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, 1999
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 X No
Indicate by check mark if disclosure of delinquent filers pursuant
to
Item 405 of Regulation S-K is not contained herein, and will not
be
contained, to the best of registrant's knowledge, in definitive
proxy or
information statements incorporated by reference in Part III of
this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by
nonaffiliated of
the registrant on December 31, 1999 was $720,991. 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
961,321 shares.
The number of shares outstanding of the Registrant's Common Stock
as of
December 31, 1999, was 2,365,284 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, 1999,
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, 1999 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>
12/99 12/98 12/97 12/96 12/95
<S> <C> <C> <C> <C> <C>
Motel Franchises Held - Total 228 227 239 262 269
Master Hosts Inns 2 4 5 12 11
Red Carpet Inn 98 96 95 107 112
Scottish Inns 118 120 126 128 130
Downtowner Inns - 2 2 2 4 2
Passport Inns - 8 5 11 11 14
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 3 4 3 4 4
Master Hosts Inns 0 0 1 1 1
Red Carpet Inn 1 1 1 1 1
Scottish Inns 2 2 2 1 1
Independent 0 1 0 1 1
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 13 13 14
Parcels of Land Held for Investment
or Development 6 6 6 5 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, 1999
1999 1998 1997
<S> <C> <C> <C>
Franchising:
Revenues 1,833,472 1,843,335 2,060,922
Operating Profit (Loss) 14,957 12,582 60,832
Financing & Investing:
Revenues 754,421 579,865 774,449
Operating Profit (Loss) 16,342 (99,264) (193,303)
Leasing:
Revenues 507,064 601,909 741,718
Operating Profit (Loss) 190,748 196,363 266,360
</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 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 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 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 contiguos 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
<TABLE>
<CAPTION>
Division 12/99 12/98 12/97
<S> <C> <C> <C>
Lodging Leased to Outsiders - Note 3 69 109 110
Franchise Division 32 40 38
Administrative & Finance 6 7 7
Total 107 156 155
</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>
Bald Knob, AR 42 Room Motel 242,028.88 -0-
Gulfport, MS Office & Warehouse Bld. 154,975.00 -0-
Hattiesburg, MS 48 Room Motel 365,206.28 -0-
Jacksonville, FL 144 Room Motel 1,473,989.51 -0-
(Lane Ave.)
Jacksonville, FL 120 Room Motel 1,100,000.00 -0-
(Arlington Rd.)
McComb, MS 51 Room Motel 279,507.09 3,406.60
Marrero, LA 100 Room Motel 440,173.10 -0-
Marrero, LA Pledge of corp. stock 5,862.19 -0-
Morgan City, LA 49 Room Motel 264,790.67 -0-
Natchez, MS 100 Room Motel 733,245.55 65,253.60
New Iberia, LA 80 Room Motel 590,137.84 163,606.38
Register, GA 40 Room Motel (2nd Mtg.) 194,456.07 -0-
Sabine Pass, TX 30 Room Motel 292,896.94 -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 $65,253.60.
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 4. 120 Room Motel $.00
Marietta, GA - Note 5. 154 Room Motel 579,059.95
Vicksburg, MS - Note 5 100 Room Motel 265,228.76
Jacksonville, FL
(Arlington Rd.) - Note 5 120 Room Motel .00
</TABLE>
Note 4 This mortgage balance was paid down by the receipt of a
payment in full on the Gretna, Louisiana Motel note. Balance was
then liquidated in December of 1999.
Note 5. These properties, are leased to First Hospitality
Management Corporation, a corporation owned by Timothy J. DeSandro,
a former employee of the Company.
Also, until August 2, 1991, the Company operated one "OmeletHouse"
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 196,440.76
(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 10,766.31
Gulfport
Jackson County, MS Two parcels of land, unimproved, 12,060.65
held for investment
Madison County, MS 3.0 acre tract of land at Ross Barnett $300 per month
Reservoir on which was a night club land lease
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 69,900.51
</TABLE>
Item 3 Legal Proceedings
None
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 Asked Price
1999 High Low High Low
<S> <C> <C> <C> <C>
1st Quarter $ .75 $ .75 $1.00 $1.00
2nd Quarter $ .75 $ .75 $1.00 $1.00
3rd Quarter $ .75 $ .75 $1.00 $1.00
4th Quarter $ .75 $ .75 $1.00 $1.00
</TABLE>
<TABLE>
<CAPTION>
Bid Price Asked Price
1998 High Low High
Low
<S> <C> <C> <C> <C>
1st Quarter $1.25 $1.25 $1.50 $1.50
2nd Quarter $1.25 $1.25 $1.50 $1.50
3rd Quarter $1.25 $1.25 $1.50 $1.50
4th Quarter $1.25 $1.25 $1.50 $1.50
</TABLE>
(b) As of this writing, there are approximately 756 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.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
REVENUE $ 3,532,449 3,814,986 4,396,435 4,911,874 6,193,245
NET INCOME 105,231 81,538 30,443 (815,303) 851,209
EARNINGS PER
SHARE 0.04 0.03 0.01 (0.35) 0.37
TOTAL ASSETS 14,303,779 14,924,365 15,370,061 15,084,285 16,259,446
LONG TERM DEBT 1,680,781 2,301,241 2,726,135 2,978,560 2,710,577
STOCKHOLDERS'
EQUITY 8,233,184 8,127,606 8,024,850 7,946,090 8,764,807
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 1999, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
1999 1998 1997 1996
<S> <C> <C> <C> <C>
TOTAL ASSETS 14,303,779 14,924,365 15,370,061 14,928,410
TOTAL EQUITY CAPITAL 8,233,184 8,127,606 8,024,850 7,946,090
OPERATING INCOME 3,532,449 3,814,986 4,396,435 4,911,874
OPERATING EXPENSE 3,283,902 3,656,215 4,308,86 6,127,234
INCOME BEFORE TAXES 248,547 158,771 87,575 (1,215,360)
INCOME TAXES (117,439) (73,280) (44,98) 424,544
NET INCOME 105,231 81,538 30,443 (815,303)
NET INCOME PER SHARE 0.04 0.03 0.01 (0.35)
</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, 1999, 1998 and 1997.
The preceding chart relects the most recent four years of the
Company's
operations. In 1999 operations resulted in income, before income
taxes of
$248,547, compared to $158,771 in 1998, and $87,575 in 1997. 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 rose slightly over 1998, as did the number of
franchises
(0.44%), although the number or rooms available within the system
decreased
slightly (4.3%). These relatively flat numbers are due to
increased competition
from other franchisors offering mutli level brands, resulting in
more
down-scaling conversions into the economy lodging sector, also,
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 increase
in revenues, the Franchise Division has decreased its
administrative cost
18.0% between 1999 and 1998 and by 9.0% between 1998 and 1997 and
7.5%
between 1997 and 1996. 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 $62,356 in 1999,
$334,028.85 in 1998, $435,570 in 1997, and $100,741 in 1996.
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 are declining 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.
Liquidity:
The question of liquidity should not be an issue in the near
future.
The non-affiliated entity leasing properties from the Company is
in
arrears in its lease payments. The company has taken steps
calculated
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 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.
<TABLE>
<CAPTION>
POSITION AND TERM
NAME AGE WITH REGISTRANT
<S> <C> <C>
Bobby E. Guimbellot 59 CEO - 25 Years
Director - 27 Years
Michael M. Bush 51 Director - 18 Years
Donald Deaton 69 Director - 13 Years
Jack M. Dubard 68 President - 6 Years
Director - 11 Years
C. Guy Lowe, Jr. 64 Director - 27 Years
Gretchen W. Nini 52 Director - 13 Years
Harry C. McIntire 70 Chairman - 6 Years
Director - 23 Years
George O. Swindell 62 Director - 24 Years
Richard A. Johnson 55 Director - 10 Years
Melanie Campbell Hanemann 44 Director - 9 Years
John L. Snyder, Jr. 73 Director - 9 Years
Melinda P. Hotho 37 Director - 6 Years
</TABLE>
The Board of Directors of the Company held no regularly scheduled
meeting in 1999.
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 is 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 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, 1999, the Company paid
aggregate
cash compensation in the amount of $75,000 to Mr. Guimbellot, the
Registrant's. Chief Executive Officer. In 1999, the Company paid
aggregate
cash compensation in the amount of $75,865,42 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.
<TABLE>
<CAPTION>
Amount and Nature Present
Name Address of of Beneficial Percent
Beneficial Owner Ownership Of Class -Note 6
<S> <C> <C>
Bobby E. Guimbellot 1,202,797 50.85%
1726 Montreal Circle
Tucker, Georgia 30084 Note 7
Harry C. McIntire 161,289 6.81%
Roswell, GA Note 8
</TABLE>
Note 6 Based on 2,365,284 shares outstanding.
Note 7 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. Mr. Snyder shares voting rights as to Shelly
Plantation with Mr. Guimbellot.
Note 8 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 9
<S> <C> <C>
Michael W. Bush Note 10 3,611 .15%
Donald Deaton 3,660 .15%
Jack M. Dubard Note 11 8,907 .37%
Bobby E. Guimbellot Note 12 1,202,797 50.85%
Melanie Campbell Hanemann 2,600 .10%
Melinda P. Hotho 1,200 .05%
Richard A. Johnson 9,600 .40%
C. Guy Lowe, Jr. 1,335 .05%
Harry C. McIntire Note 13 161,289 6.86%
Gretchen W. Nini Note 14 4,801 .20%
George O. Swindell 1,563 .06%
John L. Snyder, Jr. 2,600 .10%
1,403,963 59.29%
</TABLE>
Note 9 Based on 2,365,284shares outstanding.
Note 10 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. John L. Snyder Jr. shares voting and investment
powers
with repeat to the 361,405 shares owns by Shelly Plantation
Note 11 Includes 513 shares in the name of his wife.
Note 13 Voting and investment powers on 113,331 shares are
shared
with his wife.
Note 14 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 16
Consolidated balance sheets of the Company as of
December 31, 1999
and 1998.
Consolidated statements of changes in cash flow of the
Company for
the Fiscal Years ended December 31, 1999 and 1998.
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, 1999, 1998 AND 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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 10-28
</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,
1999
and 1998, and the related consolidated statements of
income,
stockholders' equity and cash flows for each of the three years
in
the period ended December 31, 1999. 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 generally
accepted
auditing standards. 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.
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,
1999 and 1998, and the consolidated results of their operations
and
their cash flows for each of the three years in the periods ended
December 31, 1999, in conformity with generally accepted
accounting
principles.
ROBERT J. CLARK, PC
Certified Public Accountants
Roswell, Georgia
March 15, 2000
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
CURRENT ASSETS
<S> <C> <C>
Cash $ 75,253 $ 100,898
Accounts Receivable-Net (Note G) 1,124,962 1,070,719
Accounts Receivable-Affiliates (Note G 580,403 335,060
and P)
Income Tax Receivable (Note K) 9,310 9,310
Mortgages & Notes-Affiliates (Note G 121,240 104,376
and P)
Mortgages & Notes Receivable (Note G) 688,072 589,363
Inventory (Note C) 40,819 45,067
Prepaid Expenses 50,098 45,469
Loans - Employees (Note H) 213 713
Interest Receivable 464,505 401,689
Net Deferred Tax Asset (Note K) 7,447 6,381
TOTAL CURRENT ASSETS 3,162,322 2,709,045
PROPERTY AND EQUIPMENT (Note O)
Land 1,515,118 1,855,332
Buildings & Building Improvements 2,149,732 3,841,941
Furniture, Fixtures & Equipment 561,128 760,363
Leasehold Improvements 331 331
Total Property & Equipment 4,226,309 6,457,967
Less: Accumulated Depreciation (1,123,004) (1,323,801)
PROPERTY AND EQUIPMENT - NET 3,103,305 5,134,166
OTHER ASSETS
Mortgages & Notes Receivable 5,030,468 3,925,793
Mortgages & Notes-Affiliates (Note P) 1,116,802 1,129,564
Investments in Unconsolidated 199,832 365,633
Affiliates (Note I)
Investment - Affiliate 118,896 35,440
Investment in Real Estate 235,752 235,752
Trademarks - Net (Notes J and P) 1,295,688 1,338,517
Organization Cost 9,540 13,588
Deposits 4,498 4,498
Deferred Tax Asset Valuation 0 7,581
Allowance
Marketable Equity Securities, 26,676 24,788
Carried at Market
TOTAL OTHER ASSETS 8,038,152 7,081,154
TOTAL ASSETS $ 14,303,779 $ 14,924,365
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable - Trade $ 106,097 $ 206,816
Interest Payable 174,668 166,407
Taxes Payable 179,260 95,261
Other Taxes Payable 189,683 386,858
Other Liabilities 546,982 262,983
Mortgages & Notes Payable (Note L) 482,843 693,387
Mortgages & Notes Payable- 118,327 133,885
Affiliates (Note P)
Deferred Severance Pay (Note X) 12,000 12,000
TOTAL CURRENT LIABILITIES 1,809,860 1,957,597
LONG-TERM LIABILITIES
Mortgages & Notes Payable (Note L) 1,308,603 1,921,729
Mortgages & Notes Payable- 357,178 279,312
Affiliates (Note P)
Escrow - Advance Construction Draw 15,000 100,200
(Note X)
TOTAL LONG-TERM LIABILITIES 1,680,781 2,301,241
DEFERRED AMOUNTS
Deferred Income-Installment 1,511,361 1,544,794
Deferred Rent Income 0 1,300
Net Deferred Tax Liability 101,839 54,650
Deferred Severance Pay (Note X) 143,750 140,050
TOTAL DEFERRED AMOUNTS 1,756,950 1,740,794
TOTAL LIABILITIES & 5,247,591 5,999,632
DEFERRED AMOUNTS
MINORITY INTEREST (Note A) 823,004 797,127
STOCKHOLDERS' EQUITY
Common Stock- no par value, 6,023,315 6,023,315
Authorized 5,000,000 shares, Issued
& Outstanding 2,365,284 year ended
1999 and 1998
Additional Paid in Capital 42,201 42,201
Retained Earnings 2,167,668 2,062,090
TOTAL STOCKHOLDERS' EQUITY 8,233,184 8,127,606
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 14,303,779 $ 14,924,365
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
REVENUES
Franchising Revenues $ 1,833,472 $ 1,843,335 $ 2,060,922
Financing Revenues 620,325 572,201 683,505
Sale of Furniture 439 19,519 225,468
Operating Lease Revenues 507,064 601,909 741,718
Gain on Sale of Assets 134,096 649 78,764
Investment Income 0 7,015 12,180
Legal Settlement Revenues 62,356 334,029 435,570
Other Income 374,697 436,329 158,308
TOTAL REVENUES 3,532,449 3,814,986 4,396,435
COST & EXPENSES
Operating Expense-Franchise 1,595,417 1,950,467 2,143,736
Division
Operating Expense-Financing & 1,024,330 916,328 1,230,271
Investing
Cost of Sales -Furniture Sales 4,174 14,233 122,264
Interest Expense 256,347 310,851 417,536
Depreciation & Amortization 238,590 284,656 273,173
Investment Loss 165,044 179,680 120,551
Loss on Sale of Property 0 0 1,329
TOTAL COST & EXPENSES 3,283,902 3,656,215 4,308,860
Income (Loss) from Continuing
Operations before Taxes & Minority 248,547 158,771 87,575
Interest
Less: Provisions for Income (117,439) (73,280) (44,998)
Taxes (Note K)
Income (Loss) before Minority 131,108 85,491 42,577
Interest
Less: Minority Interest in Income
(Loss) of Consolidated (25,877) (3,953) (12,134)
Subsidiaries
NET INCOME (LOSS) $ 105,231 $ 81,538 $ 30,443
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
INCOME (LOSS) PER SHARE 1999 1998 1997
<S> <C> <C> <C>
Income (Loss) per Share from
Operations before Taxes and $ .11 $ .07 $.04
Minority Interest
Income (Loss) per Share before
Minority Interest $ .06 $ .04 $.02
Basic Net Income (Loss) per
Common Share $ .04 $ .03 $.01
Average Shares Outstanding 2,365,284 2,356,949 2,335,541
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Number of
Common AdditionAL
Shares Common Paid In Retained
Outstanding Stock Capital Earnings
<S> <C> <C> <C> <C>
Balance Dec 31,1996 2,322,966 5,963,727 42,201 1,945,762
Shares Issued to
Directors 26,763 40,144
And Officers
Comprehensive Income:
Net Income 30,443
Unrealized Gain on
Securities, net of tax 2,573
Balance Dec 31,1997 2,349,729 6,003,871 42,201 1,978,778
Shares Issued to 15,555 19,444
Directors
Comprehensive Income:
Net Income 81,538
Unrealized Gain on
Securities, net of tax 1,774
Balance Dec 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 Dec 31,1999 2,365,284 6,023,315 42,201 2,167,668
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
CASH FLOWS PROVIDED BY (USED
FOR) OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $ 105,231 $ 81,538 $ 30,443
Non-Cash Items Included in
Net Income:
Depreciation and Amortization 238,590 284,656 273,173
Conversion payable to note (18,762) 0 0
receivable
Uncollectible Amounts 0 252,916 84,235
(Gain) Loss - Sale of Assets 172,014 (649) (74,236)
Deferred Income Recognized (34,733) (30,468) (16,083)
Discount Earned (3,951) 0 (27,871)
Investment Income-Affiliates 157,566 162,385 110,042
Minority Interest Income 25,877 3,953 12,134
Transfer of note payable (79,552) 0 0
Marketable Equity Security at 0 0 (2,626)
Market
Write off Note Payable (1,250) (5,404) (2,589)
Interest Receivable 0 0 (163,756)
Converted to Property
Interest Receivable Adjustment 0 45,724 6,065
Bonus Reinstated 0 0 32,833
Note payable assignment 4,976 0 0
Note Receivable 0 (236,741) (17,700)
Credit/Assignment
Expense Paid for Note Payable 0 68,052 2,666
Accruals for Investments 0 (2,892) (48,337)
Accounts Receivable Converted
To Investment or Note (34,000) (41,705) (154,194)
Capital Stock for Directors' 0 0 36,450
Fees
Sale Payables for Receivables (27,558) (190,560) 0
Miscellaneous 8,261 15,149 4,852
Net Changes In Current Assets and
Liabilities:
Accounts Receivable (346,359) (118,403) (347,284)
Accounts Receivable-Affiliates 86,364 (97,347) (133,237)
Inventories 4,248 9,362 51,506
Loan Receivable-Employee 500 (213) 8,635
Deposits 0 1,399 7,885
Interest Receivable (91,935) 44,245 69,615
Income Tax Receivable (4,629) 17,683 0
Prepaid Expense 3,396 12,798 3,306
Accounts Payable (92,657) 28,901 (18,359)
Interest Payable 8,261 (24,627) 59,224
Taxes Payable (31,701) (48,333) 46,867
Deferred Income Tax 53,704 70,751 23,463
Other Accrued Liabilities 242,598 20,528 (94,263)
Deferred Severance Pay 3,700 (117,655) 175,705
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 348,199 205,043 (61,436)
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
CASH FLOWS PROVIDED BY (USED
FOR)INVESTING ACTIVITIES
<S> <C> <C> <C>
Investment Distribution $ 0 $ 14,437 $ 16,563
Payments on Mortgages and Notes
Receivable - Incurred (78,648) (20,000) (17,431)
Collections on Mortgages and
Notes Receivable 148,136 418,553 632,423
Acquisition (Disposition) of
Fixed Assets (19,831) (22,450) (254,418)
Investment Purchases (129,870) (35,596) (126,773)
Payments made with sale of (36,036) 0 0
assets
Payments Received for 0 0 131,750
Assets Sold
Advance Receipts for 15,000 0 100,200
Investments
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES (101,249) 354,944 482,314
CASH FLOWS PROVIDED BY (USED
FOR) FINANCING ACTIVITIES
Proceeds from Notes Payable 209,919 111,484 272,523
Principal Payments on Mortgages
and Notes Payable (2,049) (16,995) (7,892)
Principal Payments on Capital
Lease Obligations (480,465) (627,810) (711,577)
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (272,595) (533,321) (446,946)
Increase (Decrease) in Cash (25,645) 26,666 (26,068)
Cash - Beginning 100,898 74,232 100,300
Cash - Ending $ 75,253 $ 100,898 $ 74,232
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
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 74.6
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, 1999 the Company had one franchise in Jamaica and
one in the Bahamas. 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 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 a maturity of three
months or less to be cash equivalents.
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 management company made payments on notes payable in
the
amount of $18,762. The management company received
credit for
these payments on their 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.
B4 - ACCOUNTING POLICY - STATEMENT OF CASH FLOWS - (Continued)
The Company had the following non-cash transactions in 1998:
The Company retired old, fully depreciated leasehold
improvements and furniture and fixtures in the amount of
$211,137.
The Company purchased two vehicles for $22,925 with two
new
notes payable for the lack of consideration.
The Company sold a note payable with a principal balance
of
$122,246 and accrued interest of $68,314 due to the CEO
to a
company in which the CEO is a majority shareholder.
This
transaction paid off receivables due to the Company from
the CEO's
company and left a credit balance in the receivable of
$61,999
which was converted to a note payable to the CEO's
company.
The Company wrote off its negative investment balance of
$48,337 in a partnership against a note receivable due
from the
partnership. The partnership assigned its mortgage
receivable in
satisfaction of the remaining notes receivables and
accrued
interest due to the Company. The write-off to bad debt
for the
note adjustments was $61,899.
The Company increased notes payable and interest payable
totaling $7,303 to record additional equitable
liabilities for its
investment in two land purchases.
The Company purchased land for $153,464 and booked a
note
payable of $300,000. $75,484 was put into an escrow
account for
future expenses and the remainder was used to pay
accrued property
taxes and loan costs.
The management company that collects lease payments for
the
Company advanced monies to a partnership of the Company.
The
Company increased its investment in the partnership and
gave a
credit of $29,107 to accounts receivable for these
payments (See
Investments in Unconsolidated Affiliates).
The management company (accounts receivable) was also
credited $29,107 for monies due from the remaining two
partners in
the partnership. A loan due to one partner from the
Company was
reduced by $14,553 and a note receivable from the other
partner
(the CEO of the Company) was increased by $14,554 (See
Related
Party).
The management company transferred a note receivable on
its
books due from the CEO of the Company for a credit of
$16,456 to
accounts receivable (See Related Party).
The management company transferred accounts receivable
on
its books from companies in which the CEO has majority
interests
for credits of $ 179,965 to accounts receivable (See
Related
Party).
The Company purchased a tug boat for $35,000 from a
company
owned by the CEO and reduced a note receivable due from
the CEO
for the lack of consideration paid (See Related Party).
The Company sold an investment in an affiliate at a loss
of
$73,826 (See Investments in Unconsolidated Affiliates).
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 past president'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 payable 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.
The Company sold a warehouse for a note receivable of
$155,000 and $5,000 cash.
In 1999, the Company paid $0 in income taxes and $205,370 in
interest.
In 1998, the Company paid $25,110 in income taxes and $246,017
in interest.
In 1997, the Company paid $59,257 in income taxes and $358,919
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:
December 31, 1999, 1998 and 1997
Listed below are sales and cost of inventory sold:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Sales $ 439 $ 19,519 $ 225,468
Cost 4,174 14,233 122,264
GROSS PROFIT (LOSS) $ (3,735) $ 5,286 $ 103,204
</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 principal amount of the obligation is received. This
deferred income is shown on the balance sheet as a deferred
credit. Deferred income recognized was $33,433 in 1999,
$30,868in 1998 and $16,082 in 1997.
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, 1999, 1998 and 1997
was 2,365,284, 2,356,949 and 2,335,541 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 1999 and 1998
are presented net of allowance for doubtful accounts of $87,224
and $95,397 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 total
$108,092 in 1999 and $93,856 in 1998. 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 1999 and 1998, the discounts totaled $80,800 and
$84,751 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.
ACCOUNTS, MORTGAGES AND NOTES RECEIVABLE - (Continued)
Maturities over the next five (5) years are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 688,072
2001 211,428
2002 241,301
2003 268,771
2004 299,401
Beyond 4,009,567
</TABLE>
H - LOANS - EMPLOYEES
Loans-Employees represents travel advances and/or loans to
employees.
I - INVESTMENTS
I. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
II.
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>
<S> <C> <C> <C>
% Ownership 1999 1998
J.Puckett/ BuenaVista-
Partnership 25% $ 0 $ 756
Houma Atrium Bldg.-
Partnership 50% (131,942) (61,822)
Extasea Casino
Cruises Of No. Fla,Inc. 40% 430,414 487,172
Hospitality Int'l
Real Estate, Inc. 45% (23,844) (6,447)
Hospitality Insurance
Services,Inc. 45% (74,796) (54,026)
Totals $ 199,832 $ 365,633
</TABLE>
The remaining 75% of J. Puckett/Buena Vista Partnership is owned
by numerous individuals. 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. Hospitality Insurance Services, 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.
INVESTMENTS- (Continued)
I. INVESTMENTS IN UNCONSOLIDATED AFFILIATES - (Continued)
The Company's share of the Houma Atrium Building Partnership
losses was $ 70,122 in 1999 and $83,156 in 1998. Losses on the
investment have been recognized up to the Company's at risk
amount. Unrecorded losses totaled $211,384 at December 31, 1999.
In 1999 and 1998, the management company which collects lease
payments for its properties advanced monies to the partnership.
The Company increased its investment in the partnership for these
payments in 1998 (See Cash Flow). In 1999, the Company increased
its receivable due from the partnership for these payments. The
CEO of the Company owns 25% of this partnership (See Related
Party).
Pan American Hospitality dissolved in 1998. The Company
wroteoff its negative investment against receivables due from
the partnership. The partnership assigned its mortgage receivable
to the Company in satisfaction of the remaining balance in
principal and accrued interest due to the Company (See Cash
Flow).
The Company reduced its ownership of Hospitality International
Real Estate, Inc. and Hospitality Insurance Services Inc., from
75% to 45% in 1998. In 1997, accounts of Cherokee Towing and
Construction Co. are not consolidated in the financial statements
since the company had not started operations and had no assets.
In 1998, the Company sold its shares in the investment. The
capital loss was $73,826 (See Cash Flow).
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).
Extasea Casino Cruises of No. Fla, Inc. owns the M/V Fantasea,
which 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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
Current Assets $ 21,757 $ 20,621
Property and other assets, net 3,772,826 3,975,974
Current liabilities 500,157 516,635
Long-term debt and other liabilities 3,105,772 3,107,165
Equity 188,654 372,795
Gross Revenues 766,329 726,794
Net Income/ (Loss) (157,799) (293,291)
</TABLE>
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 $41 in 1999, $446 in 1998, and $647 in
1997.
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 $374,645 and $331,816 on December
31, 1998 and 1997, 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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ 53,551 $ (296) $ 17,205
State, local, and franchise taxes 8,681 (126) 5,478
Total Current 62,232 (422) 22,683
Deferred Book Tax (Benefit):
Federal 46,424 56,399 16,523
State, local, and franchise taxes 8,783 17,303 5,792
Total Deferred 55,207 73,702 22,315
Net Tax Expense(Benefit) $ 117,439 $ 73,280 $44,998
</TABLE>
The reconciliation of the differencebetween the federal
statutory tax rate and the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Federal statutory tax rate 38.3% 35.3% 38.5%
Deferred severance pay .6 (26.1) 24.0
Undistributed earnings from
Affiliates 21.9 0
Capital loss carryover 6.6 9.6 0
Net operating loss carryover (14.1) (33.1) (55.2)
Change in bad debt reserve (1.3) (3.4) 9.5
Amortization of trademarks (7.7) (8.4) (22.0)
State taxes, net of
Federal income taxes (1.3) 0 2.4
Penalties 0.7 15.4
Nondeductible employee meals 3.0 5.8
Other .4 .3 1.2
Effective tax rate 21.5% (0.2)% 19.6%
</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>
1999 1998 1997
<S> <C> <C> <C>
Current deferred income tax assets:
Net operating loss carryover $ 4,454 $ 2,951 $ 0
Change in reserve for bad debts 0 0 16,039
Deferred severance pay 2,976 3,420 3,420
Contribution carryover 17 10 0
Total current deferred $ 7,447 $ 6,381 $ 19,459
Long-term deferred income tax assets:
Net operating loss carryover $ 0 $ 26,166 $ 68,316
Change in reserve for bad debts 39,796 41,439 28,433
Deferred severance pay 35,650 39,915 73,446
Capital loss carry forward 10,632 12,287 0
Total Long-term deferred $ 86,078 $119,807 $ 170,195
Long-term deferred income tax liabilities:
Amortization on trademarks $ 85,779 $ 72,319 $ 62,242
Installment sale 102,138 102,138 102,138
Total long-term deferred $187,917 $174,457 $ 164,380
</TABLE>
Hospitality International, Inc. incurred a net operating loss of
$14,678 for federal income tax purposes in 1998. The net
operating loss carryover expires in 2013. The Company also had a
net operating loss of $7,479 which expires in the year 2014.
A net operating loss of $25,739 incurred in 1996 by Red Carpet
Inns International, Inc. was used in 1997.
In 1996, Southern Scottish Inns, Inc. (SSI) had an unused net
operating loss (NOL) carryover 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. SSI used $99,717 of the
NOL in 1997 and $148,669 in 1998 leaving $91,809 which was
applied against 1999 income taxes.
Listed below are the years, amounts and tax benefits of the net
loss carryover:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net operating loss utilized $ 91,809 $ 148,669 $ 125,456
Tax benefit 19,270 46,672 36,769
Tax rate 21.0% 31.4% 29.3%
</TABLE>
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:
<TABLE>
<CAPTION
NOTES MATURITIES 1999 1998
<S> <C> <C> <C>
8% - 8.95% 2000 - 2011 $ 323,874 $ 340,170
9% - 9.75% 2000 - 2007 391,377 791,200
10% - 10.50% 2000 - 2011 143,408 374,496
11% 2000 - 2008 504,994 535,957
16.4% - 17.65% 2000 703 5,275
18.33% - 23.80% 2000 2,842 6,646
Variable 2000 - 2003 424,248 561,372
Total Debt Obligations 1,791,446 2,615,116
Less: Amounts Maturing
Within one year 482,843 693,387
Net Long-Term Notes $ 1,308,603 $ 1,921,729
</TABLE>
Maturities of debt for the five years succeeding December 31,
1999 are as follows:
<TABLE>
<S> <C>
2000 $ 482,843
2001 237,468
2002 192,731
2003 193,684
2004 172,317
Beyond 512,403
Total $ 1,791,446
</TABLE>
The above notes include various restrictions, none of which are
presently significant to the Company.
The Company's mortgage on the corporate headquarters 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 $2,110,497 and a market value
of $4,802,623.
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 1999 and 1998 is $331,350 and $333,322 respectively and its
allocated accumulated depreciation is $99,669 in 1999 and $80,688
in 1998. The Company also leases properties it owns in various
states. These properties are recorded in Property and Equipment
with a cost of $2,785,414 in 1999 with accumulated depreciation
of $585,636 and a cost of $3,958,041 with accumulated
depreciation of $568,609 in 1998.
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
1999 was $7,551. 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>
2000 $6,476
2001 $1,619
</TABLE>
The present value of the minimum lease payments is $7,580.
N - INDUSTRY SEGMENTS
The information about the Company's operations in different
industries is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Sales to unaffiliated customers:
Franchising 1,833,472 1,843,335 2,060,922
Financing & Investing 754,421 579,865 774,449
Leasing 507,064 601,909 741,718
Net profit (loss):
Franchising 14,957 12,582 60,832
Financing & Investing 16,342 (99,264) (193,303)
Leasing 190,748 196,363 266,360
Identifiable assets:
Franchising 1,664,828 1,793,377 1,793,979
Financing & Investing 12,479,423 13,004,459 13,657,619
Leasing 3,683,599 3,556,263 3,718,379
Depreciation expense:
Franchising 71,292 76,512 86,917
Leasing 72,219 72,021 75,014
Amortization expense:
Franchising 21,079 21,079 21,079
Leasing 1,817 1,966 1,583
Additions in property, plant and equipment:
Franchising 12,883 44,558 51,438
Leasing 1,971 153,464 4,504
</TABLE>
In the Financing & Investing Segment, the Company has included
net income/(loss) from unconsolidated equity investments totaling
$(147,648) in 1999, $ (162,386) in 1998 and $(110,042) in 1997.
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.
<TABLE>
<CAPTION>
Depreciable Lives
<S> <C>
Land Improvements 10 - 37 years
Buildings 31 1/2 years
Furniture, Fixtures & Equipment 3 - 7 years
Leasehold Improvements Term of lease
</TABLE>
Depreciation and amortization expense was $238,590 in 1999,
$284,656 in 1998, and $273,173 in 1997.
P - RELATED PARTY TRANSACTIONS
In 1998, the Company wrote off its investment and loans to the
dissolved partnership (See Investment in Unconsolidated
Affiliates). The partnership assigned its mortgage receivable in
satisfaction of the remaining principal and accrued interest due
to the Company from the partnership (See Cash Flow).
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
1998, the Company invested $35,440 yielding a 15% interest in a
corporation owned by the CEO. In 1999, the Company increased this
investment to $118,896 yielding a 38% interest. The Company's
management company of the Company's motels transferred a
receivable of $36,805 due from this company for lease payments in
1998 (See Cash Flow). In 1998, the note receivable due from the
CEO was increased by credits of $31,010 for lease payments given
to the management company (See Cash Flow). In 1999, a
notepayable to a company owned 100% by the CEO was reduced by
credits of $15,026 given to the management company for payments
it made on behalf of a partnership in which the CEO has a 25%
and the Company a 50% interest (See Cash Flow). The
Company paid expenses in 1999 on behalf of one CEO in the amount
of $5,707. This amount is included in Receivables-
Affiliates. The CEO elected to forego an accrued severance pay
of $121,205 in 1998. The write off is reflected in other
income and reduced the Company's deferred tax asset (See
Long-term Liabilities and Deferred Amounts). The Company also
holds a mortgage in the amount of $590,138 from a corporation
in which the CEO is a 50% shareholder. The CEO's ownership of
the Company's common stock was 50.85% at December 31, 1999 and
December 31,1998.
RELATED PARTY TRANSACTIONS - (Continued)
Included in Accounts Receivable-Affiliates are expenses totaling
$140,281 in 1999 and $143,160 in 1998 for expenses the Company
paid on behalf of Emerald Coast Cruises, Inc., the operating
company for M/V Fantasea which is owned by Extasea Casino Cruises
of No. Fla, Inc., an investment in which some of the directors
also have interests (See Investments in Unconsolidated
Affiliates). In 1998, $125,896 of the receivable was settled by
selling a note payable and accrued interest due to the CEO to
Extasea Casino Cruises of No. Fla, Inc. The sale of receivable
gave rise to a credit balance, which was converted to a note
payable to Extasea Casino Cruises of No. Fla, Inc. (See Cash
Flow). The receivable was increased at the end of the year by
credits for lease payments given to the management company for
payments of $143,160 it made on behalf of Emerald Coast Cruises,
Inc. (See Cash Flow). In 1999, the note payable to Extasea
Casino Cruises was paid off.
In 1998, a note payable due to an affiliated individual was
reduced by $14,553 for expenses paid by the Company's management
company on behalf of a partnership in which the Company has a 50%
and the individual a 25% interest (See Cash Flow). Similarly, in
1999, the note was reduced by $12,352 and accrued interest
payable by $2,494 for further payments for the partnership by the
management company (See Cash Flow).
The Company increased the receivable due from this same
partnership by payments of $27,690 made by the management
company.
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 past president was reinstated as a note
payable for $32,833, which included accrued interest. In 1998,
the Company paid $9,676 in principal and $3,079 in interest
leaving a principal balance of $1,814 and accrued interest of $67
at December 31,1998. The note and accrued interest were paid off
in 1999.
The following is a schedule of loans to related parties:
<TABLE>
<CAPTION>
RELATED INTEREST PRINCIPAL ACCRUED INTEREST
PARTY RATE BALANCE RECEIVABLE
12/31/99 12/31/98 12/31/99 12/31/98
<S> <C> <C> <C> <C> <C>
Individual 6% $ 2,500 0 0 0
Partnership
Mortgage 10% 586,791 586,740 85,676 36,356
Partnership 6% - 10% 17,264 17,264 19,567 20,157
CEO 6% - 10% 41,349 39,798 14,635 11,805
Corporation 10.75% 590,138 590,138 64,772 38,400
Totals $ 1,238,042 $1,233,940 $184,650 $ 106,718
</TABLE>
The following is a schedule of loans from related parties:
<TABLE>
<CAPTION>
RELATED INTEREST PRINCIPAL ACCRUED INTEREST
PARTY MATURITIES RATE BALANCE PAYABLE
<S> <C> <C> <C> <C> <C> <C>
12/31/99 12/31/98 12/31/98 12/31/99
Company 2000 - 2005 10% $ 225,230 $ 240,256 $ 92,580 $ 78,033
Director 1999 12% 0 3,027 0 106
Individual 2000 - 2005 12% 81,801 81,801 29,315 19,499
CEO 2000 - 2005 6% 141,519 0 0 0
Individual 2000 - 2005 15% 7,579 9,792 568 6,632
Individual 2000 - 2005 13% 18,850 31,381 20,240 20,653
Company 2000 - 2005 10% 0 46,414 0 0
Individual 1999 10% 526 526 105 53
Totals 475,505 413,197 $143,078 $ 124,976
Less Amounts Maturing within
one Year 118,327 133,885
Net Long-Term Notes - Affiliates 357,178 $ 279,312
</TABLE>
Maturities of Long-Term:
<TABLE>
<S> <C>
2000 $ 118,327
2001 0
2002 0
2003 0
2004 0
Beyond 357,178
Total $ 475,505
</TABLE>
Interest paid to related parties was $ 9,888 in 1999, $5,871 in
1998 and $3,230 in 1997.
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.
The equipment valuation (the same as its fair value) is as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Computer Equipment $ 13,285 $ 13,285
Accumulated Depreciation (6,643) (3,986)
Book Value $ 6,642 $ 9,299
</TABLE>
Minimum lease payments for each of the following years are:
<TABLE>
<CAPTION>
<S> <C>
2000 2,727
2001 0
2002 0
2003 0
2004 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 1999, 1998 and 1997 were $194,207,
$239,090 and $292,521 respectively.
S - STOCK ISSUANCE TO OFFICERS
In 1999, there was no stock issued.
In 1998, 280,000 shares of Red Carpet Inns International, Inc.
common stock were exchanged for 15,555 shares of Southern
Scottish Inns' common stock by directors. The issuance was
valued at the fair market value ($1.25 per share) of Southern
Scottish Inns' common stock. Minority Interest has been diluted
by these stock swaps.
STOCK ISSUANCE TO OFFICERS - (Continued)
In 1997, 44,333 shares of Red Carpet Inns International, Inc.,
common stock were exchanged for 2,463 shares of Southern Scottish
Inns' 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.
T - LITIGATION SETTLEMENTS
From 1995 to 1999, 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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Advertising Income $ 302,979 $ 309,499 $ 385,486
Advertising Costs (556,259) (618,651) (643,458)
Excess of Advertising Costs over
Advertising Income $ (253,280) $ (309,152) $(257,972)
</TABLE>
V - CONTINGENCIES
The amount of accounts receivable in litigation or collections
was $163,339 at the end of 1999 and $145,267 in 1998. 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 $27,521. The turnover of franchises makes the
likelihood of payment only reasonably possible; therefore, this
amount has not been accrued.
CONTINGENCIES - (Continued)
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, 1999 and 1998 with accrued interest of
$182,602 at December 31, 1999 and $219,102 at December 31, 1998.
The fair market value of the property secured by this mortgage
exceeds the balance of principal and accrued interest.
In 1998, the Company pledged one of its properties as security
for a second mortgage on a building owned by the Houma Atrium
Partnership. The book value and market value of the pledged
property was $571,324 and $2,708,863 respectively at December 31,
1999 (See Investments in Unconsolidated Affiliates).
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 $6,956,583 at December 31, 1999 and
$5,749,096 at December 31, 1998, 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 $2,266,951
in 1999 and $3,028,313 in 1998.
FINANCIAL INSTRUMENTS - (Continued)
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
Escrow-Advanced Construction Draw represents unspent monies
advanced for site preparation. Expenditures for the land
improvements totaled $229,411 in 1997. There were no
expenditures in 1998. In 1999, the land was sold to the to the
party who had advanced these monies (See Cash Flow).
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
$856 in 1999, $ 216 in 1998 and $(108) in 1997 were $2,693 in
1999, $11,980 in 1998 and $27,186 in 1997. 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
Southern Hospitality Insurance Services, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<PERIOD-TYPE> YEAR
<CASH> 75,253
<SECURITIES> 0
<RECEIVABLES> 2988,705
<ALLOWANCES> 0
<INVENTORY> 40,819
<CURRENT-ASSETS> 3,162,322
<PP&E> 4,226,309
<DEPRECIATION> (1,123,004)
<TOTAL-ASSETS> 14,303,779
<CURRENT-LIABILITIES> 1,809,860
<BONDS> 1,680,781
<COMMON> 6,023,315
0
0
<OTHER-SE> 3,032,873
<TOTAL-LIABILITY-AND-EQUITY> 14,303,779
<SALES> 439
<TOTAL-REVENUES> 3,532,449
<CGS> 0
<TOTAL-COSTS> 4,174
<OTHER-EXPENSES> 3,023,381
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256,347
<INCOME-PRETAX> 248,547
<INCOME-TAX> (117,439)
<INCOME-CONTINUING> 131,108
<DISCONTINUED> 0
<EXTRAORDINARY> (25,877)
<CHANGES> 0
<NET-INCOME> 105,231
<EPS-BASIC> .11
<EPS-DILUTED> .4
</TABLE>
