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, 1998
Commission File number 0-07107
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, 1998 was
$1,201,964. 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 961,571 shares.
The number of shares outstanding of the Registrant's
Common Stock as of December 31 1998, 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, 1998, 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, 1998 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>
12/98 12/97 12/96 12/95 12/94
<S> <C> <C> <C> <C> <C>
Motel Franchises Held - Total 227 239 262 269 343
Master Hosts Inns 4 5 12 11 18
Red Carpet Inn 96 95 107 112 147
Scottish Inns 120 126 128 130 156
Downtowner Inns - 2 2 4 2 3
Passport Inns - 5 11 11 14 19
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 4 3 4 4 4
Master Hosts Inns 0 1 1 1 1
Red Carpet Inn 1 1 1 1 1
Scottish Inns 2 2 1 1 2
Independent 1 0 1 1 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 13 14 13
Parcels of Land Held for Investment
or Development 6 6 5 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,
1998 1997 1996
<S> <C> <C> <C>
Franchising:
Revenues 1,843,335 2,060,922 2,347,965
Operating Profit (Loss) 12,582 60,832 100,709
Financing & Investing:
Revenues 579,865 774,449 1,151,339
Operating Profit (Loss) (99,264) (193,303) (1,352,308)
Leasing:
Revenues 601,909 741,718 786,957
Operating Profit (Loss) 196,363 266,360 302,744
</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 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 12/98 12/97 12/96
<S> <C> <C> <C>
Lodging Leased to Outsiders - Note 3 109 110 108
Franchise Division 40 38 36
Administrative & Finance 7 7 8
Total 156 155 152
</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 247,361.74 -0-
Gulfport, MS Office & Warehouse Bld. 154,975.00 14,567.41
Hattiesburg, MS 48 Room Motel 378,886.45 -0-
Jacksonville, FL 144 Room Motel 1,473,989.51 -0-
(Lane Ave.) on 4 acres
McComb, MS 51 Room Motel 288,900.51 4,909.76
Marrero, LA 100 Room Motel 451,526.17 -0-
on 2.5 acres
Marrero, LA Pledge of corp. stock 16,144.80 -0-
Morgan City, LA 49 Room Motel 269,924.11 -0-
Natchez, MS 100 Room Motel 771,661.95 131,487.68
New Iberia, LA 80 Room Motel 590,137.84 190,277.19
Register, GA 40 Room Motel (2nd Mtg.) 86,850.00 283,333.33
Sabine Pass, TX 30 Room Motel 310,638.77 -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
$131,487.68.
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 $ 101,641.54
Marietta, GA - Note 5. 154 Room Motel 660,046.89
Vicksburg, MS - Note 5 100 Room Motel 294,879.81
Jacksonville, FL
(Arlington Rd.) - Note 5 120 Room Motel -0-
</TABLE>
Note 4 This mortgage balance was paid down by the receipt of a
payment in full on the Gretna, Louisiana
Motel note.
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 "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 $208,713.46
(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 14,790.11
Jackson County, MS The parcels of land, unimproved,
held for investment 21,345.38
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 73,064.14
</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
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
</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>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
REVENUE $ 3,814,986 4,396,435 4,911,874 6,193,245 4,986,556
NET INCOME 81,538 30,443 (815,303) 851,209 363,480
EARNINGS PER
0.03 0.01 (0.35) 0.37 0.16
SHARE
TOTAL ASSETS 14,924,365 15,370,061 15,084,285 16,259,446 14,079,146
LONG TERM 2,301,241 2,726135 2,978,560 2,710,577 2,294,691
DEBT
STOCKHOLDERS'
EQUITY 8,127,606 8,024,850 7,946,090 8,764,807 7,913,598
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 1998, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
1998 1997 1996 1995
<S> <C> <C> <C> <C>
TOTAL ASSETS 14,924,3659 15,370,061 14,928,410 16,259,446
TOTAL EQUITY CAPTIAL 8,127,606 8,024,850 7,946,090 8,764,807
OPERATING INCOME 3,814,986 4,396,435 4,911,874 6,193,245
OPERATING EXPENSE 3,656,215 4,308,860 6,127,234 4,673,076
INCOME BEFORE TAXES 158,771 87,575 (1,215,360) 1,520,169
INCOME TAXES (73,280) (44,998) 424,544 (584,530)
NET INCOME 81,538 30,443 (815,303) 851,209
NET INCOME 0.03 0.01 (0.35) 0.37
PER SHARE
</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, 1998, 1997 and 1996.
The preceding chart relects the most recent four years of the
Company's operations. In 1998 operations resulted in income, before
income taxes of $158,771, compared to $87,575 in 1997, a loss of
$1,215,360 in 1996, an income of $1,520,169 in 1995 and an income of
$817,792 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 9.0% between 1998 and 1997, 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 $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 are declining due to payment on the
principal and the foreclosure of one note. The property was placed
into fixed assets and is being leased to another non-affiliated
entity.
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 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 58 CEO - 24 Years
Director - 26 Years
Michael M. Bush 50 Director - 17 Years
Donald Deaton 68 Director - 12 Years
Jack M. Dubard 67 President - 5 Years
Director - 10 Years
C. Guy Lowe, Jr. 63 Director - 26 Years
Gretchen W. Nini 51 Director - 12 Years
Harry C. McIntire 69 Chairman - 5 Years
Director - 22 Years
George O. Swindell 61 Director - 23 Years
Richard A. Johnson 54 Director - 9 Years
Melanie Campbell Hanemann 43 Director - 8 Years
John L. Snyder, Jr. 72 Director - 8 Years
Melinda P. Hotho 36 Director - 5 Years
</TABLE>
The Board of Directors of the Company held no regularly scheduled
meeting in 1998.
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 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, 1998, the Company paid aggregate
cash compensation in the amount of $75,000 to Mr. Guimbellot, the
Registrant's. Chief Executive Officer. In 1998, the Company paid aggregate
cash compensation in the amount of $74,742,22 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 1,165,594 50.85%
1726 Montreal Circle
Tucker, Georgia 30084 Note 7
Harry C. McIntire 161,289 6.86%
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 3,361 .14%
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 9600 .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%
1,403,713 59.23%
</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, 1997
and 1996.
Consolidated statements of changes in cash flow of the
Company for the Fiscal Years ended December 31, 1998 and 1997.
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
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, 1998,1997 AND 1996
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 10-29
</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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the
period ended December 31, 1998. 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, 1998 and
1997, and the consolidated results of their operations
and their cash flows for each of the three years in the
periods ended December 31, 1998, in conformity with
generally accepted accounting principles.
ROBERT J. CLARK, PC
Certified Public Accountants
Roswell, Georgia
December 31,1999
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
CURRENT ASSETS
<S> <C> <C>
Cash $ 100,898 $ 74,232
Accounts Receivable-Net (Note G) 1,070,719 952,316
Accounts Receivable-Affiliates (Note G 335,060 237,713
and P)
Income Tax Receivable (Note K) 9,310 26,993
Mortgages & Notes-Affiliates (Note G 104,376 105,835
and P)
Mortgages & Notes Receivable (Note G) 589,363 411,167
Inventory (Note C) 45,067 54,429
Prepaid Expenses 45,469 67,791
Loans - Employees (Note H) 713 500
Interest Receivable 401,689 445,934
Net Deferred Tax Asset (Note K) 6,381 19,459
TOTAL CURRENT ASSETS 2,709,045 2,396,369
PROPERTY AND EQUIPMENT (Note O)
Land 1,855,332 1,720,800
Buildings & Building Improvements 3,841,941 3,841,941
Furniture, Fixtures & Equipment 760,363 924,290
Leasehold Improvements 331 3,337
Total Property & Equipment 6,457,967 6,490,368
Less: Accumulated Depreciation (1,323,801) (1,331,640)
PROPERTY AND EQUIPMENT - NET 5,134,166 5,158,728
OTHER ASSETS
Mortgages & Notes Receivable 3,925,793 4,453,081
Mortgages & Notes-Affiliates (Note 1,129,564 1,244,002
P)
Investments in Unconsolidated 365,633 464,857
Affiliates (Note I)
Investment - Affiliate 35,440 0
Investment in Real Estate 235,752 228,449
Trademarks - Net (Notes J and P) 1,338,517 1,381,346
Organization Cost 13,588 3,030
Deposits 4,498 5,897
Net Deferred Tax Asset (Note K) 0 5,815
Deferred Tax Asset Valuation 7,581 4,789
Allowance
Marketable Equity Securities, 24,788 23,698
Carried at Market
TOTAL OTHER ASSETS 7,081,154 7,814,964
TOTAL ASSETS $ 14,924,365 $ 15,370,061
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS'EQUITY
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable - Trade $ 206,816 $ 177,915
Interest Payable 166,407 191,034
Taxes Payable 95,261 86,352
Other Taxes Payable 386,858 444,100
Other Liabilities 264,521 243,993
Mortgages & Notes Payable (Note L) 693,387 602,867
Mortgages & Notes Payable- 133,885 214,783
Affiliates (Note P)
Deferred Severance Pay (Note Y) 12,000 12,000
TOTAL CURRENT LIABILITIES 1,959,135 1,973,044
LONG-TERM LIABILITIES
Mortgages & Notes Payable (Note L) 1,921,729 2,292,047
Mortgages & Notes Payable- 279,312 333,888
Affiliates (Note P)
Escrow - Advance Construction Draw 100,200 100,200
(Note Y)
TOTAL LONG-TERM LIABILITIES 2,301,241 2,726,135
DEFERRED AMOUNTS
Deferred Income-Installment 1,544,794 1,576,562
Deferred Rent Income 1,300 0
Net Deferred Tax Liability 54,650 0
Deferred Severance Pay (Note Y) 140,050 257,705
TOTAL DEFERRED AMOUNTS 1,740,794 1,834,267
TOTAL LIABILITIES &
DEFERRED AMOUNTS 6,001,170 6,533,446
MINORITY INTEREST (Note A) 795,589 811,765
STOCKHOLDERS' EQUITY
Common Stock- no par value,
Authorized 5,000,000 shares, Issued
& Outstanding 2,365,284 year ended 6,023,315 6,003,871
1998 and 2,349,729 year ended 1997
Additional Paid in Capital 42,201 42,201
Retained Earnings 2,062,090 1,978,778
TOTAL STOCKHOLDERS' EQUITY 8,127,606 8,024,850
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 14,924,365 $ 15,370,061
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES
Franchising Revenues $ 1,843,335 $ 2,060,922 $ 2,347,965
Financing Revenues 572,201 683,505 791,239
Sale of Furniture 19,519 225,468 265,598
Operating Lease Revenues 601,909 741,718 786,957
Gain on Sale of Assets 649 78,764 360,100
Investment Income 7,015 12,180 0
Legal Settlement Revenues 334,029 435,570 100,741
Other Income 436,329 158,308 259,274
TOTAL REVENUES 3,814,986 4,396,435 4,911,874
COST & EXPENSES
Operating Expense-Franchise 1,950,467 2,143,736 2,317,841
Division
Operating Expense-Financing & 916,328 1,230,271 2,109,936
Investing
Cost of Sales -Furniture Sales 14,233 122,264 143,198
Interest Expense 310,851 417,536 308,237
Depreciation & Amortization 284,656 273,173 283,030
Investment Loss 179,680 120,551 87,068
Loss on Sale of Property 0 877,924 1,329
TOTAL COST & EXPENSES 3,656,215 4,308,860 6,127,234
Income (Loss) from Continuing
Operations before Taxes & Minority 158,771 87,575 (1,215,360)
Interest
Less: Provisions for Income (73,280) 424,544 (44,998)
Taxes (Note K)
Income (Loss) before Minority 85,491 42,577 (790,816)
Interest
Less: Minority Interest in Income
(Loss) of Consolidated (3,953) (12,134) (24,487)
Subsidiaries
NET INCOME (LOSS) $ 81,538 $ 30,443 $ (815,303)
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
INCOME (LOSS) PER SHARE 1998 1997 1996
<S> <C> <C> <C>
Income (Loss) per Share from Operations
before Taxes andMinority Interest $ .07 $ .04 $ (.52)
Income (Loss) per Share before Minority
Interest $ .04 $ .02 $ (.34)
Basic Net Income (Loss) per Common
Share $ .03 $ .01 $ (.35)
Average Shares Outstanding
2,356,949 2,335,541 2,322,895
</TABLE>
<TABLE>
<CAPTION>
SOUTHERN SCOTTISH INNS,INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Number of
Common Additional
Shares Common Paid In Retained
Outstanding Stock Capital Earnings
<S> <C> <C> <C> <C>
Balance December 31,1995 2,322,466 $ 5,963,03 $ 42,201 $ 2,755,46
Shares Issued to 500 688
Directors
Comprehensive
Income:
Net Loss (815,303)
Unrealized Gain on
Securities,net of tax 5,600
Balance December 31,1996 2,322,966 5,963,72 42,201 1,945,76
Shares Issued to Directors
And Officer 26,763 40,144
Comprehensive Income:
Net Income 30,443
Unrealized Gain on
Securities, net of tax 2,573
Balance December 31,1997 2,349,729 6,003,87 42,201 1,978,77
Shares Issued to Directors 15,555 19,444
Comprehensive
Income:
Net Income 81,538
Unrealized Gain on 1,774
Securities,net of tax
Balance December 31,1998 2,365,284 $ 6,023,315 $ 42,201 $ 2,062,090
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
CASH FLOWS PROVIDED BY (USED
FOR) OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $ 81,538 $ 30,443 $ (815,303)
Non-Cash Items Included inNet Income:
Depreciation and Amortization 284,656 273,173 283,030
Uncollectible Amounts 252,916 84,235 423,233
(Gain) Loss - Sale of Assets (649) (74,236) 517,824
Deferred Income Recognized (30,468) (16,083) (14,486)
Discount Earned 0 (27,871) (5,198)
Investment Income-Affiliates 162,385 110,042 75,941
Minority Interest Income 3,953 12,134 24,487
Marketable Equity Security at 0 (2,626) (5,899)
Market
Write off Note Payable (5,404) (2,589) 0
Interest Receivable Converted to Property 0 (163,756) 0
Interest Receivable Adjustment 45,724 6,065 0
Bonus Reinstated 0 32,833 0
Note Receivable Credit/Assignment (236,741) (17,700) 0
Expense Paid for Note Payable 68,052 2,666 0
Accruals for Investments (2,892) (48,337) 0
Accounts Receivable Converted
To Investment or Note (41,705) (154,194) 0
Capital Stock for Directors' Fees 0 36,450 0
Sale Payables for Receivables (190,560) 0 0
Miscellaneous 15,149 4,852 0
Net Changes In Current Assets and
Liabilities:
Accounts Receivable (118,403) (347,284) (177,405)
Accounts Receivable-Affiliates (97,347) (133,237) 102,649
Inventories 9,362 51,506 (93,549)
Loan Receivable-Employee (213) 8,635 (2,623)
Deposits 1,399 7,885 2,917
Interest Receivable 44,245 69,615 (192,150)
Income Tax Receivable 17,683 0 0
Prepaid Expense 12,798 3,306 101,796
Accounts Payable 28,901 (18,359) 60,323
Interest Payable (24,627) 59,224 50,339
Taxes Payable (48,333) 46,867 (219,179)
Deferred Income Tax 70,751 23,463 (400,101)
Other Accrued Liabilities 20,528 (94,263) (315,945)
Deferred Severance Pay (117,655) 175,705 94,000
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 205,043 (61,436) (505,299)
</TABLE>
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
CASH FLOWS PROVIDED BY (USED
FOR) INVESTING ACTIVITIES
<S> <C> <C> <C>
Investment Distribution $ 14,437 $ 16,563 $ 0
Payments on Mortgages and Notes
Receivable - Incurred (20,000) (17,431) (185,565)
Collections on Mortgages and
Notes Receivable 418,553 632,423 558,611
Acquisition (Disposition) of
Fixed Assets (22,450) (254,418) (449,255)
Investment Purchases (35,596) (126,773) 111,579
Payments Received for
Assets Sold 0 131,750 0
Advance Receipts for
Investments 0 100,200 0
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES 354,944 482,314 35,370
CASH FLOWS PROVIDED BY (USED
FOR) FINANCING ACTIVITIES
Proceeds from Notes Payable 111,484 272,523 643,355
Principal Payments on Mortgages
and Notes Payable (16,995) (7,892) (211,689)
Principal Payments on Capital
Lease Obligations (627,810) (711,577) 0
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (533,321) (446,946) 431,666
Increase (Decrease) in Cash 26,666 (26,068) (38,263)
Cash - Beginning 74,232 100,300 138,563
Cash - Ending $ 100,898 $ 74,232 $ 100,300
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 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 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, 1998 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
intercompany 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 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 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 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.
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 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.
In 1996, the Company paid $296,279 in income taxes and $265,701 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>
1998 1997 1996
<S> <C> <C> <C>
Sales $ 19,519 $ 225,468 $ 265,598
Cost 14,233 122,264 143,198
GROSS PROFIT (LOSS) $ 5,286 $ 103,204 $ 122,400
</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.
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, 1998, 1997 and 1996
was 2,356,949, 2,335,541 and 2,322,895 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 1998 and
1997 are presented net of allowance for doubtful
accounts of $95,397 and $110,487 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 $88,856 in 1998 and $123,842
in 1997. 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 1998 and 1997, the discounts
totaled $84,751 and $234,771 respectively.
The weighted average interest rate of the mortgage
notes held by the Company is 11.4 percent, and they
range from 6 percent to 12.5 percent.
The Company plans to hold the notes until maturity.
Maturities over the next five (5) years are as follows:
1999 - 589,363; 2000 - 159,942; 2001 - 171,842; 2002 - 197,570;
2003 - 220,467; Beyond - 3,175,792.
H - LOANS - EMPLOYEES
Loans-Employees represents travel advances and/or
loans to employees.
I - INVESTMENTS
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 1998 1997
<S> <C> <C> <C>
J. Puckett/Buena 25% $ 756 $ 4,915
Vista Partnership
Houma Atrium Bldg. 50% (61,822) (90,929)
Partnership
Pan American Hosp. 13% 0 (48,337)
ExtaSea Casino 40% 487,172 567,579
Cruises Of No. Fla, Inc.
Hospitality Int'l 45% (6,447) (13,462)
Real Estate, Inc.
So. Hospitality 45% (54,026) (28,735)
Insurance Services, Inc.
Cherokee Towing 67% 0 73,826 and
Construction Co.
Totals $ 365,633 $ 464,857
</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.
The Company's share of the Houma Atrium Building
Partnership losses was $83,156 in 1998 and $88,536 in
1997. Losses on the investment have been
recognized up to the Company's at risk amount.
Unrecorded losses totaled $211,384 at December 31,
1998. In 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.
(See Cash Flow). 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,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current Assets $ 20,621 $ 36,845
Property and other assets, net 3,975,974 3,339,845
Current liabilities 516,635 425,163
Long-term debt and other 3,107,165 4,410,000
liabilities Equity 372,795 (1,458,473)
Gross Revenues 726,794 809,010
Net Income/ (Loss) (293,291) (272,474)
</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 $446 in 1998,
$647 in 1997 and $1,409 in 1996.
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>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ (296) $ 17,205 $ 67,507
State, local, and franchise taxes (126) 5,478 17,546
Total Current (422) 22,683 85,053
Deferred Book Tax (Benefit):
Federal 56,399 16,523 (433,157)
State, local, and franchise taxes 17,303 5,792 (76,440)
Total Deferred 73,702 22,315 (509,597)
Net Tax Expense(Benefit) $ 73,280 $ 44,998 $ (424,544)
</TABLE>
The reconciliation of the difference between the federal statutory
tax rate and the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal statutory tax rate 35.3% 38.5% 25.5%
Deferred severance pay (26.1) 24.0 -
Undistributed earnings from affiliates 21.9 - (2.5)
Capital loss carryover 9.6 - -
Net operating loss carryover (33.1) (55.2) (3.2)
Change in bad debt reserve (3.4) 9.5 (0.3)
Amortization of trademarks (8.4) (22.0) (0.7)
State, local and franchise
taxes, net of fed. inc taxes - 2.4 (4.8)
Penalties 0.7 15.4 0.1
Nondeductible employee meals 3.0 5.8 0.3
Unrealized loss on securities - - (13.4)
Deferred income on installment sales - - -
Dividends received deduction (0.2) - (3.4)
Other .5 1.2 (0.8)
Effective tax rate (0.2)% 19.6% (3.2)%
</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>
1998 1997 1996
<S> <C> <C> <C>
Current deferred income tax assets:
Net operating loss $ 2,951 $ 0 $ 35,575
Change in reserve for bad debts 0 16,039 0
Deferred severance pay 3,420 3,420 0
Capital loss 10 0 0
Total current deferred $ 6,38 $ 19,459 $ 35,575
Long-term deferred income
tax assets:
Net operating loss carryover $ 26,166 $ 68,316 $ 200,819
Change in reserve for bad debts 41,439 28,433 0
Deferred severance pay 39,915 73,446 0
Capital loss carry forward 12,287 0 0
Total Long-term deferred $ 119,807 $ 170,195 $ 200,819
Long-term deferred income tax liabilities:
Amortization on trademarks $ 72,319 $ 62,242 $ 48,159
Installment sale 102,138 102,138 107,716
Total long-term deferred $ 174,457 $ 164,380 $ 155,875
</TABLE>
In 1996, a reduction of $112,034 relating to a deferred tax gain on
installment sales was made to deferred tax liability valuation.
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.
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 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 carryover:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net operating loss utilized 148,669 125,456 0
Tax bene 46,672 36,769 0
Tax rate 31.4% 293% 0
</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 1998 1997
<S> <C> <C> <C>
8% - 8.95% 1999 - 2011 $ 340,170 $ 358,752
9% - 9.75% 1999 - 2007 791,200 801,518
10% - 10.50% 1999 - 2011 374,496 454,298
11% 1999 - 2008 535,957 567,350
16.4%-17.65% 1999 - 1999 5,275 12,070
18.33%-23.80% 1999 6,646 12,456
Variable 1999 - 2000 561,372 688,470
Total Debt Obligations 2,615,116 2,894,914
Less: Amounts Maturing 693,387 602,867
Within one year
Net Long-Term Notes $ 1,921,729 $ 2,292,047
</TABLE>
Maturities of debt for the five years succeeding December 31, 1998
are as follows:
<TABLE>
<S> <C>
1999 $ 693,387
2000 440,804
2001 216,239
2002 223,921
2003 210,018
Beyond 830,747
Total $2,615,116
</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
$3,096,924 and a market value of $8,149,518.
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 its allocated
accumulated depreciation is $80,688 in 1998 and $61,904
in 1997. The Company also leases properties it owns
in various states. These properties are recorded in
Property and Equipment with a cost of $3,958,041 in
1998 with accumulated depreciation of $568,609 and
a cost of $2,697,806 with accumulated depreciation
of $545,017 in 1997.
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 1998 was $6,349.
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>
1999 $6,476
2000 $6,476
2001 $1,619
</TABLE>
The present value of the minimum lease payments is $12,456.
N - INDUSTRY SEGMENTS
The information about the Company's operations in
different industries is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Sales to unaffiliated customers:
Franchising 1,843,335 2,060,922 2,347,965
Financing & Investing 579,865 774,449 1,151,339
Leasing 601,909 741,718 786,957
Net profit (loss):
Franchising 12,582 60,832 100,709
Financing & Investing (99,264) (193,303) (1,352,308)
Leasing 196,363 266,360 302,744
Identifiable assets:
Franchising 1,793,377 1,793,979 1,205,667
Financing & Investing 13,004,459 13,657,619 8,560,241
Leasing 3,556,263 3,718,379 2,290,769
Depreciation expense:
Franchising 76,512 86,917 108,389
Leasing 72,021 75,014 56,133
Amortization expense:
Franchising 21,079 21,079 21,079
Leasing 1,966 1,583 1,359
Additions in property, plant and
equipment:
Franchising 44,558 51,438 108,174
Leasing 153,464 4,504 0
</TABLE>
In the Financing & Investing Segment, the Company has
included net income/(loss) from unconsolidated equity
investments totaling $ (162,386) in 1998, $(110,042) in 1997 and $0 in 1996.
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 oflease
</TABLE>
Depreciation and amortization expense was $284,656 in 1998,
$ 273,173 in 1997 and $283,030 in 1996.
P - RELATED PARTY TRANSACTIONS
In 1996, the Company transferred the sale of Sundowner
trademarks from Hospitality International, Inc. to Southern Scottish Inns,
Inc. for $360,000 (See Intangible Assets Trademarks).
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 85% by the CEO.
The management company transferred a receivable of
$36,805 due from this company for lease payments
in 1998 (See Cash Flow). In 1997, the Company loaned
an additional $5,000 to the CEO. In 1998, the
note receivable due from the CEO was increased by
credits of $31,010 for lease payments given to the
management company that manages the Company's motels
(See Cash Flow). Expenses paid on behalf of the CEO
in 1997 in the amount of $4,175 were charged to
travel expense in 1998. 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 Longterm 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,
1998 and 49.60% at December 31,1997.
Included in Accounts Receivable-Affiliates are
expenses totaling $47,772 in 1997 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 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).
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. 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 following is a schedule of loans to related parties:
<TABLE>
<CAPTION>
RELATED INTEREST PRINCIPAL ACCRUED INTEREST
PARTY RATE BALANCE RECEIVABLE
12/31/98 12/31/97 12/31/98 12/31/97
<S> <C> <C> <C> <C> <C>
Partnership
Mortgage 10% $ 586,741 $ 650,753 $ 36,356 $ 99,894
Partnership 6% - 10% 17,264 63,607 20,157 21,241
CEO 6% - 10% 39,798 45,339 11,805 7,271
Corporation 10.75% 590,138 590,138 38,400 13,918
Totals $1,233,941 $1,349,837 $ 106,718 $ 142,324
</TABLE>
The following is a schedule of loans from related parties:
<TABLE>
<CAPTION>
RELATED INTEREST PRINCIPAL ACCRUED INTEREST
PARTY MATURITIES RATE BALANCE PAYABLE
12/31/98 12/31/97 12/31/98 12/31/97
<S> <C> <C> <C> <C> <C> <C>
Company 1998 - 2004 10% 240,256 240,256 78,033 54,250
Director 1998 12% 3,027 18,028 106 290
Individual 1998 - 2004 12% 81,801 86,801 19,499 10,482
CEO 1998 - 2004 6% 0 100,990 0 68,314
2004
Individual 1998 - 2004 15% 9,792 9,792 6,632 8,726
Individual 1998 - 2004 13% 31,381 45,935 20,653 15,672
Company 1998 - 2004 10% 46,414 0 0 0
Partnership 1998 15% 0 46,343 0 2,781
Individual 1999 10% 526 526 53 0
Totals 413,197 548,671 $ 124,97 160,515
Less Amounts Maturing within
one year 133,885 214,783
Net Long-Term Notes -
Affiliates 279,312 333,888
</TABLE>
Maturities of Long-Term:
<TABLE>
<S> <C>
1999 133,885
2000 18,850
2001 0
2002 0
2003 0
Beyond 260,462
Total 413,197
</TABLE>
Interest paid to related parties was $5,871 in 1998,$3,230 in 1997
and $3,189 in 1996.
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 threeyear 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)
1998 1997
<S> <C> <C>
Computer Equipment $ 29,465 $29,465
Accumulated (12,07) (6,183)
Depreciation
Book Value $ 17,389 $23,282
</TABLE>
Minimum lease payments for each of the following years are:
<TABLE>
<CAPTION>
<S> <C>
1999 9,606
2000 2,727
2001 0
2002 0
2003 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 1998, 1997 and 1996
were $239,090, $292,521 and $130,275 respectively.
S - STOCK ISSUANCE TO OFFICERS
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.
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.
During 1996, a director exchanged 9,000 shares of Red Carpet Inns
International, Inc., common stock for 500 shares of Southern
Scottish Inns' common stock. The issuance was valued at the fair
market value ($1.375 per share) of Southern Scottish Inns' stock.
T - LITIGATION SETTLEMENTS
From 1995 to 1998, 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 1998, 1997 and 1996 in the amount of $0, $0 and
$1,864 respectively. Following is a summary of advertising
income and advertising costs for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Advertising Income $ 309,499 $ 385,486 $ 430,326
Advertising Costs (618,651) (643,458) (750,801)
Excess of Advertising Costs
over Advertising Income $ (309,152) $ (257,972) $ (320,475)
V - CONTINGENCIES
The amount of accounts receivable in litigation or
collections was $145,267 at the end of 1998 and $65,318 in
1997. 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 $18,313. 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 $614,103. 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.
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. The remaining non-performing note
totaled $1,473,990 at December 31, 1998 and 1997
with accrued interest of $219,102 at December 31,
1998 and $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.
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
$591,619 and $2,708,863 respectively at December
31,1998 (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 $5,749,096 at December 31, 1998 and $6,214,085
at December 31, 1997, 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 $3,028,313 in
1998 and $3,443,585 in 1997.
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. This could result in a
system failure or miscalculations causing disruptions of operations.
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.
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- 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. This land is
being held for future development.
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 and 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
$216 in 1998, $ (108) in1997 and $280 in 1996 were $11,980 in
1998, $27,186 in 1997 and $52,517 in 1996. Costs to close the
division were minimal.
On July 29,1999, the land and motel (see Financial Instruments)
which was obtained in 1997 by foreclosure was sold
for $1,100,010.
</TABLE>
EXHIBIT 22
Wholly Owned Subsidiaries of Southern Scottish Inns, Incorporated
Alabama Motel Corporation
Carriage Inn of Huntsville, Inc.
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-31-1998
<PERIOD-END> DEC-31-1998
<PERIOD-TYPE> YEAR
<CASH> 100,898
<SECURITIES> 0
<RECEIVABLES> 2,511,230
<ALLOWANCES> 0
<INVENTORY> 45,067
<CURRENT-ASSETS> 2,709,045
<PP&E> 6,457,967
<DEPRECIATION> (1,323,801)
<TOTAL-ASSETS> 14,924,365
<CURRENT-LIABILITIES> 1,957,597
<BONDS> 2,301,241
<COMMON> 6,023,315
0
0
<OTHER-SE> 2,901,418
<TOTAL-LIABILITY-AND-EQUITY> 14,924,365
<SALES> 19,519
<TOTAL-REVENUES> 3,814,986
<CGS> 0
<TOTAL-COSTS> 14,233
<OTHER-EXPENSES> 3,331,131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 310,851
<INCOME-PRETAX> 158,771
<INCOME-TAX> (732,280)
<INCOME-CONTINUING> 85,491
<DISCONTINUED> 0
<EXTRAORDINARY> (3,953)
<CHANGES> 0
<NET-INCOME> 81,538
<EPS-BASIC> .07
<EPS-DILUTED> .03
</TABLE>
