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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

SHOLODGE, INC.

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

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

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

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

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

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

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

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

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

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DOCUMENTS INCORPORATED BY REFERENCE

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PART I

ITEM 1.    BUSINESS.

General

      The Company develops and owns and is an operator and the exclusive franchisor of Shoney’s Inns and GuestHouse Inns & Suites. In the second quarter of 2002, the Company acquired the exclusive franchise rights of the GuestHouse Inns & Suites hotel brand and announced its plan to convert the name of the Shoney’s Inns and Shoney’s Inns & Suites hotel chain to GuestHouse International Inns & Suites as soon as practical. As of December 29, 2002, the Shoney’s Inn /GuestHouse lodging system consisted of 118 properties containing 9,747 rooms of which six containing 686 rooms are owned by the Company. Shoney’s Inns and GuestHouse Inns & Suites are currently located in 19 states.

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

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

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

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

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

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Growth Strategy

      The Company’s strategy is to increase cash flow and earnings by (i) increasing Revenue Per Available Room (“REVPAR”) in Company-owned inns while maintaining the Company’s attractive room price/value relationships while controlling operating costs, (ii) expanding the GuestHouse Inn & Suites system through the addition of new franchised units, (iii) utilizing the Company’s experience in developing all-suite hotels to construct and develop hotels for others, and (iv) expanding the number of lodging facilities served by the Company’s proprietary central reservation center (“InnLink”).

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

      Expansion of GuestHouse Inns & Suites System. In 2002, the Company has focused on expanding the GuestHouse Inns & Suites system principally through the addition of new franchises and the conversion of Shoney’s Inns to GuestHouse. As of 2002 fiscal year-end, there were 118 Shoney’s Inns and GuestHouse Inns (of which 6 are Company owned) with a total of 9,747 rooms. The Company targets existing Shoney’s Inn and GuestHouse franchisees, other hotel brand developers and contacts within the industry as potential franchisees for additional GuestHouse Inns & Suites.

      Development of Additional All-Suite Hotels. Currently, no Sumner Suites hotels are owned, under construction, or planned for the future. The Company has developed and opened two AmeriSuites hotels for Prime on sites that it owned. The Company plans to continue to develop all-suite hotels for third parties in the future as the opportunities arise.

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

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

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Shoney’s Inns/GuestHouse Concept

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

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

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

Construction and Development

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

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

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

Sales and Marketing

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

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

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

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

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

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

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

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

Lodging Operations

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

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

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

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

Franchise Operations

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

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

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

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

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

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

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

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

Lodging Industry

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

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

(1)

Room revenues divided by the number of rented rooms.

Competition

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

Government Regulation

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

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

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

Service Marks

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

Insurance

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

Employees

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

ITEM 2.     PROPERTIES.

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

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

ITEM 3.     LEGAL PROCEEDINGS.

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

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

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

PART II

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

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

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

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

ITEM 6.     SELECTED FINANCIAL DATA.

      The selected financial data set forth on the following page as of and for each of the five fiscal years in the period ended December 29, 2002 have been derived from the Company’s audited Consolidated Financial Statements. The Consolidated Financial Statements for each of the three fiscal years in the period ended December 29, 2002, which have been audited by independent auditors, are included elsewhere in this Report. The information set forth on the following page should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s Consolidated Financial Statements and the related notes thereto included elsewhere in this Report.

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

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