UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report pursuant to section 13 or 15 (d) of
the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2001
Commission File number 0-7107
Southern Scottish Inns, Inc.
A Louisiana Corporation
IRS No. 72-0711739
1726 Montreal Circle
Tucker, Georgia 30084
(770) 938-5966
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
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.
The aggregate market value of the voting stock held by nonaffiliated of the
registrant on December 31, 2001 was $712,344. The aggregate market value shall
be computed by reference to the closing price of the stock on the New York Stock
Exchange on such date. For the purposes of this response, executive officers
and directors are deemed to be the affiliates of the Registrant and the holding
by nonaffiliated was computed as 949,792 shares.
The number of shares outstanding of the Registrant's Common Stock as of December
31, 2001, was 2,366,395 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
Definitions: The "Company", the "Registrant" and the "Fiscal Year"
When used in this Annual Report, the "Company," unless the context indicates
otherwise, refers to Southern Scottish Inns, Inc. and its subsidiaries on a
consolidated basis. The "Registrant" refers to Southern Scottish Inns, Inc. as
a separate corporate entity without reference to its subsidiaries. The "Fiscal
Year" refers to the year ended December 31, 2001, which is the year for which
this Annual Report is filed. The items, numbers and letters appearing herein
correspond with those contained in Form 10-K of the Securities and Exchange
Commission, as amended through the date hereof, which specifies the information
required to be included in Annual reports on such Form. In accordance with
General Instructions C(2) to Form 10-K, the information contained herein is,
unless indicated herein being given as of a specified date or for a specified
period, given as of December 31, 2001 and referred to "as of this writing".
PART I
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. The table below shows
the various different business holdings for the last five years.
12/01 12/00 12/99 12/98 12/97
Motel Franchises Held - Total 254 253 228 227 239
Master Hosts Inns 2 2 2 4 5
Red Carpet Inn 105 102 98 96 95
Scottish Inns 129 129 118 120 126
Downtowner Inns - 4 5 2 2 2
Passport Inns - 14 15 8 5 11
Motel Operated - Total 0 0 0 0 0
Master Hosts Inns 0 0 0 0 0
Red Carpet Inn 0 0 0 0 0
Scottish Inns 0 0 0 0 0
Independent 0 0 0 0 0
Motel Owned & Leased To
Operators - Total 5 4 3 4 3
Master Hosts Inns 0 0 0 0 1
Red Carpet Inn 1 1 1 1 1
Scottish Inns 2 2 2 2 2
Independent 2 1 0 1 0
Free Standing Restaurants
Owned 0 0 0 0 0
Leased In - Note 1 0 0 1 1 1
Operated 0 0 0 0 0
Subleased - Note 1 0 0 1 1 1
Vacant 0 0 0 0 0
Wrap Around Mortgages or Other
types of Financing Held 9 10 13 13 13
Parcels of Land Held for Investment
or Development 5 6 6 6 6
Note 1. One property leased from a third party was being operated as a
restaurant by Company's sub-lessee.
(b) Segment Information
The Company identifies its significant industry segments as set forth in the
table below. All revenue items represent sales to unaffiliated customers, as
sales or transfers between industry segments are negligible.
Segment Information
for the Year Ended Dec. 31,
2001 2000 1999
Franchising:
Revenues 1,891,113 1,772,185 1,833,472
Operating Profit (Loss) 80,584 31,598 14,957
Financing & Investing:
Revenues 745,747 676,706 754,421
Operating Profit (Loss) (12,645) 18,371 16,342
Leasing:
Revenues 8,229 450,667 507,064
Operating Profit (Loss) (58,908) 136,918 190,748
(c) Description of Business
(I) 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.
(II) 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.
(III) Raw Materials
In a sense, independent motel operations seeking national affiliation for
their properties or motel operations seeking to change national affiliations
constitute raw materials for the Company's franchising division.
To date, the Company has experienced little difficulty in obtaining
information on locations to be reviewed by either its franchise committee or its
evaluation committee
(IV) 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.
Note 2:
"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 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.
(V) Seasonability
The Company's financing and leasing businesses by their nature are not subject
to seasonal fluctuations. The revenues from the Company's franchising division
tend to be concentrated in the spring and summer months during peak travel
periods.
(VI) 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, 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 2001, the Company aggressively pursued its legal rights to its
trademarks. 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 all years that
significantly increased the revenues of the Company. Attorney fees related to
those settlements also increased in those same years.
(VII) 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 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 limit the
loans it 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
(VIII) Backlogs - Not Applicable.
(IX) Government Contract
The Company is not involved in, nor does it anticipate becoming involved in,
any government contracts.
(X) 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 but benefits from the area's and the
country's general economic condition.
(XI) 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.
XII) 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.
(XIII) Employees
Division 12/01 12/00 12/99
Lodging Leased to Outsiders - Note 3 61 62 69
Franchise Division 29 28 32
Administrative & Finance 6 6 6
Total 96 96 107
Note 3:
These are not employees of the Company at date of this writing, since operations
are leased out but are given for comparative purposes.
(d) 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 and two in
Jamaica.
Item 2 Properties
The following table sets forth certain information, as of this writing,
concerning properties on which the Company holds notes secured by mortgages and
other types of financing instruments held by the Company:
Location Description Amt. Receivable Underlying Mortgages
Bald Knob, AR 42 Room Motel 229,871 -0-
Gulfport, MS Office & Whse Bldg 154,975 -0-
Jacksonville, FL 144 Room Motel 739,785 -0-
(Lane Ave.)
Jacksonville, FL 120 Room Motel 1,100,000 -0-
(Arlington Rd.)
Killeen, TX 100 Room Motel 586,741 (2nd Mtg.)
Marrero, LA 100 Room Motel 413,372 -0-
Morgan City, LA 49 Room Motel 252,123 -0-
Natchez, MS 100 Room Motel 643,245 -0-
Register, GA 40 Room Motel 176,687 (2nd Mtg.) -0-
Sabine Pass, TX 30 Room Motel 281,661 -0-
The following table sets forth certain information, as of this writing,
concerning motel properties owned by the Company and under management contract
or leased to Operators.
Location Description Mortgage Balance
Houma, LA - Note4. 120 Room Motel 42,460
Marietta, GA - Note 4. 154 Room Motel 448,136
New Iberia, LA 100 Room Motel 101,878
Vicksburg, MS- Note 4 100 Room Motel .00
McComb, MS - Note 4 50 Room Motel .00
Note 4:
These properties are leased to First Hospitality Management Corporation, a
corporation owned by Timothy J. DeSandro, a former employee of the Company
through the year 2001. In 2002 the Company will manage the properties.
The following tables set forth certain information, as of this writing,
concerning other properties owned by the company.
Location <Mortgage Balance
Atlanta, GA 168,546
Warehouse, on two parcels of land
(1.2 Acres), 22,220 square feet,
heated & air conditioned including
1,300 square feet of showroom/office
Gulfport, MS 896
Unimproved land (4) lots in City of Gulfport
Jackson County, MS 12,882
Two parcels of land, unimproved,
held for investment
Madison County, MS 300 per month land lease
3.0 acre tract of land at
Ross Barnett Reservoir. Leased from
Pearl River Valley Water Supply District
The leasehold is marketable by approved
Assignment, sublease or redevelopment.
Pass Christian, MS 71,279
Partially improved water-front property
Register, GA 2,333
Partial interest in land
Register, GA 118,366
Partial interest in 66.34 acre tract of land
Tucker, GA 61,353
Office Building and Company headquarters
Item 3 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 the Company's being liable for any money.
The Company also has two cases where there is a trial for Declaratory Judgment
where the franchisee is seeking a determination as to the validity of the
franchise. In these cases, the Company is seeking damages under the franchise
agreement against the franchisee. In one case, the franchisee has filed a
counterclaim. Counsel expects the matter to be dismissed in a Motion for
Summary Judgment.
Item 4 Submission of Matters to a Vote of Security Holders
N/A
PART II
Item 5 Market for Registrant's Common Equity Securities and Related
Matters
a. The common stock, no par value, of the Registrant is traded on the
Over the-Counter market. The following table sets forth the range of per share
bid and asked price quotations during the periods indicated. The following
represents quotations between dealers, and do not include retail mark-ups,
markdowns, or other fees or commissions, and do not represent actual
transactions.
2001
Period Bid Price High Bid Price Low Asked Price High Asked Price Low
1st Qtr. $.75 $.75 $1.00 $1.00
2nd Qtr. $.75 $.75 $1.00 $1.00
3rd Qtr. $.75 $.75 $1.00 $1.00
4th Qtr $.75 $.75 $1.00 $1.00
2000
Period Bid Price High Bid Price Low Asked Price High Asked Price Low
1st Qtr. $.75 $.75 $1.00 $1.00
2nd Qtr. $.75 $.75 $1.00 $1.00
3rd Qtr. $.75 $.75 $1.00 $1.00
4th Qtr $.75 $.75 $1.00 $1.00
b. As of this writing, there are approximately 758 shareholders of the
registrant's common stock, plus those held in brokerage houses.
c. No cash dividends have been paid on the Company's common stock during
the two most recent Fiscal Years and none are anticipated to be
paid in the foreseeable future.
Item 6 Selected Financial Data
The following table summarizes selected financial data of the Company for the
past five Fiscal Years. It should be read in conjunction with the more detailed
consolidated financial statements of the Company appearing elsewhere in this
Annual report.
YEAR 2001 2000 1999 1998 1997
REVENUE 3,436,304 3,758,786 3,532,449 3,814,986 4,396,435
NET INCOME (151,924) 90,118 105,231 81,538 30,443
EARNINGS PER SHARE (.06) 0.04 0.04 0.030 . 01
TOTAL ASSETS 12,766,299 14,290,017 14,303,779 14,924,365 15,370,061
LONG TERM DEBT 1,201,987 1,552,248 1,680,781 2,301,241 2,726135
STOCKHOLDERS'EQUITY 8,173,741 8,322,502 8,333,184 8,127,606 8,024,850
CASH DIVIDENDS
PER SHARE -0- - 0 - - 0 - - 0 - - 0 -
Item 7
Management's Discussion and Analysis of Financial Conditions and Results of
Operations
Summary of Operations
Year End 2001 2000 1999 1998
TOTAL ASSETS 12,766,299 14,290,017 14,303,779 14,924,365
TOTAL EQUITY CAPITAL 8,173,741 8,322,502 8,233,184 8,127,606
OPERATING INCOME 3,436,304 3,758,786 3,532,449 3,814,986
OPERATING EXPENSE 3,625,572 3,622,840 3,283,902 3,656,215
INCOME BEFORE TAXES (189,268) 135,946 248,547 158,771
INCOME TAXES 57,549 (29,535) (117,439) (73,280)
NET INCOME (151,924) 90,118 105,231 81,538
NET INCOME PER SHARE (.06) 0.04 0.04 0.03
Results of Operation:
The Company's operations are comprised of three main components: Franchising,
financing and investments, and leasing. The following discussion presents an
analysis of results of operations of the Company for the years ended
December 31, 2001, 2000, 1999, and 1998.
The preceding chart reflects the most recent four years of the Company's
operations. In 2001 operations resulted in a loss before income taxes of
$189,268, compared to income before taxes of $135,946 in 2000, income before
taxes of $248,547 in 1999 and income before taxes of $158,771 in 1998.
Franchising revenues in 2001 rose 6.7% over 2000. In 2000, franchising
revenues decreased slightly from 1999. In 1999, Franchising revenues rose
slightly over 1998 as did the number of franchises (.44%), although the number
of rooms available within the system decreased slightly (4.3%). These
relatively flat numbers are due to increased competition from other
franchisors offering multi-level brands, resulting in more down-scaling
conversions into the economy lodging sector. The Company has become more
stringent in its requirements relating to franchises in the areas of quality
assurance and financial reporting. Along with the slight changes in revenues,
the Franchise Division has decreased its administrative cost (4.6%) between
2001 and 2000; by 18.0% between 1999 and 1998 and by 9.0% between 1998 and
Between the years 2000 and 1999 there was an increase of 33.3% in these
costs due in large part to legal expenses connected with a large lawsuit
settlement in 2000. 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 agreement.
Gross revenues generated in this area were $402,921 in 2001, $534,363 in
2000, $62,356 in 1999, $334,029 in 1998 and $435,570 in 1997.
Financing revenues continue to drop because interest on the notes receivable
is declining as the notes move to maturity. Mortgages and notes receivable
balances rose due to the sale of a foreclosed property that had been in fixed
assets.
Leasing revenues declined in 1998 through 2000 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 will manage its properties in-house
beginning in the year 2002.
Liquidity:
The question of liquidity should not be an issue in the near future. The
non-affiliated entity formerly leasing properties from the Company is in arrears
in its past lease payments; collection is doubtful. If cash requirements
became an issue, any of the notes could be sold at a discount. However, there
is no reason to believe this will be required.
Capital Resources
(I) No material commitments for capital expenditures are planned other than
any possible purchases or development of properties through the financing
division.
(II) 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 lower credit on the new
property construction side, has meant less profitable opportunities for the
Company.
Item 8 Financial Statements and Supplemental Data
The financial statements and financial statement schedules filed as part of the
Annual report are listed in Part IV, Item 14 below.
Item 9 Disagreements of Accounting and Financial Disclosures
None.
Part III
Item 10 Directors and Executive Officers of the Registrant
The Following persons are the directors and the executive officers of the
Registrant.
NAME AGE POSITION & TERM WITH REGISTRANT
Bobby E. Guimbellot 61 CEO-27 Years, Director-29 Years
Michael M. Bush 53 Director-20 Years
Jack M. Dubard 70 President-8 Years, Director-13 Years
C. Guy Lowe, Jr. 66 Director-29 Years
Gretchen W. Nini 54 Director-15 Years
Harry C. McIntire 72 Chairman-8 Years, Director-25 Years
George O. Swindell 64 Director-26 Years
Richard A. Johnson 57 Director-12 Years
Melanie Campbell Hanemann 46 Director-11 Years
John L. Snyder, Jr. 75 Director-11 Years
Melinda P. Hotho 39 Director-8 Years
The Board of Directors of the Company held no regularly scheduled meeting
in 2001.
The term of office for all directors expires at the close of the next annual
meeting of shareholders. Officers serve at the pleasure of the Board of
Directors.
Bobby E. Guimbellot served as President of the Registrant from January of 1976
through 1994. Mr. Guimbellot remains as Chief Executive Officer of Registrant.
Mr. Guimbellot is also the principal shareholder and Chairman of the Board of
Western Wireline Services, Inc. ("Western Wireline"), an oil well service
company headquartered in Belle Chasse, Louisiana. Mr. Guimbellot has been
Chairman of Red Carpet Inns, International, Inc. a subsidiary of the registrant,
since 1982, and has been President of Red Carpet since January 1, 1992. Since
1995, Mr. Guimbellot has served as CEO of Hospitality International, the
Company's franchising subsidiary.
Michael M. Bush is President and Chief Executive Officer of the Mississippi
River Bank, Belle Chasse, Louisiana, a position which he has held for more than
ten years.
Jack M. Dubard since 1994 has been the Registrant's President, after having
served as the Vice President for several years, and was previously an
independent consultant to the Registrant and its affiliates. Prior to that,
he held an administrative position with Red Carpet Inns International, Inc.
In 1994 - 1995, Mr. Dubard served as CEO of Hospitality International, Inc.,
the Company's franchising subsidiary.
C. Guy Lowe, Jr. is a self-employed real estate developer and also provides
office building management services. He has been so engaged for more than 12
years.
Harry C. McIntire is a retired senior captain (pilot) with Delta Air Lines,
Inc. and has been a captain for more than 25 years prior to his retirement.
He has served as Vice Chairman of registrant's Board of Directors and as a
Vice President. Upon Dr. Hotho's resignation, Captain McIntire was elected
as Chairman of the Registrant's Board.
Gretchen W. Nini was a Director, Corporate Secretary, and treasurer of
Western Wireline Services, Inc., an oil well service company headquartered
in Bell Chasse, Louisiana, a position she held for more than 9 years
(See Bobby E. Guimbellot, supra).
George O. Swindell formerly owned Diamond Realty Construction, Gretna
Louisiana; he has been a real estate broker since 1970 and was a general
contractor for over 17 years.
Richard A. Johnson has had prior experience in construction, manufacturing,
health care, agriculture, recreational facilities, apartments and real
estate. Since June of 1992, Mr. Johnson served as Franchise Development
Coordinator for Hospitality International, Inc., a subsidiary of the
Registrant. He resigned in July of 1995 from his employment with Hospitality
International, Inc.
Melanie Campbell Hanemann is the current Corporate Secretary and Treasurer
of Western Wireline Services, Inc. She has been with this company for more
than nine years and during that time has held the position of Office
Administrator for Western. (See Bobby E. Guimbellot, supra).
Melinda P. Hotho - Dr. Vincent W. Hotho, after being a Director of the
Registrant for over twenty-two (22) years, the last eighteen (18) of which
he served with distinction as Chairman, due to some imprudent personal
investments and a potentially ruinous malpractice suit went through a
Chapter 7 Bankruptcy proceeding. He felt it to be in the best interest of
the Registrant and of the Company that he resign as Director and Chairman.
The Board of Directors, pending action of the Stockholders, selected
Melinda P. Hotho, his daughter, to serve on an interim basis.
John L. Snyder, Jr. is recently retired from his position as manager of
engineering at Mid-America Transportation Company. Mr. Snyder had more than
thirty years experience in marine operations. He previously held
administrative or managerial positions with Wisconsin Barge Line, Walker
Boat Yard and Mid-South Towing Company.
Directors who have resigned:
Robert H. Douglas was Director of Motel Operations for the Company until
April 1, 1990, and prior to assuming that position has been in the independent
plant nursery business. He previously served as Secretary and Treasurer of
the Registrant from September 1983, until April 1986. Prior to that,
Mr. Douglas was Director of Operations for the Company for 8 years. On
April 1, 1990, Mr. Douglas, formed a corporation to whom several of the
Company's motels were leased. Mr. Douglas resigned and retired in 1996.
Mr. Douglas passed away November 2001.
Richard H. Rogers was employed as marketing consultant for the Knoxville's
World's Fair from January 1982 to May 1982. From 1978 to January 1982,
Mr. Roger served as Vice President and Director of Operations of Cindy's
Inc., a hotel company. He became President of Hospitality International,
Inc. as subsidiary of the Registrant, in May 1982. On October 1993,
Mr. Rogers resigned his presidency of Hospitality International, Inc.
He resigned for personal reasons and to pursue other interests.
Mr. Rogers resigned as Director of the Registrant in 1994.
Dr. Vincent W. Hotho, M.D., after being a Director of the Registrant for
over twenty-two (22) years, the last eighteen (18) of which he served with
distinction as Chairman, due to some imprudent personal investments and a
potentially ruinous malpractice suit went through a Chapter 7 Bankruptcy
proceeding. He felt it to be in the best interest of the Registrant and
of the company that he resign as Director and Chairman. The Board of
Directors, pending action of the Stockholders, selected Melinda P. Hotho, his
daughter, to serve on an interim basis. The Directors elected Harry C.
McIntire as Chairman upon Dr. Hotho's resignation.
Harry C. Geller, an able and loyal Director for fourteen (14) years, in an
effort to shed some activities with a view toward his imminent retirement,
resigned in 1994 as a Director of the Registrant. Mr. Geller, the sole
stockholder and president of Securities Transfer Company, the Registrant's
Transfer Agent, has now sold this company.
Committees of the Board of Directors
The Board of Directors of the Registrant does not maintain any standing
committees.
Item 11 Executive Compensation
For services rendered in all capacities to the Company and its subsidiaries
during the Fiscal Year ended December 31, 2001, the Company paid aggregate
cash compensation in the amount of $75,000 to Mr. Guimbellot, the
Registrant's. Chief Executive Officer. In 2001, the Company paid aggregate
cash compensation in the amount of $91,487.42 to Mr. Dubard, who for said
period was Registrant's president. The Company provides Messrs. Guimbellot
and Dubard with automobiles and does not require them to account for the
personal use, if any, of the automobiles. The personal uses are not included
in the compensations reported above. However, the Company estimates that the
amount, which cannot be specifically or precisely ascertained, does not exceed
10% of the aggregate compensation, paid and unpaid, reported above.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Principal Holders
The following table sets forth, as of this writing, information with respect to
each person who, to the knowledge of the Registrant, might be deemed to own
beneficially 5% or more of the outstanding Southern Scottish Inns, Inc. common
stock, which is the only class of voting securities of the Registrant. Except,
as otherwise indicated, the named beneficial owners possess sole voting power
and sole investment power with respect to the shares set forth opposite their
respective names.
Name & Address of Amount & Nature Present Percent
Beneficial Owner of Beneficial Ownership of Class-Note 5
Bobby E. Guimbellot 1,202,797 50.85%
1726 Montreal Circle
Tucker, Georgia 30084 Note 6
Harry C. McIntire 161,289 6.82%
Roswell, GA Note 7
Note 5:
Based on 2,366,395 shares outstanding.
Note 6 :
Includes 470,750 shares owned by Bobby Guimbellot d/b/a Coastal Companies, and
35,238 owned by Industrial Funds, an entity of Western Wireline Services, Inc.
Mr. Guimbellot's shares also include 17,713 and 1,664 shares owned by Lift
Oats, Inc. and Tri Delta Dredge, Inc., respectively and 361,405 shares owned by
Shelly Plantation. Ms. Campbell shares voting rights as to Industrial Funds
shares with Mr. Guimbellot. Mr. Snyder shares voting rights as to Shelly
Plantation with Mr. Guimbellot.
Note 7:
Voting and investment power on 113,331 shares are shared with his wife.
Management Ownership
The following table sets forth, as of this writing, information concerning
he ownership of Southern Scottish Inns, Inc. common stock by all directors
and by all directors and officers as a group. Southern Scottish Inns, Inc.
common stock is the only class of equity securities of the registrant. Except
as otherwise indicated, the named beneficial owners possess sole voting power
and sole investment power with respect to the shares set forth opposite their
respective names.
Name & Address of Amount & Nature Present Percent
Beneficial Owner of Beneficial Ownership of Class-Note 8
Michael W. Bush Note 9 3,611 .15%
Jack M. Dubard Note 10 8,907 .38%
Bobby E. Guimbellot Note 11 1,202,797 50.85%
Melanie Campbell Hanemann 2,600 .10%
Melinda P. Hotho 1,200 .05%
Richard A. Johnson 25,900 1.10%
C. Guy Lowe, Jr. 1,335 .05%
Harry C. McIntire Note 12 161,289 6.82%
Gretchen W. Nini Note 13 4,801 .20%
George O. Swindell 1,563 .06%
John L. Snyder, Jr. 2,600 .10%
TOTAL 1,416,603 59.86%
Note 8: Based on 2,366,395 shares outstanding.
Note 9: Includes 250 shares in the name of his minor son.
Note 10: Includes 513 shares in the name of his wife.
Note 11: Includes 470,750 shares owned by Bobby Guimbellot d/b/a Coastal
Companies, and 35,238 owned by Industrial Funds, an entity of Western Wireline
Services, Inc. Mr. Guimbellot's shares also include 17,713 and 1,664 shares
owned by Lift Boats, Inc. and Tri Delta Dredge, Inc., respectively and 361,405
shares owned by Shelly Plantation. Melanie Campbell, the Secretary of Western
Wireline Services, Inc., shares voting and investment powers with respect to the
35,238 shares owned by Industrial Funds. John L. Snyder Jr. shares voting and
investment powers with repeat to the 361,405 shares owns by Shelly Plantation
Note 12: Voting and investment powers on 113,331 shares are shared with his
wife.
Note 13: Includes 639 shares in the name of her minor child.
Item 13 Certain Relationships and Related Transactions
Pan American Hospitality
From time to time, and on an as needed basis, the Registrant and the Company
made advances or loans to Pan American Hospitality, a partnership composed of
Red Carpet Inns International, Inc. (a subsidiary of the Registrant), Bobby E.
Guimbellot, the Registrant's CEO, Emilee Guimbellot (Mr. Guimbellot's mother),
Western Wireline Services, Inc. (an oil field service company belonging to Mr.
Guimbellot), Mildred Puckett, Mary R. Dubard (wife of Jack M. Dubard,
Registrant's President) and two unrelated individuals. As of December 31,
1997, these advances totaled $300,752.55 and either by direct advancements or
inter-company transfer said receivable is held by Red Carpet Inns International,
Inc., which as disclosed is a partner of the debtor and which holds a first
mortgage on the motel which is the partnership's major asset. The motel was
sold in 1996 with seller financing. Pan American Hospitality dissolved in 1998.
The Company's negative investment was written off against receivables due from
the Partnership. The Partnership assigned its mortgage receivable to the
Company in satisfaction of the remaining balance of principal and accrued
interest due to the Company.
PART IV
Item 14 Exhibits, Financial schedules and Reports on Form 8-K
(a) Listed below are the following documents which are filed as a part of this
Annual Report.
1. Financial statements
Auditor's Report. Note 14
Consolidated balance sheets of the Company as of December 31, 2001, and 2000.
Consolidated statements of changes in cash flow of the Company for the
Fiscal Years ended December 31, 2001 and 2000 Notes to consolidated
financial statements.
2. Exhibits.
The exhibits filed as part of the Annual report are listed on
the exhibit index which immediately precedes and is bound with such exhibits.
(B) No reports on Form 8-K have been filed by the Registrant during the last
quarter of the period covered by this Annual Report.
Note 14: For the Company's fiscal years of 1985 through 1990, our auditor was
Robert M. Mosher, C.P.A. of Biloxi, Mississippi. For the Company's fiscal
years of 1991 through 1992, our auditor was the firm of Fountain, Seymour,
Mosher & Associates of D'Iberville, Mississippi. In February of 1994
(See Item 7, Capital Resources (I)), Registrant and Company moved to the
Atlanta area. About such time and in connection with future audits, the
decision was made to change auditors and to employ R. J. Clark & Associates,
P.C. of Roswell, Georgia. R. J. Clark & Associates, P.C. had done the
Company's audits for 1983 and 1984, the audits of Red Carpet Inns
International, Inc., a partially owned subsidiary of Registrant for the
years 1992 and 1993,and the audits for Hospitality International, Inc.,
another partially owned subsidiary of Registrant, continuously since 1982.
From 1994 and for the foreseeable future, R. J. Clark & Associates, P.C. has
done and will do the audits for Southern Scottish Inns, Inc., Red Carpet Inns
International, Inc. and Hospitality International, Inc. In accordance with
the SEC Practice Section of the A.I.C.P.A., a partner other than the partner
in harge must perform a concurring review of the audit report. When the firm
is a sole proprietorship, an outside qualified professional must be utilized
and one was so utilized.
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
Chief Executive Officer
BY:
Jack M. Dubard
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:
BY:
Michael M. Bush
Director
BY:
Richard A. Johnson
Director
BY:
Melanie C. Hanemann
Director
BY:
C. Guy Lowe, Jr
Director
BY:
Jack M. Dubard
Director
BY:
Harry C. McIntire
Director
BY:
Bobby E. Guimbellot
Director
BY:
Gretchen W. Nini
Director
BY:
George O. Swindell
Director
BY:
John Snyder
Director
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
TABLE OF CONTENTS Page Number
INDEPENDENT AUDITOR'S REPORT 2
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3-4
CONSOLIDATED STATEMENTS OF INCOME 5-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 7
CONSOLIDATED STATEMENTS OF CASH FLOWS 8-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10-27
Board of Directors
Southern Scottish Inns, Inc.
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheets of Southern
Scottish Inns, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide reasonable basis for our opinion.
The Company has not presented the selected quarterly financial data, specified
by item 302(a) of Regulation S-K, that the Securities and Exchange Commission
requires as supplementary information to the basic financial statements.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southern Scottish
Inns, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the periods ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
R J CLARK AND ASSOCIATES, PC
Certified Public Accountants
Roswell, Georgia
April 15, 2002
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS
CURRENT ASSETS 2001 2000
Cash 160,400 54,612
Accounts Receivable-Net (Note G) 350,363 1,234,991
Accounts Receivable-Affiliates (Note G & P) 830,857 502,649
Mortgages & Notes-Affiliates (Note G & P) 31,660 82,919
Mortgages & Notes Receivable (Note G) 514,696 807,673
Inventory (Note C) 40,834 40,749
Prepaid Expenses 111,802 69,256
Interest Receivable 601,549 612,246
Net Deferred Tax Asset (Note K) 30,371 28,776
TOTAL CURRENT ASSETS 2,672,532 3,433,871
PROPERTY AND EQUIPMENT (Note O)
Land 1,567,044 1,649,726
Buildings & Building Improvements 2,521,180 2,587,634
Furniture, Fixtures & Equipment 556,388 569,412
Leasehold Improvements 41,773 41,773
Total Property & Equipment 4,686,385 4,848,545
Less: Accumulated Depreciation (1,167,477) (1,248,451)
PROPERTY AND EQUIPMENT - NET 3,518,908 3,600,094
OTHER ASSETS
Mortgages & Notes Receivable 3,958,73 4,785,076
Mortgages & Notes-Affiliates (Note P) 1,015,107 1,010,132
Investments in Unconsold. Affil.(Note I) (146,076) (233,345)
InvestmentAffiliate 128,834 124,899
Investment in Real Estate 244,370 217,964
Trademarks - Net (Notes J and P) 1,210,030 1,252,859
Organization Cost 6,105 7,822
Deposits 4,498 4,498
Deferred Tax Asset 124,888 61,603
Marketable Equit. Sec.,carried at Market 28,373 25,210
TOTAL OTHER ASSETS 6,574,859 7,256,718
TOTAL ASSETS 12,766,299 14,290,683
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES 2001 2000
Accounts Payable - Trade 178,758 281,416
Interest Payable 264,473 241,363
Taxes Payable 177,604 160,486
Other Taxes Payable 205,767 311,630
Other Liabilities 454,723 332,975
Mortgages & Notes Payable (Note L) 352,929 396,617
Mtgs. & Notes Payable-Affiliates(Note P) 149,195 118,327
Deferred Severance Pay (Note X) 6,000 14,250
TOTAL CURRENT LIABILITIES 1,789,449 1,857,064
LONG-TERM LIABILITIES
Mortgages & Notes Payable (Note L) 880,750 1,223,658
Mortgages & Notes Payable-Affil.(Note P) 319,119 327,619
Escrow - Real Estate Tax 2,118 971
TOTAL LONG-TERM LIABILITIES 1,201,987 1,552,248
DEFERRED AMOUNTS
Deferred Income-Installment 574,787 1,485,071
Deferred Rent Income 0 450
Net Deferred Tax Liability 0 66,552
Deferred Severance Pay (Note X) 167,500 167,500
TOTAL DEFERRED AMOUNTS 742,287 1,719,573
TOTAL LIABILITIES & DEFERRED AMOUNTS 3,733,723 5,128,885
MINORITY INTEREST (Note A) 858,835 839,296
STOCKHOLDERS' EQUITY
Common Stock- no par value,
Authorized 5,000,000 shares,
Issued & Outstanding 2,366,395
year ended 2001 and 2000 6,023,981 6,023,981
Additional Paid in Capital 42,201 42,201
Retained Earnings 2,107,559 2,256,320
TOTAL STOCKHOLDERS' EQUITY 8,173,741 8,322,502
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 12,766,299 14,290,683
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
REVENUES 2001 2000 1999
Franchising Revenues 1,891,113 1,772,185 1,833,472
Financing Revenues 483,070 584,278 620,325
Sale of Furniture 0 21 439
Operating Lease Revenues 8,229 450,667 507,064
Gain on Sale of Assets 245,913 7,607 134,096
Investment Income 16,764 84,821 0
Contract Negotiated Revenues 388,294 534,363 62,356
Other Income 402,921 324,844 374,697
TOTAL REVENUES 3,436,304 3,758,786 3,532,449
COST & EXPENSES
Operating Exp-Franchise Div 2,027,905 2,126,044 1,595,417
Operating Expense
Financing & Investing 1,106,244 911,463 1,024,330
Cost of Sales
Furniture Sales 0 45 4,174
Interest Expense 207,957 237,610 256,347
Depreciation & Amortization 188,817 215,569 238,590
Investment Loss 94,649 132,109 165,044
TOTAL COST & EXPENSES 3,625,572 3,622,840 3,283,902
Income (Loss) from
Continuing Operations
before Taxes & Minority
Interest (189,268) 135,946 248,547
Less:
Provisions for Income Taxes
(Note K) 57,549 (29,535) (117,439)
Income (Loss) before
Minority Interest (131,719) 106,411 131,108
Less: Minority Interest
in Income (Loss) of
Consolidated Subsidiaries (20,205) (16,293) (25,877)
NET INCOME (LOSS) (151,924) 90,118 105,231
INCOME (LOSS) PER SHARE 2001 2000 1999
Income (Loss) per Share
from Operations before Taxes
and Minority Interest (.08) .06 .11
Income (Loss) per Share
before Minority Interest (.06) .04 .06
Basic Net Income (Loss)
per Common Share (.06) .04 .04
Average Shares Outstanding 2,366,395 2,366,395 2,365,284
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Balance # of Common Common Additional Retained
Year Shares Stock Paid in Capital Earnings
Balance Outstanding
December 31,1998 2,365,284 6,023,315 42,201 2,062,090
Shares Issued to Directors
Comprehensive Income:
Net Income 105,231
Unrealized Gain on
Securities, net of tax 347
Balance
December 31, 1999 2,365,284 6,023,315 42,201 2,167,668
Shares Issued to
Non-Directors 1,111 666
Shares Issued to Directors
Comprehensive Income:
Net Income 90,118
Unrealized Gain/(Loss) on
Securities, net of tax (1,466)
Balance
December 31, 2000 2,366,395 6,023,981 2,201 2,256,320
Shares Issued to
Non-Directors
Shares Issued to Directors
Comprehensive Income:
Net Income (151,924)
Unrealized Gain/(Loss) on
Securities, net of tax 3,163
Balance
December 31, 2001 2,366,395 6,023,981 42,201 2,107,559
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES
YEAR 2001 2000 1999
Net Income (151,924) 90,118 105,231
Non-Cash Items Included
in Net Income:
Depreciation and Amortization 188,817 15,570 238,590
Conversion Payable to Note Receivable 0 3,173 (18,762)
Uncollectible Amounts 352,902 (11,706) 0
(Gain) Loss - Sale of Assets (224,834) 1,083 172,014
Deferred Income Recognized (33,839) (25,840) (34,733)
Discount Earned 32,763 (26,624) (3,951)
Investment Income-Affiliates 71,332 19,119 157,566
Minority Interest Income 20,205 16,293 25,877
Transfer of Note Payable 0 0 (79,552)
Assets for Accounts Receivable 3,200 4,920 0
Write off Note Payable 0 0 (1,250)
Accruals & Expense Paid by Investee (75,879) 0 0
Note Payable Assignment 0 0 4,976
Note Payable for Lawsuit Settlement
Legal Expense 0 110,166 0
Note Payable Sale of Land 0 (42,569) 0
Note Receivable Credits for Accruals 71,031 0 0
Note Receivable for Lawsuit settlement 0 (279,803) 0
Note Receivable Converted to Expense 0 2,500 0
Note Payable for Accrual (21,028) 0 0
Note Converted to Accounts Receivable 47,811 0 0
Accounts Receivable Converted
To Investment or Note (3,500) (117,209) (34,000)
Sale Payables for Receivables 0 0 (27,558)
Write Off Note Receivable 3,723 0 0
Investment Adj. to Deferred Taxes 43,202
Write Off Interest Receivable (185,576)
Assets Donated to Charity 4,040
Miscellaneous (2,197) 322 8,261
Net Changes In Current Assets &
Liabilities:
YEAR 2001 2000 1999
Accounts Receivable 531,726 (7,255) (346,359)
Accounts Receivable-Affil. (328,208) 0 86,364
Inventories (85) 70 4,248
Loan Receivable-Employee 0 213 500
Deferred Rent (450) 0 0
Interest Receivable 10,697 (213,148) (91,935)
Income Tax Receivable 0 0 (4,629)
Prepaid Expense (42,546) (19,158) 3,396
Organization Cost 0 1,718 0
Accounts Payable (102,658) 188,281 (92,657)
Interest Payable 23,110 66,695 8,261
Taxes Payable (88,745) 104,427 (31,701)
Deferred Income Tax (131,432) 34,654 53,704
Other Accrued Liabilities 121,748 (303,151) 242,598
Escrow - Real Estate Taxes 1,147 0 0
Deferred Severance Pay (8,250) 26,000 3,700
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 126,303 (161,141) 348,199
CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES
Notes Receivable Issued (2,000) (16,000) (78,648)
Collections on Mortgages
and Notes Receivable 128,322 489,220 148,136
Acquisition (Disposition)
of Fixed Assets (16,037) (63,484) (19,831)
Receipts with Sales of Assets 432,220 36,115 0
Investment Purchases (175,263) (5,334) (129,870)
Payments Made with
Sale of Assets 0 0 (36,036)
Advance Receipts
for Investments 0 (14,029) 15,000
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES 367,242 426,488 (101,249)
CASH FLOWS PROVIDED BY
(USED FOR) FINANCING ACTIVITIES
Proceeds from Notes Payable 170,232 124,217 209,919
Principal Payments on
Mortgages and Notes Payable (557,989) (409,961) (2,049)
Issuance of Stock 0 666 0
Principal Payments on
Capital Lease Obligations 0 (910) (480,465)
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (387,757) (285,988) (272,595)
Increase (Decrease)
in Cash 105,788 (20,641) (25,645)
Cash - Beginning 54,612 75,253 100,898
Cash - Ending $ 160,400 $ 54,612 $ 75,253
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 AND 1999
NOTE
A - HISTORY
The Company was incorporated on November 8, 1971, under the laws of the state
of Louisiana.
The Company has consolidated the operations of two corporations, Red Carpet
Inns International, Inc. and Hospitality International, Inc. The Company owns
a 50 percent interest in Hospitality International, Inc. and Red Carpet Inns
International, Inc. owns the other 50 percent; therefore, all of its operations
are included in these financial statements and it is noted as the franchising
division. The Company owns 74.9 percent of Red Carpet Inns International, Inc.
The Company's financing and investing division provides owner financing to
persons acquiring motel properties previously operated and/or owned by the
Company. They look to acquire available properties for development and/or
future sale. The Company also invests in companies whose business operations
include property development. These activities primarily occur in the
Southeast.
The Company's franchise division offers advertising, reservation, group sales,
quality assurance and consulting services to motel owner/operators. It is the
exclusive franchiser for Red Carpet Inns and Master Host Inns as well as
Scottish Inns. Its market has historically been the contiguous United States;
however, in 1994 the Company began to explore international markets. As of
December 31, 2001 the Company had one franchise in Jamaica. The Company also
provides a nationwide central reservation service for its franchisees. This
service was provided in house until the end of 2001. In 2002, the Company
engaged an outside service.
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
B1 - CONSOLIDATION
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.
B2 - ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.
B3 - REVENUE AND EXPENSE RECOGNITION
I. Accrual Basis
The accrual basis of accounting is used for both book and tax records. Revenue
is recognized when it is earned. Expenses are recognized when incurred.
II. Franchise Fees
Revenue from franchise sales is recognized when all material conditions of the
sale have been substantially performed. Substantial performance by the
franchiser occurs when, 1) the franchiser is not obligated in any way to excuse
payment of any unpaid notes or to refund any cash already received, 2) initial
services required by the franchiser by contract or otherwise have been
substantially performed, and 3) all other conditions have been met which affect
the consummation of the sale.
B4 - ACCOUNTING POLICY - STATEMENT OF CASH FLOWS
For purposes of the cash flow statement, the Company considers all highly liquid
debt instruments with maturity of three months or less to be cash equivalents.
The following non-cash transactions took place in 2001:
The Company purchased four vehicles for $69,807 with notes payables for the
lack of consideration.
The Company sold a vehicle for $3,200 to an employee in exchange for the
employee's auto allowance.
The Company disposed equipment with original costs of $18,388 and accumulated
depreciation of $17,441.
The Company sold a parcel of land with an adjusted basis of $13,289 held for
investment in exchange for notes and interest totaling $39,389 due to the buyer.
The gain on the exchange was $26,100.
The Company foreclosed a mortgage with a principal balance due of $1,473,990,
interest receivable due of $185,102 and related discount of $876,446 for the
underlying property. The property was subsequently sold for $20,000 in cash,
payment of accrued property taxes and expenses of $73,365 and a new note
receivable in the amount of $739,785. The gain recognized on the sale was
$50,504.
The Company took back property in lieu of foreclosure of a note in the amount
of $265,312. The property was booked in the same amount. Interest receivable of
$474 due on the note was written off.
The Company donated two barges and a boat with original costs of $58,560 and
accumulated depreciation of $54,520 to charity.
The partnership in which the Company has a 50% ownership (See Investments in
Unconsolidated Affiliates) made principal note payments in the amount of $6,994
on one of the Company's loans.
The Company wrote off prior year receivables of $352,902 to bad debt that were
due from the company that leases the Company's properties. This decision was
made because this company went out of business on January 1, 2002. The Company
will manage the properties in house beginning in the year 2002.
B4 - ACCOUNTING POLICY - STATEMENT OF CASH FLOWS - (Continued)
The following non-cash transactions took place in 2000:
The Company issued a note payable in the amount of $16,898 related to the
purchase of land.
The Company sold land with a book value of $3,027 for $7,500.
The Company converted accounts receivable in the amount of $101,039 to a note
receivable.
The Company was involved in a multifaceted non-cash transaction with a net
change of $35,686.The Company had bad debt recovery in the amount of $11,706
assumed by a related party in the form of a note.
The Company converted a note payable to a note receivable totaling $3,173.
The Company purchased a vehicle for $16,697 with a note payable for the lack
of consideration.
The Company sold a vehicle for $2,250 to an employee for a note receivable
from the employee.
The Company disposed fully depreciated equipment with original costs totaling
$6,713.
The Company was involved in a multifaceted non-cash transaction with a net
change of $34,383.
The following non-cash transactions took place in 1999:
The Company retired fully depreciated furniture and fixtures in the amount of
$9,000.
The Company purchased 50% ownership of a vehicle for $4,976 with a note
payable for the lack of consideration.
The Company sold land and paid off the related note payable and escrow in the
amount of $105,783 and $100,200, respectively.
The Company sold their portion of land and related motel investment and paid
off the related note payable in the amount of $204,701. The Company cancelled
the related notes receivable of $86,850 and a new note receivable was created
for $200,000.
The Company recorded a note receivable in the amount of $1,100,000 in relation
to the sale of a motel and the land.
The Company transferred notes in the amount of $79,552 to accounts payable.
A vehicle with a book value of $9,600 and accumulated depreciation of $5,760
was disposed.
Furniture, fixtures, and equipment with a book value of $66,695 and
accumulated depreciation of $65,874 were disposed.
The Company wrote off a note payable in the amount of $1,250.
The company that leases of the Company's properties made payments on notes
payable in the amount of $18,762. This company received credit for these
payments on its accounts receivable balance.
A note payable to a company owned 100% by the CEO was reduced by credits of
$15,026 given to the management company for payments made on behalf of a
partnership in which CEO has a 25% and the Company a 50% interest.
A note payable due to an affiliated individual was reduced by $12,352 and
accrued interest payable resolved a note payable due to an affiliated individual
by $2,494 for further payments for the partnership by the management company.
In 2001, the Company paid $7,471 in income taxes and $162,237 in interest.
In 2000, the Company paid $30,000 in income taxes and $237,610 in interest.
In 1999, the Company paid $0 in income taxes and $205,370 in interest.
C - INVENTORY
Inventory is valued at the lower of cost or market and consists of hotel and
motel furniture. The method used in determining the cost is the average cost
paid for the items.
Listed below are sales and cost of inventory sold:
2001 2000 1999
Sales $ - $ 21 $ 439
Cost - 45 4,174
GROSS PROFIT (LOSS) $ - $ (24) $ (3,735)
D - REAL ESTATE SALES
Gains on real estate transactions on which substantial down payments are not
received are deferred and recognized as income only as the principal amount of
the obligation is received. This deferred income is shown on the balance sheet
as a deferred income installment. Deferred income recognized was $33,839 in
2001, $26,289 in 2000, and $33,433 in 1999.
E - DEFERRED DEBT ISSUE COSTS
Deferred debt costs (primarily commitment fees) are being amortized over the
original term of the long-term debt to which they relate.
F - NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income by the
weighted average number of shares outstanding during the period. The weighted
average number of shares outstanding for the years ending December 31, 2001,
2000 and 1999 was 2,366,395, 2,366,395, and 2,365,284 respectively.
G - ACCOUNTS, MORTGAGES AND NOTES RECEIVABLE
In accounts receivable - trade for franchise sales, an allowance account is
provided based on a percentage of the outstanding accounts. During the year,
all bad debt write-offs were made to
G - ACCOUNTS, MORTGAGES AND NOTES RECEIVABLE - (Continued)
the allowance account. Accounts Receivables - Trade for 2001 and 2000 are
presented net of allowance for doubtful accounts of $38,394 and $43,510
respectively.
Prior to 2001, Accounts Receivable-Net also included amounts due for the
Company's operating leases. In the year 2001, no accruals were made for rent
income due from lessee because of the pending termination of the leases and the
lack of probability of collection. All lease payments received in 2001 were
applied against prior year receivables. Since no accruals were made, lease
income dropped significantly. Furthermore, the remaining balance due for the
leases was written off to bad debt. Management made this decision in view of
the financial failure of the lessee (See Cash Flow and Operating Leases).
The Company extends credit to individuals and companies in the normal course of
its operations. These loans relate to motel properties located throughout the
Southeast, and the Company requires these advances to be secured by mortgages on
the related property. The Company's exposure to loss on these notes is
dependent on the financial performance of the property and the fair value of the
property.
No reserves for uncollectible mortgages and notes receivable are maintained.
Any non-performing note is secured by assets with values greater than the
principal and accrued interest.
Included in the mortgages and notes receivable - short term are notes the
Company has with franchisees for initial franchise fees, royalty fees, sign
rental and room reservation income. The notes are either non-interest bearing
or convey an interest rate of up to 12 percent. These notes total $353,772 in
2001 and $373,279 in 2000. All are originally due within one year.
However, certain notes have been extended and have been outstanding for over one
year. Those notes due over one year are interest bearing.
Mortgages and notes receivable are stated net of associated discounts. In 2001
and 2000, the discounts totaled $86,938 and $54,175 respectively.
The weighted average interest rate of the mortgage notes held by the Company is
11.4 percent, and they range from 6 percent to 12.5 percent.
The Company plans to hold the notes until maturity.
Maturities over the next five (5) years are as follows:
2002 $ 178,404
2003 197,002
2004 217,555
2005 240,271
2006 253,086
Beyond 2,872,406
H - LOANS - EMPLOYEES
Loans-Employees represents travel advances and/or loans to employees.
I - INVESTMENTS
I. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company has investments in unconsolidated affiliates that are accounted for
under the equity method. Under the equity method, original investments are
recorded at cost and adjusted by the Company's share of earnings, losses and
distributions of these companies. Investments in unconsolidated affiliates
consist of the following:
% Ownership 2001 2000
Houma Atrium Bldg.-
Partnership 50% (465,919) (593,182)
Extasea Casino Cruises
Of No. Florida, Inc. 40% 316,898 373,656
Hospitality Int'l Real
Estate, Inc. 45% 2,945 (13,819)
Totals $ (146,076) $ (233,345)
The CEO and another individual own the remaining 50% of the Houma Atrium
Building Partnership. Hospitality International Real Estate, Inc. is 55% owned
by one individual. The CEO and two other individuals own the remaining ownership
of Extasea Casino Cruises of North Florida, Inc.
The Company's share of the Houma Atrium Building Partnership losses was $31,388
in 2001 and $75,349 in 2000. Losses on the investment have been recognized up
to the Company's at- risk amount. In 2001, the management company that collects
lease payments for its properties advanced monies to the partnership. The
Company increased its investment in the partnership for these payments in 2001.
In 2000, the investment in the Houma Atrium Building partnership was reduced and
converted to an interest bearing note receivable to bring capital balances to
agree to percentages of ownership. The CEO of the Company owns 25% of this
partnership (See Related Party).
Negative investments reflect losses in excess of investment. The Company is at
risk up to at least the amount indicated.
Extasea Casino Cruises of No. Florida, Inc. owns the M/V Fantasea, which was
originally named the M/V Commonwealth. The CEO as well as some of the directors
has interests in this investment (See Related Party).
I - INVESTMENTS - (Continued)
All the Company's investments in unconsolidated affiliates operate with fiscal
years ending on December 31. Summarized balance sheet information of the
unconsolidated affiliates as of December 31, 2001 and 2000 are as follows:
2001 2000
Current Assets $ 180,979 $ 30,430
Property and other assets, net 3,271,982 3,514,348
Current liabilities 597,973 551,741
Long-term debt and other liabilities 2,972,722 3,344,703
Equity (117,734) (351,666)
Gross Revenues 847,305 797,960
Net Income/ (Loss) (168,282) (126,947)
II. UNDISTRIBUTED EARNINGS OF UNCONSOLIDATED AFFILIATES
Pursuant to SEC Rule 4-08, the Company discloses that the consolidated retained
earnings does not contain undistributed earnings of 50 percent or less owned
investments accounted for by the equity method as of December 31,1998.
III. MARKETABLE EQUITY SECURITIES
Marketable equity securities are available for sale. Holding gains are
presented in stockholder's equity. Income taxes related to the gains are $4,042
in 2001, $3,408 in 2000, and $897 in 1999.
J - INTANGIBLE ASSETS - TRADEMARKS
Trademarks are stated on the basis of cost and are amortized, principally on a
straight-line basis, over the estimated future periods to be benefited (not
exceeding 40 years). They are periodically reviewed for impairment based on an
assessment of future operations to ensure that they are appropriately valued.
Accumulated amortization was $503,132 and $460,303 on December 31, 2001 and
2000, respectively.
Trademarks consist of $1,713,161, $510,000 of which represents the historical
cost of acquiring the trade name "Master Hosts" and related service marks,
$360,000 of which represents the cost of the Sundowner Inns and $843,161 of
which represents the marks of Downtowner/Passport International Hotel.
The Company also owns the trade name "Red Carpet Inns". A historical cost basis
in excess of $600,000 was carried on the books of the old Red Carpet Inns
Company prior to its acquisition by the Company. This amount was apparently
written off prior to the acquisition.
Management believes the current value far exceeds the historical cost to the old
company and thus the Company has in its possession an asset of substantial worth
that has no recorded cost in the financial statements. The Company also owns the
trade name "Scottish Inns" and its value is not reflected in the financial
statements.
K - INCOME TAX
The components of the provision for income taxes are as follows:
2001 2000 1999
Current:
Federal $ 23,194 $ 10,564 $ 53,551
State, local,
and franchise taxes 7,487 3,974 8,681
Total Current 30,681 14,538 62,232
Deferred Book Tax (Benefit):
Federal (73,020) 11,010 46,424
State, local,
and franchise taxes (15,210) 3,987 8,783
Total Deferred (88,230) 14,997 55,207
Net Tax Expense/
(Benefit) $ (57,549) $ 29,535 $ 117,439
The reconciliation of the difference between the federal statutory tax rate and
the Company's effective tax rate is as follows:
2001 2000 1999
Federal statutory
tax rate (30.0)% 26.0% 32.0%
Dividends received
Deduction (0.2) (0.7) (0.1)
Undistributed earnings
from affiliates 6.4 (5.3) 12.0
State tax, net of Federal
Tax (1.0) 1.5 2.8
Amortization of trademarks 2.0 2.4 1.6
Nondeductible meals 2.1 2.5 1.7
Penalties 4.5 0.5 0.5
Other (14.2) (5.2) (3.2)
Effective tax rate (30.4)% 21.7% 47.3%
The income tax effects of temporary differences between financial and income tax
reporting that gave rise to deferred income tax assets and liabilities are as
follows:
2001 2000 1999
Current deferred income tax assets:
Net operating loss
Carryover 26,486 26,678 4,454
Deferred severance pay 2,270 2,046 2,976
Contribution carryover 1,615 52 17
Total current deferred 30,371 28,776 7,447
Long-term deferred income tax assets:
Net operating loss
Carryover 155,521 7,943 0
Change in reserve
for bad debts 28,107 0 39,796
Deferred severance pay 63,378 43,028 35,650
Capital loss carry forward 0 10,632 10,632
Total Long-term deferred 247,006 61,603 86,078
Long-term deferred income tax liabilities:
Amortization on
Trademarks 96,510 66,552 85,779
Installment sale 25,608 0 102,138
Total long-term deferred 112,118 66,552 187,917
Hospitality International, Inc. had a net operating loss (NOL) of $14,678 in
1998, $7,479 in 1999 and $23,874 in 2000 for federal income tax purposes. The
entire NOL was utilized against taxable income in the year 2001.
Southern Scottish Inns, Inc. had a net operating loss of $378,283 in the year
2001 that expires in the year 2016. The Company also has net operating loss
carryovers still available from 1996 in the amount of $35,337 and from 1998 in
the amount of $67,462 that expire in the years 2011 and 2013 respectively.
Listed below are the years, amounts and tax benefits of the net loss carryover
used:
2001 2000 1999
Net operating loss utilized
$ 46,031 $ 22,649 $ 91,809
Tax benefit 10,905 5,889 19,270
Tax rate 23.7% 26.0% 21.0%
The Company and its subsidiaries file unconsolidated tax returns. The entities
are not subject to IRC SEC. 1563.
L - DEBT OBLIGATIONS
The Company has incurred debt obligations principally through public and private
offerings and bank loans. Debt obligations consist of the following:
8% - 8.95% 2002 - 2009 $ 169,442 $ 206,563
9% - 9.95% 2002 - 2006 84,161 358,610
10% - 10.95% 2002 - 2017 530,631 603,358
11% - 11.95% 2002 - 2008 513,769 538,793
12%-14% 2002 - 2004 233,179 115,527
15% 2003 - 2004 7,579 7,579
Variable 2002 - 2005 163,232 235,791
Total Debt Obligations 1,701,993 2,066,221
Less: Amounts Maturing
Within one year 502,124 514,944
Net Long-Term Notes 1,199,869 1,551,277
Maturities of debt for the five years succeeding December 31, 2001 are a
follows:
2002 502,124
2003 205,493
2004 153,014
2005 114,266
2006 106,518
Beyond 620,578
Total 1,701,993
The above notes include various restrictions, none of which are presently
significant to the Company.
The debt obligations are secured by assets on the consolidated balance sheet
with a book value of $2,648,869 and an estimated fair value of $5,477,286.
There are no compensating cash balance requirements attached to any of the debt
instruments.
M - OPERATING LEASES
The Company leases out as office space a portion of the corporate headquarters
it owns. The allocated cost of the portion leased for 2001 and 2000 is $340,606
and $340,332 respectively and its allocated accumulated depreciation is $130,214
in 2001 and $118,079 in 2000.
The terms of lease agreements vary by tenant and circumstance; however, all
current lease agreements are for one year or less.
M - OPERATING LEASES - (Continued)
The Company also leases properties it owns in various states. These properties
are recorded in Property and Equipment with a cost of $3,383,071 in 2001 with
accumulated depreciation of $592,289 and $3,396,785 in 2000 with accumulated
depreciation of $658,013.
The Company leased a copier under a non-cancelable operating lease with a term
of five years in the year 2000. This lease replaced on old lease obtained in
1997. Rent expense that included maintenance, insurance and taxes was $15,005 in
the year 2001 and $11,270 in the year 2000. The following is a schedule by years
of future minimum rentals (equipment rent only) under the lease at December 31,
2001:
2002 $ 8,095
2003 8,095
2004 8,095
2005 8,095
Total $32,380
The present value of the minimum lease payments is $23,327.
N - INDUSTRY SEGMENTS
The information about the Company's operations in different industries is as
follows:
2001 2000 1999
Sales to unaffiliated customers:
Franchising 1,891,113 1,772,185 1,833,472
Financing & Investing 745,747 676,706 754,421
Leasing 8,229 450,667 507,064
Net profit (loss):
Franchising 80,584 31,598 14,957
Financing & Investing (12,645) 18,371 16,342
Leasing (58,908) 136,918 190,748
Identifiable assets:
Franchising 1,900,892 1,842,913 1,664,828
Financing & Investing 11,600,535 12,138,292 12,479,423
Leasing 2,918,409 3,725,798 3,683,599
Depreciation expense:
Franchising 42,139 53,746 71,292
Leasing 56,499 71,141 72,219
Amortization expense:
Franchising 21,079 21,079 21,079
Leasing 1,717 1,717 1,817
Additions in property, plant and equipment:
Franchising 5,362 62,568 12,883
Leasing 274 7,010 1,971
In the Financing & Investing Segment, the Company has included net income/
(loss) from unconsolidated equity investments totaling $(87,896) in 2001,
$(57,321) in 2000, and $(147,648) in 1999.
O - PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective depreciable
lives are summarized below:
Property and equipment are recorded at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the respective assets.
Maintenance and repairs are charged to expense as incurred. Major renewals and
betterments are capitalized. When items of property or equipment are sold or
retired, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is included in the statement of income.
Depreciable Lives
Land Improvements 10 - 37 years
Buildings 31 1/2 years
Furniture, Fixtures & Equipment 3 - 7 years
Leasehold Improvements Term of lease
Depreciation and amortization expense was $188,817 in 2001, $215,569 in 2000,
and $238,590 in 1999.
P - RELATED PARTY TRANSACTIONS
The CEO of the Company is an owner in two of the investments in which there have
been losses (See Investments in Unconsolidated Affiliates).
The Company is a joint owner in a barge with the CEO. The Company's investment
in the barge totaled $128,834 and $124,333 as of December 31, 2001 and December
31, 2000 respectively. Included in Accounts Receivable-Affiliates are expenses
totaling $36,805 paid for the barge in 2001.
P - RELATED PARTY TRANSACTIONS - (Continued)
In 2000, the Company took back land and a motel for the amounts of the unpaid
principal of $590,138 and accrued interest of $64,772 due from a corporation in
which the CEO is a 50% shareholder.
Included in Accounts Receivable-Affiliates are expenses totaling $148,925 in
2001 and $142,414 in 2000 for expenses the Company paid on behalf of Texas
Marine Development Corporation, the operating company for M/V Fantasea which is
owned by Extasea Casino Cruises of No. Fla, Inc. an investment in which the CEO
and some of the directors also have interests (See Investments in Unconsolidated
Affiliates). Receivables are also due from this investee company totaling
$390,508 in 2001 and $246,931 in 2000.
Also included in Accounts Receivable-Affiliates are expenses totaling $184,167
in 2001 and $22,295 in 2000 paid on behalf of the CEO.
The CEO's ownership of the Company's common stock was 50.85% as of December 31,
2001.
Other amounts included in Accounts Receivable-Affiliates are: matching capital
contributions due from the other 25% partner in the partnership in which the
Company is a 50% owner (See Investments in Unconsolidated Affiliates) totaling
$27,853 at the end of 2001 and 2000 and expenses paid on behalf of two
affiliates totaling $45,599 in 2001 and $26,352 in 2000. One of these affiliates
closed in the year 2000. The remaining balance of $18,117 due from this company
was written off to bad debt in that year.
The following is a schedule of loans to related parties:
Related Interest Principal Accrued Interest
Party Rate Balance Receivable
2001 2000 2001 2000
PTR Mortgage 10% 586,791 586,791 175,728 135,016
Partnership 6% - 10% 18,816 17,264 21,813 20,602
CEO 6% - 10% 4,975 52,811 25,323 21,574
Partnership 6% 436,185 436,185 69,491 23,521
Totals $ 1,046,767 $ 1,093,051 $ 292,355 $ 200,713
The following is a schedule of loans from related parties:
Related Interest Principal Accrued Interest
Party Maturities Rate Balance Receivable
2001 2000 2001 2000
Company 2002-2005 10% 207,377 207,377 134,056 113,318
Individual 2002-2005 12% 81,801 81,801 49,122 39,131
CEO 2002-2005 6% 129,813 129,813 31,156 15,578
Individual 2002-2005 15% 7,579 7,579 2,768 1,669
Individual 2002-2005 13% 10,350 18,850 19,380 17,628
Individual 2002 10% 526 526 210 158
Individual 2002 10% 30,868 0 514 0
Totals 468,314 445,946 237,206 187,482
Less: Amounts Maturing
within one year 149,195 118,327
Net Long-Term
Notes - Affiliates 319,119 327,619
Maturities of Long-Term:
2002 $ 149,195
2003
2004
2005
2006
Beyond 319,119
Total $ 468,314
Interest paid to related parties was $ 0 in 2001, $78 in 2000, and $9,888 in
1999.
Q - CAPITAL LEASES
Computers and hardware upgrades were purchased under two and three year lease
agreements in 1997. All had bargain purchase options and were recorded as
capital leases. One of the computers was sold to an employee in 2000.
The equipment valuation (the same as its estimated fair value) is as follows:
2001 2000
Computer Equipment 11,985 11,985
Accumulated Depreciation (10,786) (8,390)
Book Value 1,199 3,595
The leases were paid in full in 2000.
R - LITIGATION, CLAIMS AND ASSESSMENTS
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 the Company's being liable for any money.
The Company also has two cases where there is a trial for Declaratory Judgment
where the franchisee is seeking a determination as to the validity of the
franchise. In these cases, the Company is seeking damages under the franchise
agreement against the franchisee. In one case, the franchisee has filed a
counterclaim. Counsel expects the matter to be dismissed in a Motion for Summary
Judgment.
Legal fees paid during 2001, 2000 and 1999 were $256,539, $165,005, and $194,207
respectively.
S - STOCK ISSUANCE
In 2000, 20,000 shares of Red Carpet Inns International, Inc., common stock were
issued for 1,111 shares of Southern Scottish Inns, Inc., common stock. The
issuance was valued at fair market value ($0.60 per share) of Southern Scottish
Inns, Inc. common stock. Minority interest has been diluted by these stock
swaps.
T - LITIGATION SETTLEMENTS
From 1995 to 2001, the Company aggressively pursued its legal rights to its
trademarks. 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 all years that
significantly increased the revenues of the Company. Attorney fees related to
those settlements also increased in all years.
U - ADVERTISING COSTS
The franchising division collects advertising income to fund advertising
services that are provided to benefit franchisees. Advertising costs are
expensed as incurred with the exception of its semi-annual directories, which
are amortized on a monthly basis.
Following is a summary of advertising income and advertising costs for the years
ended December 31:
2001 2000 1999
Advertising Income 273,914 283,491 302,979
Advertising Costs (607,129) (581,382) (556,259)
Excess of Advertising Costs over
Advertising Income (333,215) (297,891) (253,280)
U - ADVERTISING COSTS - (Continued)
The Company also prepaid advertising costs in the amount of $27,737 for the 2001
directory in the year 2000 and $27,737 in the year 2001 for the 2002 directory.
V - CONTINGENCIES
The amount of accounts receivable in litigation or collections was $35,410 at
the end of 2001 and $22,848 at the end of 2000. It is management's and
counsel's opinion that the chances for collection are good.
The Company's franchising division pays commissions to its sales representatives
on franchises sold. The Company policy is to pay the sales person based on
receipts of royalties from the franchisee. The commissions are recognized as
earned when the franchisee pays the royalty fees.
Estimated contingent commissions for future years are approximately $80,784.
This amount has not been accrued.
The Company is the defendant in various legal actions. In the opinion of
management and counsel such actions will not materially affect the financial
position or results of operations of the Company (See Litigation, Claims, and
Assessments).
W - FINANCIAL INSTRUMENTS
I. MARKET AND OFF BALANCE SHEET RISK
The Company holds financial instruments that relate to real estate located
throughout the Southeast. If these properties decline significantly in market
value, the valuation of the associated receivable could become impaired. No
such decline is foreseen at the present time.
In 1996, the Company had two secured mortgage notes classified as non
performing. They totaled $2,482,861 with accrued interest of $382,099 at
December 31, 1996. On December 31, 1997, the Company foreclosed one of the
mortgages and took back the land and motel for the amounts of the unpaid
principal of $1,008,971 and accrued interest of $163,756. (The operating income
of this motel is not included in the Company's income statement in 1997 nor were
the two prior years' operating results available from the prior owners). In
1998, the motel was leased to a management company. In 1999, the land and motel
obtained in 1997 by foreclosure was sold for $1,100,000. The remaining non-
performing note totaled $1,473,990 at December 31, 2000 with accrued interest of
$185,102 at December 31, 2000. The Company foreclosed this note in the year
2001 and sold the land and motel taken back (See Cash Flow).
In 1998, the Company pledged one of its properties as security for a second
mortgage on a building owned by the partnership in which it has a 50% ownership
(See Investments in Unconsolidated Affiliates). The book value and market value
of the pledged property was $530,733 and $2,382,981 respectively at December 31,
2001.
II. FAIR VALUE OF FINANCIAL INSTRUMENTS
INVESTMENTS - It is not practicable to estimate the fair value of investments
because there are no quoted market prices for its untraded common stock
investments, and a reasonable estimate of fair value could not be made without
incurring excessive costs.
MORTGAGES AND NOTES RECEIVABLE - The fair value of the mortgage and notes
receivable was determined by management estimates of the property values that
secure the mortgage notes. The fair value of these instruments is $5,520,193 at
December 31, 2001 and $6,685,800 at December 31, 2000, the carrying values on
the balance sheet.
MORTGAGES AND NOTES PAYABLE - The fair value of long-term debt equals the
carrying value. Fair values for these instruments are $1,701,993 in 2001 and
$2,066,221 in 2000.
III. ENVIRONMENTALLY SENSITIVE PROPERTY
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 is
known. However, it is possible that an approximately five and one-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 of 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 remaining land is carried at $55,647.
IV. YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any of the
computer programs or hardware that have date - sensitive hardware or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000.
The Company addressed year 2000 compliance in the normal upgrading of its
computer programs and replacement of defective hardware and had all systems in
compliance by June 30, 1999. The Company experienced no problems related to
Y2K.
X- LONG-TERM LIABILITIES AND DEFERRED AMOUNTS
Deferred Severance Pay reflects amounts due to officers of the corporation,
which have been earned to date for continued service. Since the arrangement is
not a qualified plan for federal income taxes, the expense recognized for
financial statement purposes is not deductible for tax until paid. The deferral
of this tax deduction is recognized as deferred tax asset (See Income Tax).
Y - DISCONTINUED OPERATIONS
The furniture sales division of the Company was closed in February 1998. Gross
profits derived from the furniture sales division are disclosed in Note C -
Inventory. Losses from the operations of the division, net of tax benefits /
(expenses) of $0 in 2001, $0 in 2000, and $856 in 1999. Costs to close the
division were minimal.
Exhibit 22
Wholly Owned Subsidiaries of Southern Scottish Inns, Incorporated:
Alabama Motel Corporation
Carriage Inn of Huntsville, Inc.
Gulfside Mortgage Company
Hospitality Mortgage Company
Houmas Hospitality Corporation
Labove Apartment Company
LAFLA, Inc.
Mid. Continent Supply of Louisiana
Morgan City Hospitality, Inc.
Scottish Venture One, Inc.
Scottish Venture/Canton, Inc.
Southern Inns of Arkansas, Inc.
Southern Scottish Inns No. 1, Inc.
Southern Scottish Inns No. 2, Inc.
Southern Scottish Inns No. 4, Inc.
Southern Scottish Inns of Miss, Inc.
Spanish Trail Hospitality, Inc.
Zane Enterprises
Partially Owned Subsidiaries of Southern Scottish Inns, Incorporated:
Hospitality International Real Estate, Inc.
Hospitality International, Inc.
Red Carpet Inns International, Inc.
Scottish Ventures No. 2, LLC
EXHIBIT 27
<FISCAL-YEAR-END> DEC-31-2001
<PERIOD-END> DEC-31-2001
<PERIOD-TYPE> YEAR
<CASH> 160,400
<SECURITIES> 0
<RECEIVABLES> 2,329,225
<ALLOWANCES> 0
<INVENTORY> 40,749
<CURRENT-ASSETS> 2,672,532
<PP&E> 4,686,385
<DEPRECIATION> (1,167,477)
<TOTAL ASSETS> 12,766,299
<CURRENT-LIABILITIES> 1,289,449
<BONDS> 1,201,987
<COMMON> 6,023,981
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<OTHER-SE> 3,008,595
<TOTAL-LIABILITY-AND-EQUITY> 12,766,299
<SALES> 0
<TOTAL-REVENUES> 3,436,304
<CGS> 0
<TOTAL-COST> 0
<OTHER-EXPENSE> 3,625,572
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 207,957
<INCOME-PRETAX> (189,268)
<INCOME-TAX> 57,549
<INCOME-CONTINUING> (131,719)
<DISCONTINUED> 0
<EXTRAORDINARY> (20,205)
<CHANGES> 0
<NET-INCOME> (151,924)
<ESP-PRIMARY> (.08)
<ESP-DILUTED> (.06)
Exhibit Index
Exhibit
1. Inapplicable
2. Inapplicable
3. Exhibit 3 (a) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1983 is hereby incorporated by reference
(Articles of Incorporation of Southern Scottish Inns, Inc. as amended)
(b) Exhibit 3 (b) to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1983 is hereby incorporated by reference (by-laws of
outhern Scottish Inns, Inc.).
4. Specimen Common Stock Certificate
5. Inapplicable
6. Inapplicable
7. Inapplicable
8. Inapplicable
9. Inapplicable
10. Material Contracts (Asset Sales - Lease Agreements)
11. Earnings per Share Computation
12. Security Ownership of Certain Beneficial Owners & Management
13. Inapplicable
14. Inapplicable
15. Inapplicable
16. Inapplicable
17. Inapplicable
18. Inapplicable
19. Inapplicable
20. Inapplicable
21. Inapplicable
22. List of Subsidiaries of Southern Scottish Inns, Inc.
23. Inapplicable
24. Inapplicable
25. Inapplicable
26. Inapplicable
27. Inapplicable
28. Inapplicable
29. Inapplicable