10-K 1 tenk2001edgar.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Annual Report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001 Commission File number 0-7107 Southern Scottish Inns, Inc. A Louisiana Corporation IRS No. 72-0711739 1726 Montreal Circle Tucker, Georgia 30084 (770) 938-5966 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common stock, No Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes No X Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by nonaffiliated of the registrant on December 31, 2001 was $712,344. The aggregate market value shall be computed by reference to the closing price of the stock on the New York Stock Exchange on such date. For the purposes of this response, executive officers and directors are deemed to be the affiliates of the Registrant and the holding by nonaffiliated was computed as 949,792 shares. The number of shares outstanding of the Registrant's Common Stock as of December 31, 2001, was 2,366,395 shares. DOCUMENTS INCORPORATED BY REFERENCE None Definitions: The "Company", the "Registrant" and the "Fiscal Year" When used in this Annual Report, the "Company," unless the context indicates otherwise, refers to Southern Scottish Inns, Inc. and its subsidiaries on a consolidated basis. The "Registrant" refers to Southern Scottish Inns, Inc. as a separate corporate entity without reference to its subsidiaries. The "Fiscal Year" refers to the year ended December 31, 2001, which is the year for which this Annual Report is filed. The items, numbers and letters appearing herein correspond with those contained in Form 10-K of the Securities and Exchange Commission, as amended through the date hereof, which specifies the information required to be included in Annual reports on such Form. In accordance with General Instructions C(2) to Form 10-K, the information contained herein is, unless indicated herein being given as of a specified date or for a specified period, given as of December 31, 2001 and referred to "as of this writing". PART I Item 1. Business (a) General Due to the Company's development and finance division's acquiring and selling properties, the number of properties owned, operated, leased and the number of wrap around mortgages held fluctuates constantly. The table below shows the various different business holdings for the last five years.

12/01 12/00 12/99 12/98 12/97 ~~12/96~~ Motel Franchises Held - Total 254 253 228 227 239 ~~262~~ Master ~~Host~~Hosts Inns 2 2 2 4 5 12 Red Carpet Inn 105 102 98 96 95 ~~107~~ Scottish Inns 129 129 118 120 126 ~~128~~ Downtowner Inns - 4 5 2 2 2 4 Passport Inns - 14 15 8 5 11 11 Motel Operated - Total 0 0 0 0 0 Master ~~Host~~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 ~~and~~& Leased To Operators - Total 5 4 3 4 3 4 Master Hosts Inns 0 0 0 10 1 Red Carpet Inn 1 1 1 1 1 Scottish Inns 2 2 2 2 12 Independent 2 1 0 1 0 1 Free Standing Restaurants Owned 0 0 0 0 0 Leased In - Note 1 0 10 1 1 1 Operated 0 0 0 0 0 Subleased - Note 1 0 10 1 1 1 Vacant 0 0 0 0 0 Wrap Around Mortgages or Other ~~Types~~types of Financing Held 9 10 13 13 13 13 Parcels of Land Held for Investment or Development 65 6 6 6 56

Note 1. One property leased from a third party was being operated as a restaurant by Company's sub-lessee. (b) Segment Information The Company identifies its significant industry segments as set forth in the table below. All revenue items represent sales to unaffiliated customers, as sales or transfers between industry segments are negligible.

Segment Information ~~For~~for the Year ~~Ending~~Ended ~~December~~Dec. 31, 2001 2000 1999 ~~1998~~ Franchising: Revenues 1,891,113 1,772,185 1,833,472 ~~1,843,335~~ Operating Profit (Loss) 80,584 31,598 14,957 ~~12,582~~ Financing & Investing: Revenues 745,747 676,706 754,421 ~~579,865~~ Operating Profit (Loss) (12,645) 18,371 16,342 ~~(99,264)~~ Leasing: Revenues 8,229 450,667 507,064 ~~601,909~~ Operating Profit (Loss) (58,908) 136,918 190,748 ~~196,363~~

(c) Description of Business (I) Products and Services The Company's franchise division offers advertising, reservation, group sales, quality assurance and consulting services to motel owner/operators. The Company's Financing division offers owner financing to persons acquiring motel properties previously operated and/or owned by the Company. Leasing revenue is derived from the leasing of real and personal properties, i.e. motels, restaurants and part of Hospitality's office building belonging to the Company. (II) Status of Products and Segments Each of the Company's industry segments is fully developed with an operational history of several years under Company's direction. (III) Raw Materials In a sense, independent motel operations seeking national affiliation for their properties or motel operations seeking to change national affiliations constitute raw materials for the Company's franchising division. To date, the Company has experienced little difficulty in obtaining information on locations to be reviewed by either its franchise committee or its evaluation committee (IV) Patents, Trademarks, Licenses, Franchises, and Concessions The Company has no patents. The Company does own the trade names "Master Hosts Inns", "Red Carpet Inns", "Scottish Inns", "Downtowner Inns", "Passport Inns", "Sundowner Inns" and related trademarks, etc. used in operating lodging facilities or reservation services under these names. Note 2: "Sundowner Inns" Trademarks, Registration No. 1,280,236 and No. 1,280,237, United States Patent and Trademark office, were registered May 29, 1984. In 1994, Joe W. Hudgins, the owner of the corporation to which said marks were then registered, transferred ownership of said corporation, Sundowner Reservations, Inc., a Tennessee corporation, to Hospitality International, Inc. in consideration of cancellation of inter-company debt and promise to pay the assigned corporation's debt to Red Carpet Inns International, Inc. On April 30, 1995, Sundowner Reservations, Inc. transferred title to the subject marks to Hospitality International, Inc. As of December 31, 1996, Hospitality International, Inc. transferred ownership of the subject marks to Red Carpet Inns International, Inc. for consideration of $360,000. (V) Seasonability The Company's financing and leasing businesses by their nature are not subject to seasonal fluctuations. The revenues from the Company's franchising division tend to be concentrated in the spring and summer months during peak travel periods. (VI) Working Capital The Company's financing receipts are comprised primarily of interest which does not become reflected on its balance sheet until after it is earned, whereas its payments on underlying debts are comprised primarily of principal reduction and the portion which will be returned over the next twelve months is reflected on the balance sheet as a current liability. Because of this, the Company believes a current ratio of less than one to one is appropriate for its business. However, the Company continues to, among other things, (1) reduce and contain overhead costs, (2) seek to dispose of underproductive assets, and (3) seek the most advantageous financing terms available. From 1995 to 2001, the Company aggressively pursued its legal rights to its trademarks. It has been successful in stopping motel operations from illegally using its trademarks as well as in enforcing compliance to its franchisee agreements. Settlements were reached on a number of lawsuits in all years that significantly increased the revenues of the Company. Attorney fees related to those settlements also increased in those same years. (VII) Customers The Company's business of franchising motels is contingent upon its being able to locate qualified property owner-operators who are seeking national affiliation. Through use of its franchise sales force, the Company has not experienced insurmountable difficulty in locating independent motel owner operators or owner-operators seeking to change national affiliation nor does it anticipate any such difficulty in the future. However, more franchisors are offering multi-level brands, resulting in more downscaling conversions into the economy lodging sector and, therefore, providing more competition. Likewise, the Company's financing division requires that it locate qualified owner operators or investors for its properties. Because of its franchise affiliations the financing division has not experienced, nor does it anticipate experiencing too much difficulty in locating qualified investors to purchase its developed properties. However, due to the Company's desire to limit the loans it holds to a manageable number and because third party or institutional financings for used motel properties are difficult to arrange, once a property is sold the Company carries the entire financing package and accordingly, each individual loan represents a larger portion of portfolio than it does with traditional lending institutions. Therefore, the continued performance of each existing loan may be material to the operation of the financing division (VIII) Backlogs - Not Applicable. (IX) Government Contract The Company is not involved in, nor does it anticipate becoming involved in, any government contracts. (X) Competition The Company's franchising, leased lodging and leased food service divisions each compete with other similar businesses, many of which are larger and have more national recognition than the Company. Each of these divisions competes on the basis of service and price/value relationship The Company's financing division competes with other, more traditional sources of long-term financing, most of which have greater financial resources than does the Company. Developing and financing lodging properties is being significantly affected by over-development in many areas but benefits from the area's and the country's general economic condition. (XI) Research and Development No significant research activities were conducted by the Company during the Fiscal year and the Company does not expect to expend sums on research activities during the next Fiscal Year. XII) Environmental Protection The Company is not directly affected by environmental protection measures of federal, state or local authorities to any extent which would reasonably be expected to cause material capital expenditures for compliance, so far as in known. However, it is possible that an approximately five and three-tenths (5.09) acre tract of land held as an investment and acquired as a possible motel site, located on I-10 in Ocean Springs, Mississippi, may under the new guidelines, be determined to be in part "wetlands." If so, its use and value would be adversely affected. On January 27, 1995, 3.2 acres contiguous to said tract were sold at a consideration undiminished by the wetlands issue; the value of the remaining 5.09 acres, therefore, may not be diminished. The 5.09 acre tract is carried on the Company's books at $55,647. (XIII) Employees

Division 12/0001 12/9900 12/9899 Lodging Leased to Outsiders - Note 3 61 62 69 ~~109~~ Franchise Division 29 28 32 40 Administrative & Finance 6 6 76 Total 96 ~~107~~96 ~~156~~107

Note 3: These are not employees of the Company at date of this writing, since operations are leased out but are given for comparative purposes. (d) Foreign Operations The Company is not currently involved in any business operations outside of the United States of America, except through its franchising division which does do limited business in Canada and has one franchise in the Bahamas and two in Jamaica. Item 2 Properties The following table sets forth certain information, as of this writing, concerning properties on which the Company holds notes secured by mortgages and other types of financing instruments held by the Company:

Location Description ~~Amount~~Amt. Receivable Underlying Mortgages Bald Knob, AR 42 Room ~~Hotel~~Motel ~~236~~229,~~281.89~~871 -0- Gulfport, MS Office & ~~Warehouse~~Whse Bldg. 154,975~~.00~~ -0- Jacksonville, FL 144 Room Motel 1739,~~476.989.51~~785 -0- (Lane ~~Road~~Ave.) Jacksonville, FL 120 Room Motel 1,100,000~~.00~~ -0- (Arlington ~~Road~~Rd.) ~~McComb~~Killeen, MSTX 51100 Room Motel ~~269~~586,~~052.61~~741 ~~2,318~~(2nd Mtg.04) Marrero, LLA 100 Room Motel ~~427~~413,~~539.13~~372 -0- Morgan City, LA 49 Room Motel ~~259~~252,~~048.55~~123 -0- Natchez, MS 100 Room Motel ~~694~~643,~~322.48~~245 -0- Register, GA 40 Room Motel 176,687 (2nd Mtg.) ~~176,686.56~~ -0- Sabine Pass, TX 30 Room Motel ~~287~~281,~~560.74~~661 -0-

The following table sets forth certain information, as of this writing, concerning motel properties owned by the Company and under management contract or leased to Operators.

Location Description Mortgage Balance Houma, LA ~~Note~~- 4Note4. 120 Room Motel ~~$ 56~~42,~~600.26~~460 Marietta, GA - Note 4. 154 Room Motel ~~504~~448,~~130.39~~136 New Iberia, LA 100 Room Motel ~~137~~101,~~703.79~~878 Vicksburg, MS- Note 4. 100 Room Motel ~~232,890~~.9000 ~~Jacksonville~~McComb, FLMS ~~(Arlington~~- ~~Road)~~ Note 4 ~~120~~50 Room Motel ~~-0-~~.00

Note 4: These properties are leased to First Hospitality Management Corporation, a corporation owned by Timothy J. DeSandro, a former employee of the Company through the year 2001. In 2002 the Company will manage the properties. The following tables set forth certain information, as of this writing, concerning other properties owned by the company.

Location ~~Description Mortgage Balance~~ Atlanta, GA 168,546 Warehouse, on two parcels of land ~~184,240.41~~ (1.2 Acres), 22,220 square feet , heated & air conditioned including 1,300 square feet of showroom/office. Gulfport, MS 896 Unimproved land (4) lots in City of Gulfport ~~$ 8,048.27~~ Jackson County, MS 12,882 Two parcels of land, unimproved, ~~1,803.67~~ held for investment Madison County, MS 300 per month land lease 3.0 acre tract of land at Ross Barnett ~~$300 per month~~ Reservoir ~~on which was a night club land lease when property was acquired~~. ~~The~~Leased ~~building had been untenantable, was deemed to be economically unfeasible to repair and was recently razed. Land is leased~~ from ~~the~~ Pearl River Valley Water Supply District ~~and~~The ~~the~~ leasehold is marketable by approved ~~assignment~~Assignment, sublease or redevelopment. Pass Christian, MS. 4671,279 ~~Residential~~Partially ~~lots~~improved ~~located~~water-front inproperty ~~Blue~~Register, ~~Lake~~GA ~~Subdivision.~~2,333 ~~-0-~~Partial ~~Held~~interest ~~for~~in ~~investment.~~land ~~Pass~~Register, ~~Christian~~GA 118,366 ~~Partially~~Partial ~~improved~~interest ~~water-front~~in ~~property~~66..34 78acre tract of land Tucker,~~170.14~~ GA 61,353 Office Building and Company headquarters

Item 3 Legal Proceedings The Company is named as a defendant for damages in an unspecified amount, reasonable attorney fees, interest and costs as a result of the Company's alleged violation of a patent. It is counsel's opinion that the Company will be dismissed without the Company's being liable for any money. The Company also has two cases where there is a trial for Declaratory Judgment where the franchisee is seeking a determination as to the validity of the franchise. In these cases, the Company is seeking damages under the franchise agreement against the franchisee. In one case, the franchisee has filed a counterclaim. Counsel expects the matter to be dismissed in a Motion for Summary Judgment. Item 4 Submission of Matters to a Vote of Security Holders N/A PART II Item 5 Market for Registrant's Common Equity Securities and Related Matters a. The common stock, no par value, of the Registrant is traded on the Over the-Counter market. The following table sets forth the range of per share bid and asked price quotations during the periods indicated. The following represents quotations between dealers, and do not include retail mark-ups, markdowns, or other fees or commissions, and do not represent actual transactions.

2001 Period Bid Price ~~Asked~~High Bid Price ~~2000~~Low ~~High~~Asked ~~Low~~Price High Asked Price Low 1st ~~Quarter~~Qtr. $ .75 $ .75 $1.00 $1.00 2nd ~~Quarter~~Qtr. $ .75 $ .75 $1.00 $1.00 3rd ~~Quarter~~Qtr. $ .75 $ .75 $1.00 $1.00 4th ~~Quarter~~Qtr $ .75 $ .75 $1.00 $1.00

2000 Period Bid Price ~~Asked~~High Bid Price ~~1999~~Low ~~High~~Asked ~~Low~~Price High Asked Price Low 1st ~~Quarter~~Qtr. $.75 $ .75 $1.00 $1.00 2nd ~~Quarter~~Qtr. $.75 $ .75 $1.00 $1.00 3rd ~~Quarter~~Qtr. $.75 $ .75 $1.00 $1.00 4th ~~Quarter~~Qtr $ .75 $ .75 $1.00 $1.00

b. As of this writing, there are approximately 758 shareholders of the registrant's common stock, plus those held in brokerage houses. c. No cash dividends have been paid on the Company's common stock during the two most recent Fiscal Years and none are anticipated to be paid in the foreseeable future. Item 6 Selected Financial Data The following table summarizes selected financial data of the Company for the past five Fiscal Years. It should be read in conjunction with the more detailed consolidated financial statements of the Company appearing elsewhere in this Annual report.

YEAR 2001 2000 1999 1998 1997 ~~1996~~ REVENUE $3,436,304 3,758,786 3,532,449 3,814,986 4,396,435 ~~4,911,874~~ NET INCOME (151,924) 90,118 105,231 81,538 30,443 ~~(815,303)~~ EARNINGS PER SHARE 0(.0406) 0.04 0.0304 0.01030 (0.~~35)~~ 01 TOTAL ASSETS 412,766,299 14,290,017 14,303,779 14,924,365 15,370,061 ~~5,084,285~~ LONG TERM DEBT 1,201,987 1,552,248 1,680,781 2,301,241 2,~~726,135~~726135 ~~2,978,560~~ STOCKHOLDERS' EQUITY 8,173,741 8,322,502 8,333,184 8,127,606 8,024,850 ~~7,946,090~~ CASH DIVIDENDS PER SHARE -0- - 0 - - 0 - - 0 - - 0 -

Item 7 Management's Discussion and Analysis of Financial Conditions and Results of Operations

Summary of Operations Year End 2001 2000 1999 1998 ~~1997~~ TOTAL ASSETS 12,766,299 14,290,017 14,303,779 14,924,365 ~~15,370,061~~ TOTAL EQUITY CAPITAL 8,173,741 8,322,502 8,233,184 8,127,606 ~~8,024,850~~ OPERATING INCOME 3,436,304 3,758,786 3,532,449 3,814,986 ~~4,396,435~~ OPERATING EXPENSE 3,625,572 3,622,840 3,283,902 3,656,215 ~~4,308,860~~ INCOME BEFORE TAXES (189,268) 135,946 248,547 158,771 ~~87,575~~ INCOME TAXES 57,549 (29,535) (117,439) (73.,280) ~~(44,998)~~ NET INCOME (151,924) 90,118 105,231 81,538 ~~30,443~~ NET INCOME PER SHARE 0(.0406) 0.04 0.0304 0.0103

Results of Operation: The Company's operations are comprised of three main components: Franchising, financing and investments, and leasing. The following discussion presents an analysis of results of operations of the Company for the years ended December 31, 2001, 2000, 1999, and 1998. The preceding chart reflects the most recent four years of the Company's operations. In 2001 operations resulted in a loss before income taxes of $189,268, compared to income before taxes of $135,946 in 2000, income before taxes of $248,547 in 1999 and income before taxes of $158,771 in 1998. Franchising revenues in 2001 rose 6.7% over 2000. In 2000, franchising revenues decreased slightly from 1999. In 1999, Franchising revenues rose slightly over 1998 as did the number of franchises (.44%), although the number of rooms available within the system decreased slightly (4.3%). These relatively flat numbers are due to increased competition from other franchisors offering multi-level brands, resulting in more down-scaling conversions into the economy lodging sector. The Company has become more stringent in its requirements relating to franchises in the areas of quality assurance and financial reporting. Along with the slight changes in revenues, the Franchise Division has decreased its administrative cost (4.6%) between 2001 and 2000; by 18.0% between 1999 and 1998 and by 9.0% between 1998 and Between the years 2000 and 1999 there was an increase of 33.3% in these costs due in large part to legal expenses connected with a large lawsuit settlement in 2000. A major source of revenue for the franchising area is legal settlements. The Company vigorously asserts its legal rights in the area of franchise infringements and violations of the franchise agreement. Gross revenues generated in this area were $402,921 in 2001, $534,363 in 2000, $62,356 in 1999, $334,029 in 1998 and $435,570 in 1997. Financing revenues continue to drop because interest on the notes receivable is declining as the notes move to maturity. Mortgages and notes receivable balances rose due to the sale of a foreclosed property that had been in fixed assets. Leasing revenues declined in 1998 through 2000 due to the restructuring of the lease agreements due to economic conditions, such as new competition at each of our locations and our failure to refurbish and upgrade. In 2001, leasing revenues dropped dramatically because no accruals were made for rent income due from the lessee due to the pending termination of the leases and the lack of probability of collection. The Company will manage its properties in-house beginning in the year 2002. Liquidity: The question of liquidity should not be an issue in the near future. The non-affiliated entity formerly leasing properties from the Company is in arrears in its past lease payments; collection is doubtful. If cash requirements became an issue, any of the notes could be sold at a discount. However, there is no reason to believe this will be required. Capital Resources (I) No material commitments for capital expenditures are planned other than any possible purchases or development of properties through the financing division. (II) The trend in capital resources has resulted in a gradual tightening of credit with regard to new motel construction but continues tighter with regard to older properties. This has forced more sellers of older properties into the seller-financed arena creating more competition for the Company in its Finance and Development Division. This fact, coupled with lower credit on the new property construction side, has meant less profitable opportunities for the Company. Item 8 Financial Statements and Supplemental Data The financial statements and financial statement schedules filed as part of the Annual report are listed in Part IV, Item 14 below. Item 9 Disagreements of Accounting and Financial Disclosures None. Part III Item 10 Directors and Executive Officers of the Registrant The Following persons are the directors and the executive officers of the Registrant.

NAME AGE POSITION ~~and~~& TERM ~~NAME AGE~~ WITH REGISTRANT Bobby E. Guimbellot 6061 CEO -27 26 Years, Director -29 28 Years Michael M. Bush 5253 Director -20 19 Years Jack M. Dubard 6970 President -8 7 Years, Director -13 12 Years C. Guy Lowe, Jr. 6566 Director -29 28 Years Gretchen W. Nini 5354 Director -15 14 Years Harry C. McIntire 7172 Chairman -8 7 Years, Director -25 24Years George O. Swindell 64 Director-26 Years Richard A. Johnson 5657 Director -12 11 Years Melanie Campbell Hanemann 4546 Director -11 10 Years John L. ~~Synder~~Snyder, Jr. 7475 Director -11 10 Years Melinda P. Hotho 3839 Director -8 7 Years

The Board of Directors of the Company held no regularly scheduled meeting in 2001. The term of office for all directors expires at the close of the next annual meeting of shareholders. Officers serve at the pleasure of the Board of Directors. Bobby E. Guimbellot served as President of the Registrant from January of 1976 through 1994. Mr. Guimbellot remains as Chief Executive Officer of Registrant. Mr. Guimbellot is also the principal shareholder and Chairman of the Board of Western Wireline Services, Inc. ("Western Wireline"), an oil well service company headquartered in Belle Chasse, Louisiana. Mr. Guimbellot has been Chairman of Red Carpet Inns, International, Inc. a subsidiary of the registrant, since 1982, and has been President of Red Carpet since January 1, 1992. Since 1995, Mr. Guimbellot has served as CEO of Hospitality International, the Company's franchising subsidiary. Michael M. Bush is President and Chief Executive Officer of the Mississippi River Bank, Belle Chasse, Louisiana, a position which he has held for more than ten years. Jack M. Dubard since 1994 has been the Registrant's President, after having served as the Vice President for several years, and was previously an independent consultant to the Registrant and its affiliates. Prior to that, he held an administrative position with Red Carpet Inns International, Inc. In 1994 - 1995, Mr. Dubard served as CEO of Hospitality International, Inc., the Company's franchising subsidiary. C. Guy Lowe, Jr. is a self-employed real estate developer and also provides office building management services. He has been so engaged for more than 12 years. Harry C. McIntire is a retired senior captain (pilot) with Delta Air Lines, Inc. and has been a captain for more than 25 years prior to his retirement. He has served as Vice Chairman of registrant's Board of Directors and as a Vice President. Upon Dr. Hotho's resignation, Captain McIntire was elected as Chairman of the Registrant's Board. Gretchen W. Nini was a Director, Corporate Secretary, and treasurer of Western Wireline Services, Inc., an oil well service company headquartered in Bell Chasse, Louisiana, a position she held for more than 9 years (See Bobby E. Guimbellot, supra). George O. Swindell formerly owned Diamond Realty Construction, Gretna Louisiana; he has been a real estate broker since 1970 and was a general contractor for over 17 years. Richard A. Johnson has had prior experience in construction, manufacturing, health care, agriculture, recreational facilities, apartments and real estate. Since June of 1992, Mr. Johnson served as Franchise Development Coordinator for Hospitality International, Inc., a subsidiary of the Registrant. He resigned in July of 1995 from his employment with Hospitality International, Inc. Melanie Campbell Hanemann is the current Corporate Secretary and Treasurer of Western Wireline Services, Inc. She has been with this company for more than nine years and during that time has held the position of Office Administrator for Western. (See Bobby E. Guimbellot, supra). Melinda P. Hotho - Dr. Vincent W. Hotho, after being a Director of the Registrant for over twenty-two (22) years, the last eighteen (18) of which he served with distinction as Chairman, due to some imprudent personal investments and a potentially ruinous malpractice suit went through a Chapter 7 Bankruptcy proceeding. He felt it to be in the best interest of the Registrant and of the Company that he resign as Director and Chairman. The Board of Directors, pending action of the Stockholders, selected Melinda P. Hotho, his daughter, to serve on an interim basis. John L. Snyder, Jr. is recently retired from his position as manager of engineering at Mid-America Transportation Company. Mr. Snyder had more than thirty years experience in marine operations. He previously held administrative or managerial positions with Wisconsin Barge Line, Walker Boat Yard and Mid-South Towing Company. Directors who have resigned: Robert H. Douglas was Director of Motel Operations for the Company until April 1, 1990, and prior to assuming that position has been in the independent plant nursery business. He previously served as Secretary and Treasurer of the Registrant from September 1983, until April 1986. Prior to that, Mr. Douglas was Director of Operations for the Company for 8 years. On April 1, 1990, Mr. Douglas, formed a corporation to whom several of the Company's motels were leased. Mr. Douglas resigned and retired in 1996. Mr. Douglas passed away November 2001. Richard H. Rogers was employed as marketing consultant for the Knoxville's World's Fair from January 1982 to May 1982. From 1978 to January 1982, Mr. Roger served as Vice President and Director of Operations of Cindy's Inc., a hotel company. He became President of Hospitality International, Inc. as subsidiary of the Registrant, in May 1982. On October 1993, Mr. Rogers resigned his presidency of Hospitality International, Inc. He resigned for personal reasons and to pursue other interests. Mr. Rogers resigned as Director of the Registrant in 1994. Dr. Vincent W. Hotho, M.D., after being a Director of the Registrant for over twenty-two (22) years, the last eighteen (18) of which he served with distinction as Chairman, due to some imprudent personal investments and a potentially ruinous malpractice suit went through a Chapter 7 Bankruptcy proceeding. He felt it to be in the best interest of the Registrant and of the company that he resign as Director and Chairman. The Board of Directors, pending action of the Stockholders, selected Melinda P. Hotho, his daughter, to serve on an interim basis. The Directors elected Harry C. McIntire as Chairman upon Dr. Hotho's resignation. Harry C. Geller, an able and loyal Director for fourteen (14) years, in an effort to shed some activities with a view toward his imminent retirement, resigned in 1994 as a Director of the Registrant. Mr. Geller, the sole stockholder and president of Securities Transfer Company, the Registrant's Transfer Agent, has now sold this company. Committees of the Board of Directors The Board of Directors of the Registrant does not maintain any standing committees. Item 11 Executive Compensation For services rendered in all capacities to the Company and its subsidiaries during the Fiscal Year ended December 31, 2001, the Company paid aggregate cash compensation in the amount of $75,000 to Mr. Guimbellot, the Registrant's. Chief Executive Officer. In 2001, the Company paid aggregate cash compensation in the amount of $91,487.42 to Mr. Dubard, who for said period was Registrant's president. The Company provides Messrs. Guimbellot and Dubard with automobiles and does not require them to account for the personal use, if any, of the automobiles. The personal uses are not included in the compensations reported above. However, the Company estimates that the amount, which cannot be specifically or precisely ascertained, does not exceed 10% of the aggregate compensation, paid and unpaid, reported above. Item 12 Security Ownership of Certain Beneficial Owners and Management Principal Holders The following table sets forth, as of this writing, information with respect to each person who, to the knowledge of the Registrant, might be deemed to own beneficially 5% or more of the outstanding Southern Scottish Inns, Inc. common stock, which is the only class of voting securities of the Registrant. Except, as otherwise indicated, the named beneficial owners possess sole voting power and sole investment power with respect to the shares set forth opposite their respective names.

Name ~~and~~& Address of Amount ~~and~~& Nature of Present Percent Beneficial Owner of Beneficial Ownership ~~Percent~~ of Class - Note 5 Bobby E. Guimbellot 1,202,797 50.85% 1726 Montreal Circle Tucker, Georgia 30084 Note 6 Harry C. McIntire 161,289 6.82% Roswell, ~~Georgia~~GA Note 7

Note 5: Based on 2,366,395 shares outstanding. Note 6 : Includes 470,750 shares owned by Bobby Guimbellot d/b/a Coastal Companies, and 35,238 owned by Industrial Funds, an entity of Western Wireline Services, Inc. Mr. Guimbellot's shares also include 17,713 and 1,664 shares owned by Lift Oats, Inc. and Tri Delta Dredge, Inc., respectively and 361,405 shares owned by Shelly Plantation. Ms. Campbell shares voting rights as to Industrial Funds shares with Mr. Guimbellot. Mr. Snyder shares voting rights as to Shelly Plantation with Mr. Guimbellot. Note 7: Voting and investment power on 113,331 shares are shared with his wife. Management Ownership The following table sets forth, as of this writing, information concerning he ownership of Southern Scottish Inns, Inc. common stock by all directors and by all directors and officers as a group. Southern Scottish Inns, Inc. common stock is the only class of equity securities of the registrant. Except as otherwise indicated, the named beneficial owners possess sole voting power and sole investment power with respect to the shares set forth opposite their respective names.

Name & Address of Amount ~~and~~& Nature of Present Percent Beneficial Owner of Beneficial Ownership ~~Percent~~ of Class - Note 8 Michael W. Bush Note 9 3,611 .15% Jack M. Dubard Note 10 8,907 .38% Bobby E. Guimbellot Note 11 1,202,797 50.85% Melanie Campbell Hanemann 2,600 .10% Melinda P. Hotho 1,200 .05% Richard A. Johnson 2125,~~200~~900 1.9010% C. Guy Lowe, Jr. 1,335 .05% Harry C. McIntire Note 12 161,289 6.82% Gretchen W. Nini Note 13 4,801 .20% George O. Swindell 1,563 .06% John L. Snyder, Jr. 2,600 .10% ~~________~~TOTAL ~~______~~ 1,~~411~~416,~~903~~603 59.6686%

Note 8: Based on 2,366,395 shares outstanding. Note 9: Includes 250 shares in the name of his minor son. Note 10: Includes 513 shares in the name of his wife. Note 11: Includes 470,750 shares owned by Bobby Guimbellot d/b/a Coastal Companies, and 35,238 owned by Industrial Funds, an entity of Western Wireline Services, Inc. Mr. Guimbellot's shares also include 17,713 and 1,664 shares owned by Lift Boats, Inc. and Tri Delta Dredge, Inc., respectively and 361,405 shares owned by Shelly Plantation. Melanie Campbell, the Secretary of Western Wireline Services, Inc., shares voting and investment powers with respect to the 35,238 shares owned by Industrial Funds. John L. Snyder Jr. shares voting and investment powers with repeat to the 361,405 shares owns by Shelly Plantation Note 12: Voting and investment powers on 113,331 shares are shared with his wife. Note 13: Includes 639 shares in the name of her minor child. Item 13 Certain Relationships and Related Transactions Pan American Hospitality From time to time, and on an as needed basis, the Registrant and the Company made advances or loans to Pan American Hospitality, a partnership composed of Red Carpet Inns International, Inc. (a subsidiary of the Registrant), Bobby E. Guimbellot, the Registrant's CEO, Emilee Guimbellot (Mr. Guimbellot's mother), Western Wireline Services, Inc. (an oil field service company belonging to Mr. Guimbellot), Mildred Puckett, Mary R. Dubard (wife of Jack M. Dubard, Registrant's President) and two unrelated individuals. As of December 31, 1997, these advances totaled $300,752.55 and either by direct advancements or inter-company transfer said receivable is held by Red Carpet Inns International, Inc., which as disclosed is a partner of the debtor and which holds a first mortgage on the motel which is the partnership's major asset. The motel was sold in 1996 with seller financing. Pan American Hospitality dissolved in 1998. The Company's negative investment was written off against receivables due from the Partnership. The Partnership assigned its mortgage receivable to the Company in satisfaction of the remaining balance of principal and accrued interest due to the Company. PART IV Item 14 Exhibits, Financial schedules and Reports on Form 8-K (a) Listed below are the following documents which are filed as a part of this Annual Report. 1. Financial statements Auditor's Report. Note 14 Consolidated balance sheets of the Company as of December 31, 2001, and 2000. Consolidated statements of changes in cash flow of the Company for the Fiscal Years ended December 31, 2001 and 2000 Notes to consolidated financial statements. 2. Exhibits. The exhibits filed as part of the Annual report are listed on the exhibit index which immediately precedes and is bound with such exhibits. (B) No reports on Form 8-K have been filed by the Registrant during the last quarter of the period covered by this Annual Report. Note 14: For the Company's fiscal years of 1985 through 1990, our auditor was Robert M. Mosher, C.P.A. of Biloxi, Mississippi. For the Company's fiscal years of 1991 through 1992, our auditor was the firm of Fountain, Seymour, Mosher & Associates of D'Iberville, Mississippi. In February of 1994 (See Item 7, Capital Resources (I)), Registrant and Company moved to the Atlanta area. About such time and in connection with future audits, the decision was made to change auditors and to employ R. J. Clark & Associates, P.C. of Roswell, Georgia. R. J. Clark & Associates, P.C. had done the Company's audits for 1983 and 1984, the audits of Red Carpet Inns International, Inc., a partially owned subsidiary of Registrant for the years 1992 and 1993,and the audits for Hospitality International, Inc., another partially owned subsidiary of Registrant, continuously since 1982. From 1994 and for the foreseeable future, R. J. Clark & Associates, P.C. has done and will do the audits for Southern Scottish Inns, Inc., Red Carpet Inns International, Inc. and Hospitality International, Inc. In accordance with the SEC Practice Section of the A.I.C.P.A., a partner other than the partner in harge must perform a concurring review of the audit report. When the firm is a sole proprietorship, an outside qualified professional must be utilized and one was so utilized. SIGNATURES (Originals on file) Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHERN SCOTTISH INNS, INC. (Registrant) BY: Bobby E. Guimbellot Chief Executive Officer BY: Jack M. Dubard President & CFO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. FOR THE BOARD OF DIRECTORS: BY: Michael M. Bush Director BY: Richard A. Johnson Director BY: Melanie C. Hanemann Director BY: C. Guy Lowe, Jr Director BY: Jack M. Dubard Director BY: Harry C. McIntire Director BY: Bobby E. Guimbellot Director BY: Gretchen W. Nini Director BY: George O. Swindell Director BY: John Snyder Director

~~PAGE~~SOUTHERN NOSCOTTISH INNS, INC. CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 TABLE OF CONTENTS Page Number INDEPENDENT AUDITOR'S REPORT 2 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 3-4 CONSOLIDATED STATEMENTS OF INCOME 5-6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 7 CONSOLIDATED STATEMENTS OF CASH FLOWS 8-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10-27

Board of Directors Southern Scottish Inns, Inc. INDEPENDENT AUDITOR'S REPORT We have audited the accompanying consolidated balance sheets of Southern Scottish Inns, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide reasonable basis for our opinion. The Company has not presented the selected quarterly financial data, specified by item 302(a) of Regulation S-K, that the Securities and Exchange Commission requires as supplementary information to the basic financial statements. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southern Scottish Inns, Inc. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the periods ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. R J CLARK AND ASSOCIATES, PC Certified Public Accountants Roswell, Georgia April 15, 2002 SOUTHERN SCOTTISH INNS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000

ASSETS CURRENT ASSETS 2001 2000 ~~1999~~ Cash 160,400 54,612 ~~$75,253~~ Accounts Receivable-Net (Note G) 350,363 1,234,991 ~~1,124,962~~ Accounts Receivable-Affiliates (Note G ~~and~~& P) 830,857 502,649 ~~580,403 Income Tax Receivable (Note K) $0 9,310~~ Mortgages & Notes-Affiliates (Note G ~~and~~& P) 31,660 82,919 ~~121,240~~ Mortgages & Notes Receivable (Note G) 514,696 807,673 ~~688,072~~ Inventory (Note C) 40,~~749~~834 40,~~819~~749 Prepaid Expenses 111,802 69,256 ~~50,098 Loans - Employees (Note H) 0 213~~ Interest Receivable 601,549 612,246 ~~464,505~~ Net Deferred Tax Asset (Note K) 30,371 28,776 ~~7,447~~ TOTAL CURRENT ASSETS 32,~~433~~672,~~871~~532 3,~~162~~433,~~322~~871 PROPERTY AND EQUIPMENT (Note O) Land 1,~~649~~567,~~726~~044 1,~~515~~649,~~118~~726 Buildings & Building Improvements 2,~~587~~521,~~634~~180 2,~~149~~587,~~732~~634 Furniture, Fixtures & Equipment 556,388 569,412 ~~561,128~~ Leasehold Improvements 41,773 ~~331~~41,773 Total Property & Equipment 4,~~848~~686,~~545~~385 4,~~226~~848,~~309~~545 Less: Accumulated Depreciation (1,~~248~~167,~~451~~477) (1,~~123~~248,~~004~~451) PROPERTY AND EQUIPMENT - NET 3,~~600~~518,~~094~~908 3,~~103~~600,~~305~~094 OTHER ASSETS Mortgages & Notes Receivable 3,958,73 4,785,076 ~~5,030,468~~ Mortgages & Notes-Affiliates (Note P) 1,~~010~~015,~~132~~107 1,~~116~~010,~~802~~132 Investments in ~~Unconsolidated~~Unconsold. ~~Affiliates~~ Affil.(Note I) (146,076) (233,345) ~~199~~InvestmentAffiliate 128,~~832~~834 ~~Investment - Affiliate~~ 124,899 ~~118,896~~ Investment in Real Estate 244,370 217,964 ~~235,752~~ Trademarks - Net (Notes J and P) 1,~~252~~210,~~859~~030 1,~~295~~252,~~688~~859 Organization Cost 6,105 7,822 ~~9,540~~ Deposits 4,498 4,498 Deferred Tax Asset 124,888 61,603 0 Marketable ~~Equity~~Equit. ~~Securities~~Sec.,carried ~~Carried~~ at Market 28,373 25,210 ~~26,676~~ TOTAL OTHER ASSETS 6,574,859 7,256,718 ~~8,038,152~~ TOTAL ASSETS 1412,~~290~~766,~~683~~299 14,~~303~~290,~~779~~683

LIABILITIES AND STOCKHOLDERS' EQUITY

~~2000 1999~~ CURRENT LIABILITIES 2001 2000 Accounts Payable - Trade $178,758 281,416 ~~106,097~~ Interest Payable 264,473 241,363 ~~174,668~~ Taxes Payable 177,604 160,486 ~~179,260~~ Other Taxes Payable 205,767 311,630 ~~189,683~~ Other Liabilities 454,723 332,975 ~~546,982~~ Mortgages & Notes Payable (Note L) 352,929 396,617 ~~482,843~~Mtgs. ~~Mortgages~~ & Notes Payable- Affiliates (Note P) ~~118~~149,~~327~~195 118,327 Deferred Severance Pay (Note X) 6,000 14,250 ~~12,000~~ TOTAL CURRENT LIABILITIES 1,~~857~~789,~~064~~449 1,~~809~~857,~~860~~064 LONG-TERM LIABILITIES Mortgages & Notes Payable (Note L) 880,750 1,223,658 ~~1,308,603~~ Mortgages & Notes Payable- ~~Affiliates~~ Affil.(Note P) 319,119 327,619 ~~357,178~~ Escrow - ~~Advance~~Real ~~Construction~~Estate ~~Draw~~Tax ~~(Note~~2,118 X) 971 ~~15,000~~ TOTAL LONG-TERM LIABILITIES 1,~~552~~201,~~248~~987 1,~~680~~552,~~781~~248 DEFERRED AMOUNTS Deferred Income-Installment 574,787 1,485,071 ~~1,511,361~~ Deferred Rent Income ~~450~~ 0 450 Net Deferred Tax Liability 0 66,552 ~~101,839~~ Deferred Severance Pay (Note X) 167,500 ~~143~~167,~~750~~500 TOTAL DEFERRED AMOUNTS 742,287 1,719,573 ~~1,756,950~~ TOTAL LIABILITIES & DEFERRED AMOUNTS 53,~~128~~733,~~885~~723 5,~~247~~128,~~591~~885 MINORITY INTEREST (Note A) 858,835 839,296 ~~823,004~~ STOCKHOLDERS' EQUITY Common Stock- no par value, Authorized 5,000,000 shares, Issued & Outstanding 2,366,395 year ended ~~2000~~2001 and ~~2,365,284~~2000 ~~for 1999~~ 6,023,981 6,023,~~315~~981 Additional Paid in Capital 42,201 42,201 Retained Earnings 2,~~256~~107,~~320~~559 2,~~167~~256,~~668~~320 TOTAL STOCKHOLDERS' EQUITY 8,~~322~~173,~~502~~741 8,~~233~~322,~~184~~502 TOTAL LIABILITIES ~~AND~~& STOCKHOLDERS' EQUITY 1412,~~290~~766,~~683~~299 14,~~303~~290,~~779~~683

SOUTHERN SCOTTISH INNS, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

REVENUES 2001 2000 1999 ~~1998 REVENUES~~ Franchising Revenues 1,891,113 1,772,185 1,833,472 ~~1,843,335~~ Financing Revenues 483,070 584,278 620,325 ~~572,201~~ Sale of Furniture 0 21 39439 ~~19,519~~ Operating Lease Revenues 8,229 450,667 507,064 ~~601,909~~ Gain on Sale of Assets 245,913 7,607 134,096 ~~649~~ Investment Income 16,764 84,821 0 ~~7,015~~ Contract Negotiated Revenues 388,294 534,363 62,356 ~~334,029~~ Other Income 402,921 324,844 374,697 ~~436,329~~ TOTAL REVENUES 3,436,304 3,758,786 3,532,449 ~~3,814,986~~ COST & EXPENSES Operating ~~Expense~~Exp-Franchise ~~Division~~Div 2,027,905 2,126,044 1,595,417 ~~1,950,467~~ Operating Expense- Financing & Investing 1,106,244 911,463 1,024,330 ~~916,328~~ Cost of Sales -Furniture Sales 0 45 4,174 ~~14,233~~ Interest Expense 207,957 237,610 256,347 ~~310,851~~ Depreciation & Amortization 188,817 215,569 238,590 ~~284,656~~ Investment Loss 94,649 132,109 165,044 ~~179,680~~ TOTAL COST & EXPENSES 3,625,572 3,622,840 3,283,902 ~~3,656,215~~ Income (Loss) from Continuing Operations before Taxes & Minority Interest (189,268) 135,946 248,547 ~~158,771~~ Less: Provisions for Income Taxes (Note K) 57,549 (29,535) (117,439) ~~(73,280)~~ Income (Loss) before Minority Interest (131,719) 106,411 131,108 ~~85,491 85~~ Less: Minority Interest in Income (Loss) of Consolidated Subsidiaries (20,205) (16,293) (25,877) ~~(3,953)~~ NET INCOME (LOSS) (151,924) 90,118 105,231 ~~81,538~~

INCOME (LOSS) PER SHARE 2001 2000 1999 ~~1998~~ Income (Loss) per Share from Operations before Taxes and Minority Interest $(.08) .06 $ .11 ~~.07~~ Income (Loss) per Share before Minority Interest $(.~~04 $.~~06) $ .04 .06 Basic Net Income (Loss) per Common Share $(.0406) $ .04 .0304 Average Shares Outstanding 2,366,395 2,~~365~~366,~~284~~395 2,~~356~~365,~~949~~284

SOUTHERN SCOTTISH INNS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

~~SOUTHERN~~Balance ~~SCOTTISH~~# ~~INNS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 Number~~ of Common Common Additional Retained ~~Common~~Year Shares Stock Paid Inin ~~Earnings Outstanding~~ Capital Earnings Balance Outstanding December 31,1998 ~~1997~~ 2,~~349~~365,~~729~~284 6,~~003~~023,~~871~~315 42,201 12,~~978~~062,~~778~~090 Shares Issued to ~~15,555 19,444~~ Directors Comprehensive Income: Net Income 81105,~~538~~231 Unrealized Gain on Securities, net of tax ~~1,774~~347 Balance December 31, ~~1998~~1999 2,365,284 $6,023,315 $42,201 2,~~062~~167,~~090~~668 Shares Issued to Non-Directors 1,111 666 Shares Issued to Directors Comprehensive Income: Net Income ~~105~~90,~~231~~118 Unrealized Gain/(Loss) on Securities, net of tax ~~347~~(1,466) Balance December 31, ~~1999~~2000 2,~~365~~366,~~284~~395 6,023,~~315~~981 ~~$ 42~~2,201 $2,~~167~~256,~~668~~320 Shares Issued to Non-Directors ~~1,111 666~~ Shares Issued to Directors Comprehensive Income: Net Income 90(151,~~118~~924) Unrealized Gain/(Loss) on Securities, net of tax (13,~~466)~~163 Balance December 31, ~~2000~~2001 2,366,395 $ 6,023,981 $42,201 $2,~~256~~107,~~320~~559

SOUTHERN SCOTTISH INNS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES

YEAR 2001 2000 1999 ~~1998~~Net ~~CASH~~Income ~~FLOWS PROVIDED BY~~ (~~USED FOR~~151,924) ~~OPERATING ACTIVITIES Net Income~~ 90,118 $ 105,231 ~~$ 81,538~~ Non-Cash Items Included in Net Income: Depreciation and Amortization ~~215~~188,817 15,570 238,590 ~~284,656~~ Conversion Payable to Note Receivable 0 3,173 (18,762) 0 Uncollectible Amounts 352,902 (11,706) 0 ~~252,916~~ (Gain) Loss - Sale of Assets (224,834) 1,083 172,014 ~~(649)~~ Deferred Income Recognized (33,839) (25,840) (34,733) ~~(30,468)~~ Discount Earned 32,763 (26,624) (3,951) 0 Investment Income- Affiliates 71,332 19,119 157,566 ~~162,385~~ Minority Interest Income 20,205 16,293 25,877 ~~3,953~~ Transfer of Note Payable 0 0 (79,552) 0 Assets for Accounts Receivable 3,200 4,920 0 0 Write off Note Payable 0 0 (1,250) ~~(5,404)~~Accruals ~~Interest~~& ~~Receivable~~Expense ~~Adjustment~~Paid 0by 0Investee 45(75,~~724~~879) 0 0 Note Payable Assignment 0 0 4,976 0 Note Payable for Lawsuit Settlement Legal Expense 0 110,166 0 0 Note Payable Sale of Land 0 (42,569) 0 0 Note Receivable ~~Credit/~~Credits ~~Assignment~~for Accruals 71,031 0 0 ~~(236,741)~~ Note Receivable for Lawsuit settlement 0 (279,803) 0 0 Note Receivable Converted to Expense 0 2,500 0 0Note ~~Expense~~Payable ~~Paid~~ for ~~Note~~Accrual ~~Payable~~(21,028) 0 0 ~~68,052~~Note ~~Accruals~~Converted ~~for~~to ~~Investments~~Accounts Receivable 47,811 0 0 ~~(2,892)~~ Accounts Receivable Converted To Investment or Note (3,500) (117,209) (34,000) ~~(41,705)~~ Sale Payables for Receivables 0 0 (27,558) ~~(190,560)~~Write ~~Miscellaneous~~Off ~~322~~Note ~~8,261 15,149 Net Changes In Current Assets and Liabilities: Accounts~~ Receivable (73,~~255)~~723 ~~(346,359)~~0 ~~(118,403) Accounts Receivable- Affiliates~~ 0 ~~86,364~~Investment ~~(97,347)~~Adj. ~~Inventories~~to 70Deferred ~~4,248~~Taxes 943,~~362~~202 ~~Loan~~Write ~~Receivable-Employee~~Off ~~213 500 (213) Deposits 0 0 1,399~~ Interest Receivable (~~213~~185,~~148~~576) ~~(91,935)~~Assets ~~44,245~~Donated ~~Income~~to ~~Tax~~Charity ~~Receivable 0 (~~4,~~629)~~040 ~~17,683~~Miscellaneous ~~Prepaid Expense~~ (192,~~158~~197) ~~3,396~~322 ~~12,798 Organization Cost 1,718 0 0 Accounts Payable 188,281 (92,657) 28,901 Interest Payable 66,695~~ 8,261 ~~(24,627) Taxes Payable 104,427 (31,701) (48,333)~~

Net Changes In Current Assets & Liabilities:

YEAR 2001 2000 1999 ~~1998~~Accounts Receivable 531,726 (7,255) (346,359) Accounts Receivable-Affil. (328,208) 0 86,364 Inventories (85) 70 4,248 Loan Receivable-Employee 0 213 500 Deferred Rent (450) 0 0 Interest Receivable 10,697 (213,148) (91,935) Income Tax $Receivable 0 0 (4,~~654~~629) $Prepaid 53Expense (42,~~704~~546) $(19,158) 703,~~751~~396 Organization Cost 0 1,718 0 Accounts Payable (102,658) 188,281 (92,657) Interest Payable 23,110 66,695 8,261 Taxes Payable (88,745) 104,427 (31,701) Deferred Income Tax (131,432) 34,654 53,704 Other Accrued Liabilities 121,748 (303,151) 242,598 20Escrow - Real Estate Taxes 1,~~528~~147 0 0 Deferred Severance Pay (8,250) 26,000 3,700 ~~(117,655)~~ NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 126,303 (161,141) 348,199 ~~205,043~~ CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES ~~Investment Distribution 0 0 14,437 Payments on Mortgages and~~ Notes Receivable -Issued ~~Incurred 0~~ (782,~~648~~000) (2016,000) ~~Notes Receivable Issued~~ (1678,~~000~~648) ~~0 0~~ Collections on Mortgages and Notes Receivable 128,322 489,220 148,136 ~~418,553~~ Acquisition (Disposition) of Fixed Assets (16,037) (63,484) (19,831) ~~(22,450)~~ Receipts with Sales of Assets 432,220 36,115 0 0 Investment Purchases (175,263) (5,334) (129,870) ~~(35,596)~~ Payments Made with Sale of Assets 0 0 (36,036) ~~0 Payments Received for Assets Sold 0 0 0~~ Advance Receipts for Investments 0 (14,029) 15,000 0 NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 367,242 426,488 (101,249) ~~354,944~~ CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES Proceeds from Notes Payable 170,232 124,217 209,919 ~~111,484~~ Principal Payments on Mortgages and Notes Payable (557,989) (409,961) (2,049) ~~(16,995)~~ Issuance of Stock 0 666 0 0 Principal Payments on Capital Lease Obligations 0 (910) (480,465) ~~(627,810)~~ NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (387,757) (285,988) (272,595) ~~(533,321)~~ Increase (Decrease) in Cash 105,788 (20,641) (25,645) ~~26,666~~ Cash - Beginning 54,612 75,253 100,898 ~~74,232~~ Cash - Ending $ 160,400 $ 54,612 ~~75,253~~ $ ~~100~~75,~~898~~253

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 AND 1999 NOTE A - HISTORY The Company was incorporated on November 8, 1971, under the laws of the state of Louisiana. The Company has consolidated the operations of two corporations, Red Carpet Inns International, Inc. and Hospitality International, Inc. The Company owns a 50 percent interest in Hospitality International, Inc. and Red Carpet Inns International, Inc. owns the other 50 percent; therefore, all of its operations are included in these financial statements and it is noted as the franchising division. The Company owns 74.9 percent of Red Carpet Inns International, Inc. The Company's financing and investing division provides owner financing to persons acquiring motel properties previously operated and/or owned by the Company. They look to acquire available properties for development and/or future sale. The Company also invests in companies whose business operations include property development. These activities primarily occur in the Southeast. The Company's franchise division offers advertising, reservation, group sales, quality assurance and consulting services to motel owner/operators. It is the exclusive franchiser for Red Carpet Inns and Master Host Inns as well as Scottish Inns. Its market has historically been the contiguous United States; however, in 1994 the Company began to explore international markets. As of December 31, 2001 the Company had one franchise in Jamaica. The Company also provides a nationwide central reservation service for its franchisees. This service was provided in house until the end of 2001. In 2002, the Company engaged an outside service. B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES B1 - CONSOLIDATION The consolidated financial statements include the accounts of the Company and all subsidiaries except where control is temporary or does not rest with the Company. The Company's investments in companies in which it has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method. Accordingly, the Company's share of the net earnings of these companies is included in consolidated net income. The Company's investments in other companies are carried at cost or fair value, as appropriate. All significant inter-company accounts and transactions are eliminated. B2 - ESTIMATES IN FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. B3 - REVENUE AND EXPENSE RECOGNITION I. Accrual Basis The accrual basis of accounting is used for both book and tax records. Revenue is recognized when it is earned. Expenses are recognized when incurred. II. Franchise Fees Revenue from franchise sales is recognized when all material conditions of the sale have been substantially performed. Substantial performance by the franchiser occurs when, 1) the franchiser is not obligated in any way to excuse payment of any unpaid notes or to refund any cash already received, 2) initial services required by the franchiser by contract or otherwise have been substantially performed, and 3) all other conditions have been met which affect the consummation of the sale. B4 - ACCOUNTING POLICY - STATEMENT OF CASH FLOWS For purposes of the cash flow statement, the Company considers all highly liquid debt instruments with maturity of three months or less to be cash equivalents. The following non-cash transactions took place in 2001: The Company purchased four vehicles for $69,807 with notes payables for the lack of consideration. The Company sold a vehicle for $3,200 to an employee in exchange for the employee's auto allowance. The Company disposed equipment with original costs of $18,388 and accumulated depreciation of $17,441. The Company sold a parcel of land with an adjusted basis of $13,289 held for investment in exchange for notes and interest totaling $39,389 due to the buyer. The gain on the exchange was $26,100. The Company foreclosed a mortgage with a principal balance due of $1,473,990, interest receivable due of $185,102 and related discount of $876,446 for the underlying property. The property was subsequently sold for $20,000 in cash, payment of accrued property taxes and expenses of $73,365 and a new note receivable in the amount of $739,785. The gain recognized on the sale was $50,504. The Company took back property in lieu of foreclosure of a note in the amount of $265,312. The property was booked in the same amount. Interest receivable of $474 due on the note was written off. The Company donated two barges and a boat with original costs of $58,560 and accumulated depreciation of $54,520 to charity. The partnership in which the Company has a 50% ownership (See Investments in Unconsolidated Affiliates) made principal note payments in the amount of $6,994 on one of the Company's loans. The Company wrote off prior year receivables of $352,902 to bad debt that were due from the company that leases the Company's properties. This decision was made because this company went out of business on January 1, 2002. The Company will manage the properties in house beginning in the year 2002. B4 - ACCOUNTING POLICY - STATEMENT OF CASH FLOWS - (Continued) The following non-cash transactions took place in 2000: The Company issued a note payable in the amount of $16,898 related to the purchase of land. The Company sold land with a book value of $3,027 for $7,500. The Company converted accounts receivable in the amount of $101,039 to a note receivable. The Company was involved in a multifaceted non-cash transaction with a net change of $35,686.The Company had bad debt recovery in the amount of $11,706 assumed by a related party in the form of a note. The Company converted a note payable to a note receivable totaling $3,173. The Company purchased a vehicle for $16,697 with a note payable for the lack of consideration. The Company sold a vehicle for $2,250 to an employee for a note receivable from the employee. The Company disposed fully depreciated equipment with original costs totaling $6,713. The Company was involved in a multifaceted non-cash transaction with a net change of $34,383. The following non-cash transactions took place in 1999: The Company retired fully depreciated furniture and fixtures in the amount of $9,000. The Company purchased 50% ownership of a vehicle for $4,976 with a note payable for the lack of consideration. The Company sold land and paid off the related note payable and escrow in the amount of $105,783 and $100,200, respectively. The Company sold their portion of land and related motel investment and paid off the related note payable in the amount of $204,701. The Company cancelled the related notes receivable of $86,850 and a new note receivable was created for $200,000. The Company recorded a note receivable in the amount of $1,100,000 in relation to the sale of a motel and the land. The Company transferred notes in the amount of $79,552 to accounts payable. A vehicle with a book value of $9,600 and accumulated depreciation of $5,760 was disposed. Furniture, fixtures, and equipment with a book value of $66,695 and accumulated depreciation of $65,874 were disposed. The Company wrote off a note payable in the amount of $1,250. The company that leases of the Company's properties made payments on notes payable in the amount of $18,762. This company received credit for these payments on its accounts receivable balance. A note payable to a company owned 100% by the CEO was reduced by credits of $15,026 given to the management company for payments made on behalf of a partnership in which CEO has a 25% and the Company a 50% interest. A note payable due to an affiliated individual was reduced by $12,352 and accrued interest payable resolved a note payable due to an affiliated individual by $2,494 for further payments for the partnership by the management company. In 2001, the Company paid $7,471 in income taxes and $162,237 in interest. In 2000, the Company paid $30,000 in income taxes and $237,610 in interest. In 1999, the Company paid $0 in income taxes and $205,370 in interest. C - INVENTORY Inventory is valued at the lower of cost or market and consists of hotel and motel furniture. The method used in determining the cost is the average cost paid for the items. Listed below are sales and cost of inventory sold:

2001 2000 1999 ~~1998~~ Sales $ 21- $ ~~439~~21 $ ~~19,519~~439 Cost - 45 4,174 ~~14,233~~ GROSS PROFIT (LOSS) $ - $ (24) $ (3,735) ~~$ 5,286~~

D - REAL ESTATE SALES Gains on real estate transactions on which substantial down payments are not received are deferred and recognized as income only as the principal amount of the obligation is received. This deferred income is shown on the balance sheet as a deferred income installment. Deferred income recognized was $33,839 in 2001, $26,289 in 2000, and $33,433 in 1999. E - DEFERRED DEBT ISSUE COSTS Deferred debt costs (primarily commitment fees) are being amortized over the original term of the long-term debt to which they relate. F - NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing net income by the weighted average number of shares outstanding during the period. The weighted average number of shares outstanding for the years ending December 31, 2001, 2000 and 1999 was 2,366,395, 2,366,395, and 2,365,284 respectively. G - ACCOUNTS, MORTGAGES AND NOTES RECEIVABLE In accounts receivable - trade for franchise sales, an allowance account is provided based on a percentage of the outstanding accounts. During the year, all bad debt write-offs were made to G - ACCOUNTS, MORTGAGES AND NOTES RECEIVABLE - (Continued) the allowance account. Accounts Receivables - Trade for 2001 and 2000 are presented net of allowance for doubtful accounts of $38,394 and $43,510 respectively. Prior to 2001, Accounts Receivable-Net also included amounts due for the Company's operating leases. In the year 2001, no accruals were made for rent income due from lessee because of the pending termination of the leases and the lack of probability of collection. All lease payments received in 2001 were applied against prior year receivables. Since no accruals were made, lease income dropped significantly. Furthermore, the remaining balance due for the leases was written off to bad debt. Management made this decision in view of the financial failure of the lessee (See Cash Flow and Operating Leases). The Company extends credit to individuals and companies in the normal course of its operations. These loans relate to motel properties located throughout the Southeast, and the Company requires these advances to be secured by mortgages on the related property. The Company's exposure to loss on these notes is dependent on the financial performance of the property and the fair value of the property. No reserves for uncollectible mortgages and notes receivable are maintained. Any non-performing note is secured by assets with values greater than the principal and accrued interest. Included in the mortgages and notes receivable - short term are notes the Company has with franchisees for initial franchise fees, royalty fees, sign rental and room reservation income. The notes are either non-interest bearing or convey an interest rate of up to 12 percent. These notes total $353,772 in 2001 and $373,279 in 2000. All are originally due within one year. However, certain notes have been extended and have been outstanding for over one year. Those notes due over one year are interest bearing. Mortgages and notes receivable are stated net of associated discounts. In 2001 and 2000, the discounts totaled $86,938 and $54,175 respectively. The weighted average interest rate of the mortgage notes held by the Company is 11.4 percent, and they range from 6 percent to 12.5 percent. The Company plans to hold the notes until maturity. Maturities over the next five (5) years are as follows:

~~2001 230,133~~ 2002 ~~256~~$ 178,~~434~~404 2003 ~~285~~197,~~766~~002 2004 ~~318~~217,~~471~~555 2005 ~~354~~240,~~941~~271 2006 253,086 Beyond 32,~~339~~872,~~331~~406

H - LOANS - EMPLOYEES Loans-Employees represents travel advances and/or loans to employees. I - INVESTMENTS I. INVESTMENTS IN UNCONSOLIDATED AFFILIATES The Company has investments in unconsolidated affiliates that are accounted for under the equity method. Under the equity method, original investments are recorded at cost and adjusted by the Company's share of earnings, losses and distributions of these companies. Investments in unconsolidated affiliates consist of the following:

% Ownership 2001 2000 ~~1999~~ Houma Atrium Bldg.- Partnership 50% (~~593~~465,~~182~~919) (~~131~~593,~~942~~182) Extasea Casino Cruises Of No. ~~Fla~~Florida, Inc. 40% 316,898 373,656 ~~430,414~~ Hospitality Int'l Real Estate, Inc. 45% 2,945 (13,819) ~~(23,844)~~Totals ~~Hospitality~~$ ~~Insurance Services, Inc. 45% 0~~ (74146,~~796~~076) ~~Totals~~ $ (233,345) ~~$ 199,832~~

The CEO and another individual own the remaining 50% of the Houma Atrium Building Partnership. Hospitality International Real Estate, Inc. is 55% owned by one individual. The CEO and two other individuals own the remaining ownership of Extasea Casino Cruises of North Florida, Inc. The Company's share of the Houma Atrium Building Partnership losses was $31,388 in 2001 and $75,349 in 2000. Losses on the investment have been recognized up to the Company's at- risk amount. In 2001, the management company that collects lease payments for its properties advanced monies to the partnership. The Company increased its investment in the partnership for these payments in 2001. In 2000, the investment in the Houma Atrium Building partnership was reduced and converted to an interest bearing note receivable to bring capital balances to agree to percentages of ownership. The CEO of the Company owns 25% of this partnership (See Related Party). Negative investments reflect losses in excess of investment. The Company is at risk up to at least the amount indicated. Extasea Casino Cruises of No. Florida, Inc. owns the M/V Fantasea, which was originally named the M/V Commonwealth. The CEO as well as some of the directors has interests in this investment (See Related Party). I - INVESTMENTS - (Continued) All the Company's investments in unconsolidated affiliates operate with fiscal years ending on December 31. Summarized balance sheet information of the unconsolidated affiliates as of December 31, 2001 and 2000 are as follows:

2001 2000 ~~1999~~ Current Assets $ 180,979 $ 30,430 ~~21,757~~ Property and other assets, net 3,~~514~~271,~~348~~982 3,~~772~~514,~~826~~348 Current liabilities 597,973 551,741 ~~500,157~~ Long-term debt and other liabilities 32,~~344~~972,~~703~~722 3,~~105~~344,~~772~~703 Equity (~~351~~117,~~166~~734) ~~188~~(351,~~654~~666) Gross Revenues 847,305 797,960 ~~766,329~~ Net Income/ (Loss) (~~126~~168,~~947~~282) (~~157~~126,~~799~~947)

II. UNDISTRIBUTED EARNINGS OF UNCONSOLIDATED AFFILIATES Pursuant to SEC Rule 4-08, the Company discloses that the consolidated retained earnings does not contain undistributed earnings of 50 percent or less owned investments accounted for by the equity method as of December 31,1998. III. MARKETABLE EQUITY SECURITIES Marketable equity securities are available for sale. Holding gains are presented in stockholder's equity. Income taxes related to the gains are $4,042 in 2001, $3,408 in 2000, and $897 in 1999. J - INTANGIBLE ASSETS - TRADEMARKS Trademarks are stated on the basis of cost and are amortized, principally on a straight-line basis, over the estimated future periods to be benefited (not exceeding 40 years). They are periodically reviewed for impairment based on an assessment of future operations to ensure that they are appropriately valued. Accumulated amortization was $503,132 and $460,303 on December 31, 2001 and 2000, respectively. Trademarks consist of $1,713,161, $510,000 of which represents the historical cost of acquiring the trade name "Master Hosts" and related service marks, $360,000 of which represents the cost of the Sundowner Inns and $843,161 of which represents the marks of Downtowner/Passport International Hotel. The Company also owns the trade name "Red Carpet Inns". A historical cost basis in excess of $600,000 was carried on the books of the old Red Carpet Inns Company prior to its acquisition by the Company. This amount was apparently written off prior to the acquisition. Management believes the current value far exceeds the historical cost to the old company and thus the Company has in its possession an asset of substantial worth that has no recorded cost in the financial statements. The Company also owns the trade name "Scottish Inns" and its value is not reflected in the financial statements. K - INCOME TAX The components of the provision for income taxes are as follows:

2001 2000 1999 ~~1998~~ Current: Federal $ 23,194 $ 10,564 $ 53,551 ~~$ (296)~~ State, local, and franchise ~~Taxes~~taxes 7,487 3,974 8,681 ~~(126)~~ Total Current 30,681 14,538 62,232 ~~(422)~~ Deferred Book Tax (Benefit): Federal (73,020) 11,010 46,424 ~~56,399~~ State, local, and franchise ~~Taxes~~taxes (15,210) 3,987 8,783 ~~17,303~~ Total Deferred (88,230) 14,997 55,207 ~~73,702~~ Net Tax Expense/ (Benefit) $ 29(57,~~535~~549) $ ~~117~~29,~~439~~535 $ 73117,~~280~~439

The reconciliation of the difference between the federal statutory tax rate and the Company's effective tax rate is as follows:

2001 2000 1999 ~~1998~~ Federal statutory tax rate 15(30.90)% 3826.30% 3532.30% ~~Deferred~~Dividends ~~severance~~received ~~pay~~Deduction 3.(0.2) (0.67) (260.1) Undistributed earnings from ~~Affiliates~~affiliates ~~0 0 21.9 Capital loss carryover 0~~ 6.64 ~~9.6 Net operating loss carryover~~ (25.63) ~~(14~~12.1)0 ~~(33.1)~~State ~~Change~~tax, innet ~~bad~~of ~~debt~~Federal ~~reserve~~Tax (5.1.0) (1.3)5 (32.4)8 Amortization of trademarks (52.9)0 (72.7)4 (81.4)6 ~~State~~Nondeductible ~~taxes,~~meals ~~net~~2.1 ~~of Federal income taxes (0~~2.3)5 (1.3)7 0 Penalties 04.5 0 0.75 ~~Nondeductible employee meals~~ 0 ~~0 3~~.05 Other 0(14.32) ~~0.4 0.3 Effective tax rate~~ (5.3%2) ~~21.5%~~ (03.2)%

Effective tax rate (30.4)% 21.7% 47.3% The income tax effects of temporary differences between financial and income tax reporting that gave rise to deferred income tax assets and liabilities are as follows:

2001 2000 1999 ~~1998~~ Current deferred income tax assets: Net operating loss ~~carryover~~Carryover $26,486 26,678 $4,454 ~~$2,951 Change in reserve for bad debts 0 0 0~~ Deferred severance pay 2,270 2,046 2,976 ~~3,420~~ Contribution carryover 1,615 52 17 10 Total current deferred $30,371 28,776 $7,447 ~~$6,381~~ Long-term deferred income tax assets: Net operating loss ~~carryover~~Carryover $155,521 7,943 $0 ~~26,166~~ Change in reserve for bad debts 28,107 0 39,796 ~~41,439~~ Deferred severance pay 63,378 43,028 35,650 ~~39,915~~ Capital loss carry forward 0 10,632 10,632 ~~12,287~~ Total Long-term deferred $247,006 61,603 $ 86,078 ~~$119,807~~ Long-term deferred income tax liabilities: Amortization on ~~trademarks~~Trademarks $96,510 66,552 $ 85,779 ~~$ 72,319~~ Installment sale 25,608 0 102,138 ~~102,138~~ Total long-term deferred $112,118 66,552 $187,917 ~~$174,457~~

Hospitality International, Inc. had a net operating loss (NOL) of $14,678 in 1998, $7,479 in 1999 and $23,874 in 2000 for federal income tax purposes. The entire NOL was utilized against taxable income in the year 2001. Southern Scottish Inns, Inc. had a net operating loss of $378,283 in the year 2001 that expires in the year 2016. The Company also has net operating loss carryovers still available from 1996 in the amount of $35,337 and from 1998 in the amount of $67,462 that expire in the years 2011 and 2013 respectively. Listed below are the years, amounts and tax benefits of the net loss carryover used:

2001 2000 1999 ~~1998~~ Net operating loss utilized $ 46,031 $ 22,649 $ 91,809 ~~$ 148,669~~ Tax benefit 10,905 5,889 19,270 ~~46,672~~ Tax rate 23.7% 26.0% 21.0% ~~31.4%~~

The Company and its subsidiaries file unconsolidated tax returns. The entities are not subject to IRC SEC. 1563. L - DEBT OBLIGATIONS The Company has incurred debt obligations principally through public and private offerings and bank loans. Debt obligations consist of the following: 8% - 8.95% 2002 - 2009 $ 169,442 $ 206,563 9% - 9.95% 2002 - 2006 84,161 358,610 10% - 10.95% 2002 - 2017 530,631 603,358 11% - 11.95% 2002 - 2008 513,769 538,793 12%-14% 2002 - 2004 233,179 115,527 15% 2003 - 2004 7,579 7,579 Variable 2002 - 2005 163,232 235,791 Total Debt Obligations 1,701,993 2,066,221 Less: Amounts Maturing Within one year 502,124 514,944 Net Long-Term Notes 1,199,869 1,551,277

Maturities of debt for the five years succeeding December 31, 2001 are a follows: 2002 502,124 2003 205,493 2004 153,014 2005 114,266 2006 106,518 Beyond 620,578 Total 1,701,993

The above notes include various restrictions, none of which are presently significant to the Company. The debt obligations are secured by assets on the consolidated balance sheet with a book value of $2,648,869 and an estimated fair value of $5,477,286. There are no compensating cash balance requirements attached to any of the debt instruments. M - OPERATING LEASES The Company leases out as office space a portion of the corporate headquarters it owns. The allocated cost of the portion leased for 2001 and 2000 is $340,606 and $340,332 respectively and its allocated accumulated depreciation is $130,214 in 2001 and $118,079 in 2000. The terms of lease agreements vary by tenant and circumstance; however, all current lease agreements are for one year or less. M - OPERATING LEASES - (Continued) The Company also leases properties it owns in various states. These properties are recorded in Property and Equipment with a cost of $3,383,071 in 2001 with accumulated depreciation of $592,289 and $3,396,785 in 2000 with accumulated depreciation of $658,013. The Company leased a copier under a non-cancelable operating lease with a term of five years in the year 2000. This lease replaced on old lease obtained in 1997. Rent expense that included maintenance, insurance and taxes was $15,005 in the year 2001 and $11,270 in the year 2000. The following is a schedule by years of future minimum rentals (equipment rent only) under the lease at December 31, 2001: ~~2002 $ 8,095 2003 8,095 2004 8,095 2005 8,095 Total $32,380~~

The present value of the minimum lease payments is $23,327. N - INDUSTRY SEGMENTS The information about the Company's operations in different industries is as follows:

~~NOTES~~2001 ~~MATURITIES~~ 2000 1999 8%Sales -to ~~8.95%~~unaffiliated ~~2001~~customers: -Franchising ~~2011~~1,891,113 ~~206~~1,~~563~~772,185 ~~323~~1,~~874~~833,472 9%Financing -& ~~9.75%~~Investing ~~2001~~745,747 -676,706 ~~2007~~754,421 ~~358~~Leasing 8,~~610~~229 ~~391~~450,~~377~~667 ~~10%~~507,064 -Net ~~10.50%~~profit ~~2001~~(loss): -Franchising ~~2011~~80,584 ~~265~~31,~~642~~598 ~~143~~14,~~408~~957 ~~11%~~Financing ~~2001~~& -Investing ~~2008~~(12,645) ~~538~~18,~~793~~371 ~~504~~16,~~994~~342 ~~12%-14%~~Leasing ~~2001~~(58,908) -136,918 ~~2004~~190,748 14Identifiable assets: Franchising 1,~~876~~900,892 01,842,913 ~~16.4%-17.65%~~1,664,828 ~~2001~~Financing 0& ~~703~~Investing ~~18.33%-23.80%~~11,600,535 ~~2001~~12,138,292 012,479,423 Leasing 2,~~842~~918,409 ~~Variable~~3,725,798 ~~2001~~3,683,599 -Depreciation ~~2003~~expense: ~~235~~Franchising 42,~~791~~139 ~~424~~53,~~248~~746 ~~Total~~71,292 ~~Debt~~Leasing ~~Obligations~~56,499 171,~~620~~141 72,~~275~~219 Amortization expense: Franchising 21,079 21,079 21,079 Leasing 1,~~791~~717 1,~~446~~717 ~~Less:~~1,817 ~~Amounts~~Additions ~~Maturing~~in ~~Within~~property, ~~one~~plant ~~year~~and ~~396~~equipment: Franchising 5,~~617~~362 ~~482~~62,~~843~~568 ~~Net~~12,883 ~~Long-Term~~Leasing ~~Notes~~274 17,~~223,658~~010 1,~~308,603~~971

In the Financing & Investing Segment, the Company has included net income/ (loss) from unconsolidated equity investments totaling $(87,896) in 2001, $(57,321) in 2000, and $(147,648) in 1999. O - PROPERTY AND EQUIPMENT Major classifications of property and equipment and their respective depreciable lives are summarized below: Property and equipment are recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the respective assets. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the statement of income.

2001 396,617 2002 223,271 2003 217,844 2004 169,489 2005 131,574 Beyond 481,480 Total 1,620,275

2001 1,619

2000 1999 1998 Sales to unaffiliated customers: Franchising 1,772,185 1,833,472 1,843,335 Financing & Investing 676,706 754,421 579,865 Leasing 450,667 507,064 601,909 Net profit (loss): Franchising 31,598 14,957 12,582 Financing & Investing 18,371 16,342 (99,264) Leasing 136,918 190,748 196,363 Identifiable assets: Franchising 1,842,913 1,664,828 1,793,377 Financing & Investing 2,138,292 12,479,423 13,004,459 Leasing 3,725,798 3,683,599 3,556,263 Depreciation expense: Franchising 53,746 71,292 76,512 Leasing 71,141 72,219 72,021 Amortization expense: Franchising 21,079 21,079 1,079 Leasing 1,717 1,817 1,966 Additions in property, plant and equipment: Franchising 62,568 12,883 44,558 Leasing 7,010 1,971 153,464

Depreciation and amortization expense was $188,817 in 2001, $215,569 in 2000, and $238,590 in 1999. P - RELATED PARTY TRANSACTIONS The CEO of the Company is an owner in two of the investments in which there have been losses (See Investments in Unconsolidated Affiliates). The Company is a joint owner in a barge with the CEO. The Company's investment in the barge totaled $128,834 and $124,333 as of December 31, 2001 and December 31, 2000 respectively. Included in Accounts Receivable-Affiliates are expenses totaling $36,805 paid for the barge in 2001. P - RELATED PARTY TRANSACTIONS - (Continued) In 2000, the Company took back land and a motel for the amounts of the unpaid principal of $590,138 and accrued interest of $64,772 due from a corporation in which the CEO is a 50% shareholder. Included in Accounts Receivable-Affiliates are expenses totaling $148,925 in 2001 and $142,414 in 2000 for expenses the Company paid on behalf of Texas Marine Development Corporation, the operating company for M/V Fantasea which is owned by Extasea Casino Cruises of No. Fla, Inc. an investment in which the CEO and some of the directors also have interests (See Investments in Unconsolidated Affiliates). Receivables are also due from this investee company totaling $390,508 in 2001 and $246,931 in 2000. Also included in Accounts Receivable-Affiliates are expenses totaling $184,167 in 2001 and $22,295 in 2000 paid on behalf of the CEO. The CEO's ownership of the Company's common stock was 50.85% as of December 31, 2001. Other amounts included in Accounts Receivable-Affiliates are: matching capital contributions due from the other 25% partner in the partnership in which the Company is a 50% owner (See Investments in Unconsolidated Affiliates) totaling $27,853 at the end of 2001 and 2000 and expenses paid on behalf of two affiliates totaling $45,599 in 2001 and $26,352 in 2000. One of these affiliates closed in the year 2000. The remaining balance of $18,117 due from this company was written off to bad debt in that year. The following is a schedule of loans to related parties:

~~RELATED~~Related ~~PARTY~~Interest ~~INTEREST~~Principal ~~RATE~~Accrued ~~PRINCIPAL~~Interest ~~BALANCE~~Party ~~ACCRUED~~Rate ~~INTEREST~~Balance ~~RECEIVABLE~~Receivable ~~12/31/00~~2001 ~~12/31/99~~2000 ~~12/31/00~~2001 ~~12/31/99~~2000 ~~Individual~~PTR ~~6% 0 $2,500 $ 0 $ 0 Partnership~~ Mortgage 10% 586,791 586,791 175,728 135,016 ~~85,676~~Partnership ~~Partnership6~~6% - 10% 1718,~~264~~816 17,264 21,813 20,602 ~~19,567~~ CEO 6% - 10% 4,975 52,811 4125,~~349~~323 21,574 ~~14,635~~ Partnership 6% 436,185 0436,185 69,491 23,521 0Totals ~~Partnership~~$ ~~6% 0 590~~1,~~138 0 64~~046,~~772~~767 ~~Totals~~ $ 1,093,051 $1 292,~~238,042~~355 $ 200,713 ~~$184,650~~

The following is a schedule of loans from related parties:

~~The~~Related ~~following~~Interest isPrincipal aAccrued ~~schedule~~Interest ofParty ~~loans~~Maturities ~~from~~Rate ~~related~~Balance ~~parties:~~Receivable ~~RELATED~~2001 ~~INTEREST~~2000 ~~PRINCIPAL~~2001 ~~ACCURED~~2000 ~~INTERES PARTY MATURITIES RATE BALANCE PAYABLE 12/31/00 12/31/99 12/31/00 12/31/99~~ Company ~~2000~~2002-2005 10% $207,377 ~~$225~~207,~~230~~377 134,056 113,318 ~~92,850~~ Individual ~~2000~~2002-2005 12% 81,801 81,801 49,122 39,131 ~~9,315~~ CEO ~~2000~~2002-2005 6% 129,813 ~~141~~129,~~519~~813 31,156 15,578 0 Individual ~~2000~~2002-2005 15% 7,579 7,579 2,768 1,669 ~~568~~ Individual ~~2000~~2002-2005 13% 1810,~~850~~350 18,850 19,380 17,628 ~~20,240~~ Individual ~~1999~~2002 10% 526 526 210 158 ~~105~~Individual 2002 10% 30,868 0 514 0 Totals 468,314 445,946 ~~475~~237,~~505~~206 187,482 ~~143,078~~ Less: Amounts Maturing within one year ~~118~~149,~~327~~195 118,327 Net Long-Term Notes - Affiliates ~~327~~319,~~619~~119 ~~357~~327,~~178~~619

Maturities of Long-Term: 2002 $ 149,195 2003 2004 2005 2006 Beyond 319,119 Total $ 468,314

Interest paid to related parties was $ 0 in 2001, $78 in 2000, and $9,888 in 1999. Q - CAPITAL LEASES Computers and hardware upgrades were purchased under two and three year lease agreements in 1997. All had bargain purchase options and were recorded as capital leases. One of the computers was sold to an employee in 2000. The equipment valuation (the same as its estimated fair value) is as follows:

~~2000 118,327~~ 2001 02000 ~~2002~~Computer 0Equipment ~~2003~~11,985 011,985 ~~2004~~Accumulated 0Depreciation ~~2005~~(10,786) 0(8,390) ~~Beyond~~Book ~~327~~Value 1,~~619~~199 ~~Total 5~~3,~~946~~595

The leases were paid in full in 2000. R - LITIGATION, CLAIMS AND ASSESSMENTS The Company is named as a defendant for damages in an unspecified amount, reasonable attorney fees, interest and costs as a result of the Company's alleged violation of a patent. It is counsel's opinion that the Company will be dismissed without the Company's being liable for any money. The Company also has two cases where there is a trial for Declaratory Judgment where the franchisee is seeking a determination as to the validity of the franchise. In these cases, the Company is seeking damages under the franchise agreement against the franchisee. In one case, the franchisee has filed a counterclaim. Counsel expects the matter to be dismissed in a Motion for Summary Judgment. Legal fees paid during 2001, 2000 and 1999 were $256,539, $165,005, and $194,207 respectively. S - STOCK ISSUANCE In 2000, 20,000 shares of Red Carpet Inns International, Inc., common stock were issued for 1,111 shares of Southern Scottish Inns, Inc., common stock. The issuance was valued at fair market value ($0.60 per share) of Southern Scottish Inns, Inc. common stock. Minority interest has been diluted by these stock swaps. T - LITIGATION SETTLEMENTS From 1995 to 2001, the Company aggressively pursued its legal rights to its trademarks. It has been successful in stopping motel operations from illegally using its trademarks as well as in enforcing compliance to its franchisee agreements. Settlements were reached on a number of lawsuits in all years that significantly increased the revenues of the Company. Attorney fees related to those settlements also increased in all years. U - ADVERTISING COSTS The franchising division collects advertising income to fund advertising services that are provided to benefit franchisees. Advertising costs are expensed as incurred with the exception of its semi-annual directories, which are amortized on a monthly basis. Following is a summary of advertising income and advertising costs for the years ended December 31:

2001 2000 1999 ~~Computer~~Advertising ~~Equipment~~Income 11273,~~985~~914 13283,~~285~~491 ~~Accumulated~~302,979 ~~Depreciation~~Advertising Costs (8607,~~390~~129) (6581,~~643~~382) ~~Book~~(556,259) ~~Value~~Excess 3of Advertising Costs over Advertising Income (333,~~595~~215) 6(297,~~642~~891) (253,280)

U - ADVERTISING COSTS - (Continued) The Company also prepaid advertising costs in the amount of $27,737 for the 2001 directory in the year 2000 and $27,737 in the year 2001 for the 2002 directory. V - CONTINGENCIES The amount of accounts receivable in litigation or collections was $35,410 at the end of 2001 and $22,848 at the end of 2000. It is management's and counsel's opinion that the chances for collection are good. The Company's franchising division pays commissions to its sales representatives on franchises sold. The Company policy is to pay the sales person based on receipts of royalties from the franchisee. The commissions are recognized as earned when the franchisee pays the royalty fees. Estimated contingent commissions for future years are approximately $80,784. This amount has not been accrued. The Company is the defendant in various legal actions. In the opinion of management and counsel such actions will not materially affect the financial position or results of operations of the Company (See Litigation, Claims, and Assessments). W - FINANCIAL INSTRUMENTS I. MARKET AND OFF BALANCE SHEET RISK The Company holds financial instruments that relate to real estate located throughout the Southeast. If these properties decline significantly in market value, the valuation of the associated receivable could become impaired. No such decline is foreseen at the present time. In 1996, the Company had two secured mortgage notes classified as non performing. They totaled $2,482,861 with accrued interest of $382,099 at December 31, 1996. On December 31, 1997, the Company foreclosed one of the mortgages and took back the land and motel for the amounts of the unpaid principal of $1,008,971 and accrued interest of $163,756. (The operating income of this motel is not included in the Company's income statement in 1997 nor were the two prior years' operating results available from the prior owners). In 1998, the motel was leased to a management company. In 1999, the land and motel obtained in 1997 by foreclosure was sold for $1,100,000. The remaining non- performing note totaled $1,473,990 at December 31, 2000 with accrued interest of $185,102 at December 31, 2000. The Company foreclosed this note in the year 2001 and sold the land and motel taken back (See Cash Flow). In 1998, the Company pledged one of its properties as security for a second mortgage on a building owned by the partnership in which it has a 50% ownership (See Investments in Unconsolidated Affiliates). The book value and market value of the pledged property was $530,733 and $2,382,981 respectively at December 31, 2001. II. FAIR VALUE OF FINANCIAL INSTRUMENTS INVESTMENTS - It is not practicable to estimate the fair value of investments because there are no quoted market prices for its untraded common stock investments, and a reasonable estimate of fair value could not be made without incurring excessive costs. MORTGAGES AND NOTES RECEIVABLE - The fair value of the mortgage and notes receivable was determined by management estimates of the property values that secure the mortgage notes. The fair value of these instruments is $5,520,193 at December 31, 2001 and $6,685,800 at December 31, 2000, the carrying values on the balance sheet. MORTGAGES AND NOTES PAYABLE - The fair value of long-term debt equals the carrying value. Fair values for these instruments are $1,701,993 in 2001 and $2,066,221 in 2000. III. ENVIRONMENTALLY SENSITIVE PROPERTY The Company is not directly affected by environmental protection measures of federal, state or local authorities to any extent, which would reasonably be expected to cause material capital expenditures for compliance, so far as is known. However, it is possible that an approximately five and one-tenths (5.09) acre tract of land held as an investment and acquired as a possible motel site, located on I-10 in Ocean Springs, Mississippi, may under the new guidelines, be determined to be in part "wetlands." If so, its use and value would be adversely affected. On January 27, 1995, 3.2 acres of said tract were sold at a consideration undiminished by the Wetlands issue; the value of the remaining 5.09 acres, therefore, may not be diminished. The remaining land is carried at $55,647. IV. YEAR 2000 ISSUE The year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Any of the computer programs or hardware that have date - sensitive hardware or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. The Company addressed year 2000 compliance in the normal upgrading of its computer programs and replacement of defective hardware and had all systems in compliance by June 30, 1999. The Company experienced no problems related to Y2K. X- LONG-TERM LIABILITIES AND DEFERRED AMOUNTS Deferred Severance Pay reflects amounts due to officers of the corporation, which have been earned to date for continued service. Since the arrangement is not a qualified plan for federal income taxes, the expense recognized for financial statement purposes is not deductible for tax until paid. The deferral of this tax deduction is recognized as deferred tax asset (See Income Tax). Y - DISCONTINUED OPERATIONS The furniture sales division of the Company was closed in February 1998. Gross profits derived from the furniture sales division are disclosed in Note C - Inventory. Losses from the operations of the division, net of tax benefits / (expenses) of $0 in 2001, $0 in 2000, and $856 in 1999. Costs to close the division were minimal. Exhibit 22 Wholly Owned Subsidiaries of Southern Scottish Inns, Incorporated: Alabama Motel Corporation Carriage Inn of Huntsville, Inc. Gulfside Mortgage Company Hospitality Mortgage Company Houmas Hospitality Corporation Labove Apartment Company LAFLA, Inc. Mid. Continent Supply of Louisiana Morgan City Hospitality, Inc. Scottish Venture One, Inc. Scottish Venture/Canton, Inc. Southern Inns of Arkansas, Inc. Southern Scottish Inns No. 1, Inc. Southern Scottish Inns No. 2, Inc. Southern Scottish Inns No. 4, Inc. Southern Scottish Inns of Miss, Inc. Spanish Trail Hospitality, Inc. Zane Enterprises Partially Owned Subsidiaries of Southern Scottish Inns, Incorporated: Hospitality International Real Estate, Inc. Hospitality International, Inc. Red Carpet Inns International, Inc. Scottish Ventures No. 2, LLC EXHIBIT 27 DEC-31-2001 DEC-31-2001 YEAR 160,400 0 2,329,225 0 40,749 2,672,532 4,686,385 (1,167,477) 12,766,299 1,289,449 1,201,987 6,023,981 0 0 3,008,595 12,766,299 0 3,436,304 0 0 3,625,572 0 207,957 (189,268) 57,549 (131,719) 0 (20,205) 0 (151,924) (.08) (.06) Exhibit Index Exhibit 1. Inapplicable 2. Inapplicable 3. Exhibit 3 (a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1983 is hereby incorporated by reference (Articles of Incorporation of Southern Scottish Inns, Inc. as amended) (b) Exhibit 3 (b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1983 is hereby incorporated by reference (by-laws of outhern Scottish Inns, Inc.). 4. Specimen Common Stock Certificate 5. Inapplicable 6. Inapplicable 7. Inapplicable 8. Inapplicable 9. Inapplicable 10. Material Contracts (Asset Sales - Lease Agreements) 11. Earnings per Share Computation 12. Security Ownership of Certain Beneficial Owners & Management 13. Inapplicable 14. Inapplicable 15. Inapplicable 16. Inapplicable 17. Inapplicable 18. Inapplicable 19. Inapplicable 20. Inapplicable 21. Inapplicable 22. List of Subsidiaries of Southern Scottish Inns, Inc. 23. Inapplicable 24. Inapplicable 25. Inapplicable 26. Inapplicable 27. Inapplicable 28. Inapplicable 29. Inapplicable

2000 1999 1998 Advertising Income 283,491 302,979 309,499

Filing Compare · SOUTHERN SCOTTISH INNS INC