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) pendin