Southern Scottish Inns (SSCT) 10-Q 2002 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

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

COMMISSION FILE NO. 0-7107

SOUTHERN SCOTTISH INNS, INC.

(Exact name of registrant as specified in its charter)

LOUISIANA	72-0711739
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1726 Montreal Circle

Tucker, Georgia 30084

(Address of principal executive offices)

(Zip Code)

(770) 938-5966

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

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

CLASS	SHARES OUTSTANDING AT SEPTEMBER 30 ,2002
Common Stock, Par Value $0.01 per share	2,366,395

SOUTHERN SCOTTISH INNS, INC.

INDEX

	PAGE NO.
PART I. FINANCIAL INFORMATION:
Financial Statements
Consolidated Balance Sheets-As of September 30, 2002 (Unaudited) and December 31, 2001	2-3
Consolidated Statements of Income-For the nine months ended September 30, 2002 and September 30, 2001 (Unaudited)	4-5
Consolidated Statements of Cash Flows-For the nine months ended September 30, 2002 and September 30, 2001 (Unaudited)	6-7
Notes to Consolidated Financial Statements	8-10
PART II. MANAGEMENT'S DISCUSSION AND ANALYSIS:
Item 1-Business	11-14
Item 2-Legal Proceedings	14
Item 3-Management's Discussion and Analysis of Financial Conditions and Results of Operations	14-15
Item 4-Controls and Procedures	16
SIGNATURES	17-18

PART I. FINANCIAL INFORMATION

SOUTHERN SCOTTISH INNS, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

		September 30, 2002 (Unaudited)		December 31, 2001
CURRENT ASSETS
Cash	$	124,619	$	160,400
Accounts Receivable-Net		446,258		350,363
Accounts Receivable-Affiliates		682,712		830,857
Mortgages & Notes-Affiliates		559,848		31,660
Mortgages & Notes Receivable		462,168		514,696
Inventory		344		40,834
Prepaid Expenses		60,336		111,802
Interest Receivable		640,662		601,549
Net Deferred Tax Asset		41,166		30,371
TOTAL CURRENT ASSETS		3,018,133		2,672,532
PROPERTY AND EQUIPMENT
Land		1,608,203		1,567,044
Buildings & Building Improvements		2,751,203		2,562,913
Furniture, Fixtures & Equipment		362,440		225,524
Vehicles		271,364		330,864
Total Property & Equipment		4,993,210		4,686,385
Less: Accumulated Depreciation		(1,269,763)		(1,167,477)
TOTAL NET PROPERTY AND EQUIPMENT		3,723,447		3,518,908
OTHER ASSETS
Mortgages & Notes Receivable		4,275,577		3,958,730
Mortgages & Notes-Affiliates		0		1,015,107
Investments in Unconsolidated Affiliates		(15,541)		(17,242)
Investment in Real Estate		244,370		244,370
Trademarks - Net		1,004,030		1,210,030
Loan Cost		5,805		6,105
Other Assets		5,363		4,498
Deferred Tax Asset		146,088		124,888
Marketable Equity Securities, Carried at Market		28,373		28,373
TOTAL OTHER ASSETS		5,694,065		6,574,859
TOTAL ASSETS	$	12,435,625	$	12,766,299

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

2

SOUTHERN SCOTTISH INNS, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND STOCKHOLDERS' EQUITY

		September 30, 2002 (Unaudited)		December 31, 2001
CURRENT LIABILITIES
Accounts Payable - Trade	$	246,668	$	178,758
Interest Payable		244,166		264,473
Income Taxes Payable		164,977		177,604
Other Taxes Payable		229,987		205,767
Other Liabilities		375,320		454,723
Capital Leases		2,374		0
Mortgages & Notes Payable		333,987		352,929
Mortgages & Notes Payable-Affiliates		167,420		149,195
Deferred Severance Pay		6,000		6,000
TOTAL CURRENT LIABILITIES		1,770,899		1,789,449
LONG-TERM LIABILITIES
Capital Leases		8,810		0
Mortgages & Notes Payable		763,769		880,750
Mortgages & Notes Payable-Affiliates		282,651		319,119
Escrow - Real Estate Tax		5,782		2,118
TOTAL LONG-TERM LIABILITIES		1,061,012		1,201,987
DEFERRED AMOUNTS
Deferred Income-Installment		558,226		574,787
Deferred Severance Pay		167,500		167,500
TOTAL DEFERRED AMOUNTS		725,726		742,287
TOTAL LIABILITIES & DEFERRED AMOUNTS		3,557,637		3,733,723
MINORITY INTEREST		839,062		858,835
STOCKHOLDERS' EQUITY
Common Stock- no par value, Authorized 5,000,000 shares, Issued & Outstanding 2,366,395 year ended 2003 and 2002		6,023,981		6,023,981
Additional Paid in Capital		42,201		42,201
Retained Earnings		1,972,744		2,107,559
TOTAL STOCKHOLDERS' EQUITY		8,038,926		8,173,741
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	12,435,625	$	12,766,299

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

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SOUTHERN SCOTTISH INNS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

		Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2002		2001			2002			2001
REVENUES
Franchising Revenues	$	549,071	$	520,728	$		1,510,512		$	1,425,377
Financing Revenues		71,665		86,926			342,914			266,515
Leasing & Lodging Revenues		373,951		114,226			540,023			349,522
Equity in Income of Unconsolidated Affiliates		0		28,519			44,269			28,519
Legal Settlement Revenues		32,300		107,400			93,764			416,478
Gain on Sale of Assets		0		0			0			182,974
Other Income		44,062		18,087			122,964			79,023
TOTAL REVENUES		1,071,049		875,886			2,654,446			2,748,408
EXPENSES
Operating Expense-Franchise Division		489,0739		460,190			1,408,328			1,362,932
Operating Expense-Financing & Investing		133,688		171,937			511,847			406,758
Leasing & Lodging Expense		392,373		39,850			461,476			118,661
Interest Expense		26,210		41,391			113,089			109,110
Depreciation & Amortization		33,962		47,213			102,586			142,757
Equity in Loss of Unconsolidated Affiliates		14,189		0			42,568			0
Trademark Write-Down		0		0			206,000			0
TOTAL EXPENSES		1,089,494		760,581			2,845,894			2,140,218
Net Income (Loss) from Continuing Operations before Taxes & Minority Interest		(18,445)		115,305			14,552			608,190
Provisions for Income Taxes		(10,139)		21,953			(191,448)			(144,075)
Net Income (Loss) before Minority Interest	$	(28,584)		137,258			37,000			464,115
Minority Interest in (Income) Loss - RCII	$	(7,260)		(11,358)		$		(153,748)	$	(36,377
NET INCOME (LOSS)		(35,844)		125,900		$		(134,815)		427,738

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

4

SOUTHERN SCOTTISH INNS, INC.

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(Unaudited)

		Three Months Ended September 30, 2002 2001			Nine Months Ended September 30, 2002 2001
INCOME (LOSS) PER SHARE
Income (Loss) per Share before Taxes &, Minority Interest		(.007)	.05		(.08)		.26
Income (Loss) per Share before Minority Interest		(.01)	.06		(.07)		.20
Basic Net Income (Loss) per Common Share	$	(.02)	.05	$	(.06)	$	.18
Average Shares Outstanding		2,366,395	2,366,395		2,366,395		2,366,395

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

5

SOUTHERN SCOTTISH INNS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		2002		2001
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES
Net Income	$	(134,815)	$	427,738
Non-Cash Items Included in Net Income:
Depreciation and Amortization		102,586		0
Deferred Income Recognized		(16,561)		54,176
Investment (Income)/Loss - Affiliates		(1,701)		(28,519)
Minority Interest Income		(18,933)		36,377
(Gain) Loss on the Sale of Assets		0		(182,974)
Accounts Payable Converted to Notes Payable		22,576		0
Note Receivable Charged to Income		(3,500)		0
Trademark Write-Down		206,000		0
Miscellaneous		(12,757)		3,200
Net Changes In Current Assets and Liabilities:
Accounts Receivable		(99,680)		70,636
Accounts Receivable-Affiliates		131,227		(250,371)
Inventories		40,490		0
Deposits		(865)		787
Interest Receivable		(99,205)		245,716
Prepaid Expense		51,466		25,715
Loan Cost		0		0
Accounts Payable		67,910		(42,935)
Interest Payable		(20,307)		(37,421)
Taxes Payable		11,593		33,085
Deferred Income Tax		(31,995)		50,544
Other Accrued Liabilities		(79,403)		(58,974)
Escrow - Real Estate Taxes		3,664		5,954
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES		117,790		441,315

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

6

SOUTHERN SCOTTISH INNS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

			2002			2001
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Notes Receivable Issued			(50,468)			0
Collections on Mortgages and Notes Receivable			118,584			84,312
Acquisition (Disposition) of Fixed Assets			(36,187)			(9,408)
Investment Purchases			0
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES			31,929			74,904
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Proceeds from Notes Payable		0			0
Principal Payments on Mortgages and Notes Payable		(185,499)			(420,750)
Cash Paid for Treasury Stock		0
Principal Payments on Capital Lease Obligations		0			0
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES		(185,499)			(420,750)
Increase (Decrease) in Cash		(35,780)			95,469
Cash - Beginning		160,400			54,612
Cash - Ending	$	124,620		$	150,081

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

7

SOUTHERN SCOTTISH INNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE

A - BASIS OF PRESENTATION

The accompanying consolidated financial statements for the nine months ended September 30, 2002 and 2001 have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10Q and Rule 10-01 of Regulation S-X. These financial statements for the nine months ended September 30, 2002 and September 30, 2001 have not been audited by independent public accountants but include all adjustments, consisting of normal recurring accruals, which in the management of Southern Scottish Inns, Inc. and subsidiaries ("SSI" or "the Company") are necessary for a fair statement of the financial position, results of operations and cash flows for the period presented. These statements should be read in conjunction with the audited financial statements and footnotes in the Company's annual report on Form 10-K for the year ended December 31, 2002. The accompanying consolidated balance sheet as of December 31, 2001 has been derived from audited financial statements but does not include all disclosures required by GAAP. The results of operations for the nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year ending December 31, 2002.

The consolidated financial statements include the accounts of the Company and all subsidiaries except where control is temporary or does not rest with the Company. The Company's investments in companies in which it has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method. Accordingly, the Company's share of the net earnings of these companies is included in consolidated net income. The Company's investments in other companies are carried at cost or fair value, as appropriate. All significant inter-company accounts and transactions are eliminated.

B - RECLASSIFICATIONS

As of March 31, 2002, certain reclassifications have been made to prior period information to conform to the current period presentation. Such reclassifications mostly affected Other Assets - Mortgages & Notes - Affiliates, which decreased from $1,015,107 as of December 31, 2001 to zero (-0-) as of March 31, 2002. The bulk of said amount consisted of the Tour Inn Mortgage and Note of $525,846, which was moved to Other Assets - Mortgage and Notes Receivable and the on the Houma Atrium Building of $456,547 which was moved to Current Assets - Mortgages & Notes - Affiliates.

Another reclassification made as March 31, 2002 changed Property and Equipment - Vehicles by a reduction from $330,864 as of December 31, 2001 to $271,364 as of March 31, 2002. A tug and a barge were moved from Vehicles to Equipment under Furniture, Fixtures & Equipment category.

8

SOUTHERN SCOTTISH INNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

C - RELATED PARTY

Receivables in the amount of $149,798 due from an entity which was operating the FantaSea, a "cruise to nowhere" gambling boat belonging to ExtaSea Casino Cruises of North Florida, Inc., which is owned by Registrant and some of its affiliates and which is controlled by Registrant was written off in March of 2002. Of said $149,798, $148,925 was an uncollectible debt for monies loaned, directly and indirectly by Registrant for operating expenses; the other $873 was a debt to the franchising division. The operating entity became insolvent and was administratively dissolved by its State of incorporation.

D - INDUSTRY SEGMENTS

Our operations consist of three reportable segments, which are based on similar products or services. Information on segments is as follows:

	Nine Months Ended September 30,
	2002	2001
Sales to Unaffiliated Customers
Franchising	1,510,512	1,425,377
Financing & Investing	387,183	478,008
Leasing & Lodging	540,023	349,522
Total Sales to Unaffiliated Customers	2,437,718	2,252,907
Other Income:
Franchising	181,632	455,771
Financing & Investing	35,096	20,617
Leasing & Lodging	0	19,113
Total Other Income	216,728	495,501
Depreciation and Amortization:
Franchising	13,550	34,534
Financing & Investing	21,074	22,950
Leasing & Lodging	67,962	85,273
Total Depreciation and Amortization	102,586	142,757
Interest Expense:
Franchising	5,996	4,118
Financing & Investing	49,088	19,172
Leasing & Lodging	58,005	85,820
Total Interest Expense	113,089	109,110

9

SOUTHERN SCOTTISH INNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

	Nine Months Ended
	September 30,
	2002	2001
Bad Debt Expense:
Franchising	32,360	23,664
Financing & Investing	169,841	0
Leasing & Lodging	0	0
Total Bad Debt Expense	202,201	23,664
Net Income (Loss):
Franchising	257,568	402,439
Financing & Investing	(344,963)	(53,582)
Leasing & Lodging	(47,420)	78,881
Total Net Income (Loss)	(134,815)	427,738
Identifiable Assets:
Franchising	1,598,779	1,884,974
Financing & Investing	7,844,336	7,759,751
Leasing & Lodging	2,867,891	3,576,682
Total Identifiable Assets	12,311,006	13,221,507
Additions in Property & Equipment:
Franchising	41,588	9,408
Financing & Investing	245,171	0
Leasing & Lodging	23,769	0
Total Additions in Property & Equipment	310,528	9,408

In the Financing & Investing Segment, the Company has included net income/ (loss) from unconsolidated equity investments totaling $1,701 in 2002.

E - ACCOUNTING PRONOUNCEMENTS

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that the adoption of SFAS No. 146 will have a material impact on its consolidated financial position or cash flows.

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PART II

Item 1. Business

A. - General

Due to the Company's development and finance division's acquiring and selling properties, the number of properties owned, operated, leased and the number of wrap around mortgages held fluctuates constantly.

B. - Segment Information

The Company identifies three significant industry segments as "franchising," "financing & investing," and "leasing & lodging." All revenue items represent sales to unaffiliated customers, as sales or transfers between industry segments are negligible.

C. - Description of Business

Products and Services

The Company's franchise division offers advertising, reservation, group sales, quality assurance and consulting services to motel owner/operators.

The Company's Financing division offers owner financing to persons acquiring motel properties previously operated and/or owned by the Company.

Leasing revenue is derived from the leasing of real and personal properties, i.e. motels, restaurants and part of Hospitality's office building belonging to the Company. Lodging revenues come from the operation of motels operated by a wholly owned subsidiary of the Registrant after 7/1/02.

Status of Products and Segments

Each of the Company's industry segments is fully developed with an operational history of several years under Company's direction.

Raw Materials

Not Applicable.

Patents, Trademarks, Licenses, Franchises, and Concessions

The Company has no patents. The Company does own the trade names "Master Hosts Inns", "Red Carpet Inns", "Scottish Inns", "Downtowner Inns", "Passport Inns", "Sundowner Inns" and related trademarks, etc. used in operating lodging facilities or reservation services under these names.

"Sundowner Inns" Trademarks, Registration No. 1,280,236 and No. 1,280,237, United States Patent and Trademark office, were registered May 29, 1984. In 1994, Joe W. Hudgins, the owner of the corporation to which said marks were then registered, transferred ownership of

11

said corporation, Sundowner Reservations, Inc., a Tennessee corporation, to Hospitality International, Inc. in consideration of cancellation of inter-company debt and promise to pay the assigned corporation's debt to Red Carpet Inns International, Inc. On April 30, 1995, Sundowner Reservations, Inc. transferred title to the subject marks to Hospitality International, Inc. As of December 31, 1996, Hospitality International, Inc. transferred ownership of the subject marks to Red Carpet Inns International, Inc. for consideration of $360,000. In June of 2002, the Sundowner Inns' mark was found to be impaired under a discounted cash flow analysis and was written down $206,000 from its historical cost of $360,000.

Seasonality

The Company's financing and leasing businesses by their nature are not subject to seasonal fluctuations except, perhaps, as to mortgagors and lessees' ability to meet payment schedules due to seasonality of their businesses. The revenues from the Company's franchising and lodging segments tend to be greater in the spring and summer months during peak travel periods than during slower business months.

Working Capital

The Company's financing receipts are comprised primarily of interest which does not become reflected on its balance sheet until after it is earned, whereas its payments on underlying debts are comprised primarily of principal reduction and the portion which will be returned over the next twelve months is reflected on the balance sheet as a current liability. Because of this, the Company believes a current ratio of less than one to one is appropriate for its business. However, the Company continues to attempt to, among other things, (1) reduce and contain overhead costs, (2) seek to dispose of underproductive assets, and (3) seek the most advantageous financing terms available.

From 1995 to 2000, in particular, the Company aggressively pursued its legal rights to its trademarks. Largely, it has been successful in stopping motel operations from illegally using its trademarks as well as in enforcing compliance to its franchisee agreements. Settlements were reached on a number of lawsuits in most years that significantly increased the revenues of the Company. Attorney fees related to those settlements also increased in those same years.

Customers

The Company's business of franchising motels is contingent upon its being able to locate qualified property owner-operators who are seeking national affiliation. Through use of its franchise sales force, the Company has not experienced insurmountable difficulty in locating independent motel owner-operators wanting to franchise or owner-operators seeking to change national affiliation nor does it anticipate any such difficulty in the future. However, more franchisors are offering multi-level brands, resulting in more downscaling conversions into the economy lodging sector and, therefore, providing more competition. Likewise, the Company's financing division requires that it locate qualified owner-operators or investors for its properties. Because of its franchise affiliations the financing division has not experienced, nor does it anticipate experiencing too much difficulty in locating qualified investors to purchase its developed properties. However, due to the Company's desire to limi t the loans it

12

holds to a manageable number and because third party or institutional financings for used motel properties are difficult to arrange, once a property is sold the Company carries the entire financing package and accordingly, each individual loan represents a larger portion of portfolio than it does with traditional lending institutions. Therefore, the continued performance of each existing loan may be material to the operation of the financing division.

Backlogs - Not Applicable.

Government Contracts

The Company is not involved in, nor does it anticipate becoming involved in, any government contracts.

Competition

The Company's franchising, leased lodging and leased food service divisions each compete with other similar businesses, many of which are larger and have more national recognition than the Company. Each of these divisions competes on the basis of service and price/value relationship.

The Company's financing division competes with other, more traditional sources of long-term financing, most of which have greater financial resources than does the Company.

Developing and financing lodging properties is being significantly affected by over-development in many areas and is somewhat adversely affected by the area's and the country's general economic downturn.

Research and Development

No significant research activities were conducted by the Company during the Fiscal year and the Company does not expect to expend sums on research activities during the next Fiscal Year.

Environmental Protection

The Company is not directly affected by environmental protection measures of federal, state or local authorities to any extent which would reasonably be expected to cause material capital expenditures for compliance, so far as in known. However, it is possible that an approximately five and three-tenths (5.09) acre tract of land held as an investment and acquired as a possible motel site, located on I-10 in Ocean Springs, Mississippi, may under the new guidelines, be determined to be in part "wetlands." If so, its use and value would be adversely affected. On January 27, 1995, 3.2 acres contiguous to said tract were sold at a consideration undiminished by the wetlands issue; the value of the remaining 5.09 acres, therefore, may not be diminished. The 5.09 acre tract is carried on the Company's books at $55,647.

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Foreign Operations

The Company is not currently involved in any business operations outside of the United States of America, except through its franchising division which does do limited business in Canada and has one franchise in the Bahamas.

Item 2. Legal Proceedings

The Company is named as a defendant for damages in an unspecified amount, reasonable attorney fees, interest and costs as a result of the Company's alleged violation of a patent. It is counsel's opinion that the Company will be dismissed without liability.

Item 3. Management's Discussion and Analysis of Financial Conditions and Results of Operations

Results of Operation:

Franchising revenues in third quarter 2002 increased 6% over the third quarter of 2001. In 2001, franchising revenues increased 6.7% from 2000. These increases are due to increased competition from other franchisors offering multi-level brands, resulting in more down-scaling conversions into the economy lodging sector. In response, the Company has become more stringent in its requirements relating to franchises in the areas of quality assurance. A major source of revenue for the franchising area is legal settlements. The Company vigorously asserts its legal rights in the area of franchise infringements and violations of the franchise agreements.

Financing revenues increased in the third quarter of 2002 over the third quarter of 2001 due to a note receivable which Registrant held on the Bald Knob Arkansas motel, through the mortgagor's refinancing, paying off. In general, however, revenues continue to drop because the interest amount on the notes receivable is declining as the notes move toward maturity.

On January 8, 2002. A note and second mortgage which Registrant held on a motel at Register, Georgia, on which the 2002 audited balance of $176,686.56 principal and $17860.74 accrued interest owed, was written off as a result of a foreclosure on the property by the first mortgage holder.

Also, on September 3, 2002, Registrant foreclosed on a warehouse building in Gulfport, Mississippi, which resulted in a decrease of $154,975 in Mortgages & Notes Receivable, a decrease of $60,092 in Interest Receivable and an addition of $178,852 to Buildings and an addition of $40,159 to Land.

The company's subsidiary, Red Carpet Inns International, Inc. holds a note and mortgage receivable on a motel property. This note is non-performing. In addition to the motel property, Holder also has a first mortgage on an approximately eleven acre commercial tract and a second mortgage on a rural thirty-eight acre tract. It may be necessary to pay delinquent taxes to prevent a tax sale which might otherwise occur prior to the Red Carpet Inns International, Inc.'s foreclosure efforts; if so, it is possible that additional collateral can be obtained. It is believed, between the three tracts, that the Holder is adequately secured.

14

In the past several years, in an effort to expand the scope of our presence and offerings in the hospitality entertainment industry, the Company has made investments in and non-reoccurring loans to entities engaged in "cruises to nowhere" gambling ventures. While the investments have not yielded a cash return, it is probable that all or a significant part of the investments are adequately secured and collectable. Most of the loans have been deemed to be uncollectible and those were written off in 2002; the total of these loans constituted a sizable sum to write off in one year but being deemed uncollectible, left no choice. Registrant has no intentions of making loans for such purpose again.

Leasing revenue rose significantly in the third quarter of 2002 after declining in 1998 through 2001 due to the restructuring of the lease agreements due to economic conditions, such as new competition at each of our locations and our failure to refurbish and upgrade. In 2001, leasing revenues dropped dramatically because no accruals were made for rent income due from the lessee due to the pending termination of the leases and the lack of probability of collection. The Company was more aggressive in collecting lease income in the first half of 2002 and as of July 1, 2002, executed new and more profitable leases with new lessees.

Liquidity:

Management believes that our current sources of capital including cash on hand, operating cash flow, and expected proceeds from sales of assets, were adequate to finance our operating and commitments through 2002. The question of liquidity should not be an issue in the near future. In 2001, the non-affiliated entity formerly leasing properties from the Company was in arrears in its past lease payments; collection was doubtful. As of July 1, 2002, the Company cancelled the old leases, resulting in the assumption of some of said lessee's obligations, the transfer of certain of lessee's assets to Registrant, acknowledgment of the credit to lessee's payables account to Registrant and writing off the sizable and remaining balance of this receivable. If cash requirements become an issue, any of the notes could be sold at a discount or some free and clear properties could be hypothecated. We do not believe these measures will be required.

Capital Resources

No material commitments for capital expenditures are planned for 2002 other than possible purchases of properties through the financing division.

The trend in capital resources has resulted in a gradual tightening of credit with regard to new motel construction but continues tighter with regard to older properties. This has forced more sellers of older properties into the seller-financed arena creating more competition for the Company in its Finance and Development Division. This fact, coupled with less available loan money on the new property construction side, has meant less profitable opportunities for the Company. Although the economy for the past two years has not been good, fewer foreclosures have resulted than in recent prior periods of economic downturns and therefore there are not a lot of bank REO properties available. Individual sellers are asking multiples of sales of pre-downturn years rather than of more current years. These events and tendencies shorten the supply of motel inventory while increasing the cost of acquiring the same.

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Item 4. Controls & Procedures

Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), as of September 30, 2002, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we and our management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based upon the required evaluation, the Chief Executive Officer and Chief Financial Officer believe that, as of the date of completion of the evaluation, our disclosure controls and procedures were reasonably effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the rules, we are continuing the process of reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in internal controls.

There has been no change in our internal controls over financial reporting during our most recent fiscal year that has been materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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SIGNATURES

(Originals on file)

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.

SOUTHERN SCOTTISH INNS, INC.

(Registrant)

By: __________________ ______ __ ________________ ______

Bobby E. Guimbellot Date Jack M. Dubard Date

Chief Executive Officer President & CFO

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.

FOR THE BOARD OF DIRECTORS:

_______________________________________________________

Michael M. Bush Date Richard A. Johnson Date

Director Director

_______________________________________________________

Melanie C. Hanemann Date C. Guy Lowe, Jr. Date

Director Director

_______________________________________________________

Jack M. Dubard Date Harry C. McIntire Date

Director Director

_______________________________________________________

Bobby E. Guimbellot Date Gretchen W. Nini Date

Director Director

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_______________________________________________________

George O. Swindell Date John Snyder Date

Director Director

_______________________________________________________

Melinda Hotho Date Timothy DeSandro Date

Director Director

____________________________

Anil Patel Date

Director

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