U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22132
BUCKHEAD AMERICA CORPORATION
(Exact name of small business issuer as
specified in its charter)
DELAWARE 58-2023732
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
4243 DUNWOODY CLUB DRIVE, SUITE 200,
ATLANTA, GEORGIA 30350 (Address of
principal executive offices)
(770) 393-2662
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
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
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: October 31, 1998
Common stock, par value $.01 - 1,943,935 shares outstanding
Transitional Small Business Disclosure Format (Check one):
Yes No X
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Financial Statements
September 30, 1998 and 1997
(Unaudited)
2
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
September 30, 1998
(Unaudited)
Assets
Current assets:
Cash and cash equivalents, including
restricted cash of $722,954 $ 3,204,016
Investment securities 83,162
Accounts receivable 1,711,751
Current portions of notes receivable 363,765
Other current assets 470,712
-----------
Total current assets 5,833,406
Noncurrent portions of notes receivable 1,760,825
Property and equipment, at cost, net of
accumulated depreciation 41,335,244
Deferred tax assets 2,940,000
Deferred costs, net 2,073,731
Leasehold interests, net 3,657,110
Other assets 1,461,702
----------
$ 59,062,018
==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 4,149,607
Current portions of notes payable 1,241,020
----------
Total current liabilities 5,390,627
Noncurrent portions of notes payable 33,286,050
Other liabilities 291,179
Total liabilities 38,967,856
Minority interest in partnership 650,587
Shareholders' equity:
Series A preferred stock; par value $100;
200,000 shares authorized; 30,000 shares
issued and outstanding 3,000,000
Common stock; $.01 par value; 5,000,000
shares authorized; 2,003,277 shares issued
and 1,943,935 shares outstanding 20,033
Additional paid-in capital 7,362,487
Retained earnings 9,695,650
Accumulated other comprehensive income (loss) (163,576)
Treasury stock (59,342 shares) (471,019)
----------
Total shareholders' equity 19,443,575
$ 59,062,018
==========
See accompanying notes to condensed consolidated financial statements.
3
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Income(Loss)
Nine Months ended September 30, 1998 and 1997
(Unaudited)
1998 1997
----------- ---------
Revenues:
Hotel revenues $19,846,707 10,796,669
Interest and investment income 110,551 762,108
Other income 1,566,178 1,786,511
---------- ----------
Total revenues 21,523,436 13,345,288
---------- ----------
Expenses:
Hotel operations 14,736,732 7,847,418
Other operating and administrative 3,168,483 2,410,298
Depreciation and amortization 1,325,622 801,081
Interest 2,175,301 1,050,314
---------- ----------
Total expenses 21,406,138 12,109,111
---------- ----------
Income before income taxes 117,298 1,236,177
Deferred income tax benefit (10,000) -
---------- ----------
Net income $ 127,298 1,236,177
========== ==========
Net income(loss) per common share:
Basic $ (0.05) 0.67
====== ====
Diluted $ (0.05) 0.64
====== ====
See accompanying notes to condensed consolidated financial statements.
4
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
Three Months ended September 30, 1998 and 1997
(Unaudited)
1998 1997
----------- ---------
Revenues:
Hotel revenues $7,799,274 5,081,763
Interest and investment income (loss) (44,828) 85,304
Other income 860,366 311,880
--------- ---------
Total revenues 8,614,812 5,478,947
--------- ---------
Expenses:
Hotel operations 5,751,095 3,583,952
Other operating and administrative 1,111,093 1,013,498
Depreciation and amortization 453,197 342,537
Interest 760,909 436,772
--------- ---------
Total expenses 8,076,294 5,376,759
--------- ---------
Income before income taxes 538,518 102,188
Deferred income tax expense 140,000 -
--------- ---------
Net income $ 398,518 102,188
========= =========
Net income per common share:
Basic $ 0.17 0.04
==== ====
Diluted $ 0.16 0.04
==== ====
See accompanying notes to condensed consolidated financial statements.
5
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
1998 1997
----------- -----------
Cash flows from operating activities:
Net income $ 127,298 1,236,177
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 1,325,622 801,081
Sales (purchases) of trading
securities, net 2,998,950 1,331,269
Gain on note sale - (800,000)
Other, net 394,515 (1,605,064)
---------- ----------
Net cash provided (used) by
operating activities 4,846,385 963,463
---------- ----------
Cash flows from investing activities:
Note receivable principal receipts 598,958 934,137
Originations of notes receivable (1,628,721) (320,000)
Capital expenditures (4,116,041) (887,416)
Other, net (1,218,971) (161,759)
----------- ----------
Net cash provided (used) by
investing activities (6,364,775) (435,038)
----------- ----------
Cash flows from financing activities:
Repayments of notes payable (620,232) (586,941)
Additional borrowings 2,184,872 -
Preferred stock dividends (225,000) (20,000)
Other, net 100,992 97,492
---------- ----------
Net cash provided (used) by
financing activities 1,440,632 (509,449)
---------- ----------
Net increase (decrease) in cash and
cash equivalents (77,758 ) 18,976
Cash and cash equivalents at beginning
of period 3,281,774 1,801,670
---------- ----------
Cash and cash equivalents at end of period $ 3,204,016 1,820,646
========== ==========
(Continued)
See accompanying notes to condensed consolidated financial statements.
6
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows - Continued
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
Supplemental disclosures of noncash investing and financing activities:
In May 1998, the Company recorded the following partial cash activity
relating to an acquired 121-room hotel in Norcross, Georgia:
Costs:
Cash and payables $ 223,101
Debt assumed 3,818,798
---------
Property and equipment acquired $ 4,041,899
=========
In June 1998, the Company recorded the following partial cash activity
relating to the acquisition of leasehold interests in seven hotels owned by
Host Funding, Inc.:
Costs:
Cash and payables $ 516,635
Common stock issued 400,000
-------
Leasehold interests acquired $ 916,635
=======
In August and September 1998, the Company recorded the following partial
cash activity relating to the refinancing of four owned hotels:
New mortgage notes issued $ 4,885,000
Discharge of old mortgage notes (4,323,476)
Debt issuance costs (187,084)
Net proceeds $ 374,440
=========
(Continued)
See accompanying notes to condensed consolidated financial statements.
7
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows - Continued
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
In May 1997, the Company recorded the following partial cash activity
relating to the acquisition of The Lodge Keeper Group, Inc.:
Costs:
Cash $ 825,000
Common stock issued, net
of treasury stock acquired 658,580
Debt 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
In September 1997, the Company recorded the following partial cash activity
relating to the acquisition of Hatfield Inns, LLC:
Costs:
Cash and payables $ 1,464,293
Preferred stock issued, net
of issuance costs 2,887,194
Debt assumed or placed 6,547,911
$ 10,899,398
Allocated to:
Property and equipment $ 10,740,632
Other assets 158,766
----------
$ 10,899,398
See accompanying notes to condensed consolidated financial statements.
8
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1998 and 1997
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. The results of operations for interim
periods are not necessarily indicative of the results that may be
expected for a full year or any other interim period. For further
information, see the consolidated financial statements included in the
Company's Form 10-KSB for the year ended December 31, 1997.
(2) Statement of Financial Accounting Standards No. 130,
REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
REPORTING COMPREHENSIVE INCOME. This statement establishes standards
for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. The term
"comprehensive income" is used in SFAS No. 130 to describe the total
of all components of comprehensive income including net income. "Other
comprehensive income" refers to revenues, expenses, gains, and losses
that are included in comprehensive income but excluded from earnings
under current accounting standards. Currently, "other comprehensive
income" for the Company consists solely of items recorded as a
component of shareholders' equity under SFAS No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES.
Total comprehensive income(loss)for the nine months ended September
30, 1998 and 1997 was $(36,278) and $781,049, respectively, and for
the three months ended September 30, 1998 and 1997 was $234,942 and
$102,188, respectively.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION.
First Nine Months of 1997
The Company completed the renovations of the Atlanta, Georgia Country Hearth Inn
in January 1997. The Company completed the renovations of the Dalton, Georgia
Country Hearth Inn in February 1997 and also completed certain enhancements to
the Orlando, Florida Country Hearth Inn which were required under its debt
obligation. Capital expenditures on these three hotels during the first half of
1997 aggregated approximately $608,000 and were funded from available cash and
restricted funds.
The Company received $800,000 cash from the sale of a mortgage note in February
1997. The Company also received approximately $1.6 million cash from its
investment in Industrial Revenue Bonds which were called in February 1997.
In February 1997, the Company sold two wholly owned subsidiaries which held the
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.
On May 8, 1997, the Company completed its acquisition of The Lodge Keeper Group,
Inc. of Prospect, Ohio ("Lodge Keeper"). 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. Lodge Keeper operated 18 hotels under long-term leases, held
management contracts on six Country Hearth Inn hotels and owned one independent
hotel, among other assets.
Approximately $4.5 million of the purchase price was allocated to property and
equipment and approximately $2.9 million to leasehold interests. The Company
also assumed a working capital deficit of approximately $1.3 million.
Lodge Keeper continued to manage the 24 hotels it previously managed in addition
to managing the five properties previously managed by the Company. Lodge Keeper
also manages all the properties subsequently acquired by the Company.
At its June 26, 1997 annual meeting of shareholders, the Company received
authorization to issue up to 200,000 shares of preferred stock. The Company
issued $3 million of such preferred stock in connection with the Hatfield Inn,
LLC ("Hatfield") acquisition which was completed in September 1997. The
acquisition was deemed effective on September 1, 1997. 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, and
10
the assumption or placement of approximately $6.5 million of debt. The preferred
stock is a 10% cumulative instrument convertible to common stock seven years
after issuance at the then current market value of the common shares. The new
debt had a weighted average interest rate of approximately 9.4%. Hatfield owned
eight 40 unit hotel properties located in Kentucky and Missouri. The Company
converted all eight properties into Country Hearth Inns and has used the
Hatfield plans and design rights which were also acquired to develop and
construct additional properties.
Also in September 1997, the Company financed approximately $260 thousand of its
Dalton Hotel renovation costs by placing a second mortgage on the property with
the same local bank that holds the first mortgage.
The Company received approximately $100 thousand of additional capital as a
result of the exercises of stock options by a former director and a former
employee.
First Nine Months of 1998
The conversion of the Hatfield properties to Country Hearth Inns was completed
in 1997 and the Company began 1998 with 16 hotel properties owned, 36 properties
managed, and 29 Country Hearth Inn franchise properties open and operating.
Since the beginning of the year, seven additional Country Hearth Inn franchise
properties have opened and an additional 21 are presently under development.
The above described properties include the construction of Company owned Country
Hearth Inns in Nicholasville, Kentucky which opened in September and Eddyvlle,
Kentucky which is expected to open in March 1999. The Company has also entered
into agreements to lease three newly constructed Country Hearth Inns in Georgia.
The first of such properties in Barnesville is expected to open in December 1998
and construction has begun on the second in Cedartown.
Also included is the renovation and conversion of two Lodge Keeper Ohio
properties to Country Hearth Inns. The renovation of the 88-room hotel in
Amherst has already been completed and the renovation and conversion of the
67-room Port Clinton hotel is expected to be completed in the fourth quarter of
1998.
Capital expenditures in the first nine months of 1998 amounted to approximately
$4.1 million. Construction and other loan commitments provided approximately
$2.2 million of these funds. The remainder was provided by a portion of the
proceeds from the Company's December 1997 sale of convertible debentures.
In May 1998, the Company acquired a 121-room hotel in Norcross, Georgia (the
"Norcross Hotel") for approximately $4 million, most of which being financed by
the assumption of a $3.8 million first mortgage loan.
In June 1998, the Company entered into lease agreements for the operation
and management of seven hotels owned by Host Funding, Inc.("Host"). The
11
leased properties are operated as "Sleep Inns" and "Super 8" hotels; are located
in Florida, Illinois, Missouri, Kentucky, and Mississippi; and aggregate 450
rooms. For the leasehold interests, the Company paid Host approximately $900,000
(consisting of 53,647 shares of the Company's $0.01 par value common stock and
the remainder in cash). Additionally, the Company purchased 62,212 shares of
Host common stock by executing notes aggregating $288,000 which are due in June
1999. Such Host shares represent security deposits against future rent
obligations. The Company's September 30, 1998 condensed consolidated balance
sheet reflects an unrealized loss on the Host shares of approximately $164,000.
In August 1998, the Company refinanced three of the former Hatfield properties.
The new mortgage notes bear interest at 8.25% and are amortized over twenty
years; replacing floating rate notes which had relatively shorter maturities. In
September 1998, the Company refinanced its Daytona hotel property. The new
mortgage note bears interest at 8.5% and is amortized over twenty years;
replacing a note which was to be due in April 1999. The four new notes totaled
$4,885,000 and after satisfaction of the old notes and issuance costs, the
Company netted proceeds of approximately $375,000 in addition to locking in
long-term fixed rate financing on these four properties.
RESULTS OF OPERATIONS
Periods ended September 30, 1998 and 1997
Hotel revenues amounted to $7,799,274 and $19,846,707 for the three month and
nine month periods ended September 30, 1998, respectively, as opposed to
$5,081,763 and $10,796,669 during the same periods in 1997. Hotel operating
profits for the 1998 three and nine month periods amounted to $2,048,179 and
$5,109,975, respectively, versus $1,497,811 and $2,949,251 in 1997. Such changes
are primarily attributable to the acquisition of Lodge Keeper in May 1997, the
Hatfield acquisition in September 1997, the acquisition of the Norcross Hotel in
May 1998, and the Host leases in June 1998.
In the third quarter of 1998, hotel revenues and operating profits were
generally below management's expectations. A variety of factors contributed to
revenue declines at several of the Company's owned and leased properties.
Hurricane Georges caused a significant loss of business at three gulf coast
properties. The postponement of the Daytona NASCAR event auto race caused a
significant loss of business at the Company's Daytona hotel. Lower convention
related demand caused a slight decline in revenues at the Company's Orlando
hotel property. Management has noted a softening in business travel demand which
has negatively impacted several properties; most significantly, some of the
Company's older leased properties in the Midwest which faced new competition.
The Company's newer small market 40-room Country Hearth Inns (the "Rural Gold"
properties) have continued to perform favorably and experienced revenue and
operating profit increases versus last year. Extensive marketing efforts have
also resulted in revenue increases at the Company's Atlanta and Dalton, Georgia
Country Hearth Inns. Management is focusing future growth plans on the Rural
Gold type properties. Weaker performing older leased properties
12
are being sold. Four such sales have occurred in 1998 resulting in net gains of
approximately $830,000. Additional leasehold interest sales are anticipated.
The properties presently owned by the Company are subject to a significant
amount of seasonal fluctuation. Fourth quarter results are generally not as
favorable as in the third quarter, especially in the Company's older leased
properties. On an annual basis, all properties are expected to satisfy their
debt and other cash obligations in addition to providing the Company with
management and/or franchise fees.
Note receivable interest income continued to decline as a result of decreases in
the note receivable portfolio. The first quarter of 1997 included investment
income of approximately $450,000 as a result of the Industrial Revenue Bonds
which were called. The third quarter of 1998 included unrealized losses of
approximately $108,000 relating to the decline in value of its equity
investments in hospitality related companies.
Other income in the first quarter 1997 included the $800,000 note sale gain
previously discussed. Other income in the third quarters of 1998 and 1997
includes Country Hearth Inn franchise fees of approximately $161,767 and
$156,533, respectively, excluding fees from Company owned properties which are
eliminated in consolidation. Management expects franchise fee income to increase
as more franchised properties are opened. Other income in the first nine months
of 1998 and 1997 also includes approximately $50,000 and $300,000, respectively,
relating to favorable settlements of "Old Buckhead" claims. Further such gains
are not expected.
Other operating and administrative expenses in the third quarter of 1998
increased $97,595 (9.6%) versus the same period in 1997 and were in line with
management's expectations for such costs.
Property related depreciation and interest expense in 1998 increased
proportionately to the revenue increases associated with the Hatfield, Lodge
Keeper, and Norcross Hotel acquisitions. The Company also recognized $300,000 of
interest expense on its convertible debentures issued in December 1997.
Management believes the Company has adequate resources for the completion of its
present acquisition and development commitments. Management also believes the
Company has adequate liquidity for purposes of funding seasonal cash flow
shortfalls and does not anticipate the need for additional financing for
operating purposes.
The Company has made public announcements of its intention to expand the
development of its Rural Gold properties. This expansion is being effected
through franchise development agreements with third parties, partial
participations with third party developers via joint ventures and leases, and by
purely Company owned projects. The continued expansion of these properties is
contingent on the availability of construction and permanent financing, among
many other contingencies. Also, the Company and/or its business partners may
need to raise additional equity capital in order to facilitate this growth. No
assurances can be made regarding these issues.
13
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects virtually all companies and organizations.
The Company has reviewed its computer systems and has determined that most of
the systems are already Year 2000 compliant (i.e. no modifications are
necessary). Specifically, the Company's computerized accounting, payroll,
receivable, and payable systems, which constitute the vast majority of the
Company's computerized systems, do not need to be replaced or reprogrammed.
Certain non-interfaced less critical systems may require replacement or
modification. Such systems include cash registers, electronic locks, credit card
machines, and telephone systems. The Company expects to expend less than $50,000
to bring such systems into compliance and expects that such compliance will be
achieved prior to the end of the third quarter of 1999.
RISK FACTORS
This Form 10-QSB contains forward looking statements that involve risks and
uncertainties. Statements contained in this Form 10-QSB 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 and materially from the results indicated by
such forward looking statements and by past results. For a discussion of risk
factors, see the "RISK FACTOR" section contained in the Company's Registration
Statement on Form S-3 (File No. 333-37691).
14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT INDEX
Exhibit Description
3(i) Articles of Incorporation.(Incorporated by reference
to Exhibit 3(i) to the Registrant's Registration
Statement on Form 10-SB (No.0-22132) which became
effective on November
22, 1993.)
3(i)(a) 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(i)(b) 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(i)(c) 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(ii) 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(i) Certificate of Designation, Preferences and Rights of
Series A Preferred Stock of the Registrant.
(Incorporated by reference to Exhibit 3(i)(c) to the
Registrant's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1997.)
11 Statement re: Computation of per share earnings
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
The Company has not filed any reports on Form 8-K during the quarter for
which this report is filed.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Buckhead America Corporation
(Registrant)
Date: November 12, 1998 /s/Douglas C. Collins
Douglas C. Collins
President and Chief Executive Officer
Date: November 12, 1998 /s/Robert B. Lee
Robert B. Lee
Senior Vice President and
Chief Financial Officer
16