Form 10-KSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-22132
BUCKHEAD AMERICA CORPORATION
(Name of small business issuer in its charter)
Delaware 58-2023732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4243 Dunwoody Club Drive, Suite 200, Atlanta, GA
(Address of principal executive offices) (Zip Code)
Issuer's telephone numbeR (770)393-2662
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered under Section 12(g) of the Act:
Common stock, par value $.01
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB.[_]
State issuer's revenues for its most recent fiscal year. $ 28,794,648
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. As of February 28, 1999: $ 7,308,494
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of February 28, 1999:
Common Stock, par value $.01 - 1,943,935 shares outstanding
DOCUMENTS INCORPORATED BY REFERENCE
No documents which are required to be listed under this caption are
incorporated by reference.
Transitional Small Business Disclosure Format (Check one): Yes _____; No X.
<PAGE>
PART I
Item 1. Description of Business.
BUSINESS DEVELOPMENT
Form and Year of Organization. Buckhead America Corporation ("Buckhead"
or the "Company") and most of its wholly-owned subsidiaries were incorporated in
Delaware on December 17, 1992 in connection with the bankruptcy reorganization
of Buckhead America Corporation ("Old Buckhead"), a Georgia corporation formerly
known as Days Inns of America, Inc. ("Days Inns"), and certain of its
affiliates. The Company, the successor-in-interest to certain assets and
liabilities of Days Inns, commenced operations on December 29, 1992. Other
wholly-owned subsidiaries were subsequently created, generally for the purpose
of acquiring assets. Unless the context otherwise requires, references to the
Company herein include the Company and its subsidiaries.
Material Purchases and Sales of Significant Assets. In March 1993, the
Company acquired through foreclosure a 180-room Days Inn hotel in Daytona,
Florida (the "Daytona Hotel") and in September 1994, the Company acquired
through foreclosure a 150-room Days Inn hotel in Miami, Florida (the "Miami
Hotel").
In May 1994, the Company, through a newly formed, wholly-owned
subsidiary, BAC Franchising Inc., a Delaware corporation, acquired the trademark
rights and license agreements comprising the Country Hearth Inn mid-priced hotel
franchise system.
In May 1995, Buckhead acquired a fifty-five percent (55%) interest in
Heritage Inn Associates, Ltd., a partnership which owns a 150-room hotel in
Orlando, Florida formerly known as the Heritage Inn. Immediately upon
acquisition, the hotel (the "Orlando Hotel") was converted to operate as a
Country Hearth Inn. During 1998, the Company acquired an additional 3% interest
in the partnership.
In December 1995 Buckhead purchased three Homeplace Inn hotel
properties in Texas from affiliates of American Liberty Hospitality, Inc.
("ALH"). Immediately upon acquisition, the acquired hotels (the "Texas Hotels")
along with three other ALH owned Homeplace Inn properties were converted to
operate as Country Hearth Inns.
In March 1996 the Company acquired an 82-room hotel in Atlanta,
Georgia. During the latter half of 1996 the hotel (the "Atlanta Hotel") was
renovated and refurbished and presently operates as a Country Hearth Inn.
In August 1996 the Company acquired a 96-room hotel in Dalton, Georgia.
Renovation and refurbishment of that hotel was completed in February 1997 and
the hotel (the "Dalton Hotel") presently operates as a Country Hearth Inn.
In December 1996 the Company sold the Miami Hotel.
In May 1997, the Company completed its acquisition of The Lodge Keeper
Group, Inc. of Prospect, Ohio ("Lodge Keeper"). Lodge Keeper operated 18 hotels
under long-term leases, held management contracts on six Country Hearth Inn
hotels and owned a 186-room independent extended-stay hotel. Simultaneously,
Lodge Keeper assumed the management responsibilities of four hotels previously
owned by the Company. In December 1997, the Company entered into long-term
leases with Host Funding, Inc. ("Host") on two of the already managed Country
Hearth Inn hotels.
In September 1997, the Company completed its acquisition of Hatfield
Inns, LLC. ("Hatfield"). The acquisition included eight 40-room hotel properties
located in Kentucky and Missouri (the"Kentucky/Missouri Hotels"). All eight
properties were converted to operate as Country Hearth Inns and are managed by
Lodge Keeper. The acquisition also included the plans and design rights which
the Company has used for the development and construction of additional
properties. Four additional such properties have been opened (two owned, one
leased, and one franchised) and an additional eleven properties are under
development.
In May 1998, the Company acquired a 121-room hotel in Norcross, Georgia
(the "Norcross Hotel"). The hotel is operated as a Best Western - Bradbury Suite
and is managed by Lodge Keeper.
In June 1998, the Company entered into leases for seven additional
hotel properties owned by Host. The hotel properties are operated under Super 8
(4) and Sleep Inn (3) license agreements and are managed by Lodge Keeper.
During 1998, the Company sold seven leasehold interests in hotel
properties which had been acquired with the Lodge Keeper acquisition.
In September 1998, the Company acquired fee-simple interest in a 50-room
hotel property in Coshocton, Ohio (the "Coshocton Hotel"). The property is
operated under a Travelodge license agreement. The Company had previously held a
leasehold interest in the property as a result of the Lodge Keeper acquisition.
From 1994 through 1998, the Company expanded its Country Hearth Inn
franchising operations by developing updated prototype hotels, implementing a
franchise sales and marketing plan, and establishing a centralized room
reservation system. The Company is licensed to sell Country Hearth Inn hotel
franchises in 50 states. Presently, thirty-nine Country Hearth Inns are open and
operating in thirteen states, 21 of which are Company owned or leased.
In addition to the Company owned and leased properties described above,
Lodge Keeper manages nine other hotel properties which operate under five
different brand names and has entered into contracts for the management of two
additional hotels which are presently under construction.
BUSINESS
Principal Products and Services. The Company operates in the
hospitality industry and its principal holdings include hotels, leasehold
interests in hotels, loans and other investments secured by hotels, franchising
rights, hotel management contracts and other related assets. Its principal
product is the Country Hearth Inn mid-priced hotel chain which the Company
acquired in May 1994. The primary activities of the Company involve the
expansion of the Country Hearth Inn chain, limited-service hotel management, and
development/acquisition/sale of hotel properties. Expansion of the Country
Hearth Inn chain has been effected through direct acquisition and conversion of
existing hotels, new construction, and through franchise sales. Additionally,
the Company manages 44 hotels, 35 of which are Company owned or leased. For
certain further information about the Company's hotels, see "Item 2. Description
of Property."
Brands. The Orlando, Atlanta, Dalton, Texas and Kentucky/Missouri Hotels,
as well as five other properties managed by the Company, operate under Country
Hearth Inn license agreements. The Daytona Hotel is operated under a Days Inn
license agreement. The Coshocton Hotel is operated under a Travelodge license
agreement. The Norcross Hotel is operated as a Best Western-Bradbury Suites.
Additionally, the Company manages eighteen leased properties, five of which
operate as Country Hearth Inns and eleven of which operate under other franchise
license agreements, including Travelodge (4), Sleep Inns (3), and Super 8 (4).
The Company also manages other hotel properties which operate under the names of
Suburban Lodge, Ramada, Villager, HoJo, and LK Motel.
Competition. There is significant competition in every phase of the
hospitality industry including development, construction, management, and
franchising. There are many hotel management companies in the United States, and
many of them are significantly larger than the Company. The continued growth of
the Company's hotel management operations is partially dependent upon the
Company's development and franchising operations as well as the ability to
identify and successfully negotiate third party contracts.
As a franchisor, the Company competes with a large number of hotel
franchise companies, most of whom are much larger than the Company and own
brands which are more nationally recognized than the Company's. The Company is
somewhat disadvantaged by the larger companies' reservation systems and national
marketing efforts.
As a hotel operator, the Company's owned and leased properties compete
with other hotels in each local market in which they are located. The Company
competes directly with these other hotels for hotel guests. The Company's rates
and occupancies are directly impacted by activities of these other hotels and by
additions to the supply of competing rooms in each local market.
The Company is a relatively new entrant in the hotel industry. It
believes that its management is experienced in hotel development, hotel
franchising, and hotel management. In addition, the Company may identify other
opportunities in the hospitality industry. However, existing hotel companies and
new entrants to the hotel industry in markets which the Company may pursue will
present significant competition which may have an adverse effect on the Company.
Regulation. Sales of franchises are principally regulated through
fairly uniform state laws. Such laws generally provide for registration by the
franchisor of standardized offering documents and compliance with numerous
financial qualifications. The Company undertook substantial registration
activities and is presently licensed to sell Country Hearth Inn franchises in 50
states.
Research and Development. During 1998 and 1997 the Company invested
approximately $42,000 and $63,000, respectively, in market studies,
environmental studies, and other feasibility analyses relating to potential
hotel acquisitions and development.
Environmental Compliance. The Company's operations and maintenance
policies and procedures at each owned, leased, or managed property include
policies and procedures regarding environmental compliance. The costs of such
compliance is not significant.
Employees. As of February 28, 1999, the Company had 696 employees in
the aggregate, including 40 full-time and 4 part-time corporate employees and
301 full-time and 351 part-time hotel employees. Four full-time hotel employees
are employed under a collective bargaining agreement.
RISK FACTORS
This Form 10-KSB contains forward looking statements that involve risks
and uncertainties. Statements contained in this Form 10-KSB that are not
historical facts are forward looking statements that are subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. The
Company's actual results may differ significantly from the results indicated by
such forward looking statements.
The Company is subject to a number of risks, including the general
risks of investing in real estate, the illiquidity of real estate, environmental
risks, possible uninsured or underinsured losses, fluctuations in property
taxes, hotel operating risks, the impact of competition, the difficulty of
managing growth, seasonality, the risks inherent in operating a hotel franchise
business, and the risks involved in hotel renovation and construction. For a
discussion of these and other risk factors, see the "RISK FACTOR" section
contained in the Company's Registration Statement on Form S-3 (File No.
333-37691).
<PAGE>
Item 2. Description of Property.
CORPORATE OFFICES
The Company's corporate headquarters are located at 4243 Dunwoody Club
Drive, Suite 200, Atlanta, Georgia. The Company leases approximately 3,600
square feet as its corporate headquarters. The lease term extends through
October 1999 at an annual rate of approximately $57,000. The Company believes
its headquarters are adequate for its current needs.
Hotel management and accounting functions are conducted by Lodge Keeper
which operates in leased office space located in Prospect, Ohio. The Lodge
Keeper leased space includes approximately 16,800 square feet and extends
through November 2001 at an annual rate of approximately $50,000. The Company
believes that these offices are adequate for its current needs and provides room
for moderate expansion.
<PAGE>
OWNED REAL PROPERTIES
Land. As of February 28, 1999, the Company owned six parcels of undeveloped
and unencumbered land, with an aggregate book value of $214,198. All of such
parcels are held for sale.
Owned and Leased Hotel Properties. The following table sets forth certain
1998 information for each of the Company's owned and leased hotels:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Average Average per
No. of Year Year Occupancy Daily Available Total
Properties Rooms Built Acquired Rate(1) Rate(1) Room(1) Revenue(2)
- - - --------------------------- -------- ------------- ----------- ------------ ----------- ----------- -------------
2 Country Hearth Inns
in Georgia 172 1967-1971 1996 46.6% $49.10 $22.89 $1,541,132
Country Hearth Inn
Orlando, FL 150 1985 1995 81.9% $70.34 $57.61 $4,029,107
3 Country Hearth Inns
in Texas 120 1984-1986 1995 53.3% $47.89 $25.53 $1,151,386
9 Country Hearth Inns
in Kentucky and Missouri 359 1993-1998 1997-1998 58.2% $47.13 $27.41 $3,452,372
Days Inn
Daytona, FL 180 1972 1993 48.7% $48.09 $23.40 $1,879,661
St. Louis NW Inn
St. Louis, MO 186 1964-1968 1997 92.9% $20.53 $19.07 $1,361,138
Travelodge
Coshocton, OH 50 1974 1997 50.4% $41.03 $20.67 $393,110
Best Western -
Bradbury Suites
Norcross, GA 121 1987 1998 50.1% $53.36 $26.74 $906,628
Host Funding Leases
in FL, MS, OH, KY, MO
IL, IN 614 1985-1993 1997-1998 63.2% $47.68 $30.12 $4,695,328
Other Leased Properties
in OH and MI 539 1968-1975 1997 48.7% $41.89 $20.41 $4,178,286
Other (3) $2,131,938
- - - --------------------------- -------- ------------- ----------- ------------ ----------- ----------- -------------
Total $25,720,086
- - - --------------------------- -------- ------------- ----------- ------------ ----------- ----------- -------------
</TABLE>
(1) Statistical information represents full year of operation.
(2) Total revenue represents revenues earned during ownership period.
(3) Represents revenues earned from properties prior to their sale in 1998.
<PAGE>
Atlanta Hotel. In March 1996, the Company acquired an 82-room hotel in
Atlanta, Georgia formerly known as the Sandy Springs Inn (the "Atlanta Hotel").
During the latter half of 1996, the hotel was renovated and refurbished for
conversion to operate as a Country Hearth Inn. The conversion was substantially
completed in January 1997 at a total cost of approximately $800,000,
approximately half of such was financed through lease arrangements, which were
subsequently paid off in February 1998.
The Atlanta Hotel secures a first mortgage loan with a December 31, 1998
balance of $2,087,394. The loan bears interest at 9.5% and requires monthly
payments of $20,350 until August 2016.
The market for hotel rooms in Atlanta is extremely competitive due to the
multitude of properties in the area. The hotel is positioned as a moderately
priced property targeted primarily at business travelers. Occupancy and room
rates averaged approximately 52.9% and $60.27 during 1998.
Renovation and environmental programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management, the property is adequately covered by insurance and is suitable
and adequate for its present use. Property taxes in 1998 were approximately
$40,000.
Differences between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for depreciable real property and 5-10 years for all other
depreciable property.
Dalton Hotel. In August 1996, the Company acquired a 96-room hotel in
Dalton, Georgia formerly known as the Sunset Inn (the "Dalton Hotel"). The
Company immediately initiated a renovation and refurbishment project to convert
the hotel to operate as a 90-room Country Hearth Inn. The project was
substantially completed in February 1997 at a total cost of approximately
$850,000, including leased equipment which was paid off in February 1998.
The Dalton Hotel secures a first mortgage loan with a December 31, 1998
balance of $1,006,161. The loan bears interest at 9.15% and requires monthly
payments of $9,549 until September 2001 at which time the then remaining balance
is due.
The Dalton Hotel also secures a second mortgage loan with a December 31,
1998 balance of $256,983. The loan bears interest at 8.74% and requires monthly
payments of $2,313 until September 2001, at which time the then remaining
balance is due.
The property is positioned to compete with the existing low and moderately
priced properties in the area. It will also compete with new properties
presently under development in the area. It is located adjacent to and is highly
visible from I-75, a major north/south interstate highway. Occupancy and room
rates in 1998 averaged approximately 40.9% and $35.95, respectively.
Renovation and environmental programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management, the property is adequately covered by insurance and is suitable
and adequate for its present use. Property taxes in 1998 were approximately
$23,000.
Differences between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for depreciable real property and 5-10 years for all other
depreciable property.
Orlando Hotel. In May 1995, the Company acquired the majority ownership of
a 150-room hotel in Orlando, Florida (the "Orlando Hotel"). Prior to the
acquisition, the Company held a second mortgage on the property with an
aggregate principal and interest balance of approximately $2.8 million (the "Old
Second Mortgage"). The second mortgage balance was reduced to $1 million (the
"New Second Mortgage") in exchange for a fifty-five percent (55%) interest in
Heritage Inn Associates, Ltd., the partnership which owns the hotel. The hotel
was also subject to a first mortgage which collateralized certain Orange County,
Florida industrial development bonds (the "Orlando IRB").
The Orlando IRB and the New Second Mortgage were fully paid and satisfied
in November 1996 with proceeds from a new first mortgage loan secured by the
property. The new first mortgage loan had a December 31, 1998 balance of
$4,436,293, bears interest at 9.55% and requires monthly principal and interest
payments of $43,028 until December 2016, at which time the then remaining
balance is due and payable.
The market for hotel rooms in Orlando is extremely competitive due to the
multitude of properties in the area. The Orlando Hotel does benefit from the
large number of local attractions and from the Orlando Convention Center
activities. The hotel is positioned as a lower priced alternative property
situated among mega-room high rises. Occupancy and room rates in 1998 averaged
81.9% and $70.34, respectively.
Renovation and environmental programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management, the property is adequately covered by insurance and is suitable
and adequate for its present use. Property taxes in 1998 were approximately
$125,000.
Differences between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for depreciable real property and 5-10 years for all other
depreciable property.
Texas Hotels. In December 1995, Buckhead purchased three Homeplace Inn
hotel properties in Texas from affiliates of American Liberty Hospitality, Inc.
("ALH"). The three hotels secure a first mortgage loan with a December 31, 1998
balance of $2,253,045. The first mortgage loan matures December 2002, bears
interest at 9.056%, and requires monthly payments of $21,680.
Immediately upon acquisition, the acquired hotels (the "Texas Hotels")
along with three other ALH owned Homeplace Inn properties were converted to
operate as Country Hearth Inns.
The Texas Hotels are limited service 40-room properties located in smaller
southeastern Texas cities. Generally, comparable rooms are not immediately
available in their selected markets. Occupancy and room rates in 1998 averaged
approximately 53.3% and $47.89, respectively.
Renovation and environmental programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management, the properties are adequately covered by insurance and are
suitable and adequate for their present use. Property taxes in 1998 totaled
approximately $42,000.
Differences between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for depreciable real property and 5-10 years for all other
depreciable property.
Kentucky/Missouri Hotels. In September 1997, the Company acquired eight
40-room hotel properties located in Kentucky and Missouri from Hatfield Inns,
LLC. All eight properties (the "Kentucky/Missouri Hotels") were converted to
Country Hearth Inns. The conversion costs were not significant; approximately
$10,000 to $20,000 per property. In September 1998, construction was completed
on a ninth comparable property located in Nicholasville, Kentucky.
The Kentucky/Missouri Hotels secure first and second mortgage notes payable
with December 31, 1998 balances aggregating $8,003,310. Three of the mortgage
notes were refinanced in 1998. The three new notes with an aggregate December
31, 1998 balance of $2,567,999 bear interest at 8.25% and require monthly
payments of $22,026 until September 2018. Three other notes with an aggregate
December 31, 1998 balance of $2,339,536 are cross-collateralized, bear interest
at 9.18%, and require monthly payments of $21,826 until October 2007. The
remaining notes bear interest at prime plus 1%, require aggregate monthly
payments of $33,531, and mature at various dates (2000-2015).
The Kentucky/Missouri Hotels are limited service 40-room interior corridor
properties located in smaller cities where they enjoy limited competition in
their selected markets. Occupancy and room rates in 1998 averaged approximately
58.2% and $47.13, respectively.
Renovation and environmental programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management, the properties are adequately covered by insurance and are
suitable and adequate for their present use. Aggregate property taxes in 1998
were approximately $100,000.
Differences between personal property financial reporting asset bases and
federal tax bases are not significant. Federal tax bases of real property are
approximately $2.4 million less than financial reporting asset bases.
Straight-line depreciation methods are used based on useful lives of 40 years
for depreciable real property and 5-10 years for all other depreciable property.
Daytona Hotel. The Company owns a 180-room Days Inn hotel in Daytona,
Florida (the "Daytona Hotel") which was acquired by the Company through
foreclosure in March 1993. The hotel was acquired subject to a first mortgage
which was in default. The mortgage note was restructured in May 1994. In
September 1998, the first mortgage note was paid off and refinanced by a new
mortgage. The new mortgage note with a December 31, 1998 balance of $2,288,917
bears interest at 8.5% and is due in monthly installments of $19,960 until
October 2018.
The market for comparable rooms is extremely competitive due to the large
number of hotels/motels in the Daytona area. The area does benefit, however,
from certain event related demand peaks. Average room occupancy and average
daily rate during 1998 was 48.7% and $48.09, respectively.
Renovation and environmental programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management, the property is adequately covered by insurance and is suitable
and adequate for its present use. Property taxes in 1998 were approximately
$61,000.
Differences between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for depreciable real property and 5-10 years for all other
depreciable property.
St. Louis NW Inn. The Company acquired the 186-room Northwest Inn in St.
Louis, Missouri (the "NW Inn"), as part of the May 1997 Lodge Keeper
acquisition. The property is an extended-stay facility which is positioned to
compete with existing low priced extended-stay properties in the area. It will
also compete with new extended-stay properties presently under development in
the area. Occupancy and room rates in 1998 averaged approximately 92.9% and
$20.53, respectively.
The property secures a first mortgage loan with a December 31, 1998 balance
of $1,753,000. The loan bears interest at 8.5% and requires monthly payments of
$13,178 until February 2004.
Renovation and environmental programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management, the property is adequately covered by insurance and is suitable
and adequate for its present use. Property taxes in 1998 were approximately
$61,000.
Differences between personal property financial reporting asset bases and
federal tax bases are not significant. Federal tax bases of real property are
approximately $1.7 million less than financial reporting asset bases.
Straight-line depreciation methods are used based on useful lives of 40 years
for depreciable real property and 5-10 years for all other depreciable property.
Coshocton Hotel. The Company acquired fee-simple interest in the 50-room
Travelodge in Coshocton, Ohio in September 1998. The hotel was previously
operated by the Company under a lease agreement. The purchase was financed by a
$600,000 mortgage which bore interest at 10%. In November 1998, the mortgage was
paid off with proceeds from refinancing of a new mortgage in the amount of
$700,000. The new mortgage with a December 31, 1998 balance of $699,200 bears
interest at 8.75% and requires monthly payments of $7,009 until December 2013.
The Coshocton Hotel is a limited service 50-room interior corridor property
located in an area which enjoys limited competition in its market. Occupancy and
room rates in 1998 averaged approximately 50.4% and $41.03, respectively.
Renovation and environmental programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management, the property is adequately covered by insurance and is suitable
and adequate for its present use. Property taxes in 1998 were approximately
$9,000.
Differences between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for depreciable real property and 5-10 years for all other
depreciable property.
Norcross Hotel. In May 1998, the Company acquired a 121-room hotel located
in Norcross, Georgia which is operated as a Best Western-Bradbury Suites. The
property is a suites hotel and competes favorably with other similar mid-priced
properties with commercial business from surrounding office complexes. Occupancy
and room rates in 1998 averaged 50.1% and $53.36, respectively.
The property secures a first mortgage loan with a December 31, 1998 balance
of $3,776,924. The loan bears interest at an indexed rate based on U.S. Treasury
securities and is currently at 8.75% and requires monthly payments of $32,911
until February 2007.
Renovation and environmental programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management, the property is adequately covered by insurance and is suitable
and adequate for its present use. Property taxes in 1998 were approximately
$49,000.
Differences between financial reporting asset bases and federal tax bases
are not significant. Straight-line depreciation methods are used based on useful
lives of 40 years for depreciable real property and 5-10 years for all other
depreciable property.
Host Funding Leases. During 1998 and 1997, the Company, in two separate
transactions, entered into long term lease agreements for four Super 8 Motels,
three Sleep Inns, and two Country Hearth Inns owned by Host Funding, Inc.
("Host"). The properties are located in Florida, Mississippi, Missouri,
Illinois, Kentucky, Ohio, and Indiana. Lease terms are for fifteen (15) years
with two extension options of five years each, and provide for contingent
payments based on a percentage of revenues. Base rents for the nine properties
aggregates $2,553,841 per year.
The leased properties are generally located along highways and interstates
and compete with similarly situated budget properties. Occupancy and room rates
in 1998 averaged 63.2% and $47.68, respectively.
Other Leased Hotels. In addition to the Host lease properties described
above, the Company leases eight other limited-service hotels which are located
in Ohio. Lease terms range from 10 to 30 years with options to renew at varying
terms. Certain of the leases provide for contingent payments based upon a
percentage of revenues. Base rentals on the eight properties aggregates
$625,225.
The Leased Hotels are generally located along highways and interstates and
compete with similarly situated budget properties. Occupancy and room rates in
1998 averaged 48.7% and $41.89, respectively.
INVESTMENT POLICIES
Most of the Company's initial real estate holdings was principally
hospitality related. Asset acquisitions since inception have also been
predominately hospitality related and made for the primary purpose of generating
additional income. Further, management's experience and expertise is in the
hospitality business. Accordingly, the Company has determined that it will
primarily seek out investments in the hospitality industry. In that regard, the
Board of Directors has determined that the Company will focus upon investments
in hospitality related companies with income growth potential. Such investments
could take the form of (a) hotel property purchases, (b) hotel mortgage
purchases, (c) hotel mortgage servicing, (d) hotel management and/or (e) hotel
franchising. The Board of Directors has not set any limitations on the
percentage of assets which may be invested in any one investment. These policies
may be changed without a vote of security holders.
<PAGE>
Item 3. Legal Proceedings.
The Company is not a party in any pending legal proceedings other than
routine litigation that is incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
MARKET INFORMATION
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol: BUCK.
The following table presents the high and low sales prices for the Common
Stock for each quarter of 1997 and 1998.
($ Per Share)
High Low
------------------
Quarter ended March 31, 1997 7.37 6.00
Quarter ended June 30, 1997 7.25 6.25
Quarter ended September 30, 1997 9.12 6.62
Quarter ended December 31, 1997 8.87 7.00
Quarter ended March 31, 1998 7.88 6.00
Quarter ended June 30, 1998 7.75 6.50
Quarter ended September 30, 1998 7.50 5.38
Quarter ended December 31, 1998 6.75 4.75
The sales price amounts have been supplied by The Nasdaq Stock Market and
do not include retail mark-up, mark-down, or commission and may not represent
actual transactions.
HOLDERS
As of February 28, 1999, the Company estimates that there were
approximately 750 beneficial holders of its Common Stock.
DIVIDENDS
On September 23, 1997, the Company issued 30,000 unregistered shares of
$100 par value ten percent (10%) nonvoting cumulative Series A Preferred Stock
as partial consideration for the acquisition of Hatfield Inns, LLC. The Series A
Preferred Stock has certain rights, privileges and preferences that limit and
qualify the rights of the Common Shareholders of the Company. Holders of the
Series A Preferred Stock are entitled to receive, prior and in preference to any
distribution to the holders of Common Stock, cumulative dividends at the rate of
10% per annum, to the extent declared by the Board of Directors. All accrued but
unpaid dividends of the Series A Preferred Stock must be paid in full before any
cash dividend may be declared on the Common Stock. Further, holders of the
Series A Preferred Stock have certain preferential distribution rights in the
event of any liquidation, dissolution or winding-up of the Company.
During 1998 and 1997, the Board of Directors declared dividends of $300,000
and $92,333, respectively, on the Series A Preferred Stock. As of December 31,
1998, $25,000 of such dividends remained unpaid.
Certain of the Company's debt obligations contain provisions relating to
minimum net worth and debt to equity ratios. In the opinion of management, such
restrictions are not likely to limit the ability to pay dividends in the future.
The Company has not sold any securities during the last quarter of the
period covered by this report without registering them under the Securities Act
of 1933.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
The Company continued to acquire interests in hotel properties during
1998. The most significant transaction was the purchase of leasehold interests
in seven hotel properties owned by Host Funding, Inc. ("Host"). The properties
operate as Sleep Inn(3) and Super 8(4) hotels. The leasehold interests were
purchased in June 1998 for an aggregate purchase price of approximately $1.3
million, including approximately $500,000 in cash, $400,000 of Company common
stock, and $400,000 of notes payable. The Company committed to expend
approximately $400,000 for renovations and other improvements to the properties
for which it would receive dollar for dollar credits against its notes payable
to Host. Such expenditures have been substantially completed. The Company also
leases two Country Hearth Inns owned by Host; such transactions having been
completed in October 1997.
The Company also acquired a 121-room hotel in Norcross Georgia which is
operated as a Best Western-Bradbury Suite. The acquisition was completed in May
1998 for an aggregate purchase price of approximately $4 million, including cash
of approximately $200,000 and an assumed mortgage note payable of approximately
$3.8 million.
In September 1998, the Company acquired a 50-room hotel property in
Coshocton, Ohio for approximately $725,000. The property is operated under a
Travelodge license agreement. The Company had previously held a leasehold
interest in the property. The purchase price was partially financed by a
$600,000 mortgage note which was later paid off with the proceeds from a new
$700,000 mortgage note.
The Company completed construction of a 40-room hotel in Nicholasville,
Kentucky which opened in September 1998 and began construction on another
40-room property in Eddyville, Kentucky. The Eddyville property opened in March
1999. Construction of both of these properties was partially financed by
construction loans ($1 million each) from a local bank and by purchase money
notes to the land sellers for an aggregate of $225,000. Both of these properties
which operate as Country Hearth Inns are based on the designs obtained in the
Company's September 1997 acquisition of Hatfield Inns, LLC which is discussed
further below.
Also during 1998, the Company entered into agreements to lease three
newly constructed properties in Georgia. These properties are also based on the
40-room Country Hearth Inn designs. One property in Barnesville was completed
and opened in late December. Two other properties in Cedartown and Monroe are
presently under construction and expected to open during 1999.
During 1998, the Company completed significant renovations on three
leased hotels in Ohio which have been converted to operate as Country Hearth
Inns.
In the aggregate, the Company spent approximately $6 million on capital
expenditures during 1998 in addition to approximately $900,000 on the Host lease
acquisition and renovation expenditures. Proceeds from notes payable of
approximately $3 million during 1998 partially financed these expenditures. The
remaining proceeds from the Company's December 1997 sale of $5 million of
convertible debentures (see below) provided the additional funds needed.
Another source of funds during 1998 was the sale of certain leasehold
interests. The Company has previously announced its intention to divest its
investments in older less profitable hotel properties. During 1998, the Company
sold eight of its leasehold interests in hotel properties which resulted in
gains of approximately $1.6 million. The operating profit contribution from
these properties which has been lost was not significant. Management expects to
complete similar sales in 1999, although the resulting gains are not expected to
be of the same magnitude.
Two significant acquisitions which nearly doubled the assets of the
Company highlighted 1997. In May 1997, the Company completed its acquisition of
The Lodge Keeper Group, Inc. of Prospect, Ohio ("Lodge Keeper"). Lodge Keeper
operated 18 hotels under long-term leases, held management contracts on six
Country Hearth Inn hotels and owned a 186-room independent extended-stay hotel.
In September 1997, the Company completed its acquisition of Hatfield Inns, LLC.
("Hatfield"). The Hatfield acquisition included eight 40-room hotel properties
located in Kentucky and Missouri.
The Lodge Keeper acquisition included a fully-staffed hotel management
operations center capable of additional capacity. Simultaneous with the
acquisition, Lodge Keeper assumed the management responsibilities of four hotels
previously owned by the Company and has assumed management responsibility for
all the properties subsequently acquired and developed in 1997 and 1998. As of
February 28, 1999, Lodge Keeper managed 44 hotel properties, including 35 owned
or leased by the Company. Management believes there is significant growth
potential for its hotel management business and the Company is aggressively
pursuing opportunities to manage hotels for institutional and individual
investors.
The Lodge Keeper purchase price totaled approximately $6.3 million
consisting of $825,000 cash, 106,320 shares of common stock of the Company, and
the assumption of approximately $4.8 million of debt. Management believes that
hotel management and leasehold profits will be adequate to service the assumed
debt.
All eight of the properties acquired from Hatfield have been converted
to operate as Country Hearth Inns. Conversion costs were not significant. The
acquisition also included the plans and design rights for these 40-room interior
corridor properties specifically designed for smaller markets. Management
believes there is significant growth potential for the development and
construction of these properties. Four additional hotel properties of this type
have been opened (two owned, one leased, and one franchised) and another eleven
are under development.
The Hatfield purchase price totaled approximately $11 million
consisting primarily of cash and payables of $1.5 million, $3 million of
preferred stock issued by the Company, and the assumption or placement of
approximately $6.5 million of debt. The preferred stock is nonvoting and accrues
cumulative dividends at the rate of 10% per annum, payable when and to the
extent declared by the Company's board of directors. All accrued but unpaid
dividends of the preferred stock must be paid in full before any cash dividend
may be declared on the Company's common stock. Management believes that the
acquired hotels' operating profits will adequately service the related debt and
preferred stock dividends, if declared.
The Company completed its fourth full year of Country Hearth Inn
franchising, marketing, and conversion activities in 1998. As of February 28,
1999, there were 39 Country Hearth Inn properties open and operating in thirteen
states. During 1997 and 1998, the Company executed master license agreements for
the development of 65 new Country Hearth Inns. Ten Country Hearth Inns are
presently under construction and 12 other properties under signed agreements are
in various stages of pre-construction.
For operating purposes, the Company has not historically encountered
liquidity shortfalls, the need for short-term financing, or the need to raise
additional equity capital. Significant acquisitions have been financed primarily
by mortgage debt and issuance of equity securities to the sellers. The specific
need for future such financing would be directly impacted by the size and nature
of future acquisitions, if any. The Company's hotel operations are highly
seasonal in nature. Second and third quarter operating profits are typically
higher than the first and fourth quarters. As a result the Company is presently
susceptible to seasonal liquidity shortfalls. The Company has arranged for a $1
million line of credit with a bank to help protect against such shortfalls. No
draws on the line of credit were made during 1998.
In December 1997, the Company issued $5,000,000 of convertible
debentures to investment funds managed by Tower Investment Group, Inc., now
known as Bay Harbour Management ("Bay Harbour"). Bay Harbour manages investment
funds which already owned approximately 14% of the outstanding common shares of
the Company at that time and now own approximately 26%. The related debenture
notes bear interest at 8%, payable quarterly in arrears, and are due December
2002. The debentures are convertible into common shares of the Company at any
time at $9.00 per share. If all such debentures were converted, an additional
555,555 shares of common stock would be issued. The Company used the proceeds
for conversions of certain leased properties into Country Hearth Inns and for
deposits and/or cash portions of hotel and leasehold interest acquisitions as
discussed above. A portion of the proceeds were also used to defer the need for
short term financing which may have otherwise become necessary due to the highly
seasonal impact of hotel operations.
The Company's balance sheet at December 31, 1998 includes a deferred
tax asset of $3,831,000. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income by
the Company during the periods in which those temporary differences become
deductible. Management considers the projected future taxable income and tax
planning strategies in determining whether a valuation allowance is necessary.
Some of the various factors considered by management are discussed below.
During 1997, the Company sold two wholly owned subsidiaries which held an
investment in Days Inns Mortgage Trust ("DIMT"). DIMT was treated as a
partnership for income tax purposes and had produced significant tax purpose net
operating losses (NOLs) totaling approximately $34 million through December 31,
1996. These NOLs had no impact on the Company's book provision for regular taxes
because the ultimate dissolution of the partnership would result in immediate
gain recognition for a comparable amount. Because of NOL limitations, the
Company was exposed, however, to significant potential future alternative
minimum tax liability. All of these tax attributes accompanied the DIMT interest
with its sale, and the Company's tax position is no longer impacted by DIMT.
Also during 1997, the Internal Revenue Service commenced and completed
an examination of the Company's 1994 federal income tax return. No changes to
the Company's return, as filed, were made or proposed.
The Hatfield acquisition was structured as a tax-free merger; thus, the
Company's tax basis in the assets acquired were not stepped-up to fair market
value. The resulting deferred tax liability was offset, however, by a reduction
in the Company's deferred tax asset valuation allowance of $930,000.
In evaluating the impact of the above events in conjunction with
recent trends in the Company's operations, specifically franchising activities,
hotel management, and hotel development and sales, management determined that it
was more likely than not that the results of future operations would generate
sufficient taxable income to realize a portion of the deferred tax assets. Such
determination was made in the fourth quarter of 1997, resulting in the
recognition of a $2,930,000 deferred income tax benefit. Similarly in 1998,
based on actual events and other information available, it appeared more likely
than not that additional portions of the deferred tax assets would be realized
and the Company recognized an additional net deferred tax asset of $901,000.
Although no assurances can be made, realization of the Company's deferred tax
assets should occur if the Company generates approximately $14 million of
taxable income over the next 8 to 20 years.
<PAGE>
RESULTS OF OPERATIONS
Hotel revenues and operating profits in 1998 amounted to approximately
$25.7 million and $5.3 million, respectively, compared with $15.6 million and
$3.1 million in 1997. These 1998 increases reflect the results of the Lodge
Keeper and Hatfield acquisitions in 1997 and the Host leases and other smaller
acquisitions in 1998. Overall operating profit margins increased slightly as a
result of the sale of leasehold interests in eight properties which had lower
profit margins.
For hotel properties which were owned by the Company in 1998 and 1997,
revenue per available room ("Revpar") and operating profits generally increased
at most properties. Specifically, the Company's owned hotels in Atlanta and
Dalton, Georgia; Orlando and Daytona, Florida; and all Kentucky and Missouri
properties experienced Revpar increases in 1998. The Company's owned hotels in
Texas experienced Revpar declines in 1998. Newer properties in nearby markets
have negatively impacted the profitability of these hotels. Management is
presently assessing whether or not to sell some or all of these properties.
The Company earned approximately $2.1 million of hotel revenues from
eight leased properties prior to their sale in 1998. The eight remaining leased
properties acquired with the 1997 Lodge Keeper acquisition generated aggregate
1998 revenues of approximately $4.2 million. Additional leasehold interest sales
are anticipated in 1999 which will cause a decline in such revenues. Operating
profits, however, are not expected be significantly impacted.
The Host leases which were acquired in June 1998 contributed revenues
of approximately $2.9 million and hotel operating profits of approximately
$200,000. Such amounts should increase on an annualized basis after
consideration of seasonal fluctuations.
The Company experienced net operating losses in the fourth quarter of
1997 and the first quarter of 1998 which largely reflects the seasonal nature of
limited service hotel operations. The increase in the number of properties from
the Lodge Keeper and Hatfield acquisitions magnified this aspect of the
Company's operations.
Investment income declined from approximately $784,000 in 1997 to
$201,000 in 1998. The 1997 amount includes a $455,000 gain from the call of an
industrial revenue bond previously owned by the Company. Through 1997 and a
portion of 1998, the Company's note receivable portfolio declined as a result of
payments received in excess of new notes originated. The Company's net note
receivable portfolio increased in 1998, however, as a result of the notes taken
in connection with the previously discussed leasehold interest sales. Interest
income from this source is expected to continue.
Franchising activities losses were reduced to approximately $247,000 in
1998. Such loss is after the elimination of intercompany franchise fees on
Company owned and leased Country Hearth Inns. If such fees were included,
franchising would have reported a modest profit in 1998. The Company has
continued investing in the establishment of the Country Hearth Inn brand and
expects that franchising activities will report a slight profit in 1999 even
after the elimination of intercompany fees. Management continues to believe that
substantial profits will be realized in future years from its investments in
franchising activities.
The Company continues to experience substantial profits from its hotel
acquisition/development/sale activities. The Company recognized gains on
property and leasehold sales in 1998 and 1997 of approximately $1.6 million and
$289,000, respectively. Management expects further profits from these
activities, however, the amounts and timing of such are not predictable.
Other income in 1998 and 1997 includes nonrecurring gains of
approximately $500,000 and $1.1 million, respectively, from collections on
impaired notes and favorable settlements of Old Buckhead claims.
Other operating and administrative expenses increased in 1998 to
approximately $2.3 million from $1.8 million in 1997. The substantial portion of
this increase is attributable to the acquisition of Lodge Keeper's hotel
management operations in May 1997 and to a lesser extent is attributable to
payroll increases.
Interest expense in 1998 increased to approximately $3 million from
$1.6 million in 1997. The increase is attributable to the additional debt from
the Lodge Keeper and Hatfield acquisitions in 1997 and the Norcross hotel
acquisition in 1998. Also, the Company recognized approximately $400,000 of
interest expense relating to the convertible debentures issued in December 1997.
The Company has approximately $4 million of debt obligations which are floating
rate (prime plus 1%). The remainder of the Company's debt obligations are fixed
rate (8% to 9.55%). Interest expense in 1999 is expected to increase as a result
of the obligations added in 1998 being outstanding for a full year. Management
considers the present borrowing rates and availability of hotel financing to be
favorable, thus increasing the likelihood of further hotel acquisitions.
Similarly, depreciation and amortization expenses increased in 1998 as
a result of the hotel acquisitions and should increase further in 1999 as a
result of the acquired properties being held for a full year.
As previously discussed, the Company recognized deferred income tax
benefits in 1998 and 1997 of $901,000 and $2,930,000, respectively.
YEAR 2000 ISSUES
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after 1999.
This could result in a system failure or miscalculations causing disruptions of
operations. The Year 2000 issue affects virtually all companies and all
organizations. The Company recognizes the importance of ensuring that its
business operations are not disrupted as a result of Year 2000 related computer
system and software issues.
The Company has conducted an assessment of its computer and data
telecommunications information systems ("IT Systems"), as well those computer
systems that do not relate to information technology, including, without
limitation, electronic locks, telephone systems, elevators, VCR's and other
guest service related systems ("Non-IT Systems"), to identify needed Year 2000
remediation. The Company currently anticipates that its Year 2000 assessment,
remediation, and testing efforts will be completed by December 31, 1999.
The Company's home office, and management company IT Systems have been
evaluated and tested and are considered to be Year 2000 compliant. All hotel
front office systems have been evaluated. Seven such systems were found to not
be Year 2000 compliant and will need to be upgraded or replaced at an estimated
total cost of $40,000.
The Company has communicated with its significant vendors and service
providers regarding the extent to which these entities have addressed Year 2000
compliance issues. The most critical IT System being credit card processing has
been tested and found to be Year 2000 compliant. Other vendor and service
provided systems such as electronic lock systems and guest related telephone and
television systems have been tested and found to be Year 2000 compliant. All
other less critical systems are currently being evaluated. Management estimates
that this process is approximately 75% complete and expenditures to remediate
any problems encountered will not be significant.
The Company has not communicated with its hotel guests regarding Year
2000 compliance issues, since none of its guests is considered to be
individually significant and the Company receives no electronic data from its
guests other than credit card information which is discussed above.
Based on the Company's assessments and available information, the
Company believes that its cost to ensure Year 2000 compliance will not exceed
$100,000. As of February 28, 1999 the Company had incurred approximately $10,000
related to Year 2000 assessment, remediation and testing. The Company believes
that the Year 2000 issue will not pose significant operational problems for the
Company. However, if all Year 2000 issues are not properly identified, or
assessment, remediation and testing are not completed timely, there can be no
assurance that the Year 2000 issue will not materially adversely impact the
Company's results of operations or adversely affect the Company's relationships
with guests, vendors or others. Additionally, there can be no assurance that the
Year 2000 issues of other entities, including, but not limited to, the Company's
third party vendors and service providers and its guests, will not have a
material adverse impact on the Company's systems or results of operations. The
Company has not engaged an independent expert solely to assist in its Year 2000
efforts. However, when installing new software, the Company requires year 2000
compliance assurances from its vendors.
The Company has not yet determined the operational costs and problems
that would be reasonably likely to result from the failure by the Company and
certain third parties to complete efforts necessary to achieve Year 2000
compliance on a timely basis. The Company has not developed a contingency plan
for dealing with the most reasonably likely worst case scenario, and such
scenario has not yet been clearly identified. The Company currently plans to
complete such analysis and contingency planning by December 31, 1999.
Readers are cautioned that forward-looking statements regarding Year
2000 issues should be read in conjunction with the cautionary statement in the
RISK FACTORS section of "Item 1. Description of Business".
Item 7. Financial Statements.
ANNUAL FINANCIAL STATEMENTS
The Company's consolidated financial statements with independent auditors'
report thereon are included on pages 24 through 52 which follow.
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
With Independent Auditors' Report Thereon
<PAGE>
Independent Auditors' Report
The Board of Directors
Buckhead America Corporation:
We have audited the accompanying consolidated balance sheets of Buckhead America
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Buckhead America
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Atlanta, Georgia
March 5, 1999
<PAGE>
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents, including restricted cash of
$547,695 in 1998 and $410,397 in 1997 (note 3) $ 1,604,194 3,281,774
Investment securities (note 4) 120,496 3,188,115
Accounts receivable, net (note 6) 1,886,341 1,049,009
Current portions of notes receivable, net (note 5) 367,017 370,520
Other current assets 344,669 344,207
--------- ---------
Total current assets 4,322,717 8,233,625
Noncurrent portions of notes receivable, net (note 5) 2,696,561 724,307
Investment securities (note 4) 139,977 --
Property and equipment, at cost, net (notes 6, 8, and 9) 42,306,067 34,275,664
Deferred tax assets (note 12) 3,831,000 2,930,000
Deferred costs, net (note 7) 1,892,195 1,933,153
Leasehold interests, net (note 7) 3,192,939 2,839,487
Other assets (note 7) 1,159,662 1,227,787
----------- -----------
$ 59,541,118 52,164,023
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,618,621 3,291,528
Current portions of notes payable (note 8) 1,251,251 933,183
--------- ---------
Total current liabilities 4,869,872 4,224,711
Noncurrent portions of notes payable (note 8) 33,357,178 27,648,925
Other liabilities 256,049 262,567
--------- ---------
Total liabilities 38,483,099 32,136,203
--------- ---------
Minority interest in partnership 565,694 674,269
Shareholders' equity (notes 10 and 13):
Series A preferred stock; par value $100; 200,000 shares
authorized; 30,000 shares issued and outstanding 3,000,000 3,000,000
Common stock; $.01 par value; 5,000,000 shares
authorized; 2,003,277 and 1,949,630 shares issued
and 1,943,935 and 1,897,780 shares outstanding in
1998 and 1997, respectively 20,033 19,496
Additional paid-in capital 7,362,487 6,963,024
Retained earnings 10,728,847 9,793,352
Accumulated other comprehensive loss (148,023) --
Treasury stock, 59,342 and 51,850 common shares
in 1998 and 1997, respectively (471,019) (422,321)
--------- ---------
Total shareholders' equity 20,492,325 19,353,551
Commitments and contingency (notes 7, 9, and 15)
--------- ---------
$ 59,541,118 52,164,023
========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998 and 1997
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
Revenues:
Hotel revenues $ 25,720,086 $ 15,590,744
Franchise fee income 699,208 538,632
Gains on property sales (notes 6 and 7) 1,648,894 289,300
Investment income (note 4) 201,334 784,090
Other income, net (notes 11 and 14) 525,126 1,366,783
---------------- ---------------
Total revenues 28,794,648 18,569,549
---------------- ---------------
Expenses:
Hotel operations 20,420,888 12,522,578
Franchise operations 946,834 1,155,120
Other operating and administrative (note 14) 2,337,140 1,842,974
Depreciation and amortization 1,773,346 1,204,082
Interest 2,981,945 1,601,183
---------------- ---------------
Total operating, administrative, and
interest expenses 28,460,153 18,325,937
---------------- ---------------
Income before income taxes 334,495 243,612
Deferred income tax benefit (note 12) (901,000) (2,930,000)
---------------- ---------------
Net income $ 1,235,495 3,173,612
================ ===============
Net income per common share (note 10):
Basic $ 0.48 1.67
================ ===============
Diluted $ 0.47 1.56
================ ===============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMPREHENSIVE COMMON PREFERRED PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
INCOME STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK EQUITY
------------- -------- --------- ---------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $ 18,180 -- 6,288,574 6,712,073 455,128 (389,821) 13,084,134
Issuance of 106,320 common shares
for business acquisition, net of
5,000 treasury shares acquired 1,063 -- 690,017 -- -- (32,500) 658,580
Issuance of 25,333 common shares
pursuant to exercise of options 253 -- 97,239 -- -- -- 97,492
Issuance of 30,000 preferred shares
for business acquisition, net of
$112,806 issuance costs -- 3,000,000 (112,806) -- -- -- 2,887,194
Preferred stock dividends -- -- -- (92,333) -- -- (92,333)
Comprehensive income:
Net income $ 3,173,612 -- -- -- 3,173,612 -- -- 3,173,612
Change in unrealized gain on
investment securities
(see below) (455,128) -- -- -- -- (455,128) -- (455,128)
------------- -------- --------- ---------- --------- ------------- --------- -------------
Total comprehensive income $ 2,718,484
============= -------- --------- ---------- --------- ------------- --------- -------------
Balances at December 31, 1997 19,496 3,000,000 6,963,024 9,793,352 -- (422,321) 19,353,551
Issuance of 53,647 common shares
for asset acquisition 537 -- 399,463 -- -- -- 400,000
Acquisition of 7,492 common shares -- -- -- -- -- (48,698) (48,698)
Preferred stock dividends -- -- -- (300,000) -- -- (300,000)
Comprehensive income:
Net income $ 1,235,495 -- -- -- 1,235,495 -- -- 1,235,495
Change in unrealized gain (loss)
on investment securities (see
below) (148,023) -- -- -- -- (148,023) -- (148,023)
-------------
Total comprehensive income $ 1,087,472
============= -------- --------- ---------- --------- ------------- --------- -------------
Balances at December 31, 1998 $ 20,033 3,000,000 7,362,487 10,728,847 (148,023) (471,019) 20,492,325
============= ======== ========= ========= ========= ============= ========= =============
1998 1997
------------- --------
Disclosure of reclassification
amount:
Unrealized holding losses
arising during the period $ (148,023) --
Less reclassification adjustment
for gains included in net
income -- 455,128
============= ========
$ (148,023) 455,128
============= ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,235,495 3,173,612
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,773,346 1,204,082
Sales (purchases) of trading securities, net 2,998,950 (1,631,470)
Realized gains on trading securities (37,260) (146,527)
Unrealized holding losses on trading securities 105,929 51,755
Realized gains on available-for-sale securities -- (455,128)
Gains on property and leasehold interest sales (1,648,894) (289,300)
Gain on note sale -- (800,000)
Minority interest in partnership income 250,015 121,154
Equity in joint venture losses 124,480 125,487
Deferred income tax benefit (901,000) (2,930,000)
Change in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net (837,332) (415,596)
Accounts payable and accrued expenses 295,140 (162,000)
Other, net 149,992 79,267
---------------- ---------------
Net cash provided by (used in) operating activities 3,508,861 (2,074,664)
---------------- ---------------
Cash flows from investing activities:
Principal receipts on notes receivable 704,970 1,188,566
Originations of notes receivable (1,018,721) (440,000)
Acquisitions of businesses and hotels (707,783) (1,601,815)
Additions to property and equipment (5,966,947) (1,364,478)
Investments in joint ventures (148,873) (648,525)
Investment maturities -- 1,565,000
Proceeds from property and leasehold interest sales 989,064 348,000
Acquisition of additional partnership interests (60,000) --
---------------- ---------------
Net cash used in investing activities (6,208,290) (953,252)
---------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable 2,969,091 5,396,353
Repayments of notes payable (1,723,092) (848,489)
Net proceeds from refinancing of notes payable 374,440 --
Distribution to minority interest partners (298,590) (45,003)
Proceeds from issuance of common shares -- 97,492
Preferred stock dividends paid (300,000) (92,333)
---------------- ---------------
Net cash provided by financing activities 1,021,849 4,508,020
---------------- ---------------
Net (decrease) increase in cash and cash equivalents (1,677,580) 1,480,104
Cash and cash equivalents at beginning of year 3,281,774 1,801,670
---------------- ---------------
Cash and cash equivalents at end of year $ 1,604,194 3,281,774
================ ===============
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
Supplemental disclosure of cash flow information -
cash paid during the year for interest, net of interest capitalized
of $48,542 in 1998 and $32,843 in 1997 $ 2,765,901 1,615,431
================ ===============
Supplemental disclosures of noncash investing and financing activities:
Costs:
Cash $ 191,148
Payables 31,953
Note payable assumed 3,818,798
----------------
Property and equipment $ 4,041,899
================
Costs:
Cash $ 516,635
Common stock issued 400,000
Notes payable issued 400,000
----------------
$ 1,316,635
================
Allocated to:
Lessor's common stock $ 288,000
Leasehold interests 1,028,635
----------------
$ 1,316,635
================
New notes payable issued $ 4,885,000
Discharge of old notes payable (4,323,476)
Notes payable issuance costs (187,084)
----------------
Net proceeds $ 374,440
================
(Continued)
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Proceeds:
Cash, net of closing costs $ 989,064
Notes receivable, net 1,655,000
----------------
----------------
2,644,064
----------------
Basis in leasehold interests sold:
Leasehold interests, net 270,002
Leasehold improvements, net 725,168
----------------
----------------
995,170
----------------
Gains on leasehold interest sales, net $ 1,648,894
================
Costs:
Cash $ 825,000
Common stock issued, net of treasury stock acquired 658,580
Notes payable assumed 4,784,754
----------------
$ 6,268,334
================
Allocated to:
Property and equipment $ 4,489,490
Other assets 3,127,860
Working capital deficit (1,349,016)
----------------
$ 6,268,334
================
Costs:
Cash and payables $ 1,464,293
Preferred stock issued, net of issuance costs 2,887,194
Notes payable assumed or placed 6,547,911
----------------
$ 10,899,398
================
Allocated to:
Property and equipment 10,740,632
Other assets 158,766
----------------
$ 10,899,398
================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) The Company
Buckhead America Corporation (the Company) was created in December 1992
and effectively commenced operations on January 1, 1993. The Company
operates in the hospitality industry and its principal holdings include
hotels, loans, leasehold interests and other investments secured by
hotels, hotel management contracts, hotel franchising rights, and other
related assets. Its principal product is the Country Hearth Inn midpriced
hotel franchise system which the Company acquired in May 1994.
The primary activities of the Company involve the expansion of the
Country Hearth Inn chain, limited-service hotel management and
development/ownerships/sales of hotel properties. Expansion of the
Country Hearth Inn franchise system is effected through development of
new hotels, direct acquisition and conversion of existing hotels, and
franchise sales.
The Company also owns and manages other hotel properties not included in
the Country Hearth Inn system. Hotel management operations are conducted
through the Company's wholly owned subsidiary, The Lodge Keeper Group,
Inc. (Lodge Keeper).
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying financial statements include the accounts of the
Company and its consolidated subsidiaries. They also include, on a
consolidated basis, the accounts of a 58%-owned partnership which
owns a hotel subject to a nonrecourse mortgage. The accounts of
the partnership are consolidated on a gross basis with the
minority partners' interest reflected separately on a net basis.
All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities as of the
balance sheet date and revenues and expenses during the reporting
period to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
(b) Revenue Recognition
Hotel revenues are recognized as earned, which is generally
defined as the date upon which a guest occupies a room and
utilizes the hotel's services.
Initial franchise fees are recognized as income upon receipt as
the Company has no future obligations associated with the initial
fees. The Company also receives continuing royalty, marketing, and
other fees based upon a percentage of each hotel's gross revenues.
These continuing fees are recognized when earned.
Investment income is recognized as earned.
<PAGE>
(c) Cash and Cash Equivalents
Cash and cash equivalents include demand and savings deposits with
financial institutions and cash on hand. Restricted cash includes
funds held by trustees for the benefit of the Company or its
creditors. The Company considers all highly liquid instruments
with maturities of less than three months to be cash equivalents.
(d) Investment Securities
The Company has classified all of its investments as either
"trading" or "available-for-sale." Available-for-sale securities
are recorded at fair value with unrealized gains and losses, net
of the related tax effect, reported as other comprehensive income.
Trading securities are also recorded at fair value with unrealized
gains and losses reported as investment income in the consolidated
statements of income.
(e) Notes Receivable
Notes receivable are recorded at cost, less the related general
allowance for doubtful accounts and any allowances for impaired
notes receivable. The Company, considering current information and
events regarding the borrowers' ability to repay their
obligations, values its notes receivable, for which it is probable
that the Company will be unable to collect the full amount due in
accordance with the note agreement, at the present value of the
expected future cash flows, market price of the loan, if
available, or the value of the underlying collateral, if any. The
Company does not accrue interest for notes receivable considered
to be impaired. Cash receipts on impaired notes receivable is
either applied against principal or may be reported as interest
income depending on management's judgment as to the collectibility
of principal.
(f) Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation.
Depreciation on property and equipment is calculated on the
straight-line method over the estimated useful lives of the
assets. Property and equipment held under capital leases and
leasehold improvements are amortized over the shorter of the lease
term or estimated useful life of the asset. Estimated useful lives
of property and equipment are as follows:
Buildings 25 to 40 years
Furniture, fixtures, and equipment 5 to 10 years
Leasehold improvements 5 to 20 years
(g) Deferred Costs
Deferred costs primarily consist of costs associated with the
acquisition of trademark rights and franchise licenses and are
amortized over the estimated useful lives of the assets, which
range from 10 - 20 years. Deferred costs also include unamortized
note payable issuance costs which are amortized over the term of
the related debt.
<PAGE>
(h) Leasehold Interests
Leasehold interests are intangible assets that represent the
right to operate certain hotel properties, inclusive of the right
to use the properties under existing lease agreements, and are
stated at cost, less accumulated amortization. Amortization is
calculated on the straight-line method over the terms of the
related leases.
(i) Other Assets
Other assets primarily consist of deposits and investments in
partnerships or corporate joint ventures other than those which
are consolidated due to control. Investees in which the Company
has the ability to exercise significant influence are accounted
for using the equity method.
(j) Treasury Stock
Treasury stock is stated at cost. In noncash exchanges, fair
value represents cost.
(k) Marketing Costs
The Company incurs costs for various marketing and advertising
efforts. All costs related to marketing and advertising are
expensed in the period incurred. Marketing costs amounted to
$556,360 and $542,203 for the years ended December 31, 1998 and
1997, respectively, and are included in franchise operations
expense ($123,625 and $302,254, respectively) and in hotel
operations expense ($432,735 and $239,949, respectively) in the
accompanying consolidated statements of income.
(l) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
A valuation allowance is recognized when it appears it is more
likely than not that some or all of deferred tax assets will not
be realized.
(m) Fair Value of Financial Instruments
Management believes that the carrying amounts of cash and cash
equivalents, accounts receivable, other current assets, accounts
payable and accrued expenses, and current portions of notes
receivable and payable are reasonable approximations of their fair
value because of the short-term nature of these instruments.
The fair value of noncurrent portions of notes receivable is
determined as the present value of expected future cash flows
discounted at the interest rate currently offered by the Company,
which approximates rates currently offered by local lending
institutions for loans of similar terms to companies with
comparable credit risk. Based on this valuation methodology,
management believes that the carrying amount of the noncurrent
portions of notes receivable is a reasonable approximation of its
fair value.
<PAGE>
Investment securities (both trading and available-for-sale) are
stated at fair value in the accompanying balance sheet. These fair
values are based on quoted market prices at the reporting date for
those or similar investments.
The fair value of the Company's noncurrent portions of notes
payable is estimated by discounting the future cash flows of each
instrument at rates currently offered to the Company for similar
debt instruments of comparable maturities by the Company's
bankers. Based on this valuation methodology, management believes
that the carrying amount of the noncurrent portions of notes
payable is a reasonable estimation of its fair value.
(n) Reclassifications
Certain reclassifications have been made to the 1997 balances to
conform with classifications adopted in 1998.
(o) Stock Options
The Company accounts for its stock options in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, which encourages entities
to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 allows entities to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and record compensation expense on the
date of grant only if the current market price of the underlying
stock exceeds the exercise price. In addition, pro forma net
income and pro forma earnings per share disclosures for employee
stock option grants must be provided as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company
continues to apply the provisions of APB opinion No. 25 and
provides the pro forma provisions of SFAS No. 123.
(p) Impairment of Long-Term Assets
Property and equipment, deferred costs and leasehold interests are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets
may not be recoverable. Recoverability is measured by a comparison
of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If an asset is considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the fair
value of the asset.
(q) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for
reporting and presentation of comprehensive income and its
components in a full set of general purpose financial statements.
SFAS No. 130 requires all items that are required to be recognized
under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed in equal
prominence with the other financial statements. Comprehensive
income of the Company consists of net income and net unrealized
gains (losses) on investment securities and is presented in the
consolidated statements of shareholders' equity and comprehensive
income. The statement requires only additional disclosures in the
consolidated financial statements. It does not affect the
Company's financial position or consolidated results of
operations. Prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
<PAGE>
(r) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information. This statement establishes standards for the way
public business enterprises are to report information about
operating segments in annual financial statements and requires
those enterprises to report selected information about operating
segments using the "management approach" concept. It also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131
supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, but retains the requirement to report
information about major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 15,
1997. The Company operates and manages its business as one
segment.
(3) Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1998 and 1997 included the
following:
1998 1997
-------------- -------------
Unrestricted cash:
Operating accounts, money market funds,
and overnight investments $ 550,855 2,264,632
Hotel operating accounts, savings
accounts, and cash on hand 505,644 606,745
-------------- -------------
1,056,499 2,871,377
-------------- -------------
Restricted cash:
Unsettled claim reserves (a) 609 27,282
Mortgage-related escrows (b) 494,596 330,625
Insurance deposits (c) 52,490 52,490
-------------- -------------
547,695 410,397
-------------- -------------
$ 1,604,194 3,281,774
============== =============
(a) The Company acted as a trustee and administered certain
aspects of claims asserted in the bankruptcy of the entity
formerly known as Days Inns of America, Inc. (the Days
Bankruptcy). The residual amounts, if any, in certain of the
related reserve accounts inured to the benefit of the Company
(note 11). Accordingly, these accounts, along with the related
liabilities, are reflected in the accompanying consolidated
balance sheets. Such liabilities, which equal the restricted
cash balances, are included in accounts payable and accrued
expenses.
(b) Mortgage-related escrows are standard reserve accounts held by
or on behalf of the holders of mortgages on certain Company
properties (note 8). Such amounts are restricted to the
payment of insurance, property taxes, and/or property and
equipment replacements and enhancements relating to the
mortgaged properties.
(c) The Company is self-insured for workers' compensation
liabilities relating to certain employees in certain
locations. Some states require deposits be made by
self-insuring companies. Such deposits are restricted to the
payment of workers' compensation claims which are otherwise
not settled.
<PAGE>
(4) Investment Securities
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for trading and available-for-sale
securities by investment type and class of investment at December 31,
1998 and 1997, are as follows:
<TABLE>
<S> <C> <C> <C> <C>
1998
-----------------------------------------------------------------------
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
-------------- --------------- -------------- ----------------
Trading securities -
equity securities $ 11,812 112,082 (3,398) 120,496
Available-for-sale
securities - equity
securities 288,000 -- (148,023) 139,977
-------------- --------------- -------------- ----------------
Total $ 299,812 112,082 (151,421) 260,473
============== =============== ============== ================
1997
-----------------------------------------------------------------------
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
-------------- --------------- -------------- ----------------
Trading securities:
U.S. government and
agency obligations $ 2,962,739 - - 2,962,739
Equity securities 10,763 216,779 (2,166) 225,376
-------------- --------------- -------------- ----------------
Total $ 2,973,502 216,779 (2,166) 3,188,115
============== =============== ============== ================
</TABLE>
At December 31, 1998 and 1997, all trading securities are classified as
short-term and all available-for-sale securities are classified as
long-term.
Other comprehensive loss in 1998 consists of an unrealized loss on
available-for-sale securities of $148,023.
Certain Industrial Revenue Bonds (IRBs) which were secured by a Days Inn
hotel located in Birmingham, Alabama, were called at par on February 1,
1997. Investment income in 1997 includes a realized gain of $455,128
resulting from the call of the IRBs. Other comprehensive income in 1997
includes an equal amount of loss relating to the corresponding change in
unrealized holding gain.
Equity securities are primarily concentrated in hospitality related
companies.
Proceeds from the sale of trading securities were $3,000,000 and
$2,600,000 in 1998 and 1997, respectively. Net realized gross gains were
calculated on a specific identification basis and included in investment
income in 1998 were $37,260 and in 1997 were $146,527.
<PAGE>
(5) Notes Receivable
Notes receivable at December 31, 1998 and 1997 consist of the following:
<TABLE>
<S> <C> <C> <C>
1998
----------------------------------------------------
Other
Secured notes Total
------------- -------------- ----------------
Principal $ 2,652,398 787,331 3,439,729
Less allowances 284,071 92,080 376,151
------------- -------------- ----------------
2,368,327 695,251 3,063,578
Less current portions 121,495 245,522 367,017
------------- -------------- ----------------
Noncurrent portions $ 2,246,832 449,729 2,696,561
============= ============== ================
Number of notes 14 10 24
============= ============== ================
1997
----------------------------------------------------
Other
Secured notes Total
------------- --------------- ----------------
Principal $ 232,048 920,653 1,152,701
Less allowances 40,856 17,018 57,874
------------- --------------- ----------------
191,192 903,635 1,094,827
Less current portions 191,192 179,328 370,520
------------- --------------- ----------------
Noncurrent portions $ -- 724,307 724,307
============= =============== ================
Number of notes 4 9 13
============= =============== ================
</TABLE>
The secured notes are primarily collateralized by mortgages and
leasehold interests on hotel properties.
The recorded investment in impaired notes receivable has been recognized
as of December 31, 1998 and 1997 was approximately $17,080 and $17,018,
respectively, and the Company has fully reserved for these notes. Cash
received in payment of impaired loans during 1998 and 1997 amounted to
$9,938 and $806,199, respectively, and is included in other income in the
accompanying consolidated statements of income.
<PAGE>
The activity in the allowance for doubtful notes receivable for the
years ended December 31, 1998 and 1997 was as follows:
<TABLE>
1998 1997
------------- -------------
<S> <C> <C>
Allowance for doubtful notes receivable at $ 57,874 1,441,810
beginning of year
Allowances recorded in connection with leasehold
interest sales (note 7) 350,215 --
Allowance allocated to impaired notes acquired in
business combination -- 41,196
Write-downs charged against the allowance (22,000) (618,933)
Collections on impaired notes (9,938) (806,199)
------------- -------------
Allowance for doubtful notes receivable
at end of year $ 376,151 57,874
============= =============
(6) Property and Equipment
Property and equipment at December 31, 1998 and 1997 consist of the
following:
1998 1997
---------------- ----------------
Hotel properties:
Country Hearth Inn in Atlanta, Georgia:
Land and building $ 3,913,680 3,910,363
Furniture, fixtures, and equipment 385,931 61,240
---------------- ----------------
4,299,611 3,971,603
Accumulated depreciation (265,969) (137,550)
---------------- ----------------
4,033,642 3,834,053
---------------- ----------------
Country Hearth Inn in Dalton, Georgia:
Land and building 1,965,977 1,952,639
Furniture, fixtures, and equipment 352,158 300,660
---------------- ----------------
2,318,135 2,253,299
Accumulated depreciation (161,967) (72,686)
---------------- ----------------
2,156,168 2,180,613
---------------- ----------------
Country Hearth Inn in Orlando, Florida:
Land and building 6,978,578 6,932,578
Furniture, fixtures, and equipment 967,181 933,259
---------------- ----------------
7,945,759 7,865,837
Accumulated depreciation (1,564,040) (1,319,416)
---------------- ----------------
6,381,719 6,546,421
---------------- ----------------
<PAGE>
1998 1997
---------------- ----------------
Three Country Hearth Inns in southeastern
Texas:
Land and buildings $ 3,033,000 3,033,000
Furniture, fixtures, and equipment 645,398 537,995
---------------- ----------------
3,678,398 3,570,995
Accumulated depreciation (474,500) (318,500)
---------------- ----------------
3,203,898 3,252,495
---------------- ----------------
Country Hearth Inns in Kentucky and Missouri
(nine in 1998 and eight in 1997):
Land and buildings 11,373,223 9,744,326
Furniture, fixtures, and equipment 1,562,165 1,363,557
---------------- ----------------
12,935,388 11,107,883
Accumulated depreciation (523,826) (129,000)
---------------- ----------------
12,411,562 10,978,883
---------------- ----------------
Days Inn in Daytona, Florida:
Land and building 3,046,020 3,029,895
Furniture, fixtures, and equipment 270,858 338,363
Capital lease assets 49,110 49,110
---------------- ----------------
3,365,988 3,417,368
Accumulated depreciation (561,100) (455,052)
---------------- ----------------
2,804,888 2,962,316
---------------- ----------------
Extended-stay facility in St. Louis, Missouri:
Land and building 3,393,244 3,382,966
Furniture, fixtures, and equipment 126,863 111,785
---------------- ----------------
3,520,107 3,494,751
Accumulated depreciation (143,270) (53,457)
---------------- ----------------
3,376,837 3,441,294
---------------- ----------------
Travelodge in Coshocton, Ohio:
Land and building 944,459 --
Furniture, fixtures, and equipment 29,212 --
---------------- ----------------
973,671 --
Accumulated depreciation (13,154) --
---------------- ----------------
960,517 --
---------------- ----------------
Best Western in Norcross, Georgia:
Land and building 3,861,899 --
Furniture, fixtures, and equipment 188,762 --
---------------- ----------------
4,050,661 --
Accumulated depreciation (82,991) --
---------------- ----------------
3,967,670 --
---------------- ----------------
<PAGE>
1998 1997
---------------- ----------------
Leasedhotel properties in the Midwest (eight in 1998 and seventeen
in 1997):
Leasehold improvements $ 1,083,967 383,837
Furniture, fixtures, and equipment 779,322 257,202
Capital lease assets 20,174 156,268
---------------- ----------------
1,883,463 797,307
Accumulated depreciation (165,195) (95,892)
---------------- ----------------
1,718,268 701,415
---------------- ----------------
Construction-in-progress 1,001,213 --
---------------- ----------------
Corporate offices:
Leasehold improvements 60,985 60,985
Furniture, fixtures, and equipment 122,352 145,539
---------------- ----------------
183,337 206,524
Accumulated depreciation (107,850) (79,239)
---------------- ----------------
75,487 127,285
---------------- ----------------
Land held for sale 214,198 250,889
---------------- ----------------
Total property and equipment $ 42,306,067 34,275,664
================ ================
</TABLE>
In May 1997, the Company acquired Lodge Keeper of Prospect, Ohio. The
purchase price totaled approximately $6.3 million consisting primarily of
cash of $825,000, 106,320 shares of common stock of the Company, and the
assumption of approximately $4.8 million of debt (note 8). Lodge Keeper
operated 18 hotels under long-term leases (note 7), held management
contracts on six Country Hearth Inn hotels, and owned one independent
hotel, among other assets. The acquisition was recorded using the
purchase method of accounting and Lodge Keeper's results of operations
are included in the Company's financial statements from the acquisition
date.
In September 1997, the Company acquired Hatfield Inns, LLC ("Hatfield").
The purchase price totaled approximately $11 million consisting primarily
of cash and payables of $1.5 million, $3 million of preferred stock
issued by the Company (note 10), and the assumption or placement of
approximately $6.5 million of debt (note 8). Hatfield owned eight 40-unit
hotel properties located in Kentucky and Missouri. The Company has
converted all eight properties into Country Hearth Inns and intends to
use the plans and design rights which were also acquired to develop and
construct additional properties. The acquisition was recorded using the
purchase method of accounting and Hatfield's results of operations are
included in the Company's financial statements from the acquisition date.
In May 1998, the Company acquired a 121-room hotel in Norcross, Georgia
(the "Norcross Hotel"). The hotel is operated as a Best Western-Bradbury
Suites. The purchase price totaled approximately $4 million consisting
primarily of cash and payables of $200,000 and the assumption of
approximately $3.8 million of debt (note 8). The acquisition has been
recorded using the purchase method of accounting and the Norcross Hotel's
results of operations are included in the Company's financial statements
from the acquisition date.
<PAGE>
In September 1998, the Company acquired a 50-room hotel property in
Coshocton, Ohio for approximately $725,000. The property is operated
under a Travelodge license agreement. The Company had previously held a
leasehold interest in the property as a result of the Lodge Keeper
acquisition. The Company's basis in the property reflected above includes
the purchase price and the Company's former basis in the leasehold
interest of approximately $210,000. The property is encumbered by a
mortgage loan (note 8).
All of the above described business and hotel acquisitions were recorded
using the purchase method of accounting. The following table presents, on
an unaudited pro forma basis, the Company's 1998 and 1997 consolidated
revenues, net income, and net income per share that would have been
reported if all of these transactions had occurred at the beginning of
the periods presented. The unaudited pro forma results are not
necessarily indicative of the results which will occur in the future.
For the years ended
December 31,
-----------------------------------
1998 1997
-------------- ----------------
Revenues $ 29,173,409 24,991,570
Net income 1,182,337 3,699,857
Basic net income per share .46 1.83
Diluted net income per share .45 1.57
All of the Company's other owned hotel properties were acquired in 1993
through 1998 and are encumbered by mortgage loans (note 8).
In 1997, the Company recognized a gain of $289,300 as a result of the
taking of a parcel of land by the Commonwealth of Virginia under eminent
domain statutes. Compensation proceeds of $348,000 are included in accounts
receivable in the accompanying consolidated balance sheets at December 31,
1998 and 1997 and were received during 1999.
(7) Deferred Costs, Leasehold Interests, and Other Assets
Deferred costs at December 31, 1998 and 1997 consist of the following:
1998 1997
--------------- -------------
Country Hearth Inn franchise system:
Trademark rights $ 584,300 584,300
Franchise licenses 939,778 939,778
Other deferred costs 163,549 162,338
------------- -------------
1,687,627 1,686,416
Accumulated amortization (470,333) (350,334)
------------- -------------
1,217,294 1,336,082
Unamortized notes payable issuance costs 674,901 597,071
--------------- -------------
$1,892,195 1,933,153
=============== =============
<PAGE>
Leasehold interests represent the cost of leasehold rights in real
property acquired by the Company and consist of the following at December
31, 1998 and 1997:
1998 1997
--------------- -------------
Leasehold interests $ 3,431,867 2,927,409
Accumulated amortization (238,928) (87,922)
--------------- -------------
$ 3,192,939 2,839,487
=============== =============
During 1998, the Company sold eight leasehold interests in hotel
properties which had been acquired in conjunction with the Lodge Keeper
acquisition. The Company received net proceeds of approximately $990,000
in cash and $1,655,000 in notes receivable. The notes receivable are
secured by the related leasehold interests. The Company recorded
approximately $1.6 million in gains in connection with these sales. The
Company remains contingently liable for rent payments due in accordance
with the leases on certain of the properties (note 9).
In June 1998, the Company entered into leases for seven hotel properties
owned by Host Funding, Inc. The hotel properties are operated under Super
8(4) and Sleep Inn (3) license agreements. All of the leases are
accounted for as operating leases (note 9). The Company paid
approximately $500,000 in cash, $400,000 in common stock and $400,000 in
notes payable for the leasehold interests. In addition to the leases, the
Company received $288,000 of Host Funding, Inc. common stock; the
remainder of the acquisition fee was allocated to leasehold interests.
Other assets at December 31, 1998 and 1997 consist of the following:
<TABLE>
1998 1997
<S> <C> <C>
------------- -------------
Contract deposits $ -- 68,677
Investments in joint ventures/partnerships 1,159,662 1,135,269
Other -- 23,841
------------- -------------
$ 1,159,662 1,227,787
============= =============
</TABLE>
Investments in joint ventures/partnerships consists of investments in six
entities, each of which owns a single hotel property. The Company
accounts for its interests on the equity method and recognized aggregate
losses from these entities of $124,480 and $125,487 during 1998 and 1997,
respectively.
<PAGE>
(8) Notes Payable
Notes payable at December 31, 1998 and 1997 consist of the following:
<TABLE>
1998 1997
---------------- --------------
<S> <C> <C> <C>
First mortgage note payable (Atlanta) $ 2,087,394 2,131,037
First and second mortgage notes payable (Dalton) 1,263,144 1,289,924
First mortgage note payable (Orlando) 4,436,293 4,518,726
First mortgage note payable (Texas) 2,253,045 2,305,258
First and second mortgage notes payable
(Kentucky/ Missouri) 8,003,311 6,849,939
First mortgage notes payable (Daytona) 2,288,917 2,088,599
First mortgage note payable (St. Louis) 1,753,000 1,786,268
First mortgage note payable (Coshocton) 699,200 --
First mortgage note payable (Norcross) 3,776,924 --
Construction loans (Kentucky) 592,482 23,391
Unsecured subordinated debt 2,034,011 2,232,258
Convertible debentures, net of unamortized discount 4,920,555 4,900,555
Other notes payable 448,132 314,070
Capital lease obligations (note 9) 52,021 142,083
---------------- --------------
34,608,429 28,582,108
Less current portions 1,251,251 933,183
---------------- --------------
Noncurrent portions of notes payable $ 33,357,178 27,648,925
================ ==============
</TABLE>
The Atlanta first mortgage note payable is secured by the Atlanta hotel
property (note 6). The note bears interest at 9.5%, requires monthly
payments of $20,350, and matures in August 2016.
The Dalton first and second mortgage notes payable are secured by the
Dalton hotel property (note 6). The first mortgage note payable bears
interest at 9.15% and requires monthly payments of $9,549. The second
mortgage note payable bears interest at 8.74% and requires monthly
payments of $2,313. Both notes mature in September 2001.
The Orlando first mortgage note payable is secured by the Orlando hotel
property (note 6). The note bears interest at 9.55%, requires monthly
payments of $43,028, and matures in December 2016.
The Texas first mortgage note payable is secured by the Texas hotel
properties (note 6). The note bears interest at 9.056%, requires monthly
payments of $21,680, and matures in December 2002.
The Kentucky/Missouri first and second mortgage notes payable are secured
by the hotels in Kentucky and Missouri (note 6). Three mortgages were
refinanced during 1998. The three new mortgage notes payable with an
aggregate December 31, 1998 balance of $2,567,999 bear interest at 8.25%,
require monthly payments of $22,026, and mature in September 2018. The
remaining notes bear interest at prime plus 1% (8.75% at December 31,
1998), require aggregate monthly payments of $33,531, and mature at
various dates (2000-2015). Three notes with an aggregate December 31,
1998 balance of $2,339,536 are cross-collateralized, bear interest at
9.18%, and require aggregate monthly payments of $21,826 and mature in
October 2007.
<PAGE>
The Daytona first mortgage note was refinanced during 1998. The new
Daytona first mortgage note payable is secured by the Daytona hotel
property (note 6). The note bears interest at 8.5%, requires monthly
payments of $19,960, and matures in October 2018.
The St. Louis first mortgage note payable is secured by the St. Louis
extended-stay facility (note 6). The note bears interest at 8.5%,
requires monthly payments of $13,178, and matures in February 2004.
The Coshocton first mortgage note payable is secured by the Coshocton
hotel property (note 6). The note bears interest at 8.75%, requires
monthly payments of $7,009, and matures in December 2013.
The Norcross first mortgage note payable is secured by the Norcross hotel
property (note 6). The note bears interest at 8.75%, requires monthly
payments of $32,911, and matures in February 2007.
The construction loan with a December 31, 1998 balance of $592,482
represents draws made towards the construction of a Country Hearth Inn in
Eddyville, Kentucky; the Company entered into a construction loan secured
by the hotel property under construction with a total commitment of
$1,000,000. Borrowings under the loan bear interest at 9.25% with
required monthly interest only payments until maturity in December 2001.
The unsecured subordinated debt consists of five notes assumed as part of
the Lodge Keeper acquisition (note 6). The notes are due in varying
amounts of monthly and quarterly payments and mature at various dates
through December 2002. The stated balances represent the present value of
amounts to be paid at a discount rate of 9%. Two of the five notes were
paid in full in 1998.
The convertible debentures, which were issued to investment funds managed
by a related party (note 14), consist of four notes aggregating
$5,000,000 net of unamortized original issue discount of $79,445 in 1998
and $99,445 in 1997. The notes bear interest at 8%, are unsecured,
require quarterly interest only payments, and mature in December 2002.
Under the debenture agreements, the holders also have certain rights of
conversion (note 10).
The combined aggregate amount of maturities for all notes payable for
each of the next five years and thereafter is as follows:
Year ending December 31,
---------------------------------
1999 $ 1,251,251
2000 2,176,592
2001 3,914,935
2002 8,284,103
2003 670,689
Thereafter 18,310,859
-------------
$ 34,608,429
=============
(9) Leases
The Company leases certain equipment under agreements that are classified
as capital leases. The leases have terms ranging from two to six years
and have purchase options at the end of the original lease terms.
<PAGE>
Capital lease assets included in property and equipment at December 31,
1998 and 1997 are as follows:
1998 1997
----------- -----------
Equipment $ 69,284 205,378
Accumulated amortization (14,830) (20,836)
----------- -----------
$ 54,454 184,542
=========== ===========
The Company operates several of its locations in leased facilities. Lease
terms range from 10 to 30 years with options to renew at varying terms.
Certain of the leases provide for contingent payments based upon a
percent of sales. Some leased vehicles and equipment are classified as
operating leases.
Future minimum payments, by year and in the aggregate, under
noncancelable capital leases and operating leases with initial or
remaining terms of one year or more consist of the following at December
31, 1998:
<TABLE>
<CAPTION>
Year ending Capital Operating
December 31, leases leases
------------ ------------- --------------
<S> <C> <C> <C>
1999 $ 24,240 3,322,878
2000 19,818 3,297,347
2001 14,449 3,236,785
2002 9,632 3,188,304
2003 -- 3,103,209
Subsequent years -- 25,673,393
------------- --------------
Total minimum lease payments 68,139 41,821,916
==============
Less estimated executory costs 3,189
-------------
Net minimum lease payments 64,950
Amounts representing interest (12,929)
-------------
Present value of net minimum payments 52,021
Current portions 16,935
-------------
Long-term capitalized lease obligation $ 35,086
=============
</TABLE>
Rental expense, including contingent rentals of $230,376 in 1998 and
$109,489 in 1997 and net of sublease rentals of $80,129 in 1998 and
$84,741 in 1997, for all operating leases was $3,300,307 in 1998 and
$1,356,003 in 1997.
Leases described in the preceding paragraphs include leases between the
Company and operating companies whose shareholders are common
shareholders of the Company. Such amounts totaled $69,984 in 1998 and
$33,475 in 1997. Total future minimum payments under these related party
leases amount to $227,455.
<PAGE>
The Company remains contingently liable for future minimum rental
payments of $2,162,418 on sold leasehold interests (note 7) and on
subleased and assigned properties and equipment in the event of default
by the purchasers, sublessees and assignees.
(10) Capital Structure and Net Income Per Share
Series A Preferred Stock
In connection with the Hatfield acquisition (note 6), the Company issued
30,000 shares of Series A (par value $100) preferred stock. The Series A
preferred stock is nonvoting and accrues cumulative dividends at the rate
of 10% per annum, payable when and to the extent declared by the
Company's Board of Directors. All accrued but unpaid dividends of the
Series A preferred stock must be paid in full before any cash dividend
may be declared on the Company's common stock. As of December 31, 1998,
there was one month ($25,000) of cumulative preferred dividends in
arrears. Such amount is included in accounts payable and accrued expenses
on the December 31, 1998 consolidated balance sheet.
In the event of any voluntary or involuntary liquidation, dissolution, or
winding-up of the Company, the holders of the Series A preferred stock
shall be entitled to receive, prior and in preference to any distribution
to the holders of the Company's common stock, an amount equal to the par
value of the preferred shares held plus any unpaid cumulative dividends.
At any time after September 17, 2004, each holder of Series A preferred
stock may convert any or all such stock, at par, into common shares of
the Company. The conversion price for such common shares shall be the
market price of such shares immediately prior to conversion.
At any time after September 17, 2004, the Company may convert all of the
Series A preferred stock, at 110% of par, into common shares of the
Company. The conversion price for such common shares shall be the market
price of such shares immediately prior to conversion. If the Company
converts the Series A preferred stock into common shares of the Company,
the holders of such converted shares have certain rights for a limited
time period to put the shares back to the Company for cash.
Convertible Debentures
The convertible debentures (note 8) are convertible into common shares of
the Company any time at the option of the holder at a price of $9 per
share. If all such debentures were converted, an additional 555,555
shares of common stock would be issued.
<PAGE>
Net Income Per Share
The following table sets forth the computations of basic and diluted net
income per common share for the years ended December 31, 1998 and 1997:
<TABLE>
1998 1997
---- ----
<S> <C> <C> <C>
Numerator:
Net income $ 1,235,495 3,173,612
Less Series A preferred stock dividends (300,000) (92,333)
-------------- --------------
Numerator for basic net income per common shares 935,495 3,081,279
Add back debenture interest, net of tax (assumed
converted) 248,000 --
Add back Series A preferred stock dividends
(assumed converted) -- 92,333
-------------- --------------
Numerator for diluted net income per common shares $ 1,183,495 3,173,612
============== ==============
Denominator:
Denominator for basic net income per common share:
Actual weighted-average shares outstanding 1,926,511 1,844,098
Effect of dilutive securities:
Series A preferred stock -- 122,178
Convertible debentures 555,555 --
Outstanding stock options 45,852 63,470
-------------- --------------
Denominator for diluted net income per common share 2,527,918 2,029,746
============== ==============
Net income per common share:
Basic $ 0.48 $ 1.67
==== ====
Diluted $ 0.47 $ 1.56
==== ====
</TABLE>
The assumed conversion of the convertible preferred stock was excluded
from the computation of diluted net income per common share in 1998
because the effect would be antidilutive. The assumed conversion of the
convertible debentures was excluded from the computation of diluted net
income per common share in 1997 because the effect would be antidilutive.
(11) Other Income
Other income is presented net of minority interest in partnership income,
$250,015 and $121,154 in 1998 and 1997, respectively, and equity in joint
venture losses (note 7). Other income includes $9,938 in 1998 and
$806,199 in 1997 relating to collections on impaired loans (note 5),
hotel management fees of $224,454 and $254,954 in 1998 and 1997,
respectively, and $510,000 and $330,540 in 1998 and 1997, respectively,
from favorable settlements of Days Bankruptcy claims and changes in
estimates of allowed amounts of remaining unsettled claims (note 3).
<PAGE>
(12) Income Taxes
Total income tax benefit, principally Federal, recognized differs from
the amount computed by applying the U.S. Federal income tax rate of 34%
to pretax income as a result of the following:
<TABLE>
1998 1997
-------------- ---------------
<S> <C> <C>
Computed "expected" tax expense $ 114,000 83,000
Increase (reduction) in income taxes resulting from:
State taxes, net of Federal tax benefit 13,000 7,000
Reduction in valuation allowance for deferred
tax assets (1,028,000) (3,020,000)
---------------- ---------------
$ (901,000) (2,930,000)
================ ===============
At December 31, 1998, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $14 million which is
available to offset future taxable income, if any, and expire at dates
from 2006 through 2018.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1998
and 1997 are presented below:
1998 1997
---------------- ---------------
Deferred tax assets:
Notes receivable allowances $ 128,000 20,000
Net operating loss carryforwards 4,602,000 4,908,000
Effect of state income taxes 421,000 412,000
---------------- ---------------
Total deferred tax assets 5,151,000 5,340,000
Less valuation allowance (62,000) (1,090,000)
---------------- ---------------
Deferred tax assets 5,089,000 4,250,000
---------------- ---------------
Deferred tax liabilities:
Partnership losses (30,000) (1,000)
Property and equipment basis differences (1,228,000) (1,319,000)
---------------- ---------------
Gross deferred tax liabilities (1,258,000) (1,320,000)
---------------- ---------------
Net deferred tax assets $ 3,831,000 2,930,000
================ ===============
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998
and 1997 was $62,000 and $1,090,000, respectively. The net changes in the
total valuation allowance for the years ended December 31, 1998 and 1997
were decreases of $1,028,000 and $3,950,000, respectively. Approximately
$930,000 of the 1997 decrease was attributable to the Hatfield
acquisition (note 6) - (see below).
<PAGE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income by the Company during the periods in which those temporary
differences become deductible. Management considers the projected future
taxable income and tax planning strategies in determining the valuation
allowance.
The Hatfield acquisition (note 6) was structured as a tax-free merger;
thus, the Company's tax basis in the assets acquired were not stepped-up
to fair market value. The resulting deferred tax liability was offset,
however, by a reduction in the Company's deferred tax asset valuation
allowance of $930,000.
The Lodge Keeper acquisition was similarly structured; thus, there were
deferred tax liabilities relating to differences in book and tax bases of
the assets acquired. Lodge Keeper, however, had NOLs available to offset
such built-in gains; thus, no net deferred tax impact from the Lodge
Keeper acquisition was recognized by the Company.
In evaluating the impact of the above events in conjunction with recent
trends in the Company's operations, specifically franchising activities,
hotel management, and hotel development and sales, management determined
that it was more likely than not that the results of future operations
would generate sufficient taxable income to realize a portion of the
deferred tax assets. Such determination was made in the fourth quarter of
1997, resulting in the recognition of a $2,930,000 deferred income tax
benefit. Similarly in 1998, based on actual events and other information
available, it appeared more likely than not that additional portions of
the deferred tax assets would be realized and the Company recognized an
additional net deferred tax asset of $901,000. Although no assurances can
be made, realization of the Company's deferred tax assets should occur if
the Company generates approximately $14 million of taxable income over
the next 8 to 20 years.
(13) Stock Option Plan
The Company's 1995 Stock Option Plan (the 1995 Plan) authorized the
issuance of options for up to 170,000 shares of the Company's common
stock. The Company's 1997 Stock Option Plan (the 1997 Plan) authorized
the issuance of options for up to 80,000 shares of the Company's common
stock. The Company's 1998 Stock Option Plan (the 1998 Plan) authorized
the issuance of options for up to 90,000 shares of the Company's common
stock. Granted options vest one-third immediately, one-third on the first
anniversary of the grant date, and one-third on the second anniversary of
the grant date. The exercise price for all options represents the fair
value of the common stock at the grant date. All 1995 Plan options
terminate five years after vesting, or earlier under certain conditions.
All 1998 and 1997 Plan options terminate ten years after vesting, or
earlier under certain conditions.
<PAGE>
The granted stock option activity is as follows:
Number Weighted-average
of shares exercise price
-------------- --------------------
Balance December 31, 1996 156,000 $ 4.25
Granted in 1997 77,000 6.88
Exercised in 1997 (25,333) 3.85
Forfeited in 1997 (1,667) 5.38
-------------- ----
Balance December 31, 1997 206,000 5.27
Granted in 1998 90,000 7.37
-------------- ----
Balance December 31, 1998 296,000 $ 5.91
============== ====
The following table summarizes information concerning stock options
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------------- -----------------------------
Weighted- Weighted- Weighted-
Range of average average average
exercise remaining exercise exercise
prices Shares life price Shares price
----------------- ----------- -------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 3.44 80,000 2.3 years $ 3.44 80,000 $ 3.44
$ 5.38 - 6.25 49,000 3.5 years 5.74 49,000 5.74
$ 6.88 77,000 9.5 years 6.88 51,333 6.88
$ 7.37 90,000 10.5 years 7.37 30,000 7.37
----------- ---- -----------
296,000 $ 5.91 210,333
=========== ==== ===========
</TABLE>
No compensation expense has been recognized for the Company's stock
option plans. Had compensation cost for the Company's stock option plans
been determined based upon the fair value methodology prescribed under
SFAS No. 123, the Company's net income would have been reduced by
approximately $151,000 or approximately $0.08 per common share (basic)
and $0.06 per common share (diluted) in 1998 and reduced by approximately
$73,000, or approximately $0.04 per common share (basic and dilutive) in
1997. The effects of either recognizing or disclosing compensation cost
under SFAS No. 123 may not be representative of the effects on reported
net income for future years. The fair value of the options granted during
1998 is estimated as $2.31 on the date of grant using the Black-Sholes
option-pricing model with the following assumptions: dividend yield 0%,
volatility of 20%, risk-free interest rate of 6.0%, and an expected life
of five years. The fair value of options granted during 1997 is estimated
as $2.16 on the date of grant using the Black-Sholes option-pricing model
with the following assumptions: dividend yield 0%, volatility 20%,
risk-free interest rate of 6.0%, and an expected life of five years.
<PAGE>
(14) Related Party Transactions
Following the Days Bankruptcy, a trust was created (the Creditors' Trust)
to pursue certain claims for the benefit of unsecured creditors. The
Company acts as trustee for the Creditors' Trust. The Company was
reimbursed $100,000 in 1998 and 1997 for expenses incurred related to the
Creditors' Trust. Other operating and administrative expenses in the
accompanying 1998 and 1997 consolidated statements of income are
presented net of such amounts.
The Company performed accounting and tax services for the Days Inn
Mortgage Trust, a special-purpose CMO Trust. Other income in 1997
includes $60,000 for the performance of such services.
Other notes receivable (note 5) at December 31, 1998 and 1997 includes
$187,583 and $230,221, respectively, due from an officer and shareholder
of the Company. Such note was originated in connection with the Lodge
Keeper acquisition, bears interest at 10%, and is due in monthly
installments of $5,312 until June 2002.
The convertible debentures (notes 8 and 10) were issued to investment
funds managed by a subsidiary of Bay Harbour Management, formerly known
as Tower Investment Group, Inc. (Bay Harbour). Bay Harbour owns or
controls approximately 26% of the Company's outstanding common stock. An
executive officer of Bay Harbour is on the Company's Board of Directors.
(15) Commitments
In conjunction with master development agreements executed with two
developers, the Company is required to advance certain amounts to the
developers at certain points in the construction of the properties. Under
an agreement executed with Marion and Cass St. Corporation (Cassland),
owned by a significant shareholder, the Company is required to advance a
total of $135,000 per property constructed. The agreement specifies the
construction of three properties. As of December 31, 1998, the Company
had advanced Cassland a total of $315,000 and is required to advance an
additional $90,000 once certain construction points are achieved on the
third property. These advances are recorded as notes receivable with
interest accruing at a rate of 8% per annum.
The master development agreement entered into with H&W Ventures, Inc.
(H&W) requires the Company to advance H&W a total of $75,000 per property
developed. The agreement calls for a maximum of five properties. For the
first two properties, the advances are required once H&W purchases land
and executes the related license agreements. For the last three
properties, the advances are made once a property is opened in accordance
with the license agreement.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<S> <C> <C> <C>
Year Joined
Name Age Position The Company
- - - ---- --- -------- -----------
Douglas C. Collins 46 Chairman of the Board of Directors 1992
President, Chief Executive
Officer and Treasurer
Robert B. Lee 44 Director 1992
Senior Vice President, Chief
Financial Officer and Secretary
Ronald L. Devine 55 Director 1997
President - The Lodge Keeper Group
Gregory C. Plank 53 President - BAC Franchising, Inc. 1996
William K. Stern 72 Director 1992
Steven A. Van Dyke 40 Director 1997
David C. Glickman 36 Director 1999
David B. Mumford 40 Director 1999
</TABLE>
Douglas C. Collins. Mr. Collins became President and Chief Executive
Officer of the Company in December 1992, became a director of the Company in May
1995 and became Chairman of the Board of Directors in March 1999. Prior to
joining the Company, Mr. Collins served as President of Days Inns from February
1992 through September 1992 and Director of Days Inns from September 1992
through November 1992. Mr. Collins served as Senior Vice President and Chief
Financial Officer of Days Inns from August 1990 through February 1992, after
serving as President of Imperial Hotels Corporation, a hotel chain owner and
operator, from April 1988 until May 1990. Mr. Collins joined Imperial Hotels
Corporation in August 1980, serving as Vice President of Finance and Development
from June 1984 to April 1988.
Robert B. Lee. Mr. Lee became Secretary of the Company in December 1992 and
became Vice President and Chief Financial Officer in July 1993. Mr. Lee was
named Senior Vice President of Buckhead in May 1996 and became a director in
June 1997. Prior to joining the Company, Mr. Lee served as the Corporate
Controller of Days Inns from October 1990 until December 1992. Prior to that, he
functioned in numerous capacities up to senior manager in the accounting and
audit practice of KPMG from December 1979 to October 1990.
Ronald L. Devine. Mr. Devine was the President and Chief Executive Officer
of The Lodge Keeper Group, Inc. ("Lodge Keeper") prior to its acquisition by the
Company and served in that capacity for more than the last five years. Mr.
Devine continues to serve as President of Lodge Keeper and is an executive
officer of the Company. Mr. Devine became a director of the Company in March
1999.
Gregory C. Plank. Mr. Plank became President of BAC Franchising, Inc., the
Company's Country Hearth Inn franchising subsidiary, in May 1996. From 1991 to
1996, Mr. Plank served as Executive Vice President of Forte Hotels, Inc.
overseeing Travelodge and Thriftlodge in North and South America. Mr. Plank
previously served as Vice President of Marketing for Ramada and has held Vice
President positions in development and operations for Sheraton Inns, Hawthorn
Suites, and independent developers.
William K. Stern. Mr. Stern became a director of the Company in December
1992. He has over forty years of experience in the hospitality industry. He
served as Vice President of Loews Hotels and as President of Loews
Representation International, Inc. ("LRI"), a separate division of Loews Hotels.
In 1987, Mr. Stern established "The Grande Collection of Hotels," a deluxe
division of LRI. Mr. Stern also served as the Chief Executive Officer of the
Grande Collection division. Mr. Stern has been the owner of Stern Services
International, a hotel consulting company, since 1992.
Steven A. Van Dyke. Mr. Van Dyke became a director of the Company in June
1997. He is the President and Chief Executive Officer of Bay Harbour Management,
L.C. ("Bay Harbour"), formerly known as Tower Investment Group, Inc. and has
served in that capacity for more than the last five years. Tower is an
investment advisor and manages multimillion dollar private equity and debt
funds.
David C. Glickman. Mr. Glickman became a director of the Company in March
1999. He is an Associate Director with Bear Stearns & Co., Inc., an investment
banking firm, and has served in that capacity for more than the last five years.
David B. Mumford. Mr. Mumford became a director of the Company in March
1999. He is the president of Mumford Company, Inc., a national leader in the
brokerage of hotel real estate, and has served in that capacity for more than
the last five years.
The members of the Company's Board of Directors are elected annually to
serve one year terms. Messrs. Devine, Glickman, and Mumford were appointed to
the Board in March 1999 in order to fill a vacated seat and to fill additional
seats which were concurrently created. The holders of Common Stock will elect
directors at the next annual meeting, which is scheduled to occur on or about
Thursday, May 27, 1999.
<PAGE>
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on its review of copies of forms received by it pursuant
to Section 16(a) of the Securities Exchange Act of 1934, as amended, or written
representations from certain reporting persons, the Company believes that during
1998 all Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial owners were complied with except as
follows:
Type and (#) of Reports Number of
Reporting Person Not Timely Filed in 1998 Transactions
---------------------- ------------------------ ------------
Steven A. Van Dyke and Form 4 (6) 19
Additional Reporting Persons:
Douglas P. Teitelbaum
Tower Investment Group, Inc.
Bay Harbour Management, L.C.
The Company believes that all required filings were filed, but that
those described above were not timely filed.
<PAGE>
Item 10. Executive Compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company to
the named executive officers for the years ended December 31, 1998, 1997 and
1996. These are the only executive officers who received annual salary and bonus
in excess of $100,000 in 1998.
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
Annual Compensation Securities All Other
Name and Salary Bonus Underlying Compensa-
Principal Position Year ($) ($) Options (#) tion ($)
- - - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Douglas C. Collins 1998 $250,000 110,470 18,000 (c) $14,000 (d)
Chief Executive Officer 1997 235,000 94,005 16,000 1,500
1996 235,000 72,000 7,000 4,750
Robert B. Lee 1998 115,500 25,457 12,000 (c) 9,000 (e)
Chief Financial Officer 1997 105,000 31,502 9,000 1,449
1996 98,600 22,292 4,000 3,022
Gregory C. Plank 1998 150,000 48,062 9,000 (c) 6,500 (f)
President - Franchising 1997 135,000 40,502 6,000 -
1996 (a) 81,000 24,111 15,000 35,312
Ronald L. Devine 1998 111,481 24,572 9,000 (c) 5,000 (g)
President - Lodge Keeper 1997 (b) 70,240 21,005 9,000 -
</TABLE>
(a) Mr. Plank's employment with the Company began on May 20, 1996.
(b) Mr. Devine's employment with the Company began on May 8, 1997.
(c) See "OPTION GRANTS TABLE."
(d) Employer's portion of 401(k) contribution ($4,000) and non-qualified
deferred compensation plan ($10,000).
(e) Employer's portion of 401(k) contribution ($4,000) and non-qualified
deferred compensation plan ($5,000).
(f) Employer's portion of 401(k) contribution ($4,000) and non-qualified
deferred compensation plan ($2,500).
(g) Employer's portion of non-qualified deferred compensation plan.
<PAGE>
OPTION GRANTS TABLE
The following table sets forth the number of shares of Common Stock
underlying options granted to the named executive officers during the year ended
December 31, 1998. No stock appreciation rights were granted.
<TABLE>
<CAPTION>
Individual Grants
Number of Percent of
Shares of Total
Common Stock Options
Underlying Granted to Exercise
Options Employees Price Expiration
Name Granted (#) in Fiscal 1998 ($/Share) Date (g)
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Douglas C. Collins 6,000 8.3% $ 7.37 (f) May 28, 2008
6,000 8.3% $ 7.37 (f) May 28, 2009
6,000 8.3% $ 7.37 (f) May 28, 2010
Robert B. Lee 4,000 5.6% $ 7.37 (f) May 28, 2008
4,000 5.6% $ 7.37 (f) May 28, 2009
4,000 5.6% $ 7.37 (f) May 28, 2010
Gregory C. Plank 3,000 4.2% $ 7.37 (f) May 28, 2008
3,000 4.2% $ 7.37 (f) May 28, 2009
3,000 4.2% $ 7.37 (f) May 28, 2010
Ronald L. Devine 3,000 4.2% $ 7.37 (f) May 28, 2008
3,000 4.2% $ 7.37 (f) May 28, 2009
3,000 4.2% $ 7.37 (f) May 28, 2010
</TABLE>
(f) The exercise price was fixed as the market price at the date of grant.
(g) The options expire ten years after the date they become vested.
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth the number and fiscal year-end value of
unexercised options granted to the named executive officers as of December 31,
1998.
<TABLE>
Number of
Shares of
Common Stock Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End(#) FY-End($)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
---- ------------- -------------
<S> <C> <C>
Douglas C. Collins 53,666 / 17,334 $39,300 / -0-
Robert B. Lee 24,000 / 11,000 13,100 / -0-
Gregory C. Plank 22,000 / 8,000 -0- / -0-
Ronald L. Devine 9,000 / 9,000 -0- / -0-
No options were exercised by the named executive officers during 1998.
No stock appreciation rights have been issued or exercised.
</TABLE>
COMPENSATION OF DIRECTORS
Robert M. Miller, the former Chairman of the Board of Directors of the
Company, received annual fees of $87,000 and $750 per attendance at board of
directors meetings during 1998 and 1997. Mr Miller resigned as a director of the
Company in March 1999. Mr. Miller received total compensation in 1999 of
$78,750.
Each of the Company's other outside (non-employee) directors receive an
annual fee of $12,000 and $750 per attendance at board of directors meetings.
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Douglas C. Collins. The Company has entered into an employment contract
with Mr. Collins for a term which expires in July 2002. If the contract is
terminated by the Company (1) prior to the end of its term, (2) other than for
cause, and (3) within twelve months following a change-in-control (generally,
acquisition of control of over 50% of the Common Stock or a change in a majority
of the board of directors), Mr. Collins shall be entitled to the greater of (x)
his annual salary (as defined) payable through the end of his employment term
and (y) one-half of his annual salary (as defined) for the rest of the year in
which such termination occurs. If such event occurred as of January 1, 1999, Mr.
Collins would be entitled to a payment of $1,382,382.
If Mr. Collins terminates his contract (1) between 90 and 120 days
following a change-in-control or (2) within 30 days following any demotion,
diminution of responsibility or pay or forced relocation occurring within twelve
months of a change-in-control, he shall be entitled to the lesser of (x) his
annual salary (as defined) through the end of his employment term, and (y)
one-half of his annual salary (as defined) for the year in which such
termination occurs. If such event occurred as of January 1, 1999, Mr. Collins
would be entitled to a payment of $192,890.
If Mr. Collins' employment is otherwise terminated without cause before the
expiration of his employment term, the Company must pay him an amount equal to
his annual salary (as defined) for the year in which such termination occurs. If
such event occurred as of January 1, 1999, Mr. Collins would be entitled to a
payment of $385,781.
Robert B. Lee. The Company has entered into an employment contract with Mr.
Lee for a term which expires in July 2002. If the contract is terminated by the
Company (1) prior to the end of its term, (2) other than for cause, and (3)
within twelve months following a change-in-control (as defined above), Mr. Lee
shall be entitled to the greater of (x) his annual salary (as defined) payable
through the end of his employment term and (y) one-half of his annual salary (as
defined) for the rest of the year in which such termination occurs. If such
event occurred as of January 1, 1999, Mr. Lee would be entitled to a payment of
$577,339.
If Mr. Lee terminates his contract (1) between 90 and 120 days following a
change-in-control or (2) within 30 days following any demotion, diminution of
responsibility or pay or forced relocation occurring within twelve months of a
change-in-control, he shall be entitled to the lesser of (x) his annual salary
(as defined) through the end of his employment term, and (y) one-half of his
annual salary (as defined) for the year in which such termination occurs. If
such event occurred as of January 1, 1999, Mr. Lee would be entitled to a
payment of $80,559.
If Mr. Lee's employment is otherwise terminated without cause before the
expiration of his employment term, the Company must pay him an amount equal to
his annual salary (as defined) for the year in which such termination occurs. If
such event occurred as of January 1, 1999, Mr. Lee would be entitled to a
payment of $116,118.
Gregory C. Plank. The Company has entered into an employment contract with
Mr. Plank for a term which expires in May 2000. If the contract is terminated by
the Company (1) prior to the end of its term, (2) other than for cause, and (3)
within twelve months following a change-in-control (as defined above), Mr. Plank
shall be entitled to the greater of (x) his annual base salary payable through
the end of his employment term and (y) one-half of his base salary for the rest
of the year in which such termination occurs. If such event occurred as of
January 1, 1999, Mr. Plank would be entitled to a payment of $212,500.
If Mr. Plank terminates his contract (1) between 90 and 120 days following
a change-in-control or (2) within 30 days following any demotion, diminution of
responsibility or pay or forced relocation occurring within twelve months of a
change-in-control, he shall be entitled to the lesser of (x) his annual base
salary through the end of his employment term, and (y) one-half of his base
salary for the year in which such termination occurs. If such event occurred as
of January 1, 1999, Mr. Plank would be entitled to a payment of $75,000.
If Mr. Plank's employment is otherwise terminated without cause before the
expiration of his employment term, the Company must pay him an amount equal to
his annual base salary for the year in which such termination occurs. If such
event occurred as of January 1, 1999, Mr. Plank would be entitled to a payment
of $150,000.
Ronald L. Devine. The Company has entered into an employment contract with
Mr. Devine for a term which expires in May 2000. If the contract is terminated
by the Company (1) prior to the end of its term, (2) other than for cause, and
(3) within twelve months following a change-in-control (as defined above), Mr.
Devine shall be entitled to the greater of (x) his annual base salary payable
through the end of his employment term and (y) one-half of his base salary for
the rest of the year in which such termination occurs. If such event occurred as
of January 1, 1999, Mr. Devine would be entitled to a payment of $153,333.
If Mr. Devine terminates his contract (1) between 90 and 120 days following
a change-in-control or (2) within 30 days following any demotion, diminution of
responsibility or pay or forced relocation occurring within twelve months of a
change-in-control, he shall be entitled to the lesser of (x) his annual base
salary through the end of his employment term, and (y) one-half of his base
salary for the year in which such termination occurs. If such event occurred as
of January 1, 1999, Mr. Devine would be entitled to a payment of $57,500.
If Mr. Devine's employment is otherwise terminated without cause before the
expiration of his employment term, the Company must pay him an amount equal to
his annual base salary for the year in which such termination occurs. If such
event occurred as of January 1, 1999, Mr. Devine would be entitled to a payment
of $115,000.
REPORT ON REPRICING OF OPTIONS/SARS
Not applicable.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of February 28, 1999 with
respect to the beneficial ownership of shares of the Common Stock held by
beneficial owners of more than 5% of the Common Stock. The information set forth
below is based upon the Company's stock records and information obtained by the
Company from the persons named below. Unless otherwise indicated, each person
has sole voting and investment power with respect to such shares.
Name and Address Amount and Nature of Percent
of Beneficial Ownership Beneficial Ownership of Class
------------------------- ----------------------- --------
NY Motel Enterprises 112,821 - Direct 5.80%
440 West 57th Street
New York, NY 10019
Leon M. & Marsha C. Wagner 124,181 - (a) 6.39%
1325 Avenue of the Americas
22nd Floor
New York, NY 10019
Hotel-Motel Management Corporation 182,750 - Direct 9.40%
3485 N. Desert Drive - Suite 106
Building 2
East Point, GA 30344
Heartland Advisors, Inc. 184,600 - Investment 9.50%
790 North Milwaukee Street Advisor
Milwaukee, WI 53202
Bay Harbour Management, L.C. 1,054,702 - Investment 42.20%
Suite 270 Advisor (b)
777 South Harbour Island Boulevard
Tampa, FL 33602
(a) Mr. Wagner holds 111,036 shares directly and Ms. Wagner, his spouse, holds
13,145 shares directly.
(b) Includes 499,147 shares owned by investment funds managed by Bay Harbour and
555,555 contingently issuable shares from the conversion of debentures owned by
investment funds managed by Bay Harbour.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of February 28, 1999, all beneficial
holdings of outstanding Common Stock by the directors and the named executive
officers of the Company and all directors and executive officers as a group. The
information set forth below is based upon the Company's stock records and
information obtained by the Company from the persons named below. Unless
otherwise indicated, each person has sole voting and investment power with
respect to such shares. The address of each director and executive officer is in
care of the Company, Suite 200, 4243 Dunwoody Club Drive, Atlanta, Georgia
30350.
Name of Amount and Nature of Percent
Beneficial Holder Beneficial Ownership of Class
----------------- -------------------- --------
Douglas C. Collins 72,774 - (a) 3.64%
Robert B. Lee 37,808 - (b) 1.92%
Ronald L. Devine 74,452 - (c) 3.81%
Gregory C. Plank 24,000 - (d) 1.22%
William K. Stern 41,666 - (e) 2.11%
Steven A. Van Dyke 1,069,399 - (f) 42.67%
David C. Glickman - -
David B. Mumford - -
Directors and Officers 1,313,591 - (a-f) 49.64%
as a group (8 persons)
(a) Mr. Collins holds 12,600 shares directly and holds 6,508 shares
indirectly through DC Hospitality, Inc., which is 85% owned by Mr. Collins and
15% owned by Mr. Lee. Mr. Collins also has the right to acquire an additional
53,666 shares within the next 60 days pursuant to option agreements.
(b) Mr. Lee holds 7,300 shares directly and holds 6,508 shares indirectly
through DC Hospitality, Inc., which is 15% owned by Mr. Lee and 85% owned by Mr.
Collins. Mr. Lee also has the right to acquire an additional 24,000 shares
within the next 60 days pursuant to option agreements.
(c) Mr. Devine holds 65,452 shares directly and has the right to acquire an
additional 9,000 shares within the next 60 days pursuant to option agreements.
(d) Mr. Plank holds 2,000 shares directly and has the right to acquire
22,000 additional shares within the next 60 days pursuant to option agreements.
(e) Mr. Stern holds 10,000 shares directly and has the right to acquire
31,666 additional shares within the next 60 days pursuant to option agreements.
(f) Mr. Van Dyke holds 8,031 shares directly and has the right to acquire
an additional 6,666 shares within the next 60 days pursuant to option
agreements. Mr. Van Dyke is the President and Chief Executive Officer of Bay
Harbour. Bay Harbour manages investment funds which own 499,147 shares and have
the right to acquire 555,555 within the next 60 days from the conversion of
debentures.
CHANGES IN CONTROL
To the best of the Company's knowledge, there are no arrangements which
may result in a change of control.
<PAGE>
Item 12. Certain Relationships and Related Transactions.
On December 22, 1997, the Company issued $5,000,000 of Convertible
Debentures to investment funds managed by Tower Investment Group, Inc., now
known as Bay Harbour Management, L.C. ("Bay Harbour"). Bay Harbour manages
investment funds which, at that time, owned 262,000 (13.8%) of the outstanding
common shares of the Company. Bay Harbour presently owns 449,147 (23.1%) common
shares. Mr. Van Dyke, a director of the Company is the Chief Executive Officer
of Bay Harbour.
The related debenture notes bear interest at 8%, payable quarterly in
arrears, and are due December 22, 2002. The debentures are convertible into
common shares of the Company at any time at $9.00 per share. If all such
debentures were converted, an additional 555,555 shares of Common Stock would be
issued.
In connection with the Lodge Keeper acquisition, the Company assumed a
lease for office space in Prospect, Ohio. The lease requires annual rent
payments of approximately $50,000 through 2001. Members of the immediate family
of Mr. Devine, an executive officer and director of the Company, own 50% of the
lessor.
Also in connection with the Lodge Keeper acquisition, Mr. Devine executed a
$250,000 note payable to the Company for certain inventory and equipment which
did not relate to Lodge Keeper's primary business. The note bears interest at
10% and is due in monthly installments of $5,312 until June 2002.
During 1998, Mumford Company, Inc. earned aggregate brokerage commissions
of $142,313 relating to the Company's sale of seven leasehold interests in hotel
properties. Mr. Mumford, a director of the Company, is the President of Mumford
Company, Inc. Mr. Mumford was not a director of the Company at the time the sale
transactions occurred.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) INDEX TO EXHIBITS
-----------------
Exhibit Description
------- -----------
2.1 Closing Agreement dated May 15, 1995 between Heritage Inn
Associates, Ltd. and BLM EB, Inc. (Incorporated by reference to
Exhibit (2) to the Registrant's Current Report on Form 8-K filed
May 25, 1995.)
2.2 Agreement for Purchase and Sale of Hotel between Buckhead and ALH
Properties No. One, Inc. (Incorporated by reference to Exhibit
(2)(a) to the Registrant's Current Report on Form 8-K filed
December 20, 1995.)
2.3 Agreement for Purchase and Sale of Hotel between Buckhead and ALH
Properties No. Two, Inc. (Incorporated by reference to Exhibit
(2)(b) to the Registrant's Current Report on Form 8-K filed
December 20, 1995.)
2.4 Stock Purchase Agreement dated as of March 7, 1997 among the
Registrant, The Lodge Keeper Group, Inc. ("Lodge Keeper") and the
Stockholders of Lodge Keeper. (Incorporated by reference to
Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1997.)
2.5 Agreement of Merger dated as of March 11, 1997 among the
Registrant, BLM-RH, Inc., Hatfield Inns, LLC, Guy Hatfield
Dorothy Hatfield, and Hatfield Inns Advisors, LLC. (Incorporated
by reference to Appendix B to the Registrant's Definitive Proxy
Statement filed with the Securities and Exchange Commission on
June 9, 1997.)
2.6 Second Amendment to Agreement of Merger, dated as of September
17, 1997 among the Company, BLM-RH, Inc., Hatfield Inns, LLC, Guy
Hatfield, Dorothy Hatfield, and Hatfield Inn Advisors, LLC.
(Incorporated by reference to Exhibit 2.1.1 to the Registrant's
Current Report on Form 8-K filed October 8, 1997.)
3.1 Articles of Incorporation. (Incorporated by reference to Exhibit
2.1 to the Registrant's Registration Statement on Form 10-SB (No.
0-22132) which became effective on November 22, 1993.)
3.2 Certificate of Amendment of Certificate of Incorporation.
(Incorporated by reference to Exhibit 3(i)(a) to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1994.)
3.4 Certificate of Amendment of Certificate of Incorporation
(Incorporated by reference to Appendix "A" to the Registrant's
Definitive Proxy Statement filed with the Securities and Exchange
Commission on June 9, 1997.)
3.5 Certificate of Designation, Preference and Rights of Series A
Preferred Stock of the Registrant. (Incorporated by reference to
Exhibit 3.1(c) to the Registrant's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1997.)
3.6 Certificate of Amendment of Certificate of Incorporation
(Incorporated by reference to Appendix "A" to the Registrant's
Definitive Proxy Statement filed with the Securities and Exchange
Commission on May 5, 1998.)
3.7 By-Laws - Amended and Restated as of June 27, 1994. (Incorporated
by reference to Exhibit 3(ii) to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1994.)
4.1 Mortgage Note Payable dated as of November 7. 1996 made by
Heritage Inn Associates, LP as maker, to Bloomfield Acceptance
Company, LLC. (Incorporated by reference to Exhibit 4(ii) to the
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996.)
4.2 Certificate of Designation, Preference and Rights of Series A
Preferred Stock of the Registrant. (Incorporated by reference to
Exhibit 3.1(c) to the Registrant's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1997.)
4.3 Form of Stock Certificate (Incorporated by reference to Exhibit
4.3 to the Registrant's Registration Statement on Form S-8 (No.
333-58375) filed on July 2, 1998.
10.1 Employment Agreement dated as of June 30, 1993 between the
Company and Douglas C. Collins. (Incorporated by reference to
Exhibit 6.2 to the Registrant's Registration Statement on Form
10-SB (No.022132) which became effective on November 22, 1993.)
<PAGE>
10.2 Amendment to Douglas C. Collins Employment Agreement.
(Incorporated by reference to Exhibit (ii)(b) to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995.)
10.3 Employment Agreement dated as of June 30, 1993 between the
Company and Robert B. Lee. (Incorporated by reference to Exhibit
10(ii)(c) to the Registrant's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1995.)
10.4 Amendment to Robert B. Lee Employment Agreement. (Incorporated by
reference to Exhibit 10(ii)(d) to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995.)
10.5 Employment Agreement dated as of April 29, 1996 between the
Company and Gregory C. Plank. (Incorporated by reference to
Exhibit 10(ii)(e) to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996.)
10.6 1995 Stock Option Plan. (Incorporated by reference to Appendix
A to the Registrant's Definitive Proxy Statement dated April 25,
1995.)
10.7 1997 Employee Stock Option Plan (Incorporated by reference to
Annex 1 to the Registrant's Definitive Proxy Statement filed with
the Securities and Exchange Commission on June 9,1997.)
10.8 Form of Amended and Restated Debenture (Incorporated by reference
to Exhibit II to the Schedule 13D of Bay Harbour, Tower and
Steven Van Dyke filed December 31, 1997 (File No. 005-47807)).
10.9 Debentures Purchase Agreement dated as of December 2, 1997
between the Company and Bay Harbour for its managed accounts.
(Incorporated by reference to Exhibit 10.2 to the Registrant's
Current Report on Form 8-K filed January 9, 1998.)
10.10 1998 Employee Stock Option Plan (Incorporated by reference to
Annex 1 to the Registrant's Definitive Proxy Statement filed with
the Securities and Exchange Commission on May 5, 1998.)
21* Subsidiaries of the Company
23* Accountants' Consent
27* Financial Data Schedule (Electronic filing only)
--------------------------
* Filed herewith.
(b) REPORTS ON FORM 8-K.
The Company has not filed any reports on Form 8-K during the last
quarter of the period covered by this report.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<CAPTION>
(Registrant) BUCKHEAD AMERICA CORPORATION
<S> <C> <C>
By: (Signature and Title): /s/ Douglas C. Collins /s/ Robert B. Lee
-------------------------------------------------------
Douglas C. Collins Robert B. Lee
President & Senior Vice President & Chief
Chief Executive Officer Financial & Accounting Officer
Date: March 29 , 1999 March 29 , 1999
--------------- ---------------
</TABLE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: (Signature and Title) Date
/s/ Douglas C. Collins March 29 , 1999
- - - ------------------------- ------------------
Douglas C. Collins
Director
/s/ Robert B. Lee March 29 , 1999
- - - ------------------------- ------------------
Robert B. Lee
Director
/s/ Ronald L. Devine March 29 , 1999
- - - ------------------------- ------------------
Ronald L. Devine
Director
/s/ William K. Stern March 29 , 1999
- - - ------------------------- -------------------
William K. Stern
Director
March 29 , 1999
- - - ------------------------- -------------------
Steven A. Van Dyke
Director
/s/ David C. Glickman March 29 , 1999
- - - ------------------------- -------------------
David C. Glickman
Director
/s/ David B. Mumford March 29 , 1999
- - - ------------------------- -------------------
David B. Mumford
Director
Exhibit 21 to Buckhead America Corporation
December 31, 1998 Form 10-KSB
BUCKHEAD AMERICA CORPORATION
(A Delaware Corporation)
SUBSIDIARY COMPANIES
As of December 31, 1998
Delaware Corporations
---------------------
BLM Virginia, Inc.
BLM Prime, Inc.
CHI - Sandy Springs, Inc.
BAC Hotel Management, Inc.
BLM EB Orlando, Inc.
BLM EB, Inc.
CHI Dixie, Inc.
BLM EB Daytona, Inc.
BLM-F, Inc.
BLM-RH, Inc.
BLM-RF, Inc.
BAC Franchising Inc.
Texas Corportion
----------------
Country Hearth Inns/Texas, Inc.
Georgia Corporation
-------------------
Country Hearth Inns - Dalton, Inc.
Ohio Corporations
-----------------
The Lodge Keeper Group, Inc.
Integrated Motel Management Group of Ohio, Inc.
HOMANCO, Inc.
LKG Development I, Inc.
ACCOUNTANTS' CONSENT
The Board of Directors
Buckhead America Corporation:
We consent to incorporation by reference in the Registration Statements (Nos.
333-05313 and 333-37691) on Form S-3 and in the Registration Statements (Nos.
33-97046, 333-33097 and 333-58375) on Form S-8 of Buckhead America Corporation
of our report dated March 5, 1999, relating to the consolidated balance sheets
of Buckhead America Corporation and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and comprehensive income, and cash flows for the years then ended, which report
appears in the December 31, 1998 annual report on Form 10-KSB of Buckhead
America Corporation.
/s/ KPMG LLP
Atlanta, Georgia
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BUCKHEAD AMERICA CORPORATION FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,604
<SECURITIES> 120
<RECEIVABLES> 3,440
<ALLOWANCES> 376
<INVENTORY> 0
<CURRENT-ASSETS> 4,323
<PP&E> 46,370
<DEPRECIATION> 4,064
<TOTAL-ASSETS> 59,541
<CURRENT-LIABILITIES> 4,870
<BONDS> 34,608
<COMMON> 20
0
3,000
<OTHER-SE> 17,472
<TOTAL-LIABILITY-AND-EQUITY> 59,541
<SALES> 25,720
<TOTAL-REVENUES> 28,795
<CGS> 20,421
<TOTAL-COSTS> 22,194
<OTHER-EXPENSES> 3,284
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,982
<INCOME-PRETAX> 334
<INCOME-TAX> (901)
<INCOME-CONTINUING> 1,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,235
<EPS-PRIMARY> .48
<EPS-DILUTED> .47
</TABLE>
