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 was for $30 million (a $10 million term loan and a $20 million revolving line of credit), secured by a pledge of certain promissory notes payable to the Company received in connection with the sale of 16 of the Company’s lodging facilities in the third quarter of 1998 and real property collateral (one hotel) added in 2002 by the second amendment. The borrowing base was the lower of (a) 85% of the outstanding principal amount of the pledged notes, (b) 65% of the appraised market value of the underlying real property collateral securing the pledged notes and of the real property collateral, (c) a multiple of the trailing twelve months’ net operating income of the real property collateral and of the underlying properties securing the pledged notes serving as collateral, or (d) $30 million. Effective October 3, 2001, the interest rate on the term loan was at the lender’s base rate plus 100 basis points, and the interest rate on the revolving line of credit was at the lender’s base rate plus 250 points, with a floor of 7.00% on both portions of the facility. The Company was to pay commitment fees on the unused portion of the facility at .50% per annum. The credit facility also contained covenants which limited or prohibited the incurring of certain additional indebtedness in excess of a specified debt to total capital ratio, prohibited additional liens on the collateral, restricted mergers and the payment of dividends and restricted the Company’s ability to place liens on unencumbered assets. The credit facility contained financial covenants as to the Company’s minimum net worth. In the fourth quarter of 2003, the Company decided that the credit facility no longer served the Company’s needs, terminated the facility, and has received all of its collateral back from the financial institution. On January 6, 2004, the Company filed a complaint against the financial institution for its breach of the loan agreement, claiming damages to the Company in excess of $25 million

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

     The Company also has a loan secured by its corporate aircraft with a balance of $5.3 million as of December 28, 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 $10.8 million mature in May of 2004. Its outstanding Series A and Series A-1 Senior Subordinated Notes in the face amount of $22.2 million mature in November of 2006 and its Series B and Series B-1 Senior Subordinated Notes in the face amount of $16.4 million mature in September of 2007.

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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. The Company believes that a combination of existing cash, the liquidation of notes receivable, the sale of hotel properties, and net cash provided by operations, will be sufficient to fund its capital expenditures, debt repayments and operations for at least the next twelve months.

     The following table represents the Company’s outstanding contractual obligations as of December 28, 2003 excluding standby letters of credit of $625,000 outstanding at December 28, 2003. The letters of credit are maintained primarily to support the Company’s workers’ compensation insurance program.

Recently Issued Accounting Pronouncements

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

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

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 $90,000 based on the balances of these variable-rate notes receivable at December 28, 2003. Changes in interest rates would not impact interest expense since there was no long-term variable-rate debt at December 28, 2003.

     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 28, 2003, 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.

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

     None.

ITEM 9A. CONTROLS AND PROCEDURES

     (a) As of December 28, 2003, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14(c) 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 as of December 28, 2003.

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

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. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information under the heading “2003 Auditor Fees” with respect to principal accountant fees and services, to be contained in the Company’s Proxy Statement with respect to the next Annual Meeting of Shareholders is incorporated herein by reference.

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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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* Filed herewith

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SIGNATURES

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

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

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Report of Independent Auditors

Shareholders and Board of Directors
ShoLodge, Inc.

We have audited the accompanying consolidated balance sheets of ShoLodge, Inc. and subsidiaries as of December 28, 2003 and December 29, 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 28, 2003. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ShoLodge, Inc. and subsidiaries at December 28, 2003 and December 29, 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 28, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

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

/s/ Ernst & Young LLP

Nashville, Tennessee
March 31, 2004

F-1

ShoLodge, Inc. and Subsidiaries

Consolidated Balance Sheets

F-2

ShoLodge, Inc. and Subsidiaries

Consolidated Balance Sheets (continued)

See accompanying notes.

F-3

ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Operations

F-4

ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Operations (continued)

See accompanying notes

F-5

ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

Years ended December 28, 2003, December 29, 2002 and December 30, 2001