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.
Note 1. On August 15, 1990, the Company acquired Downtowner passport International Motel Corporation, the owner of Downtowner and Passport registered marks. This acquisition of corporate stock was in the nature of a conveyance in satisfaction of debt. In late 1991 the Company deemed the 1990 acquisition to be flawed and in February of 1992, the Company acquired the assets of Passport International Motel Corporation for assumption of debt and simultaneously conveyed same to Hospitality International, Inc. the Company's franchising subsidiary, for the same consideration.
Note 2. One property leased from a third party is being operated as a restaurant by Company's sub-lessee.
(b) Segment Information - Note 3
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.
* Included in Financing & Property Development Information.
(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 provides owner financing to persons acquiring motel properties previously operated and/or owned by the Company. For amounts of revenue of similar products and services in excess of 15% total, see Item 1 (b) above.
(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 constitute raw materials for the Company's franchising division, and sites suitable for development and existing properties which may be acquired constitute raw materials for both the Company's lodging division and its financial 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" and related trademarks, etc. used in operating lodging facilities under these names.
(V) Seasonability
The Company's financing business by its nature is 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 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 financing
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.
(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 division each compete with other similar businesses, many of which are larger and have more national recognition than does 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.
Competition in developing and financing lodging properties has been significantly affected by over-development in some areas as well as the area's and the country's general economic condition, and by the market force of the Resolution Trust Corporation, the latter of which decreased in the current reporting period.
(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.
(XIII) Employees
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, as of June 30, 1995, was not then 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 franchisee in the Bahamas. As of April 30, 1995, the franchising division has two franchisees in Costa Rica and two in Jamaica.
Item 2
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:
* 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 $290,563.31.
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.
Note 5 These properties, on April 1, 1990, were leased to First Hospitality Management Corporation, a corporation owned by Robert H. Douglas, a Director of the Company and a former employee of the Company.
Note 6 Title to this property was reacquired by foreclosure December 7, 1990. It re-opened for business April, 1990, under an agreement with Alahunt, Inc., a corporation wholly owned by Richard A. Johnson, a Director of Registrant. During the current reporting period, the Company leased this property to Thelma Pullin, a sister of the Registrant's then president.
Note 7 The Marietta property in 1992 was operated by the Company. Since 1993, it has been leased to 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 since which time the property has been leased to First Hospitality Management Company.
The following table sets forth certain information, as of this writing, concerning other properties owned or recently owned by the company.
Note On 6/9/94 our interest in Purvis, MS land was sold subject to then debt for consideration of $250,000 to John M. Hill, a partner of Nelson & Hill, owner of the other undivided 1/2 interest in said land.
Item 3
Item 3 Legal Proceedings
Waymon Barron, Plaintiff, v. Southern Scottish Inns, of Mississippi, Inc., et al, Defendants
On or about September 4, 1986, a Complaint for damages for negligence and breach of implied warranty was filed in the circuit Court of Warren County, Mississippi, styled Waymon Barron v. Motel Recovery & Development, Ltd., d/b/a Scottish Inn of Vicksburg, a Partnership, Lewis Slaughter and Southern Scottish Inns, Inc., General Partner, and Sam Patel, bearing Cause No. 14,307 on the docket of said Court. Service of Process was not had on Registrant.
On or about August 10, 1987, an Amended Complaint for damages in the same matter was filed in the same Court, styled Waymon Barron v. Motel Recovery & Development, a Limited Partnership, Lewis Slaughter and Reba Slaughter, General Partners, Scott Yeoman and James Johnstone, Limited Partners; Southern Scottish Inns of Mississippi, Inc., N. V. Patel and Sam Patel, bearing Cause No. 14,307 C on the docket of said Court. Later, Registrant and Hospitality International, Inc., a partially owned subsidiary of the Company, were made additional party Defendants. The Company and its defendant subsidiaries have obtained separate counsel, answered the complaints and are preparing defenses.
The Amended Complaint demands judgement of $1,500,000 plus interest and costs of Court, and trial by jury.
The Amended Complaint alleges that Plaintiff on October 26, 1985, while a guest in Room 101 of the Scottish Inn in Vicksburg stepped onto a rotten place in the floor, that his leg went through and he fell injuring his back, which injury required surgery and resulted in loss of wage earning ability and loss of his ability to enjoy life.
On October 25, 1985, the date Mr. Barron checked into said room and on October 26, 1985, the date of his injury, the record title of the Scottish Inn in Vicksburg was in Defendant Southern Scottish Inns of Miss., Inc. The motel was not being operated by said subsidiary of the Company or the Registrant on either of said dates.
On January 26, 1984, this motel was the subject of a Contract For Deed with Defendants Lewis Slaughter and Reba K. Slaughter, his wife. Subsequently, and prior to August of 1984, said Defendants transferred their rights, duties and interest under and in the Contract For Deed to Defendant Motel Recovery and Development, a limited partnership, of which the named individual persons were the general or limited partners. In August of 1984, Motel Recovery and Development, leased the subject motel to Defendant N. V. Patel. On October 2, 1984, Registrant and its defendant subsidiary recognized the transfer from Mr. and Mrs. Slaughter to Motel Recovery and Development and the lease from Motel Recovery and development to N. V. Patel. In May of 1986, Registrant and its defendant subsidiary, through surrender of possession and of operation of Mr. Patel and Motel Recovery and Development regained possession and leased same.
For some time, the Plaintiff did not diligently pursue this claim, except for the taking of depositions of the Plaintiff's doctor and of an expert building tradesman. Motions for Summary Judgement were filed by the Co- Defendants, Southern Scottish Inns, Inc. and Southern Scottish Inns of Miss., Inc. Also, Hospitality International, Inc. filed a motion for Summary Judgement. Circa October 31, 1993, the Court file reflects that during the last eight (8) months, the insurer for our Franchisee settled, on behalf of Hospitality, with the plaintiff and Hospitality International, Inc. was dismissed. During the current reporting period, the Registrant was dismissed on Summary Judgement and Southern Scottish Inns, of Mississippi, Inc. was dismissed on Summary Judgements. Plaintiff has appealed both dismissals and the appeals are pending.
PART II
Item 5
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.
(b) As of this writing, there are approximately 910 shareholders of the Registrant's common stock.
(c) No cash dividends have been paid on the Company's common stock during the two most recent Fiscal Years and none are anticipated to be paid in the foreseeable future.
Item 6
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.
Item 7
Item 7 Management's Discussion and Analysis of Financial Conditions and Results of Operations
Capital Resources
(I) No material commitments for capital expenditures are planned other than any possible purchases or development of properties through the financing division.
Hospitality International, Inc. was able to acquire a suitable office facility and moved into same on November 1, 1992. The property consists of 2.76 acres of land and 26,888 square feet of office space, of which 15,592 square feet is in use , of which Hospitality uses 11,296 square feet. The property costs $425,000, of which $409,000 was financed. The loan was guaranteed by Registrant and by Bob Guimbellot, personally. During the first week of February of 1994, the Company moved its offices into this facility. At this time, and for the foreseeable future, Southern Scottish Inns, Inc., Red Carpet Inns International, Inc. and Hospitality International, Inc. are all sharing the same office building.
(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
Item 8 Financial Statements and Supplemental Data
The financial statements and financial statement schedules filed as part of the Annual report are listed in Item 14 below.
Item 9
Item 9 Disagreements of Accounting and Financial Disclosures
Not applicable.
Part III
Item 10
Item 10 Directors and Executive Officers of the Registrant
The Following persons are the directors and the executive officers of the Registrant.
The Board of Directors of the Company held one regularly scheduled meeting in 1994.
The term of office for all directors expires at the close of the next annual meeting of shareholders. Officers serve at the please 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.
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 six years.
Donald Deaton is President of Hospitality International, Inc., a motel franchising company and subsidiary of the Registrant.
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 the corporation to whom several of the Company's motels are leased.
Jack M. Dubard is currently 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. Since early 1994, Mr. Dubard has 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 8 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 5 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 has been a general contractor of over 18 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 1995 from his employment by Hospitality International, Inc.
Melanie Campbell is the current Corporate Secretary and Treasurer of Western Wireline Services, Inc. She has been with this company for more than six 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.
Timothy J. Desandro has been selected to serve as Director on an interim basis. He is currently the Lessee of the Scottish Inn located in Marietta, Georgia, which property he has managed for the past six (6) years. Previously he functioned in the capacity of oil well service operator, a position that Mr. DeSandro held for 20 years.
Directors who have resigned:
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 ye 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 the past fourteen (14) years, in an effort to shed some activities with a view toward his imminent retirement, resigned in 1994 as a Director of the Registrant. Mr. Geller, the sole stockholder and president of Securities Transfer Company, the Registrant's Transfer Agent, has given Registrant notice that he is closing Securities Transfer Company at Calendar year end.
Committees of the Board of Directors
The Board of Directors of the Registrant does not maintain any standing committees.
Item 11
Item 11 Executive Compensation
For services rendered in all capacities to the Company and its subsidiaries during the Fiscal Year ended December 31, 1995, the Company paid aggregate cash compensation in the amount of $98,000.00 to Mr. Guimbellot, the Registrant's then President and present Chief Executive Officer. His salary was partially deferred and he is owed $169,687.27, most of which is from prior periods. His annual salary is $88,200. In 1995, the Company paid aggregate cash compensation in the amount of $62,969.99 to Mr. Dubard, who for most of said period was vice president of Registrant and CEO of its franchising subsidiary, and who for the latter part of said period was Registrant's president and CEO of Hospitality Inc.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 cost is not included in the compensation 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
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.
Note 8 Based on 2,322,466 shares outstanding.
Note 9 Includes 470,750 shares owned by Bobby Guimbellot d/b/a Coastal Companies, and 35,238 owned by Industrial Funds, an entity of Western Wireline Services, Inc. Mr. Guimbellot's shares also include 17,713 and 1,664 shares owned by Lift Boats, Inc. and Tri Delta Dredge, Inc., respectively and 361,405 shares owned by Shelly Plantation. Ms. Campbell shares voting rights as to Industrial Funds shares with Mr. Guimbellot.
Note 10 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.
Note 11 Based on 2,322,466 shares outstanding.
Note 12 Includes 250 shares in the name of his minor son.
Note 13 Includes 470,750 shares owned by Bobby Guimbellot d/b/a Coastal Companies, and 35,238 owned by Industrial Funds, an entity of Western Wireline Services, Inc. Mr. Guimbellot's shares also include 17,713 and 1,664 shares owned by Lift Boats, Inc. and Tri Delta Dredge, Inc., respectively and 361,405 shares owned by Shelly Plantation. Melanie Campbell, the Secretary of Western Wireline Services, Inc., shares voting and investment powers with respect to the 35,238 shares owned by Industrial Funds.
Note 14 Includes 413 shares in the name of his wife.
Note 15 Voting and investment powers on 113,331 shares are shared with his wife.
Note 16 Includes 639 shares in the name of her minor child.
Item 13
Item 13 Certain Relationships and Related Transactions
J. Puckett and Company/Buena Vista Venture
This entity is an ordinary particular Louisiana partnership. The Registrant owns twenty-five (25) of the one hundred (100) partnership units. Bobby E. (Bob) Guimbellot, individually, Registrant's Chief Executive Officer, owns eleven (11) of said partnership units. Additionally, Mr. Guimbellot, d/b/a Coastal Companies, owns twenty (20) of said units. Emilee B. Guimbellot, Bob Guimbellot's mother, owns one (1) said units. Shelly Plantation Ventures, a partnership in which Mr. Guimbellot is a principal unit owner and in which his mother is a small unit owner, while not a partner, is a three (3) per cent equity owner in J. Puckett. The Registrant, in June of 1992, borrowed $50,000.00 from J. Puckett. This debt was represented by a demand note bearing interest at twelve (12) % per year and was paid off March 1995. On November 17, 1995 this partnership sold the motel it owned on the Southside of Highway 90 in Biloxi, Mississippi. Funds from the sale were placed on deposit in a Trust Account with the intention of the partnership finding a like kind exchange. After the 45 day period, it was clear that a like kind property had not been found. The Registrant's portion of the sale was received in January, 1996. At the time of the property sale, a note held by J. Puckett on a prior property credit sale on the Northside of Highway 90 in Biloxi, Mississippi was paid and the Registrant received $258,000 in November, 1995 from that payment.
Pan American Hospitality
From time to time, and on an as needed basis, the Registrant has made advances to Pan American Hospitality, a partnership comprised of Red Carpet Inns International, Inc. (a subsidiary of the Registrant), Bobby E. Guimbellot, Emilee Guimbellot (Mr. Guimbellot's mother), Western Wireline Services, Inc., Mildred Puckett, Mary R. Dubard (wife of Jack M. Dubard), and two unrelated individuals. As of December 31, 1995, these advances total $145,676.
C. Guy Lowe, Jr.
On April 4, 1986, the Company acquired from C. Guy Lowe, Jr., (a director of the Registrant) all of the outstanding stock of O.S. of South Louisiana, Inc. in exchange for the Registrant's promissory note in the face amount of $132,448. On May 5, 1986, Mr. Lowe assigned this note to Merchants Trust and Savings Bank. No scheduled payments were made on this note. On July 31, 1990, Red Carpet Inns International, Inc., a consolidated subsidiary of the Company, borrowed $100,000 from Merchants Trust and Savings Bank and loaned it to the Company. The Company, in turn, paid the $100,000 back to Merchants Trust and savings Bank as assignee, in full, compromise settlement of the original note of $132,448 to Mr. Lowe. The Company will lower its basis in its O.S. of South Louisiana, Inc. stock. The new note from Merchants Trust and Savings Bank to Red Carpet Inns International, Inc. was guaranteed by two affiliated entities belonging to the Company President, Bobby E. Guimbellot. The Company is now indebted to Red Carpet Inns International, Inc. in the amount of $70,000 at an interest rate of one and one-half (1/2%) percent over Chase Manhattan Bank prime rate.
PART IV
Item 14
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 17 Consolidated balance sheets of the Company as of December 31, 1995 and 1994. Consolidated statements of changes in cash flow of the Company for the Fiscal Years ended December 31, 1995, 1994 and 1993. Notes to consolidated financial statements.
2. Financial statement schedules.
3. 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 17 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, P.C. 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. For the year 1994 and for the foreseeable future, Mr. Clark will do the audits for Southern Scottish Inns, Inc., Red Carpet Inns International, Inc. and Hospitality International, Inc. Mr. Mosher cooperated with Mr. Clark in the transition. 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
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHERN SCOTTISH INNS, INC. ---------------------------- (Registrant)
By: Bobby E. Guimbelott 9/5/95 By: Jack M. Dubard 9/5/95 --------------------------- ------------------------ 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 Melinda P. Hotho - ------------------------ ------ ------------------------ ------ Michael M. Bush Date Melinda P. Hotho Date Director Director
Melanie Campbell Richard A. Johnson - ------------------------ ------ ------------------------ ------ Melanie Campbell Date Richard A. Johnson Date Director Director
Donald Deaton C. Guy Lowe, Jr. - ------------------------ ------ ------------------------ ------ Donald Deaton Date C. Guy Lowe, Jr. Date Director Director
Timothy D. DeSandro Harry C. McIntire - ------------------------ ------ ------------------------ ------ Timothy D. DeSandro Date Harry C. McIntire Date Director Director
Robert H. Douglas Gretchen W. Nini - ------------------------ ------ ------------------------ ------ Robert H. Douglas Date Gretchen W. Nini Date Director Director
Jack M Dubard John Snyder - ------------------------ ------ ------------------------ ------ Jack M. Dubard Date John Snyder Date Director Director
Bobby E. Guimbellot George O. Swindell - ------------------------ ------ ------------------------ ------ Bobby E. Guimbellot Date George O. Swindell Date Director Director
SOUTHERN SCOTTISH INNS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southern Scottish Inns, Inc. and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
ROBERT J. CLARK, PC Roswell, Georgia June 7, 1996
SOUTHERN SCOTTISH INNS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994
The accompanying notes are an integral part of these financial statements.
SOUTHERN SCOTTISH INNS, INC. CONSOLIDATED BALANCE SHEETS - CONTINUED DECEMBER 31, 1995 AND 1994
The accompanying notes are an integral part of these financial statements.
SOUTHERN SCOTTISH INNS, INC. CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1995, 1994 AND 1993
The accompanying notes are an integral part of these financial statements.
SOUTHERN SCOTTISH INNS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1995, 1994 AND 1993
The accompanying notes are an integral part of these financial statements.
SOUTHERN SCOTTISH INNS, INC. CONSOLIDATED STATEMENTS OF CASH FLOW YEAR ENDED DECEMBER 31, 1995, 1994 AND 1993
The accompanying notes are an integral part of these financial statements.
SOUTHERN SCOTTISH INNS, INC. CONSOLIDATED STATEMENTS OF CASH FLOW - CONTINUED FOR THE YEAR ENDED DECEMBER 31, 1995, 1994 AND 1993
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995
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% interest in Hospitality International, Inc. and Red Carpet Inns International, Inc. owns the other 50%; therefore, all of its operations are included in these financial statements and it is noted as the franchising division. The Company owns 70.8% 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 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 franchisor for Red Carpet Inns and Master Host Inns as well as Scottish Inns and owns the Downtowner/Passport trademarks. Its market has historically been the contiguous United States; however, in 1994 the Company began to explore international markets. The Company also provides a nationwide central reservation service for its franchisees.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 Company's 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.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
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.
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 are recognized when all material conditions of the sale have been substantially performed. Substantial performance by the franchisor occurs when, 1) the franchisor is not obligated in any way to excuse payment of any unpaid notes or to refund any cash already received, 2) initial services required by the franchisor by contract or otherwise have been substantially performed, and 3) all other conditions have been met which affect the consummation of the sale.
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.
In 1995 the Company purchased an investment for $512,192 and recorded a payable for the same amount. The cash was paid in January 1996.
During 1994, the Company had the following non-cash transactions: 1. The Company exchanged land for an installment note receivable of $13,000. 2. The Company purchased a building and land by financing $250,000 of the purchase price with a mortgage note.
In 1995, the company paid $95,149 in income taxes and approximately $261,113 in interest.
In 1994, the Company paid $985 in income taxes and approximately $236,940 in interest.
In 1993, the Company paid approximately $361,361 in interest.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
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. The furniture sold in 1993 had a zero basis; and therefore, no cost of sales was recorded. Inventory was sold at a loss in 1994. In 1995, $175 of inventory was sold at a cost of $120.
REAL ESTATE SALES
Gains on real estate transactions on which substantial down payments are not received are deferred and recognized as income only when the principle amount of the obligation is received. This deferred income is shown on the balance sheet as a deferred credit.
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.
NET INCOME PER SHARE
Net income per common 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, 1995 and 1994 was 2,322,466 and 2,319,694 in 1993.
ACCOUNTS, MORTGAGES AND NOTES RECEIVABLE
For accounts receivable - trade, 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 1995 and 1994 are presented net of allowance for doubtful accounts of $71,082, and $92,318 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 reserve for uncollectible mortgages and notes receivable is maintained. Questionable unsecured notes receivable are written down to net realizable value; secured mortgages and notes receivable are written down to the adjusted basis of the secured property.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
ACCOUNTS, MORTGAGES AND NOTES RECEIVABLE - (CONTINUED)
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%. The management elected to write off some of the accrued interest for this year. These notes amount to $32,469 in 1995 and $46,762 in 1994. All are due within one year. 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 1995, these totaled $135,897.
The weighted average interest rate of the mortgage notes held by the Company is 11.4%, and they range from 10% to 12.5%.
Maturities over the next five (5) years are as follows:
LOAN EMPLOYEES
Loan Employees represents travel advances and/or loans to employees.
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:
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
INVESTMENTS IN UNCONSOLIDATED AFFILIATES - (CONTINUED)
Those negative investments reflect losses in excess of investment, and the Company is at risk up to at least the amount noted.
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, 1995 and 1994 are as follows:
INTANGIBLE ASSETS - TRADEMARKS
Trademarks are stated on the basis of cost and are amortized, 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 $246,158 and $212,329 on December 31, 1995 and 1994, respectively.
The trade name "Red Carpet Inns" is also owned by the Company. A historical cost basis in excess of $600,000 was carried on the books of the old Red Carpet Inns company prior to its acquisition by the Company. This amount apparently was 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.
In 1993 the franchising division accepted the marks of Downtowner/Passport International Hotel Corporation from Southern Scottish Inns, Inc. in satisfaction of Southern Scottish Inns, Inc. payable to the franchising division. In this transaction, the Company also assumed some debt of Downtowner/Passport International Hotel Corporation to outside parties. The amount booked as Downtowner/Passport International Hotel Corporation's trademark comprises three amounts: (1) the receivable from Southern Scottish Inns, Inc., (2) the debts of Downtowner/Passport International Hotel Corporation assumed and (3) an outstanding receivable due to the company from Downtowner/Passport International Hotel Corporation.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
INCOME TAX
The components of the provision for income taxes are as follows:
The reconciliation of the difference between the federal statutory tax rate and the Company's effective tax rate is as follows:
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
INCOME TAX - (CONTINUED)
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:
On December 31, 1992, the Company had an unused net operating loss of $628,319 to be applied toward future taxable income. Listed below are the years, amounts, and tax benefit of the net loss carryforward. The remaining loss carryforward was totally used against taxable income in 1995. Such amounts reduce the current portion of tax that is actually payable.
The Company and its subsidiaries file unconsolidated tax returns. The entities are not subject to Internal Revenue Code Section 1563. The taxes have been calculated accordingly.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
DEBT OBLIGATIONS
The Company has incurred debt obligations primarily through public and private offerings and bank loans. Debt obligations consist of the following:
Maturities of long-term debt for the five years succeeding December 31, 1995, are as follows (in thousands):
The above notes include various restrictions, none of which are presently significant to the Company.
OPERATING LEASES
The Company leases out as office space a portion of the building it owns. The allocated cost of the portion leased is $161,856 and its allocated accumulated depreciation is $16,700 at the end of 1995. The company also leases properties it owns in various states. These properties are recorded in Property & Equipment and total $2,859,661 with accumulated depreciation of $448,926. The terms of lease agreements vary by tenant and circumstance; however, all current lease agreements are for one year or less. Contingent lease income for one property is based on ninety percent of property profits and amounts to $471,700 in 1995.
Schedule of Minimum Future Rental on Noncancelable Operating Leases
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
INDUSTRY SEGMENTS
The information about the Company's operations in different industries are as follows:
Included in the Financing & Investing Segment the Company has included net income from unconsolidated equity investments totaling $375,316 in 1995, $305,398 in 1994 and $164,747 in 1993.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
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 straight-line over the estimated useful lives of the respective assets. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated deprecation are removed from the accounts and any gain or loss is included in the statement of income.
Depreciation and amortization expense was $270,081 in 1995, $216,313 in 1994 and $188,378 in 1993.
RELATED PARTY TRANSACTIONS
The Company paid expenses on behalf of four of its unconsolidated subsidiaries. The balance due from the subsidiaries was $116,016 at December 31, 1995 and $80,057 at December 31, 1994.
The Company purchased a mortgage note of a related unconsolidated partnership from a third party in 1995. The mortgage is on the motel which the partnership operates and derives its revenues. The mortgage was purchased for $350,000 cash when it had a carrying value of $481,943; therefore, the Company booked an original issue discount of $131,943.
The following is a schedule of loans to related parties:
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
RELATED PARTY TRANSACTIONS - (CONTINUED)
The following is a schedule of loans from related parties:
Maturities of Long-Term:
CONDEMNED BUILDING WRITE OFF
In 1993 an existing building was condemned and written off. The loss shown on the books was $148,904.00. The fixed asset and accumulated depreciation for this property was removed from the corporate books, except for an allowance of $50,000 for salvage of scrap metal. This amount was written off in 1994.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
PENDING LITIGATION
At present time the company has a pending litigation against them in the amount of $1,500,000. The lawsuit has been dismissed, however the plaintiff still has time to appeal. The Company is also the defendant in other 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.
CHANGE IN METHODOLOGY FOR CALCULATING MINORITY INTEREST IN SUBSIDIARIES
A change in the calculation for determining minority interest was made in 1993. Minority interest was increased based on requirements stated in Statements of Financial Accounting Standards No. 94.
STOCK ISSUANCE TO OFFICERS
During 1993 common stock was issued to corporate officers. These shares were exchanged for Red Carpet Inns International, Inc. common stock based on like kind market rules and totaled 3,334 shares.
LITIGATION SETTLEMENTS
In 1994 and 1995 the franchising division aggressively pursued its legal rights to its trademarks. It has been successful in stopping motel operations from illegally using its trademarks, as well as enforcing compliance to its franchise agreements. Settlements were reached on a number of lawsuits in 1995 and 1994 that significantly increased the revenues of the Company. Attorneys collected one-third of settlements as fees; therefore, legal expenses also increased significantly in 1995 and 1994.
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 1995 and 1994 in the amount of $85,678 and $49,967 respectively.
A summary of advertising income and advertising costs for the years ended December 31,
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
SIGNS - RED CARPET INNS
The Company held Red Carpet Inns signs for future sale. In 1994, a change in personnel and a lack of sufficient documentation made the existence and thus valuation of the signs unknown and accordingly management decided to write-off these assets at their historical cost.
CONTINGENCIES
The amount of accounts receivable in litigation or collections at the end of 1995 was $59,365 and $35,571 in 1994. It was management's and counsel's opinion that the chances for collection were 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 $102,000. The turnover of franchises makes the likelihood of payment only reasonably possible; therefore, this amount has not been accrued.
In 1995, the Company purchased an equity interest in a corporation and guaranteed some of its loans. The guarantees totaled $235,760. The Company also perfected an interest in the corporation's property.
PRIOR PERIOD ADJUSTMENT
The Company made an adjustment to the retained earnings for 1993 to correctly amortize its trademarks and to properly account for tax benefits of the net operating loss carryforward on the books of a consolidated subsidiary. The amortization of the trademarks does not have any income tax effect, and it reduced net income in years prior to 1993 by $165,750. The tax benefit of the carryforward loss increased net income in years prior to 1993 by $196,559. This carryforward benefit was completely used in 1995.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED) December 31, 1995
FINANCIAL INSTRUMENTS
I. MARKET AND OFF BALANCE SHEET RISK
The Company holds financial instruments that relate to real estate located throughout the Southeast. If these properties decline significantly in market value, the valuation of the associated receivable could become impaired. No such decline is foreseen at the present time.
The Company is carrying a 13% investment in a partnership which operates a motel and restaurant. This Partnership has had operating losses in previous years and the Company has loaned the Partnership monies to fund its daily operations. These loans total $263,954 and carry an interest rate ranging from 9% to 12%. The loans are due on demand; however, the Company does not intend to call them in the near future. If the property and all of its assets were sold at their estimated fair market values, the monies received might not yield enough to repay these unsecured loans to the Company. However, the Company does own the mortgage note on the property of the Partnership. (See related party notes.) Since the note was purchased at a discount and the estimated fair value of the property exceeds the carrying value of the note, the Company reasonably expects to recover the purchase price of the mortgage.
The Company has three secured mortgage notes classified as non- performing. They total $2,806,221 with accrued interest of $186,589 at December 31, 1995. However, the fair market values of the properties secured by these mortgages exceed the balance of principal and accrued interest.
II. FAIR VALUE OF FINANCIAL INSTRUMENTS
INVESTMENTS - It is not practicable to estimate the fair value of Investments because there are no quoted market prices for its untraded common stock investments, and a reasonable estimate of fair value could not be made without incurring excessive costs. (See Investments.)
MORTGAGES AND NOTES RECEIVABLE - The fair value of the mortgage and notes receivable was determined by management estimates of the property values which secure the mortgage notes. The fair value of these instruments is $7,175,293 at December 31, 1995 and $6,053,833 at December 31, 1994.
LONG-TERM DEBT - The fair value of the long-term debt is based on the borrowing rates currently available to the Company for bank loans with similar security arrangements, terms and average maturities. The fair value for these instruments is $2,833,924 at December 31, 1995 and $2,679,462 at December 31, 1994.
Consolidated statements of share-holders equity