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, 1997
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, 1997 was $1,226,151. 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 980,921 shares.
The number of shares outstanding of the Registrant's Common Stock as of
December 31 1997, was 2,349,729 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, 1997, 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, 1997 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 show the
various different business holdings for the last five years.
<TABLE>
<CAPTION>
12/97 12/96 12/95 12/94 12/93
<S> <C> <C> <C> <C> <C>
Motel Franchises Held
- Total 239 262 269 343 354
Master Hosts Inns 5 12 11 18 21
Red Carpet Inn 95 107 112 147 147
Scottish Inns 126 128 130 156 163
Downtowner Inns - 2 4 2 3 3
Passport Inns - 11 11 14 19 20
Motel Operated - Total 0 0 0 0 0
Master Hosts Inns 0 0 0 0 0
Red Carpet Inns 0 0 0 0 0
Scottish Inns 0 0 0 0 0
Independent 0 0 0 0 0
Motel Owned & Leased To
Operators - Total 3 4 4 4 5
Master Hosts Inns 0 1 1 1 1
Red Carpet Inn 1 1 1 1 1
Scottish Inns 2 1 1 2 3
Independent 0 1 1 0 0
Free Standing Restaurants
Owned 0 0 0 0 0
Leased In - Note 1 1 1 1 1 1
Operated 0 0 0 0 0
Subleased - Note 1 1 1 1 1 1
Vacant 0 0 0 0 0
Wrap Around Mortgages
or Other types of
Financing Held 13 13 14 13 11
Parcels of Land Held
for Investment or
Development 6 5 3 3 3
</TABLE>
Note 1. One property leased from a third party is 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.
<TABLE>
<CAPTION>
Segment Information
for the Year Ended Dec. 31,
1997 1996 1995
<S> <C> <C> <C>
Franchising:
Revenues 2,060,922 2,347,965 2,816,074
Operating Profit (Loss) 60,832 100,709 (434,218)
Financing & Investing:
Revenues 774,449 1,151,339 1,701,901
Operating Profit (Loss) (193,303) (1,352,308) 1,282,
707
Leasing:
Revenues 741,718 786,957 913,602
Operating Profit (Loss) 266,360 302,744 390,175
</TABLE>
(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 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 tends 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.
(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 down-scaling 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 Contracts
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
compete 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 may soon be significantly
affected by over-development in some 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
(5.3) 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 5.3 acres, therefore, may not be diminished. The 5.3 acre tract is
carried on the Company's books at $55,647.
(XIII) Employees
<TABLE>
<CAPTION>
Division 12/97 12/96 12/95
<S> <C> <C> <C>
Lodging Leased to Outsiders
- Note 3 110 108 95
Franchise Division 38 36 45
Administrative & Finance 7 8 6
Total 155 152 146
</TABLE>
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:
<TABLE>
<CAPTION>
Amount Underlying
Location Description Receivable Mortgages
<S> <C> <C> <C>
Jacksonville, FL
(Arlington Rd) 120 Room Motel - 0 - Note 4 -0-
on 3.5 acres
Bald Knob, AR 42 Room Motel 252,189.11 -0-
Gretna, LA 45 Room Motel 223,375.48 -0-
Gulfport, MS Office & Warehouse Bld. 154,744.30 24,068.48
</TABLE>
Note 4. Technically, this was still an equitable mortgage as of 12-31-97.
However, there had been a declared and uncured default, an action for
foreclosure filed and as of 12-31-97 an instrument had been executed by
mortgagor and mortgagee agreeing for delivery of the property to mortgagee as
of 1-3-98. Therefore, the amount of this mortgage is not reflected in the
totals or sub-totals appearing herein and the property is shown as an "owned"
property.
<TABLE>
<CAPTION>
Amount Underlying
Location Description Receivable Mortgages
<S> <C> <C> <C>
Hattiesburg, MS 48 Room Motel 391,269.91 -0-
Jacksonville, FL 144 Room Motel 1,473,989.51 -0-
(Lane Ave.) on 4 acres
McComb, MS 51 Room Motel 297,340.57 6,270.44
Marrero, LA 100 Room Motel 461,726.33 -0-
on 2.5 acres
Morgan City, LA 49 Room Motel 274,513.93 -0-
Natchez, MS 100 Room Motel 806,264.95 *187,789.25
New Iberia, LA 80 Room Motel 590,137.64 215,458.97
Sabine Pass, TX 30 Room Motel 303,205.71 -0-
</TABLE>
* While the indenture in favor of a bank in connection with this
receivable is not a mortgage, an original sum of $475,000.00 of the
receivable was assigned and pledged in 1990 to a bank and might be
considered as being in the nature of an underlying mortgage. Said
$475,000 is reduced to $187,789.25.
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.
<TABLE>
<CAPTION>
Location Description Mortgage Balance
<S> <C> <C>
Houma, LA - Note 5. 120 Room Motel $ 383,156.58
Marietta, GA - Note 6. 154 Room Motel 729,701.37
Vicksburg, MS - Note 5. 100 Room Motel -0-
Jacksonville, FL (Arlington Rd.) 120 Room Motel -0-
</TABLE>
Note 5. These properties, on April 1, 1990, were leased to First
Hospitality Management Corporation, a corporation owned by Timothy J. DeSandro,
a former employee of the Company.
Note 6. The Marietta property in 1992 was operated by the Company.
From 1993 through 1995, it was leased to Timothy J. DeSandro, a former employee
of the Company. Since the first part of 1996, it has been leased to First
Hospitality Management Company, a corporation owned by Mr. DeSandro.
Also, until August 2, 1991, the Company operated one "Omelet House" restaurant
located in New Iberia, Louisiana, which it leases from an individual. On
August 1, 1991, the Company entered into a rental agreement with Alfred W.
Schoeffler, who operated same from August 3, 1991, through September 24, 1992;
the property was vacant until March of 1993, at which time the property was
leased to First Hospitality Management Corporation.
The following table sets forth certain information, as of this writing,
concerning other properties owned by the company.
<TABLE>
<CAPTION>
Location Description Mortgage Balance
<S> <C> <C>
Atlanta, GA Warehouse, on two parcels of land $219,988.87
(1.2 Acres), 22,220 square feet,
heated & air conditioned including
1,300 square feet of showroom/office.
Gulfport, MS Unimproved land (4) lots in city
of Gulfport 19,181.46
Madison County, MS 3.0 acre tract of land at $300 per month
Ross Barnett Reservoir on which land lease
was a night club when property
was acquired. The building had
been untenantable, was deemed
to be economically unfeasible to
repair and was recently razed.
Land is leased from Pearl River
Valley Water Supply District
and the leasehold is marketable
by approved assignment, sublease
or redevelopment.
Pass Christian, MS 46 Residential lots located -0-
In Blue Lake Subdivision.
Held for investment.
Pass Christian, MS Partially improved water-front
Property 80,064.10
</TABLE>
Item 3 Legal Proceedings
Waymon Barron, Plaintiff, v. Southern Scottish Inns, of
Mississippi, Inc., et al, Defendants
On or about September 4, 1986, a Complaint for damages for negligence and
breach of implied warranty was filed in the circuit Court of Warren County,
Mississippi, styled Waymon Barron v. Motel Recovery & Development, Ltd., d/b/a
Scottish Inn of Vicksburg, a Partnership, Lewis Slaughter and Southern Scottish
Inns, Inc., General Partner, and Sam Patel, bearing Cause No. 14,307 on the
docket of said Court. Service of Process was not had on Registrant.
On or about August 10, 1987, an Amended Complaint for damages in the same
matter was filed in the same Court, styled Waymon Barron v. Motel Recovery &
Development, a Limited Partnership, Lewis Slaughter and Reba Slaughter, General
Partners, Scott Yeoman and James Johnstone, Limited Partners; Southern Scottish
Inns of Mississippi, Inc., N. V. Patel and Sam Patel, bearing Cause No. 14,307
C on the docket of said Court. Later, Registrant and Hospitality
International, Inc., a partially owned subsidiary of the Company, were made
additional party Defendants. The Company and its defendant subsidiaries have
obtained separate counsel, answered the complaints and are preparing defenses.
The Amended Complaint demands judgement of $1,500,000 plus interest and costs
of Court, and trial by jury.
The Amended Complaint alleges that Plaintiff on October 26, 1985, while a guest
in Room 101 of the Scottish Inn in Vicksburg stepped onto a rotten place in the
floor, that his leg went through and he fell injuring his back, which injury
required surgery and resulted in loss of wage earning ability and loss of his
ability to enjoy life.
On October 25, 1985, the date Mr. Barron checked into said room and on October
26, 1985, the date of his injury, the record title of the Scottish Inn in
Vicksburg was in Defendant Southern Scottish Inns of Miss., Inc. The motel was
not being operated by said subsidiary of the Company or the Registrant on
either of said dates.
On January 26, 1984, this motel was the subject of a Contract For Deed with
Defendants Lewis Slaughter and Reba K. Slaughter, his wife. Subsequently, and
prior to August of 1984, said Defendants transferred their rights, duties and
interest under and in the Contract For Deed to Defendant Motel Recovery and
Development, a limited partnership, of which the named individual persons were
the general or limited partners. In August of 1984, Motel Recovery and
Development, leased the subject motel to Defendant N. V. Patel. On October 2,
1984, Registrant and its defendant subsidiary recognized the transfer from Mr.
and Mrs. Slaughter to Motel Recovery and Development and the lease from Motel
Recovery and development to N. V. Patel. In May of 1986, Registrant and its
defendant subsidiary, through surrender of possession and of operation of Mr.
Patel and Motel Recovery and Development regained possession and leased same.
For some time, the Plaintiff did not diligently pursue this claim, except for
the taking of depositions of the Plaintiff's doctor and of an expert building
tradesman. Motions for Summary Judgement were filed by the Co-Defendant,
Southern Scottish Inns of Miss., Inc. Also, Hospitality International, Inc.
filed a motion for Summary Judgement. Circa October 31, 1993, the Court file
reflects that during the last eight (8) months, the insurer for our Franchisee
settled on behalf of Hospitality with the Plaintiff and Hospitality
International was dismissed. During the current reporting period, the
Registrant was dismissed on Summary Judgement and Southern Scottish Inns of
Mississippi, Inc. was dismissed on Summary Judgements. Plaintiff has appealed
both dismissals and the appeals are pending.
The appeals to the Court of Appeals of the State of Mississippi resulted in
affirmations of the judgements of the Circuit Court of Warren County.
Plaintiff then filed a Petition for Writ of Certiorari as to both defendants
and on September 22, 1998, the Supreme Court of Mississippi by Order denied the
Petition for Writ of Certiorari.
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted to a Vote of Security Holders during 1997.
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,
mark-downs, or other fees or commissions, and do not represent actual
transactions.
<TABLE>
<CAPTION>
Bid Price Bid Price
1996 High Low High Low
<S> <C> <C> <C> <C>
1st Quarter $ 1.25 $ 1.25 $1.75 $1.75
2nd Quarter $ 1.25 $ 1.25 $1.75 $1.75
3rd Quarter $ 1.25 $ 1.25 $1.75 $1.75
4th Quarter $ 1.25 $ 1.25 $1.75 $1.75
</TABLE>
<TABLE>
<CAPTION>
Bid Price Bid Price
1997 High Low High Low
<S> <C> <C> <C> <C>
1st Quarter $1.25 $1.25 $1.75 $1.75
2nd Quarter $1.25 $1.25 $1.75 $1.75
3rd Quarter $1.25 $1.25 $1.75 $1.75
4th Quarter $1.25 $1.25 $1.75 $1.75
(b) As of this writing, there are approximately 936 shareholders of the
Registrant's common stock.
(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.
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
REVENUE $4,396,435 4,911,874 6,193,245 4,986,55 4,151,305
NET INCOME 30,443 (815,303) 851,209
363,480 210,678
EARNINGS PER
SHARE 0.01 (0.35) 0.37 0.16 0.09
TOTAL ASSETS 15,361,888 15,084,285 16,259,446 14,079,146 13,915,514
LONG TERM
DEBT 2,726,135 2,978,560 2,710,577 2,294,691 2,356,475
STOCKHOLDERS'
EQUITY 8,016,677 7,946,090 8,764,807 7,913,598 8,231,133
CASH DIVIDENDS
PER SHARE -0- - 0 - - 0 - - 0 - - 0 -
</TABLE>
Item 7 Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Summary of Operations For the Year Ended 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 % 1996 % 1995 % 1994 % 1993
<S> <C> <C> <C> <C> <C>
TOTAL
ASSETS 15,361,888 3 14,928,410 -9 16,259,446 13 14,079,146 1 13,915,514
TOTAL EQUITY
CAPITAL 8,016,677 1 7,946,090 -10 8,764,807 10 7,913,598 -4 8,231,133
OPERATING
INCOME 4,396,435 -12 4,911,874 -26 6,193,245 19 4,986,556 17 4,151,305
OPERATING
EXPENSE 4,308,860 -42 6,127,234 24 4,673,076 11 4,168,764 14 3,603,958
INCOME BEFORE
TAXES 87,575 (1,215,360) 1,520,169 817,792
547,347
INCOME TAXES (44,998) 424,544 (584,530) (316,199) (208,350)
NET INCOME 30,443 (815,303) 851,209 363,480 210,678
NET INCOME
PER SHARE 0.01 (0.35) 0.37 0.16 0.09
</TABLE>
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, 1997, 1996 and 1995.
The preceding chart relects the most recent five years of the Company's
operations. In 1997, operations resulted in income before income taxes of
$87,575 as compared to a loss of $1,215,360 in 1996 and income of $1,520,169 in
1994. In 1995, the Company recognized a gain of $738,833 from an ownership in
a partnership. The recognition of the gain was deferred until 1996 for
tax purposes. The partnership was undecided as to whether it would
liquidate the proceeds or reinvest the monies. In 1996, the partnership
decided to distribute the monies. The capital received by the Company did
equal the Company's investment in the partnership. However, a loss of $699,346
was recognized on the income statement. Also, in 1996 the Company wrote off
outstanding loans in the amount of $594,808. Those write-offs were to
companies in which the Company had vested interests.
Franchising revenues continue to drop, as do the number of franchises and the
number or rooms available within the systems. The decreases are due to
increased competition from other franchisors offering mutli-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 drop in revenues, the company has decreased its administrative cost by
7.5% between 1997 and 1996 and 18.8% between 1996 and 1995. 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. Revenues in this area generated gross revenues of
$435,570 in 1997, $100,741 in 1996 and $664,441 in 1995.
Financing revenues continue to drop because interest on the notes receivable is
declining as the notes move to maturity. Mortgages and notes receivable
balances are declingin due to payment on the principal and the foreclosure of
one note. The property was placed into fixed assets and is being leased by
another non-affiliated entity.
Leasing revenues are declining due to the restructuring of the lease agreements
due to economic conditions, such as the Olympics in Atlanta in 1996 and new
competition at other locations.
Liquidity:
The question of liquidity should not be an issue in the near future. The cash
flow from the Arlington property which was taken back formerly generated
approximately $145,000 a year. The non-affiliated entity leasing properties
from the Company is in arrears in its lease payments. The company is taking
steps to insure payments from the leasee are brought current. If cash
requirements became an issue, any of the notes could be sold at a discount.
However, there is not 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 loosening of credit with
regard to new motel construction but has not changed perceptively 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 tighter credit on the
purchase 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.
<TABLE>
<CAPTION>
POSITION AND TERM
NAME AGE WITH REGISTRANT
<S> <C> <C>
Bobby E. Guimbellot 57 CEO - 23 Years
Director - 25 Years
Michael M. Bush 49 Director - 16 Years
Donald Deaton 67 Director - 11 Years
Jack M. Dubard 66 President - 4 Years
Director - 9 Years
C. Guy Lowe, Jr. 62 Director - 25 Years
Gretchen W. Nini 50 Director - 11 Years
Harry C. McIntire 68 Chairman - 4 Years
Director - 21 Years
George O. Swindell 60 Director - 22 Years
Richard A. Johnson 53 Director - 8 Years
Melanie Campbell Hanemann 42 Director - 7 Years
John L. Snyder, Jr. 71 Director - 7 Years
Melinda P. Hotho 35 Director - 4 Years
</TABLE>
The Board of Directors of the Company held no regularly scheduled meeting in
1997.
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.
Donald Deaton a Vice President of Hospitality International, Inc., a motel
franchising company and subsidiary of the Registrant.
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.
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 given Registrant notice that he is closing Securities
Transfer Company at Calendar year end.
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, 1997, the Company paid aggregate
cash compensation in the amount of $75,000.00 to Mr. Guimbellot, the
Registrant's then President and present Chief Executive Officer. His salary
was partially deferred and he is owed $121,205.27, from prior periods. In
1997, the Company paid aggregate cash compensation in the amount of $73,054 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.
<TABLE>
<CAPTION>
Amount and Nature Present
Name Address of of Beneficial Percent
Beneficial Owner Ownership Of Class - Note 7
<S> <C> <C>
Bobby E. Guimbellot 1,165,594 49.60%
1726 Montreal Circle
Tucker, Georgia 30084 Note 8
Harry C. McIntire 161,289 6.86%
Roswell, GA Note 9
</TABLE>
Note 7 Based on 2,349,729 shares outstanding.
Note 8 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. Ms. Campbell shares voting rights as to
Industrial Funds shares with Mr. Guimbellot.
Note 9 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 the
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.
<TABLE>
<CAPTION>
Amount and Nature Present
Name of of Beneficial Percent
Beneficial Owner Ownership Of Class - Note 10
<S> <C> <C>
Michael W. Bush Note 11 3,611 .15%
Donald Deaton 3,660 .15%
Timothy DeSandro 2,448 .10%
Jack M. Dubard Note 12 8,907 .37%
Bobby E. Guimbellot Note 13 1,165,594 49.60%
Melanie Campbell Hanemann 2,600 .11%
Richard A. Johnson 10,400 .44%
C. Guy Lowe, Jr. 1,335 .05%
Harry C. McIntire Note 14 161,289 6.86%
Gretchen W. Nini Note 15 4,801 .20%
George O. Swindell 1,563 .06%
John L. Snyder, Jr. 2,600 .11%
1,368,808 58.20%
</TABLE>
Note 10 Based on 2,349,729 shares outstanding.
Note 11 Includes 250 shares in the name of his minor son.
Note 12 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.
Note 13 Includes 513 shares in the name of his wife.
Note 14 Voting and investment powers on 113,331 shares are shared
with his wife.
Note 15 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.
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 16
Consolidated balance sheets of the Company as of December 31, 1997
and 1996.
Consolidated statements of changes in cash flow of the Company for
the Fiscal Years ended December 31, 1997 and 1996.
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 16 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 Robert J. Clark of Roswell,
Georgia. Mr. Clark had done the Company's Audits for 1983 and 1984. Mr. Clark
had done the Audits of 1992 and 1993 for Red Carpet Inns International, Inc.,
an affiliate of Registrant. Mr. Clark has done the Audits for Hospitality
International, Inc., a partially owned subsidiary of Registrant, continuously
since 1982. From 1994 and for the foreseeable future, Mr. Clark 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
charge 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: By:
Bobby E. Guimbellot Date Jack M. Dubard Date
Chief Executive Officer President & CFO
SIGNATURES (Cont.)
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
Donald Deaton Date Harry C. McIntire Date
Director Director
Jack M. Dubard Date Gretchen W. Nini Date
Director Director
Bobby E. Guimbellot Date John Snyder Date
Director Director
Melinda P. Hotho Date George O. Swindell Date
Director Director
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE NO.
<S> <C>
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 10-26
</TABLE>
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, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the periods ended December 31, 1997. 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southern Scottish
Inns, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the periods ended December 31, 1997, in conformity with
generally accepted accounting principles.
ROBERT J. CLARK, PC
Certified Public Accountants
Roswell, Georgia
October 31, 1998
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CURRENT ASSETS
Cash 74,232 100,300
Accounts Receivable-Net (Note G) 952,316 605,032
Accounts Receivable-Affiliates (Note G and P) 146,784 13,547
Income Tax Receivable (Note K) 26,993 0
Mortgages & Notes-Affiliates (Note G and P) 105,835 95,103
Mortgages & Notes Receivable (Note G) 411,167 361,020
Inventory (Note C) 54,429 105,935
Prepaid Expenses 67,791 72,214
Loans - Employees (Note H) 500 9,135
Interest Receivable 445,934 515,549
Deferred Tax Asset (Note K) 19,459 35,575
TOTAL CURRENT ASSETS 2,305,440 1,913,410
PROPERTY AND EQUIPMENT (Note O)
Land 1,720,800 1,378,867
Buildings & Building Improvements 3,841,941 2,822,969
Furniture, Fixtures & Equipment 924,290 1,248,129
Leasehold Improvements 3,337 3,337
Total Property & Equipment 6,490,368 5,453,302
Less: Accumulated Depreciation (1,331,640) (1,418,802)
PROPERTY AND EQUIPMENT - NET 5,158,728 4,034,500
OTHER ASSETS
Mortgages & Notes Receivable 4,453,081 5,617,000
Mortgages & Notes-Affiliates (Note P) 1,244,002 1,283,554
Investments in Unconsolidated Affiliates (Note I) 555,786 568,646
Investment in Real Estate 228,449 22,500
Trademarks - Net (Notes J and P) 1,381,346 1,424,175
Organization Cost 3,030 0
Deposits 5,897 4,692
Deferred Tax Asset (Note K) 170,195 200,819
Deferred Tax Asset Valuation Allowance 4,789 0
Marketable Equity Securities, Carried at Market 15,525 14,989
TOTAL OTHER ASSETS 8,062,100 9,136,375
TOTAL ASSETS 15,526,268 15,084,285
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable - Trade 177,915 196,274
Interest Payable 191,034 131,810
Taxes Payable 86,352 108,543
Other Taxes Payable 444,100 375,042
Other Liabilities 243,993 338,256
Due To/From Affiliates 0 0
Mortgages & Notes Payable (Note L) 602,867 516,144
Mortgages & Notes Payable-Affiliates (Note P) 214,783 131,978
Current Deferred Tax Liabilities 0 0
Deferred Severance Pay (Note Y) 12,000 12,000
TOTAL CURRENT LIABILITIES 1,973,044 1,810,047
LONG-TERM LIABILITIES
Mortgages & Notes Payable (Note L) 2,292,047 2,632,593
Mortgages & Notes Payable-Affiliates (Note P) 333,888 345,967
Escrow - Advance Construction Draw (Note Y) 100,200 0
TOTAL LONG-TERM LIABILITIES 2,726,135 2,978,560
DEFERRED AMOUNTS
Deferred Income-Installment 1,576,562 1,308,926
Deferred Income Taxes (Note K) 164,380 155,875
Deferred Severance Pay (Note Y) 257,705 82,000
TOTAL DEFERRED AMOUNTS 1,998,647 1,546,801
TOTAL LIABILITIES &
DEFERRED AMOUNTS 6,697,826 6,335,408
MINORITY INTEREST (Note A) 811,765 802,787
STOCKHOLDERS' EQUITY
Common Stock- no par value, Authorized
50,000,000 shares, Issued & Outstanding
2,349,729 6,003,871
5,963,727
Additional Paid in Capital 42,201 42,201
Retained Earnings 1,970,605 1,940,162
TOTAL STOCKHOLDERS' EQUITY 8,016,677 7,946,090
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 15,526,268 15,084,285
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
REVENUES
Franchising Revenues 2,060,922 2,347,965 2,816,074
Financing Revenues 683,505 791,239 777,851
Sale of Furniture 225,468 265,598 175
Operating Lease Revenues 741,718 786,957 913,602
Gain on Sale of Assets 78,764 360,100 554,398
Investment Income 12,180 0 374,216
Legal Settlement Revenues 435,570 100,741 664,441
Other Income 158,308 259,274 92,488
TOTAL REVENUES 4,396,435 4,911,874 6,193,245
COST & EXPENSES
Operating Expense-
Franchise Division 2,143,736 2,317,841 2,854,705
Operating Expense-
Financing & Investing 1,230,271 2,109,936 1,240,299
Cost of Sales -Furniture Sales 122,264 143,198 120
Interest Expense 417,536 308,237 307,871
Deprecation & Amortization 273,173 283,030 270,081
Investment Loss 120,551 87,068 0
Loss on Sale of Property 1,329 877,924 0
TOTAL COST & EXPENSES 4,308,860 6,127,234 4,673,076
Income (Loss) from Continuing Operations before
Taxes & Extraordinary Items 87,575 (1,215,360) 1,520,169
Less: Provisions
for Income Taxes (Note K) (44,998) 424,544 (584,530)
Income (Loss) before
Minority Interest 42,577 (790,816) 935,639
Less: Minority Interest in
Income (Loss) of
Consolidated Subsidiaries (12,134) (24,487) (84,430)
NET INCOME (LOSS) 30,443 (815,303) 851,209
INCOME (LOSS) PER SHARE
Income (Loss) per Share
from Operations before Taxes
and Minority Interest .04 (.52) .65
Income (Loss) per Share
before Minority Interest .02 (.34) .40
Net Income (Loss) per Common Share .01 (.35) .37
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY
YEAR ENDED DECEMBER 31, 1997,1996 AND 1995
<TABLE>
<CAPTION>
Number of
Common Additional
Shares Common Paid In Retained
Outstanding Stock Capital Earnings
<S> <C> <C> <C> <C>
Balance December 31, 1994 2,322,466 5,963,039 42,201 1,904,256
Net Income 851,209
Balance December 31, 1995 2,322,466 5,963,039 42,201 2,755,465
Shares Issued to Directors 500 688
Net Loss (815,303)
Balance December 31, 1996 2,322,966 5,963,727 42,201 1,940,162
Shares Issued to Directors
and Officers 26,763 40,144
Net Income 30,443
Balance December 31, 1997 2,349,729 6,003,871 42,201 1,970,605
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997,1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES
Net Income 30,443 (815,303) 851,209
Non-Cash Items Included in Net Income:
Depreciation and Amortization 273,173 283,030 270,080
Uncollectible Amounts 84,235 423,233 41,224
(Gain) Loss - Sale of Assets (74,236) 517,824 (554,954)
Deferred Income Recognized (16,083) (14,486) (13,048)
Discount Earned (27,871) (5,198) (3,752)
Investment Income-Affiliates 110,042 75,941 (833,291)
Minority Interest Income 12,134 24,487 84,430
Marketable Equity Security at
Market (2,626) (5,899) 0
Write off Note Payable (2,589) 0 0
Interest Receivable Converted
to Property (163,756) 0 0
Interest Receivable Adjustment 6,065 0 0
Bonus Reinstated 32,833 0 0
Note Receivable Credit (17,700) 0 0
Expense Paid for Note Payable 2,666 0 0
Accruals for Investments (48,337) 0 0
Accounts Receivable
Converted to Investment or Note (154,194) 0 0
Capital Stock for Directors' Fees 36,450 0 0
Miscellaneous 4,852 0 0
Net Changes In Current Assets and Liabilities:
Accounts Receivable (347,284) (177,405) 36,163
Accounts Receivable-Affiliates (133,237) 102,649 55,662
Inventories 51,506 (93,549) 120
Loan Receivable-Employee 8,635 (2,623) (6,513)
Deposits 7,885 2,917 13,878
Interest Receivable 69,615 (192,150) (110,034)
Prepaid Expense 3,306 101,796 (45,568)
Accounts Payable (18,359) 60,323 2,559
Interest Payable 59,224 50,339 (3,355)
Taxes Payable 46,867 (219,179) 193,557
Deferred Income Tax 23,463 (400,101) 396,809
Other Accrued Liabilities (94,263) (315,945) (97,353)
Deferred Severance Pay 175,705 94,000 0
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES (61,436) (505,299) 277,823
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES
Investment Distribution 16,563 0 415,000
Payments on Mortgages and
Notes Receivable - Incurred (17,431) (185,565) (565,453)
Collections on Mortgages
and Notes Receivable 632,423 558,611 117,527
Acquisition (Disposition)
of Fixed Assets (254,418) (449,255) (223,930)
Investment Purchases (126,773) 111,579 (85,827)
Payments Received for
Assets Sold 131,750 0 0
Advance Receipts for Investments 100,200 0 0
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES 482,314 35,370 (342,683)
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES
Proceeds from Notes Payable 272,523 643,355 814,900
Principal Payments on
Mortgages and Notes Payable (7,892) (211,689) (694,080)
Principal Payments on Capital
Lease Obligations (711,577) 0 (752)
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (446,946) 431,666 120,068
Increase (Decrease) in Cash (26,068) (38,263) 55,208
Cash - Beginning 100,300 138,563 83,355
Cash - Ending 74,232 100,300 138,563
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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 71.5 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. The
Company also provides a nationwide central reservation service for its
franchisees.
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
franchisor occurs when, 1) the franchisor 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 franchisor 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 a maturity of three months or less to be cash
equivalents.
The following non-cash transactions took place in 1997:
* The Company wrote off a note payable to an affiliate to consulting income in
the amount of $2,589 (See Related Party).
* The Company sold an automobile to an employee for $1,304 in exchange for a
note for the lack of consideration.
* The lease purchases of computer equipment were recorded as $22,285 and booked
as notes payables.
* The Company traded in an auto for another auto and took a new note
payable for the lack of consideration.
* A director's bonus was reinstated as a note in the amount of
$32,833 (See Related Party).
* A vehicle sold to an employee was repossessed and re-booked for the
balance of the loan of $2,800.
* The Company repossessed a motel and land for non-payment of the
mortgage.
* The property was reinstated for the amount of the note, $1,008,871
and accrued interest, $163,756.
* The Company booked notes payables and interest payable totaling
$147,466 to record equitable liabilities for its investment in two land
purchases.
* The Company exchanged a note receivable of $36,640 for the
remaining stock of the Labove Apartment Company and then sold the
underlying assets for a note receivable of $330,000 and $55,000
cash (See Investments in Unconsolidated Affiliates).
* The Company sold a warehouse for a note receivable of $155,000 and $5,000
cash.
The following non-cash transactions took place in 1996:
* The Company purchased land for $150,000, recorded a payable for
$129,000 and made a down payment of cash for $21,000.
* A computer was transferred from Hospitality International, Inc. to Southern
Scottish Inns, Inc. with a book value of $1,039.
* An investment in barges of $15,859 was written off. The sale of scrap
material of $1,271 was recorded as miscellaneous income.
* The Company disposed of furniture and equipment with a book value of $18,890.
* The Company transferred the sale of trademarks from a subsidiary for
$360,000.
* An investment in a motel was recorded as $212,506 and booked as a
note payable.
* The lease purchase of a computer was recorded as $16,180 and it was booked as
a note payable.
In 1995, the Company purchased an investment for $512,192 and recorded a
payable for the lack of consideration in the same amount. The cash was paid in
January 1996.
In 1997, the Company paid $59,257 in income taxes and approximately $358,919 in
interest.
In 1996, the Company paid $296,279 in income taxes and approximately $265,701
in interest.
In 1995, the Company paid $95,149 in income taxes and approximately $261,113 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:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Sales 225,468 265,598 175
Cost 122,264 143,198 120
GROSS PROFIT (LOSS) 103,204 122,400 55
</TABLE>
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 principle amount of
the obligation is received. This deferred income is shown on the balance sheet
as a deferred credit.
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
Net income (loss) per share is computed by dividing net income by the weighted
average number of shares outstanding during the period. The weighed average
number of shares outstanding for the years ending December 31, 1997 and 1996
was 2,336,348 and 2,322,966 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 the allowance account. Accounts
Receivables for 1997 and 1996 are presented net of allowance for doubtful
accounts of $110,487 and $88,939 respectively.
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. The management elected to
write off some of the accrued interest in 1997 and 1996. These notes amount to
$123,842 in 1997 and $78,196 in 1996. 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 1997
and 1996, the discounts totaled $234,771 and $262,642 respectively.
The weighted average interest rate of the mortgage notes held by the Company is
11.4 percent, and they range from 10 percent to 12.5 percent.
The Company plans to hold the notes until maturity.
Maturities over the next five (5) years are as follows:
<TABLE>
<S> <C>
1998 411,167
1999 125,298
2000 139,585
2001 145,535
2002 160,046
Beyond 3,882,617
</TABLE>
H - LOANS - EMPLOYEES
Loans-Employees represents travel advances and/or loans to employees.
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:
<TABLE>
<CAPTION>
% Ownership 1997 1996
<S> <C> <C> <C>
J. Puckett/ BuenaVista-
Partnership 25% 4,915 11,368
Houma Atrium Bldg.-
Partnership 50% 0 (58,388)
Labove Apartment Company 50% 0 111,520
Pan American Hospitality-
Partnership 13% (48,337) (48,337)
M/V FantaSea 35% 567,579 528,849
Hospitality Int'l
Real Estate, Inc. 75% (13,462) 23,634
Hospitality Insurance
Services, Inc. 75% (28,735) 0
Cherokee Towing and
Construction Co. 67% 73,826 0
</TABLE>
Various entities own the remaining interests in the unconsolidated affiliates.
No one other entity owns more than 50% of any unconsolidated affiliate.
In 1997, the remaining stock of Labove Apartment Company was acquired and the
underlying assets distributed for the stock. All the assets were sold for a
note receivable yielding a gain of $231,670. The sale is being treated under
the installment method for both book and tax. The gain recognized in 1997 was
$34,398 (See Cash Flow).
The Company's share of the Houma Atrium Building Partnership losses was $88,536
in 1997 and $100,242 in 1996. Losses on the investment been recognized up to
the Company's at risk amount. Unrecorded losses totaled $128,228 at December
31, 1997. The CEO of the Company owns the remaining 50% of this partnership
(See Related Party).
INVESTMENTS IN UNCONSOLIDATED AFFILIATES- (Continued)
Pan American Hospitality incurred losses in 1997 and 1996. The Company's
percentage of loss on the investment was $4,922 in 1997 and $21,503 in 1996.
In keeping with generally accepted accounting principles, the loss was not
reflected in the Company's books because the loss would reduce the investment
beyond zero, including its at risk amount. The CEO of the Company owns 31.65%
of this partnership (See Related Party).
Although the percentage of ownership in Pan American Hospitality Partnership is
less than 20 percent, the investment is accounted for under equity method
because the Company exercises significant control over its operations.
Negative investments reflect losses in excess of investment. The Company is at
risk up to at least the amount indicated.
The J. Puckett/Buena Vista Partnership dissolved in 1996. The remaining value
represents undistributed monies. The CEO was an 11% partner (See Related
Party).
The M/V FantaSea was originally named the M/V Commonwealth. The CEO as well as
some of the directors have interests in this investment (See Related Party).
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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current Assets $ 36,845 $ 66,114
Property and other assets, net 3,339,845 3,186,996
Current liabilities 425,163 206,987
Long-term debt and
other liabilities 4,410,000 4,369,474
Equity (1,458,473) (1,323,351)
</TABLE>
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 $331,816 and $288,987 on December 31, 1997 and
1996, 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 trade name "Red Carpet Inns" is also owned by the Company. 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.
INTANGIBLE ASSETS - TRADEMARKS (Continued)
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.
K - INCOME TAX
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal 17,205 67,507 155,153
State, local,
and franchise taxes 5,478 17,546 33,618
Total Current 22,683 85,053 188,771
Deferred Book Tax (Benefit):
Federal 16,523 (433,157) 335,957
State, local,
and franchise taxes 5,792 (76,440) 59,802
Total Deferred 22,315 (509,597) 395,759
Net Tax Expense(Benefit) 44,998 (424,544) 584,530
</TABLE>
The reconciliation of the difference between the federal statutory tax rate and
the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal statutory tax rate 38.5% 25.5% 33.6%
Deferred severance pay 24.0 - -
Undistributed earnings
from subsidiary - (2.5) -
Undistributed earnings
from partnership - - (16.4)
Net operating loss
Carryforward (55.2) (3.2) (4.4)
Change in bad debt reserve 9.5 (0.3) (0.5)
Amortization of trademarks (22.0) (0.7) (0.5)
State, local and franchise
taxes, net of federal
income taxes 2.4 (4.8) 1.5
Penalties 15.4 0.1 0.1
Nondeductible employee meals 5.8 0.3 0.4
Unrealized loss on securities - (13.4) -
Deferred income on
installment sales - (3.4) -
Other 1.2 (0.8) (1.4)
Effective tax rate 19.6% (3.2)% 12.4%
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current deferred income tax assets:
Net Operating loss
Carryforward 0 35,575 0
Change in reserve
for bad debts 16,039 0 0
Deferred severance pay 3,420 0 0
Total current deferred 19,459 35,575 0
Long-term deferred income tax assets:
Net operating loss
Carryforward 68,316 200,819 0
Change in reserve
for bad debts 28,433 0 0
Deferred severance pay 73,446 0 0
Total Long-Term Deferred 170,195 200,819 0
Current deferred income tax liabilities:
Change in reserve
for bad debts 0 0 16,985
Undistributed earnings from
Partnership 0 0 284,942
Total current deferred 0 0 301,927
Long-term deferred income tax liabilities:
Amortization on trademarks 62,242 48,159 17,655
Installment sale 102,138 107,716 0
Total long-term deferred 164,380 155,875 17,655
</TABLE>
In 1996, a reduction of $112,034 relating to a deferred tax gain on installment
sales was made to deferred tax liability valuation.
On December 31, 1991, Red Carpet Inns International, Inc. had an unused net
operating loss of $684,897 to be applied toward future taxable income. The
remaining loss carryforward was used against taxable income in 1995. A net
operating loss of $25,739 incurred in 1996 was used in 1997.
In 1996, Southern Scottish Inns, Inc. (SSI) had an unused net operating loss
(NOL) carryforward of $631,423. As a result of an IRS audit of SSI's 1996 tax
return and SSI's amendment of its 1994 tax returns, this NOL was reduced by
$291,998 and income tax receivables of $26,993 were recorded. Additionally,
SSI used $98,947 of the NOL in 1997, leaving $240,478 to be applied against
future income. The NOL expires in the year 2011.
Listed below are the years, amounts and tax benefits of the net loss
carryforward:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net operating loss utilized 125,456 0 197,564
Tax benefit 36,769 0 84,281
Tax rate 29.3% 0 43.0%
</TABLE>
The Company and its subsidiaries file unconsolidated tax returns. The entries
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:
<TABLE>
<CAPTION>
NOTES MATURITIES 1997 1996
<S> <C> <C> <C>
7% 1997 - 2006 0 18,724
8% - 8.95% 1998 - 2011 358,752 264,570
9% - 9.75% 1998 - 2007 801,518 988,724
10% - 10.50% 1998 - 2011 454,298 531,277
11% 1998 - 2008 567,350 595,730
12.50% 1996 - 1997 0 2,703
16.4%-17.65% 1998 - 1999 12,070 14,773
18.33%-21.98% 1998 - 2000 12,456 0
Variable 1998 - 2000 688,470 732,236
Total Debt Obligations 2,894,914 3,148,737
Less: Amounts Maturing
within one year 602,867 516,144
Net Long-Term Notes 2,292,047 2,632,593
</TABLE>
Maturities of debt for the five years succeeding December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998 602,867
1999 455,253
2000 371,248
2001 273,000
2002 121,901
Beyond 1,070,645
</TABLE>
The above notes include various restrictions, none of which are presently
significant to the Company.
The Company's mortgage on the building was payable in full on February 1,
1998. However, the Company obtained a bridge note through May 1, 1998 and
negotiated a 5-year note on June 1, 1998.
The debt obligations are secured by assets on the consolidated balance sheet
with a book value of $2,667,912 and a market value of $6,431,971.
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 building it owns. The
allocated cost of the portion leased is $331,350 and $326,852 for 1997 and 1996
and its allocated accumulated depreciation is $61,904 and $43,569 respectively.
The Company also leases properties it owns in various states. These properties
are recorded in Property & Equipment and total $2,697,806 with accumulated
depreciation of $545,017.
The terms of lease agreements vary by tenant and circumstance; however, all
current lease agreements are for one year or less.
In 1997, the Company signed a four-year lease for a copier. The lease did not
meet the requirements under FAS 13 for a capital lease and was recorded as an
operating lease. Rental expense for 1997 was $4,857. Future minimum rental
payments required through the year 2001 when the copier may be purchased for
its market value are as follows:
<TABLE>
<S> <C>
1998 $6,476
1999 $6,476
2000 $6,476
2001 $1,619
</TABLE>
N - INDUSTRY SEGMENTS
The information about the Company's operations in different industries is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Sales to unaffiliated customers:
Franchising 2,060,922 2,347,965 2,816,074
Financing & Investing 774,449 1,151,339 1,701,901
Leasing 741,718 786,957 913,602
Operating profit (loss):
Franchising 60,832 100,709 (434,218)
Financing & Investing (193,303) 1,352,308) 1,282,707
Leasing 266,360 302,744 390,175
Identifiable assets:
Franchising 1,793,979 1,205,667 1,380,145
Financing & Investing 13,657,619 8,560,241 9,799,032
Leasing 3,718,379 2,290,769 2,697,806
Depreciation expense:
Franchising 86,917 108,389 129,859
Leasing 75,014 56,133 60,217
Amortization expense:
Franchising 21,079 21,079 21,079
Leasing 1,583 1,359 0
Additions in property, plant and equipment:
Franchising 51,438 108,174 204,582
Leasing 4,504 0 19,348
</TABLE>
In the Financing & Investing Segment, the Company has included net income from
unconsolidated equity investments totaling $ 10,110 in 1997, $0 in 1996 and
$375,316 in 1995.
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 deprecation are removed from the
accounts and any gain or loss is included in the statement of income.
<TABLE>
<CAPTION>
Depreciable Lives
<S> <C>
Land Improvements 10 - 37 years
Buildings 30 1/2 years
Furniture, Fixtures & Equipment 3 - 7 years
Leasehold Improvements
Term of lease
</TABLE>
Depreciation and amortization expense was $273,173 in 1997, $ 283,030 in 1996
and $270,081 in 1995.
P - RELATED PARTY TRANSACTIONS
In 1996, the Company transferred the sale of trademarks from a subsidiary for
$360,000.
The Company purchased a mortgage note of a related unconsolidated partnership
from a third party in 1995. The mortgage is on the motel which the partnership
operates and derives its revenues. The mortgage was purchased for $350,000
cash when it had a carrying value of $481,943; therefore, the Company recorded
an original issue discount of $131,943.
The CEO of the Company is a partner in two of the investments in which there
have been losses. He also has interests in two other investments. (See
Investments in Unconsolidated Affiliates).
In 1997, the Company loaned an additional $5,000 to the CEO. The note plus 10%
interest is due in one year. The Company paid expenses on behalf of the CEO in
the amount of $4,175. These amounts are included in Receivables-Affiliates.
The Company also holds a mortgage in the amount of $590,138 from a corporation
in which the CEO is a 50% shareholder.
Also included in Accounts Receivable-Affiliates are expenses totaling $47,772,
which the Company paid on behalf of M/V FantaSea, an investment in which some
of the directors also have interests. The remaining balance in Accounts
Receivable-Affiliates, $94,937 reflects expenses paid on behalf of subsidiaries
through December 31, 1997.
In 1997, the Company wrote off a note payable of $2,589 due to an affiliate to
income (See Cash Flow).
In 1997, a bonus for a director was reinstated as a note payable for $32,833
which included accrued interest.
The following is a schedule of loans to related parties:
<TABLE>
<CAPTION>
RELATED INTEREST PRINCIPAL ACCRUED INTEREST
PARTY RATE BALANCE RECEIVABLE
12/31/97 12/31/96 12/31/97 12/31/96
<S> <C> <C> <C> <C> <C>
Partnership
Mortgage 10% 350,000 350,000 67,533 47,289
Partnership 10% 300,753 298,322 32,361 9,118
Partnership 6% - 10% 63,607 63,607 21,241 12,662
Corporation 10% 0 36,640 0 0
CEO 6% - 10% 45,339 40,339 7,271 4,782
Corporation 10.75% 590,138 589,749 13,918 3,188
Totals 1,349,837 1,378,657 142,324 77,039
</TABLE>
The following is a schedule of loans from related parties:
<TABLE>
<CAPTION>
RELATED INTEREST PRINCIPAL ACCRUED INTEREST
PARTY MATURITIES RATE BALANCE PAYABLE
12/31/97 12/31/96 12/31/97 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Company 1997-2001 15% 240,256 240,256 54,250 30,224
Director 1997 12% 18,028 5,239 290 1,077
Individual 1997-2001 12% 86,801 25,801 10,482 699
CEO 1997-2001 6% 100,990 100,990 68,314 56,195
Individual 1997-2001 15% 9,792 9,792 8,726 7,321
Individual 1997-2001 13% 45,935 45,935 15,672 11,595
Partnership 1997-2001 9% 0 2,589 0 0
Partnership 1997 15% 46,343 46,343 2,781 0
Individual 1997 10% 526 1,000 0 0
Totals 548,671 477,945 160,515 107,111
Less Amounts Maturing
within one Year 214,783 131,978
Net Long-Term
Notes - Affiliates 333,888 345,967
</TABLE>
<TABLE>
<CAPTION>
Maturities of Long-Term:
<S> <C>
1998 $ 214,783
1999 0
2000 0
2001 0
2002 0
Beyond 333,888
</TABLE>
Interest paid to related parties was $3,230 in 1997, $3,189 in 1996 and $3,043
in 1995.
Q - CAPITAL LEASES
Included in Property & Equipment under the category of Office Equipment is a
computer which is under a five year lease purchase agreement. In 1995, the
Company purchased the equipment for its fair value of $1,600.
In 1996, the Company obtained a computer system under a three-year lease
purchase agreement, recording $16,180 in equipment and $1,618 in depreciation
expense.
Additional 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.
The equipment valuation (the same as its fair value) is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer Equipment 29,465 16,180
Accumulated Depreciation 6,183 1,618
Book Value 23,282 14,562
</TABLE>
Minimum lease payments for each of the following years are:
<TABLE>
<CAPTION>
<S> <C>
1998 11,958
1999 7,793
2000 2,727
2001 0
2002 0
</TABLE>
R - LITIGATION, CLAIMS AND ASSESSMENTS
The Company is named as a defendant in 13 litigation claims along with other
parties who are primarily responsible (i.e. cases relating to injuries that
occurred at a franchisee's location, or where another party is directly
liable). For claims against a franchise location, the Company requires that
its franchisee maintain insurance coverage including the Company as an
additional insured. The Company has its own independent liability insurance
policy and an umbrella policy. The Company has placed its insurance carrier on
notice of all outstanding claims, and there are cases pending wherein the
Company is a primary defendant. The Company has received notice of insurance
coverage for each case in which it is named as a defendant either from its
insurance carrier, or from a carrier which has the Company named as an
additional insured. In certain personal injury cases, wherein the liability or
the value of a claim has not been determined, the Company has received, in
certain cases, notice that a defense is being provided under a reservation of
rights.
Legal fees paid during 1997,1996 and 1995 were $292,521, $130,275 and $233,142
respectively.
S - STOCK ISSUANCE TO OFFICERS
In 1997, 2,643 shares of Southern Scottish Inns' common stock were exchanged
for 44,333 shares of Red Carpet Inns International, Inc. common stock by two
directors and 24,300 shares were issued to directors and officers for board
meeting attendance. The issuance was valued at the fair market value ($1.50
per share) of Southern Scottish Inns' stock.
During 1996, 500 shares of Southern Scottish Inns' common stock were exchanged
for 9,000 shares of Red Carpet Inns International, Inc. common stock by a
director. The issuance was valued at the fair market value ($1.375 per share)
of Southern Scottish Inns' stock.
T - LITIGATION SETTLEMENTS
From 1995 to 1997, 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.
The Company is carrying a prepaid advertising balance for the years ending
1997,1996 and 1995 in the amount of $0, $1,864 and $85,678 respectively.
Following is a summary of advertising income and advertising costs for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Advertising Income
385,486 430,326 500,862
Advertising Costs (629,676) (747,879) (858,628)
Excess of Advertising
Costs over Advertising Income (244,190) (317,553) (357,766)
</TABLE>
V - CONTINGENCIES
The amount of accounts receivable in litigation or collections was $65,318 at
the end of 1997 and $20,664 in 1996. 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 $17,233.
The turnover of franchises makes the likelihood of payment only reasonably
possible; therefore, this amount has not been accrued.
As a second maker on a construction loan, Southern Scottish Inns, Inc. is
contingently liable for $630,615. The real estate and property converts to
Southern Scottish Inns, Inc. in case of default.
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.
The Company is carrying a 13 percent investment in a partnership which holds a
mortgage on a motel. This Partnership has had operating losses in previous
years and the Company has loaned the Partnership monies to fund its daily
operations. These loans total $300,753 and carry an interest rate ranging from
9 percent to 12 percent. The loans are due on demand; however, the Company
does not intend to call them in the near future.
The Company owns the mortgage note on the property of the Partnership (See
Related Party). Since the note was purchased at a discount and the estimated
fair value of the property exceeds the carrying value of the note, the Company
reasonably expects to recover the purchase price of the mortgage.
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 remaining non-
performing note totaled $1,473,990 with accrued interest of $250,151 at
December 31, 1997. The fair market value of the property secured by this
mortgage exceeds the balance of principal and accrued interest.
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 which
secure the mortgage note. The fair value of these instruments are $6,214,085
at December 31, 1997 and $7,356,677 at December 31, 1996, the carrying values
on the balance sheet.
LONG-TERM DEBT - The fair value of long-term debt equals the carrying value.
Fair values for these instruments are $3,443,585 in 1997 and $3,626,682 in
1996.
X - LIQUIDATION OF ASSETS
In 1995, the Company recognized a sale of $738,833 in the liquidation of assets
on a partnership owned but deferred recognition of the gain for tax purposes.
This deferral resulted in a deferred tax liability of $284,942 being reported
in the books. In 1996, the partnership was liquidated. The Company had a
balance in this investment after receiving the liquidation from the partnership
and wrote off $699,346 against its investment account. This resulted in a loss
of $699,346 which is reflected on the income statement.
In 1996, the Company wrote off outstanding loans in the amount of $594,808 to
companies in which it had vested interests.
Y- LONGTERM LIABILITIES AND DEFERRED AMOUNTS
Escrow-Advanced Construction Draw represents unspent monies advanced for the
construction of a Sundowner Inn in Canton, Mississippi by the future leasee and
purchasers of the property. Expenditures for the land totaled $229,411 in
1997.
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).
Z - SUBSEQUENT EVENTS
The furniture sales division of the company was closed in February 1998.
Exhibit 22
Wholly Owned Subsidiaries of Southern Scottish Inns, Incorporated
Carriage Inn of Huntsville, Inc.
Gulfside Mortgage Company
Hospitality Mortgage Company
Houmas Hospitality Corporation
Labove Apartment Company
LAFLA, Inc.
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.
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
Southern Hospitality Insurance Services, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> YEAR
<CASH> 74,232
<SECURITIES> 0
<RECEIVABLES> 2,089,529
<ALLOWANCES> 0
<INVENTORY> 54,429
<CURRENT-ASSETS> 2,305,440
<PP&E> 6,490,368
<DEPRECIATION> 1,331,640
<TOTAL-ASSETS> 15,526,268
<CURRENT-LIABILITIES> 1,973,044
<BONDS> 2,726,135
<COMMON> 6,003,871
0
0
<OTHER-SE> 2,824,571
<TOTAL-LIABILITY-AND-EQUITY> 15,526,268
<SALES> 225,468
<TOTAL-REVENUES> 4,396,435
<CGS> 0
<TOTAL-COSTS> 4,308,860
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 417,536
<INCOME-PRETAX> 87,575
<INCOME-TAX> (44,998)
<INCOME-CONTINUING> 42,577
<DISCONTINUED> 0
<EXTRAORDINARY> (12,134)
<CHANGES> 0
<NET-INCOME> 30,443
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.01)
</TABLE>
