U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO 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
-----------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2023732
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7000 Central Parkway, Suite 850, Atlanta, GA 30328
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 393-2662
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Act:
Common stock, par value
$.01
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value is computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing. As of February 28, 2002: $ 932,927 .
For purposes of this response, all executive officers, directors, and
holders of greater than 10% of the outstanding common shares of the registrant
as of the specified date are considered to be affiliates.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of February 28,
2002:
Common Stock, par value $.01 - 2,015,885 shares outstanding
DOCUMENTS INCORPORATED BY REFERENCE
Information contained in registrant's definitive proxy statement relating
to the 2002 Annual Meeting of Stockholders is incorporated by reference in
response to Items 10 through 13 of Part III.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General Development of Business
Buckhead America Corporation ("Buckhead" or the "Company") and most of its
wholly-owned subsidiaries were incorporated in Delaware on December 17, 1992.
Other subsidiaries were subsequently created or purchased, generally for the
purpose of acquiring assets. Unless the context otherwise requires, references
to Buckhead or to the Company herein include the Company and its subsidiaries.
In 1994, Buckhead acquired the trademark and franchise licensing rights to
Country Hearth Inns, a modernized bed and breakfast hotel concept. From
inception through 2000, the Company's primary growth activities generally
included the acquisition and construction of hotels, entering lease agreements
relating to hotels, entering into contracts for the management of hotels for
third parties, and the marketing and selling of Country Hearth Inn franchises.
The Company's operating activities included the operation of the owned and
leased hotels, the operation of a hotel management company which managed the
owned and leased hotels as well as other hotels, and the operation of a hotel
franchising company which marketed, sold, and serviced Country Hearth Inn
franchises.
At the beginning of 2001, Buckhead owned 22 hotel properties, 21 of which
operated as Country Hearth Inns. Buckhead also leased 15 hotel properties, eight
of which operated as Country Hearth Inns. Lodge Keeper, the Company's hotel
management subsidiary, managed all but one of the owned and leased hotels. In
addition, Lodge Keeper managed 22 other hotel properties which operated under
various brand names, including seven Country Hearth Inns. A total of 58 Country
Hearth Inns were open and operating in 12 states, 29 of which were Company owned
or leased.
Of the 37 hotels owned or leased as of the beginning of the year, 17 had
been classified as held for sale. During 2001, the Company classified all of its
remaining owned hotels as held for sale and also sought to sell or terminate its
remaining leasehold interests. During 2001, the Company sold nine owned hotels
and one leasehold interest in a hotel. The Company also negotiated the
termination of seven other long-term hotel leases. Additionally, the Company
granted leasehold interests in two of its owned hotels and the related
agreements also included purchase options for the properties, one of such was
executed subsequent to year end.
As of the end of 2001, the Company owned 13 hotels, all of which were
classified as held for sale. The Company also held leasehold interests in 11
other hotels, four of which had become effective during 2001. Including the
hotel sold subject to the purchase option, three owned hotels have been sold in
the first quarter of 2002. Also subsequent to year end 2001, the Company
negotiated the termination of three additional hotel leases and continues to
pursue either the sale or termination of its remaining hotel leases.
During the fourth quarter of 2001, management adopted a plan to discontinue
its hotel management business. The Company executed contracts with an unrelated
third party for the management of its owned and leased hotels which became
effective January 1, 2002. The Company also terminated or assigned its third
party hotel management contracts effective at various dates from January 1 to
March 31, 2002. The Company's hotel management subsidiary, Lodge Keeper,
continues to perform certain accounting and cash management functions. Such
activities are anticipated to cease during the second quarter of 2002.
The Company continued to market and sell Country Hearth Inn franchises. As
of December 31, 2001, 61 Country Hearth Inns were open and operating, 21 of
which were Company owned or leased. An additional seven were under various
stages of development.
Financial Information About Segments
The information required by this caption is included in the Company's
consolidated financial statements which are included pursuant to Item 8 of this
Form 10-K and incorporated herein by reference.
2
Description of 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. Expansion of the Country Hearth Inn chain has been effected
through direct acquisition and conversion of existing hotels, new construction,
and through franchise sales. For certain further information about the Company's
hotels, see "ITEM 2. DESCRIPTION OF PROPERTY."
Segments. The Company conducted recurring operations in three segments of
the limited-service hotel industry - hotel franchising, hotel management, and
hotel operations. The company generated additional revenues and results of
operations from hotel development activities. During the fourth quarter of 2001,
management adopted a plan to discontinue its hotel management segment. It is
anticipated that all activities relating to the hotel management segment will
cease by the end of the second quarter of 2002.
Hotel franchising involves the selling and servicing of rights and licenses
comprising the Country Hearth Inn lodging system. Revenues include initial fees
and continuing royalty, marketing and reservation fees from Company owned and
leased hotels and from unaffiliated customers. Continuing fees are based on each
franchised hotel's room revenues.
Hotel management involved the oversight of day-to-day hotel operations and
accounting for limited-service and some full-service hotels. Revenues include
continuing fees from Company owned and leased hotels and from unaffiliated
customers. Continuing fees are based on each managed hotel's revenues.
Hotel operations involves the operations of Company owned and leased
hotels. Revenues are generated from unaffiliated hotel guests. Hotel operations
also includes the Company's share (equity method) of unconsolidated entities
which also operate hotels and the minority interests share of consolidated
partnerships' results which are included in hotel operations.
Hotel development involves the development and construction or purchase of
existing hotel properties and subsequent sale thereof along with related
activities such as servicing notes receivable generated from sales. Corporate
activities are generally administrative and also include all interest income and
expense which does not specifically relate to other segment operations.
Franchise and management fees are charged to Company owned and leased
hotels at the same rates as charged to unaffiliated customers.
Brands. The Company's owned and leased properties as of December 31, 2001
operate under the brand names of Country Hearth Inn (21), Sleep Inn (1), and
unbranded (2).
Competition. There is significant competition in every phase of the
hospitality industry including development/ownership and franchising. There are
many hotel companies in the United States, and many of them are significantly
larger than the Company.
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 small player in the hotel industry. It believes
that its management is experienced in hotel development and hotel franchising.
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 operates will present significant
competition which may have an adverse effect on the Company.
3
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.
Seasonality. Due to the typical travel trends of hotel guests in most of
the geographic areas in which the Company operates, limited service hotel
operations tend to be highly seasonal. Historically, results in the second and
third calendar quarters are stronger than in the first and fourth quarters. This
seasonality impacts all of the Company's operating segments since the revenues
of all segments are dependent on hotel guest revenue.
Economy. As is true in most industries, general economic conditions impact
operating results and strategic opportunities. Economic conditions during 2001
were generally not favorable for the hotel industry. Many authoritative bodies
reported the occurrence of a mild recession. Additionally, after September 11,
significant declines in travel were experienced which not only negatively
impacted the results from hotel operations, but also negatively impacted the
Company's hotel sales program.
Research and Development. During 2001, 2000, and 1999 the Company invested
approximately $30,000, $38,000, and $28,000, 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, 2002, the Company had 60 employees in the
aggregate, including 6 full-time corporate employees, 4 full-time hotel
franchising employees, 12 full-time and 1 part-time hotel management employees,
and 13 full-time and 24 part-time hotel operations employees.
Financial Information About Geographic Areas
All of the Company's operations are conducted in the United States.
4
Risk Factors
This Form 10-K contains forward looking statements that involve risks and
uncertainties. Statements contained in this Form 10-K 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 under insured 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 hotel management business, and the risks involved in hotel renovation and
construction, and the uncertainty of obtaining additional financing or
extensions of existing credit facilities as needed. 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). Also see "Liquidity and
Capital Resources" section of "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." and "Item 7A. Quantitative and
Qualitative Disclosures About Market Risk."
ITEM 2. DESCRIPTION OF PROPERTY.
Corporate Offices
The Company's corporate headquarters are located at 7000 Central Parkway,
Suite 850, Atlanta, Georgia. The Company leases approximately 4,900 square feet
as its corporate headquarters. The lease term extends through December 2002 at
an annual rate of approximately $96,600. Franchising and hotel management
operations are also conducted at this location. The Company believes its
headquarters are adequate for its current needs.
Hotel 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 2006 at
an annual rate of approximately $60,000. The Company believes that these offices
are adequate for its current needs. The Company is presently conducting
negotiations for the termination of the Lodge Keeper lease as a result of the
plan to discontinue its hotel management operations, see "ITEM 1. DESCRIPTION OF
BUSINESS."
5
Owned and Leased Real Properties
Land. As of February 28, 2002, the Company owned three parcels of
undeveloped and unencumbered land, with an aggregate book value of $115,501. All
of such parcels are held for sale.
Owned and Leased Hotel Properties. The following table sets forth certain
2001 information for each of the Company's hotels which were owned or leased as
of December 31, 2001:
Revenue
Average Average per
No. of Year Year Occupancy Daily Available Total
Properties Rooms Built Acquired Rate Rate Room Revenue(a)
---------------------------------------------------------------------------------------------------------------------------
Country Hearth Inn
Norcross, GA 121 1985 1998 35.3% $41.10 $14.51 $ 672,526
Country Hearth Inn
Mason, OH 93 1997 1999 41.9% $62.93 $26.37 $ 931,752
Two Country Hearth Inns 1987-
and Suites in MI & OH 82 1988 2000 49.2% $62.15 $30.58 $ 941,736
Eight Owned Country Hearth 1993- 1997-
Inns in IN, KY, MO, & OH 319 2000 2000 51.4% $51.30 $26.37 $3,060,825
Six Leased Country Hearth 1999- 1999-
Inns in GA & TN 240 2001 2001 43.5% $47.13 $20.50 $1,398,637
Two Leased Properties 1994-
in FL & MS 158 1995 1998 47.4% $47.54 $22.53 $1,346,533
Other Leased Properties 1970-
Three in OH 213 1973 1997 45.3% $50.26 $22.78 $1,845,326
Northwest Inn 1964-
St. Louis, MO 186 1968 1997 95.6% $22.41 $21.42 $1,546,212
Other (b) $5,773,690
---------------------------------------------------------------------------------------------------------------------------
Total $17,517,237
---------------------------------------------------------------------------------------------------------------------------
(a) Total revenue represents revenues earned during ownership period.
(b) Represents revenues earned in 2001 from properties prior to their sale
or lease expiration.
6
Norcross, GA Country Hearth Inn. This 121-room hotel was acquired in 1998
and was converted to operate as a Country Hearth Inn in 1999. The hotel secures
a mortgage note with a December 31, 2001 balance of $3,591,794. This property is
held for sale and is presently listed with a broker.
Mason, OH Country Hearth Inn. This 93-room Country Hearth Inn was
constructed in 1996 and 1997 and opened in June 1997. The Company's investment
in the partnership which owned the hotel increased from 27.5% to 44.5% in May
1997 in connection with the Lodge Keeper acquisition. The property was subject
to a first mortgage loan with a December 31, 2001 balance of $2,388,060. The
partnership also had notes payable to certain partners including $220,038 to the
Company and $247,244 to a minority partner as of December 31, 2001. The property
was sold in March 2002.
Two Country Hearth Inns and Suites . In August 2000, the Company acquired a
40-unit all suites property in Grand Rapids, Michigan and a 42-unit all suites
property in Dublin, Ohio. Both properties were immediately converted to operate
under the Country Hearth Inn franchise system. The Dublin property is owned by a
limited partnership in which the Company holds an approximate 74% interest and
the hotel secures a mortgage note with a December 31, 2001 balance of
$1,375,533. The Grand Rapids property is owned by an LLC in which the Company
holds a 20% interest and the hotel secures a mortgage note with a December 31,
2001 balance of $1,376,846. The Company leases (triple-net basis) the property
from the LLC for net rent of approximately $200,000 per year. The Dublin
property is presently under contract for sale and the Company is conducting
negotiations for the lease termination and sale of the Grand Rapids property. No
assurance can be given that any of these anticipated transactions will close.
Eight Owned Country Hearth Inns. In September 1997, the Company acquired
eight 40-room hotel properties located primarily in smaller communities of
Kentucky (5) and Missouri (3). All eight were converted to operate as Country
Hearth Inns. From 1998 through 2000 the Company constructed five additional
properties of similar design in Kentucky (2), Ohio (2), and Indiana (1).
Generally, these properties are interior corridor 40-room facilities located in
smaller communities and enjoy limited competition. During 2001, five of these
properties were sold. The remaining eight properties are held for sale and
secure first and second mortgage notes payable with December 31, 2001 balances
aggregating $6,905,802. The Company granted leasehold interests in two of the
properties and the related agreements also included purchase options for the
properties, one of which was executed in March 2002.
Six Leased Country Hearth Inns. The Company had entered into several long
term triple-net lease agreements relating to 40-room properties to be
constructed in smaller communities in Georgia and Tennessee, four of which
became effective during 2001. Generally, each lease had an initial term of 15
years and options for up to an additional 15 years. Each lease required annual
rent of approximately $150,000 and provided for additional percentage rent based
on hotels revenues over certain levels. During 2001, several of these leases
were terminated and of the six leases which remained as of December 31, 2001,
one was terminated in January 2002. The Company is presently conducting
negotiations for the termination of the remaining leases.
Two Leased Properties. During 1997 and 1998, the Company, in two separate
transactions, entered into long term lease agreements for eight hotel properties
owned by Host Funding, Inc. ("Host"). During 2001, the Company negotiated the
termination of six of these leases. During the first quarter of 2002, the
Company completed negotiations for the termination of the remaining two leases;
such terminations are expected to be effective March 31, 2002.
Other Leased Properties. In addition to the leased properties described
above, the Company leases three other limited-service hotels all of which are
located in Ohio. All three properties operate as Country Hearth Inns. 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 three properties aggregates $217,157 per year. Two
of these leasehold interests are presently being marketed for sale.
St. Louis Northwest Inn. The Company acquired the 186-room Northwest Inn in
St. Louis, Missouri, as part of the May 1997 Lodge Keeper acquisition. The
property secured a first mortgage loan with a December 31, 2001 balance of
$1,623,863. The property was sold in February 2002.
Renovation and environmental programs are continuously ongoing at all
Company owned and leased hotels and management believes adequate funds are
available for these purposes. In the opinion of management, the properties are
adequately covered by insurance and are suitable and adequate for their present
use.
7
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party in any pending legal proceedings other than
routine litigation that is incidental to its business and/or involves claims
which do not exceed 10% of its current assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
The Company's Common Stock trades on The Nasdaq SmallCap Market under the
symbol: BUCK. Prior to February 27, 2001, the Common Stock was traded on The
Nasdaq National Market.
The Company has received notifications from The Nasdaq Stock Market, Inc.
that its shares fail to meet certain minimum requirements for continued listing.
If the qualification requirements are not met, the shares will likely be
delisted, possibly as soon as June 4, 2002.
The following table presents the high and low sales prices for the Common
Stock for each quarter of 2000 and 2001.
($ Per Share)
----------------
High Low
Quarter ended March 31, 2000 5.94 5.12
Quarter ended June 30, 2000 5.56 4.00
Quarter ended September 30, 2000 5.37 4.12
Quarter ended December 31, 2000 5.50 3.62
Quarter ended March 31, 2001 4.19 3.12
Quarter ended June 30, 2001 3.20 1.80
Quarter ended September 30, 2001 2.06 1.00
Quarter ended December 31, 2001 2.70 0.90
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, 2002, the Company estimates that there were
approximately 800 beneficial holders of its Common Stock, including individual
participants in security position listings.
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. Pursuant to
a settlement agreement finalized in 2000, certain dividends in arrears were
forgiven and the Company agreed to exchange all of the outstanding shares of
Series A Preferred Stock for an equal number of unregistered shares of $100 par
value Series B Preferred Stock. The exchange was completed in the first quarter
of 2001. The Series B Preferred Stock is nonvoting and accrues cumulative
dividends at the rate of 9.25%. The Series B 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 B 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 9.25% per annum, to the
extent declared by the Board of Directors. All accrued but unpaid dividends of
the Series B Preferred Stock must be paid in full before any cash dividend may
be declared on the Common Stock. Further, holders of the Series B Preferred
Stock have certain preferential distribution rights in the event of any
liquidation, dissolution or winding-up of the Company. During 2001 and 2000, the
Board of Directors declared dividends of $208,125 and $231,250 respectively, on
the Preferred Stock. As of December 31, 2001, there was $95,500 of cumulative
preferred dividends in arrears.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
None.
9
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data of Buckhead America Corporation for and
as of the end of each of the years indicated in the five-year period ended
December 31, 2001 have been derived from the audited consolidated financial
statements of Buckhead America Corporation and subsidiaries, which consolidated
financial statements have been audited by KPMG LLP. The selected consolidated
financial data should be read in conjunction with the consolidated financial
statements of Buckhead America Corporation and subsidiaries, including the notes
to those consolidated financial statements, which are included elsewhere herein
and in the registrant's previously filed Form 10-K for 2000 and Form 10-KSB's
for 1999, 1998, and 1997.
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Hotel revenues 17,517,237 23,717,220 25,886,594 25,720,086 15,590,744
Total revenues 18,926,002 25,655,463 31,340,104 28,944,689 18,314,595
(Loss) income from continuing
operations before income taxes (11,748,017) (4,807,645) 2,272,049 927,893 857,488
Income tax expense (benefit) - 2,859,328 880,000 (901,000) (2,930,000)
(Loss) income from continuing
operations (11,748,017) (7,666,973) 1,392,049 1,828,893 3,787,488
Net (loss) income (14,423,423) (8,273,121) 1,668,957 1,235,495 3,173,612
Diluted (loss) income from continuing
operations per common share (5.96) (3.93) 0.52 0.70 1.87
Diluted (loss) income per
common share (7.29) (4.23) 0.61 0.47 1.56
Total assets 28,736,998 53,364,472 58,714,701 59,541,118 52,164,023
Notes payable 24,765,384 35,156,721 32,779,342 34,608,429 28,582,108
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Financial Condition and Changes in Financial Condition
For an understanding of the significant factors that influenced the
Company's performance during the past three years, the following discussion
should be read in conjunction with the consolidated financial statements and the
notes to consolidated financial statements included under Item 8 of this Form
10-K for the years ended December 31, 2001, 2000, and 1999, which are
incorporated herein by reference.
The Company's operations did not generate sufficient cash to cover its
current obligations during 2001. The Company used proceeds from sales of its
operating assets in order to remain liquid and implemented a plan to discontinue
its hotel management segment, a personnel reduction, a salary deferment program,
and other cost reduction strategies. The Company has also negotiated extensions,
and sometimes reductions, of certain of its obligations.
These activities are ongoing and management believes that the negative cash
flow from operations will be significantly reduced in 2002, but will still be
negative. Thus, the Company's program of selling assets is continuing.
Unfortunately, current economic conditions affecting the hospitality industry
are not favorable and the Company did not receive its invested values from sales
occurring in 2001 and expects similar results for sales occurring in 2002.
Accordingly, the Company recognized significant write-downs of various assets in
the fourth quarter of 2001.
Management is continuing negotiations with creditors for extensions and/or
reductions of obligations. Management believes that it is possible that current
obligations in 2002 could be met through asset sales and restructuring of
certain obligations. No assurance can be given that such activities will be
successful. See "Liquidity and Capital Resources" below for further discussion
of these matters.
During 2001, as in 1999 and 2000, payment of preferred stock dividends were
suspended for various periods of time. As of December 31, 2001, there was
$92,500 of cumulative preferred dividends in arrears. Management is currently
conducting negotiations regarding the future payment of such dividends.
As of December 31, 2000, the Company had 13 properties and four leasehold
interests classified as held for sale. During 2001, the Company continued to
market its owned and leased hotels and classified almost all of its owned and
leased hotels as held for sale. During 2001, the Company sold nine owned hotels,
sold the leasehold interest in one hotel, sold three parcels of land, and
negotiated the termination of seven long-term leases relating to hotel
properties previously operated by the Company. Additionally, the Company sold
leasehold interests in two of its owned hotel properties. The leases include
purchase options, one of which was exercised in February 2002.
In connection with the sales mentioned above, the Company incurred net
losses of $1,218,185 which were charged to previously established impairment
allowances. Also, the Company recorded a loss of $280,778 in connection with the
termination of seven long-term hotel leases. Such amount is also included in the
2001 results of operations. In connection with the 2001 sales, aggregate notes
payable were reduced by $9,586,153 and the Company generated net cash proceeds
of $3,271,909 and notes receivable of $975,000.
Additionally, during the fourth quarter of 2001, the Company incurred
losses of $1,394,921 on the sale of two of the sold hotel properties for which
no impairment allowances had previously been provided. Such amount is included
in the 2001 results of operations.
During the fourth quarter of 2001, economic conditions affecting the
hospitality industry worsened significantly. The Company evaluated the carrying
values of its 13 owned and two leased hotel properties which were classified as
held for sale as of December 31, 2001. The Company recorded additional
impairment provisions of $6,360,000 relating to these hotels in the fourth
quarter of 2001. As of December 31, 2001, aggregate impairment allowances
amounted to $7,265,344.
11
The Company remains contingently liable on three mortgage notes payable on
which the Company is guarantor relating to properties sold in 2000 and 2001. The
aggregate balance of these notes at December 31, 2001 was approximately $3.7
million and the notes are due in aggregate monthly installments of $34,318 until
2018. The Company also remains contingently liable for future minimum rental
payments totaling $1,926,825 ($610,177 in 2002, $598,511 in 2003, $360,488 in
2004, and $357,649 in later years) on sold leasehold interests and on subleased
and assigned properties and equipment in the event of default by the purchasers,
sublessees and/or assignees. The potential financial exposure for guaranteed
note obligations and contingent rents may be determined by the ability of other
hotel operators to satisfy these obligations. Their ability to satisfy such
obligations is subject to many risks, including economic conditions affecting
the hotel industry, their ability to effectively manage their hotel assets, new
competition, and other factors.
During the fourth quarter of 2001, the Company adopted a plan to
discontinue its hotel management activities. The Company terminated its
management contracts relating to hotels owned by third parties and entered into
management contracts with an unrelated company for the management of Company
owned and leased hotels. The Company continues to perform certain accounting
functions relating to these hotels and anticipates that all such activities will
be discontinued during the second quarter of 2002. Remaining assets of the
discontinued segment are not significant. Remaining liabilities of the
discontinued segment primarily consist of lease obligations and severance. The
estimated costs associated with such obligations have been accrued and are
included in the 2001 estimated loss on disposal of hotel management segment.
The same adverse economic conditions which affected the Company's 2001
hotel operations also affected other hotel owners from which the Company is owed
various accounts and notes receivable. Accordingly, during the fourth quarter of
2001, the Company recorded additional receivable allowances (bad debt expenses)
of $878,964, $400,000 of such amount related to the Company's discontinued hotel
management operations.
In April 2001, nine management contracts relating to hotels owned by
affiliates of Quality Lodging LLC were purportedly terminated by the hotel
owners. The Company is contesting the validity of such terminations and is
seeking to recover damages through arbitration and litigation. The defendants
have alleged certain counterclaims and presently the outcome of the dispute is
uncertain. Discontinued operations' loss from operations of hotel management
segment in 2001 includes charges of approximately $1.1 million relating to the
termination of these contracts.
The Company has continued its expansion of the Country Hearth Inn lodging
system. The net number of Country Hearth Inns open increased by 12 in 1999, by
nine in 2000, and by three in 2001 bringing the total number of properties open
to 61. An additional seven properties are in various stages of development; most
of which are expected to open within the next 12 to 18 months.
During 2000, the Company sold a 40-room hotel in Texas, a 50-room hotel in
Ohio, and a 180-room hotel in Florida. Net proceeds from these sales aggregated
approximately $1.1 million in cash plus a $550,000 note receivable. Also, notes
payable of approximately $3.5 million were paid-off or assumed by purchasers.
In August 2000, the Company acquired a 40-unit all suites property in Grand
Rapids, Michigan and a 42-unit all suites property in Dublin, Ohio. Both
properties were immediately converted to operate under the Country Hearth Inn
franchise system. The Dublin property is owned by a limited partnership in which
the Company holds an approximate 74% interest and the hotel secures a mortgage
note with an original balance of $1.4 million. The Grand Rapids property is
owned by an LLC in which the Company holds a 20% interest and the hotel secures
a mortgage note with an original balance of $1.4 million. The Company leases
(triple-net basis) the property from the LLC for net rent of approximately
$200,000 per year. These two properties are included in those classified as held
for sale as of December 31, 2001.
In June 2000, the Company purchased a 40-room property in Georgia which it
had previously operated under a lease agreement. The Company assumed a mortgage
note payable of approximately $1.0 million in connection therewith. This
property was one of those sold during 2001.
12
Capital expenditures during 2000, aggregated approximately $3.4 million and
mostly related to the Company's two newly constructed Country Hearth Inns in
Madison, Indiana and Urbana, Ohio. Approximately $2.3 million of such
expenditures was funded by construction loan commitments and the remainder was
funded by working capital and the Company's line of credit. The Madison and
Urbana properties are included in those classified as held for sale as of
December 31, 2001.
In June 1999, the Company completed the sale of the Country Hearth Inn
located in Orlando, Florida for $13.5 million. The Company held an approximate
59% interest in the partnership which owned the hotel in addition to holding
franchise and hotel management contracts relating to the operation of the
property. After retirement of an approximate $4.4 million first mortgage loan,
payment of certain fees, costs, bonuses, and minority interest shares, the
Company's share of net proceeds was approximately $5.5 million. After
distributions to minority interest partners of approximately $3.2 million, the
Company began soliciting for additional partnership units and the Company has
purchased an additional 15% of the partnership. The Company continued to operate
the property under an agreement with Orange County, Florida (the purchaser)
until January 2001 at which time the property was demolished to make way for
expansion of the Orange County Convention Center.
In August 1999, the Company purchased nine hotel management agreements from
the members of Quality Lodging, LLC ("Quality") for an aggregate purchase price
of approximately $900,000, including the issuance of 65,378 unregistered shares
of the Company's common stock. The Company also agreed to purchase additional
contracts from Quality when the related hotel properties were completed and
opened. During 2000, the Company purchased an additional three contracts for an
aggregate purchase price of approximately $230,000, including 19,226
unregistered shares of the Company's common stock. These are the hotel
management contracts involved in the wrongful termination litigation discussed
above.
The Company sold its leasehold interests in four hotel properties during
1999 resulting in aggregate gains of approximately $500,000. These sales
represented a continuation of the Company's previously announced desire to
divest itself of older properties.
In July 1999, the Company completed the sale of one of its three 40-room
hotel properties in Texas. A second of these properties was sold in January 2000
and the third property was sold in March 2001. Operating profit contribution
from these hotels has not been significant. Management estimated an aggregate
loss on sale of these three properties to be approximately $300,000. Such loss
was recognized in the second quarter of 1999 by the recording of a provision for
impairment.
The Company holds a 44.5% interest in a partnership which owns a 93-room
Country Hearth Inn in Mason, Ohio. Due to an increase in effective control, the
Company consolidated the partnership in its 1999 and 2000 financial statements.
As a result of the consolidation, the Company's property and equipment increased
by approximately $4 million and notes payable by approximately $3 million.
During 1999, the Company loaned the partnership approximately $240,000 which,
along with $268,000 from another partner, was used to reduce the first mortgage
obligation on the hotel. This property was sold in March 2002 at an amount which
approximated the balance of the first mortgage loan. The Company's resulting
loss is included in the 2001 impairment provision discussed above.
Capital expenditures during 1999 aggregated approximately $3 million and
mostly related to two new Company owned Country Hearth Inns in Eddyville,
Kentucky and Washington Courthouse, Ohio. Approximately $1.5 million of such
expenditures was funded by construction loan commitments and the remainder was
funded by working capital and the Company's line of credit. The Washington
Courthouse property was among those sold during 2001 and the Eddyville property
is included in those classified as held for sale as of December 31, 2001.
During the first half of 1999, the Company drew down $1 million on its bank
line of credit in order to fund working capital needs and construction
commitments. Also, the Company temporarily suspended payment of dividends on its
preferred stock.
13
The Company's balance sheet at December 31, 1999 included a deferred tax
asset of $2,788,000. 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.
As a result of significant operating losses incurred in the fourth quarter of
2000 and the necessity to recognize significant asset impairment provisions ,
management elected to establish a valuation allowance for the full amount of the
Company's deferred tax assets. This resulted in the recognition in the fourth
quarter of 2000 of a net income tax charge of approximately $2.9 million.
Liquidity and Capital Resources
Net cash used in continuing operations in 2001 was $2,226,157. Net cash
used in all operations, including discontinued operations amounted to
$2,866,323. The primary source for such cash was the sale of properties and the
termination of certain leases which in the aggregate provided funds of
$3,271,909. Overall, the Company's net cash and cash equivalents decreased in
2001 by $720,666.
The property sales and lease terminations alone are expected to decrease
negative cash flow by approximately $500,000. As certain other properties are
sold, management expects additional decreases in negative cash flow. The
Company's hotel management segment which is in the process of being
discontinued, used $640,166 of cash in 2001. After payment of approximately
$500,000 of phase-out costs, management expects negative cash flow from the
hotel management segment to be eliminated.
The Company has suspended payment of preferred stock dividends and has
negotiated deferrals of certain note payable obligations. The Company has
significantly reduced personnel and implemented a salary deferral program.
Certain other overhead costs have been reduced or eliminated. The combination of
these and the previously discussed actions are expected to reduce the Company's
negative cash flow from operations to an amount which management expects to be
funded from continued property sales.
Current portions of notes payable as of December 31, 2001 amounted to
approximately $15.2 million. Approximately $8.1 million of such amount is
expected to be repaid by 2002 property sales. As of March 29, 2002, the Company
was in default on certain of its note payable obligations. Management is
presently conducting negotiations with certain of its creditors regarding the
modification of repayment terms. If such negotiations are not successful, the
Company will most likely not be able to satisfy all its obligations as they
become due.
Management is also exploring sources of liquidity other than those
described above, including the sale or financing of some of its other assets. No
assurance can be given that any of the previously described activities will be
successful. These circumstances raise substantial doubt about the Company's
ability to continue as a going concern.
Following is the Company's material contractual cash commitments as of
December 31, 2001:
Operating
Due In: Notes Payable * Lease Payments Total
2002 $ 15,227,767 1,301,995 16,529,762
2003 762,004 1,012,598 1,774,602
2004 692,507 983,213 1,675,720
2005 468,305 925,916 1,394,221
2006 325,669 843,649 1,169,318
Thereafter 7,289,132 6,748,940 14,038,072
* Includes capital lease obligations
14
Results of Operations
The Company conducted recurring operations in three segments of the
limited-service hotel industry - hotel franchising, hotel management, and hotel
operations. The Company generates additional revenues and results of operations
from hotel development activities.
Hotel franchising involves the selling and servicing of rights and licenses
comprising the Country Hearth Inn lodging system. Revenues include initial fees
and continuing royalty, marketing and reservation fees from Company owned and
leased hotels and from unaffiliated customers. Continuing fees are based on each
franchised hotel's room revenues.
Hotel management involved the oversight of day-to-day hotel operations and
accounting for limited-service and some full-service hotels. Revenues included
continuing fees from Company owned and leased hotels and from unaffiliated
customers. Continuing fees were based on each managed hotel's revenues.
Hotel operations involves the operations of Company owned and leased
hotels. Revenues are generated from unaffiliated hotel guests. Hotel operations
also include the Company's share (equity method) of unconsolidated entities
which also operate hotels and the minority interests' share of consolidated
entities' results which are included in hotel operations.
Hotel development activities involve the development and construction or
purchase of existing hotel properties and subsequent sale thereof along with
related activities such as servicing notes receivable generated from sales.
Corporate activities are generally administrative and also include all interest
income and expense which does not specifically relate to other segment
operations.
Franchise and management fees were charged to Company owned and leased
hotels at the same rates as charged to unaffiliated customers and are eliminated
in consolidation.
During the fourth quarter of 2001, the Company adopted a plan to
discontinue its hotel management activities. The Company terminated its
management contracts relating to hotels owned by third parties and entered into
management contracts with an unrelated company for the management of Company
owned and leased hotels. The Company continues to perform certain accounting
functions relating to these hotels and anticipates that all such activities will
be discontinued during the second quarter of 2002. Remaining assets of the
discontinued segment are not significant. Remaining liabilities of the
discontinued segment primarily consist of lease obligations and severance. The
costs associated with such obligations have been estimated to be approximately
$500,000 which was accrued and included in the 2001 estimated loss on disposal
of hotel management segment. The 2001 phase-out loss also includes the write off
of approximately $180,000 of deferred costs relating to management contracts
which were terminated.
Hotel Franchising Segment
Hotel franchising revenues and income before taxes amounted to $1,975,271
and $727,016, respectively, in 2001, $1,784,142 and $424,763, respectively, in
2000, and $2,141,373 and $901,020, respectively, in 1999. The 1999 results
include termination fees of $640,895 from the Orlando hotel sale transaction.
The remaining increases in revenues and profits are attributable to the
previously discussed increases in the number of Country Hearth Inns opened in
2001, 2000, and 1999. Revenues also include fees from Company owned or leased
hotels of $739,080 in 2001, $911,572 in 2000, and $809,624 in 1999. Franchising
expenses in 2001 decreased by $111,124 from the 2000 amount partially as a
result of the Company's overall 2001 cost reduction activities. One of
management's goals continues to be the expansion of the Country Hearth Inn
chain.
15
Hotel Operations Segment
Hotel revenues amounted to $17,517,237 in 2001, $23,717,220 in 2000, and
$25,886,594 in 1999. Hotel earnings before interest, taxes, depreciation,
amortization, and rent ("EBITDAR") declined from $7,115,743 in 1999 to
$4,931,736 in 2000 and to $3,478,161 in 2001. As previously discussed, the
Company has sold numerous properties during 1999, 2000, and 2001. The decreases
specified above are mostly attributable to those transactions. Additional
factors affecting the hotel operations segment are discussed below.
Same property revenues generally declined moderately during the first three
quarters of 2001 and declined sharply in the fourth quarter. The first three
quarters' decline is generally attributable to slightly weakened demand which
resulted in lower room occupancies. Both occupancy and ADR (average daily rate)
decreased significantly in the fourth quarter as a result of extreme declines in
demand. The ADR declines have a much larger impact on profitability which is
reflected in lower profit margins in 2001. Hotel operations segment expenses
also include $130,807, $812,654, and $131,065 in 2001, 2000, and 1999,
respectively, relating to joint venture losses. Further such joint venture
losses are not expected.
Management has noted some mild upswings in demand during the first quarter
of 2002. However, because of the liquidity issues previously discussed, it is
still the Company's intention to sell its remaining hotel assets and to seek
termination of its hotel leases.
Decreases in hotel operations depreciation and interest expense are
directly related to property sales. Further decreases are expected as additional
properties have been placed for sale. Rent expense is also expected to decrease
significantly in future periods as a result of lease terminations, most of which
occurred near the end of 2001.
Development and Corporate
Development revenues in 2000 and 1999 include gains on property sales of
$608,717 and $3,587,639. The 2001 development segment includes the previously
discussed property losses of $1,675,699. All three years include impairment
provisions. Property and leasehold interests held for sale are stated at the
lower of cost or fair value less costs to sell. Fair value of property and
leasehold interests held for sale has been estimated by management based upon
current market information. At the date on which a decision is made to dispose
of a property or leasehold interest, any amount by which the carrying amount of
an asset exceeds the fair value less cost to sell is reported as a provision for
impairment. During 2001, 2000, and 1999, the Company recorded provisions for
impairment of $6,360,000, $2,050,000, and $373,529, respectively, relating to
its properties held for sale. The Company recorded an additional $250,000
provision for impairment in 2000 relating to two hotel leases because the lender
had initiated foreclosure activities against the landlord on two of the
properties.
Investment income from the Company's note receivable portfolio and
investment securities is included in development and corporate revenues. The
decline in 2001 investment income is due to the recognition of a $288,000
other-than-temporary impairment on available-for-sale securities. Similar losses
in future periods are not expected.
Development and corporate expenses in 2001 include a $428,964 bad debt
provision relating to the Company's note receivable portfolio. Other operating
and administrative expenses decreased from $1,847,550 in 2000 to $1,495,506 in
2001 primarily as a result of the Company's overall cost reduction activities.
Management expects an additional decrease in 2002.
Development and corporate interest expense relates to various notes payable
which do not relate directly to owned hotel properties. Such notes include a $5
million convertible debenture which is due in December 2002. See "Liquidity and
Capital Resources" above.
Risk Factors
This report contains forward looking statements that involve risks and
uncertainties. Statements contained in this report 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.
16
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 under insured 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,
the risks involved in hotel renovation and construction, and the uncertainty of
obtaining additional financing or extensions of existing credit facilities as
needed. 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). Also see "Liquidity and Capital Resources" above and "Item 7A.
Quantitative and Qualitative Disclosures about Market Risk."
Critical Accounting Policies
Discontinued Operations
The Company reports its results of discontinued operations in accordance
with APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. Under APB Opinion No. 30, since
the Company has determined to discontinue the management segment of its
business, the net results of operations and cash flows from the management
segment are segregated and reported separately from the results of operations
and cash flows from continuing operations. Additionally, costs associated with
the phasing out of the management segment and the expected losses to be
sustained during the phase out period have been accrued and reported as an
additional component of discontinued operations. Such accrued costs are based on
management's current best estimates and are subject to changes based on future
events.
Property, Equipment, and Leasehold Interests Held for Sale
Property, equipment, and leasehold interests held for sale are stated at
the lower of cost or fair value less costs to sell. Fair value of property and
leasehold interests held for sale has been determined by the Company based upon
current market information assuming a non-distressed sale. Future events, such
as a forced liquidation, could negatively impact such values. At the date on
which a decision is made to dispose of a property or leasehold interest, any
amount by which the carrying amount of an asset exceeds the fair value less cost
to sell is reported as a provision for impairment. Due to the intent of the
Company to dispose of such properties and leasehold interests in the short-term,
the properties, leasehold interests, and all related notes payable are initially
reflected as current in the consolidated balance sheets. Properties and
leasehold interests which have remained held for sale for more than one year and
are not under contract for sale are classified as noncurrent.
Going Concern
Management is continuing negotiations with creditors for extensions and/or
reductions of obligations. Management believes that it is possible that current
obligations in 2002 could be met through assets sales and restructuring of
certain obligations. However, no assurance can be given that such activities
will be successful. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Effect of New Accounting Pronouncements
In June 2001, SFAS No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets, were issued. SFAS No. 141 requires the use
of purchase accounting for all business combinations entered into after June 30,
2001. The Company adopted the provisions of SFAS No. 141 as of July 1, 2001;
however, there was no material impact on the Company's financial position,
results of operations, or cash flows. SFAS No. 142 specifies that goodwill and
certain intangible assets will no longer be amortized but instead will be
subject to periodic impairment testing. The Company is required to adopt the
provisions of SFAS No. 142 as of January 1, 2002. The Company does not expect
any material impact on the Company's financial position, results of operations,
or cash flows from the adoption of SFAS No. 142 due to the fact that there is no
goodwill recorded in the consolidated financial statements.
17
In August 2001, SFAS No. 143, Accounting for Asset Retirement Obligations,
was issued. SFAS No. 143 addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and for
the related retirement costs. SFAS No. 143 is required to be adopted on January
1, 2003. Management does not anticipate that the adoption of SFAS No. 143 will
have a material impact on the Company's financial position, results of
operations or cash flows.
In October 2001, SFAS No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets, was issued. SFAS No. 144 supersedes and amends SFAS No. 121
and relevant portions of APB Opinion No. 30. SFAS No. 144 is required to be
adopted on January 1, 2002. Management does not anticipate that the adoption of
SFAS No. 144 will have a material impact on the Company's financial position,
results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of December 31, 2001, the Company's obligations included variable rate
mortgage notes and a line of credit bank note with aggregate principal balances
of $1,990,028 which mature at various dates through 2015. The Company is exposed
to the market risk of significant increases in future interest rates. Each
incremental point increase in the prime interest rate would increase the
Company's interest expense by approximately $20,000 per year. This risk is
somewhat mitigated in that inflationary increases in interest rates would
theoretically result in increases in average hotel room rates. Also, significant
increases in interest rates would have a dampening effect on additions of
competitive hotels in the Company's markets.
At December 31, 2001, the Company's unrestricted investment securities
included equity securities valued at $22,419. The Company is exposed to the risk
that such securities will become worthless. The Company's restricted investment
securities also include equity securities. Such restricted securities comprise
the assets of the Company's deferred compensation plan and changes in the value
of such securities have no net impact on the Company's earnings.
The ultimate collection of the Company's notes receivable is subject to
various credit risks. Net notes receivable at December 31, 2001 amounted to
$4,547,390 and consisted of 34 notes, most of which were collateralized by or
related to various hotel assets. Additionally, the Company remains contingently
liable on three mortgage notes payable on which the Company is guarantor
relating to properties sold in 2000 and 2001. The notes' balances at December
31, 2001 were approximately $3.7 million and the notes are due in aggregate
monthly installments of $34,318 until 2018. The Company also remains
contingently liable for future minimum rental payments totaling $1,926,825
($610,177 in 2002, $598,511 in 2003, $360,488 in 2004, and $357,649 in later
years) on sold leasehold interests and on subleased and assigned properties and
equipment in the event of default by the purchasers, sublessees and/or
assignees. The collection of such notes receivable and the potential financial
exposure for guaranteed note obligations and contingent rents is determinant on
the ability of other hotel operators to satisfy these obligations. Their ability
to satisfy such obligations is subject to many risks, including economic
conditions affecting the hotel industry, their ability to effectively manage
their hotel assets, new competition, and other factors.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS' REPORT THEREON
Buckhead America Corporation's consolidated financial statements with
independent auditors' report thereon are included on the pages which follow.
19
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2001 and 2000
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Buckhead America Corporation:
We have audited the accompanying consolidated balance sheets of Buckhead America
Corporation and subsidiaries (the Company) as of December 31, 2001 and 2000 and
the related consolidated statements of income (loss), shareholders' equity
(deficit) and comprehensive income (loss), and cash flows for each of the years
in the three-year period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, operating cash deficiencies and currently does not have the
ability to repay or refinance certain debt maturing in 2002. These circumstances
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Atlanta, Georgia
March 29, 2002
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
2001 2000
ASSETS ------- -------------
Current assets:
Cash and cash equivalents, including restricted cash of $329,479
in 2001 and $382,646 in 2000 (note 3) $ 625,005 1,345,671
Investment securities, including restricted securities of $168,259
in 2001 and $182,067 in 2000 (note 4) 190,678 202,750
Accounts receivable, net 1,013,534 1,436,030
Current portions of notes receivable, net (note 5) 676,017 832,055
Property, equipment, and leasehold interests held for sale, net (notes 6
and 8) 10,539,253 21,273,517
Other current assets 289,438 202,911
--------------- -------------
Total current assets 13,333,925 25,292,934
Investment securities (note 4) -- 42,771
Noncurrent portions of notes receivable, net (note 5) 3,871,373 3,695,160
Property, equipment, and leasehold interests held for sale, net (notes 6 and 8) 9,415,229 --
Other property and equipment, at cost, net (notes 6, 8, and 9) 966,640 20,967,076
Deferred costs, net (note 7) 1,149,831 2,535,461
Leasehold interests, net (note 7) -- 670,530
Other assets (note 7) -- 160,540
--------------- -------------
$ 28,736,998 53,364,472
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,250,123 1,310,588
Accrued expenses 2,514,933 2,109,689
Current portions of notes payable (note 8) 15,227,767 18,803,712
--------------- -------------
Total current liabilities 18,992,823 22,223,989
Noncurrent portions of notes payable (note 8) 9,537,617 16,353,009
Other liabilities (note 4) 289,551 269,330
--------------- -------------
Total liabilities 28,819,991 38,846,328
--------------- -------------
Minority interests 587,520 764,068
--------------- -------------
Shareholders' equity (notes 10 and 13):
Series B preferred stock; $100 par value. Authorized 200,000 shares;
issued and outstanding 30,000 shares 3,000,000 3,000,000
Common stock; $0.01 par value. Authorized 5,000,000 shares;
issued 2,113,881 shares, outstanding 2,015,885 and 2,025,023 shares in
2001 and 2000, respectively 21,139 21,139
Additional paid-in capital 7,897,530 7,897,530
(Accumulated deficit) retained earnings (10,901,865) 3,729,683
Accumulated other comprehensive loss -- (245,229)
Treasury stock, 97,996 and 88,858 common shares
in 2001 and 2000, respectively (687,317) (649,047)
--------------- -------------
Total shareholders' equity (670,513) 13,754,076
Commitments and contingencies (notes 8, 9, and 15)
--------------- -------------
$ 28,736,998 53,364,472
=============== =============
See accompanying notes to consolidated financial statements.
22
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
Years ended December 31, 2001, 2000, and 1999
2001 2000 1999
---------------- -------------- -------------
Revenues:
Hotel revenues $ 17,517,237 23,717,220 25,886,594
Franchise fee income (note 6) 1,200,810 872,570 1,331,749
Gains on property sales, net (notes 6 and 7) -- 608,717 3,587,639
Investment income (note 4) 207,955 442,719 495,531
Other income, net -- 14,237 38,591
---------------- -------------- -------------
Total revenues 18,926,002 25,655,463 31,340,104
---------------- -------------- -------------
Expenses:
Hotel operations 13,474,214 17,454,398 18,141,606
Franchise operations 767,230 840,239 808,909
Other operating and administrative (notes 11 and 14) 1,495,506 1,847,550 1,702,913
Leasehold rent 2,621,336 2,601,020 2,858,378
Bad debt expense (note 5) 478,964 -- --
Depreciation and amortization (note 6) 836,060 1,607,648 1,752,372
Losses on property sales and lease
terminations (notes 6, 7, and 8) 1,675,699 -- --
Provisions for impairment (note 6) 6,360,000 2,300,000 373,529
Interest 2,834,203 2,999,599 3,299,283
Equity in joint venture losses (note 7) 130,807 812,654 131,065
---------------- -------------- -------------
Total expenses 30,674,019 30,463,108 29,068,055
---------------- -------------- -------------
(Loss) income from continuing operations before
income taxes (11,748,017) (4,807,645) 2,272,049
Provision for income taxes (note 12) -- 2,859,328 880,000
---------------- -------------- -------------
(Loss) income from continuing operations (11,748,017) (7,666,973) 1,392,049
---------------- -------------- -------------
Discontinued operations (note 16):
(Loss) income from operations of hotel management
segment (less income taxes in 1999 of $175,000) (1,995,578) (606,148) 276,908
Estimated loss on disposal of hotel management
segment, including operating losses during
phase-out period (679,828) -- --
---------------- -------------- -------------
(Loss) income from discontinued operations (2,675,406) (606,148) 276,908
---------------- -------------- -------------
Net (loss) income $ (14,423,423) (8,273,121) 1,668,957
================ ============== =============
Net (loss) income per common share (note 10):
Basic:
Continuing operations $ (5.96) (3.93) 0.55
Discontinued operations (1.33) (0.30) 0.14
---------------- -------------- -------------
Net (loss) income $ (7.29) (4.23) 0.69
================ ============== =============
Diluted:
Continuing operations $ (5.96) (3.93) 0.52
Discontinued operations (1.33) (0.30) 0.09
---------------- -------------- -------------
Net (loss) income $ (7.29) (4.23) 0.61
================ ============== =============
See accompanying notes to consolidated financial statements.
23
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
and Comprehensive Income (Loss)
Years ended December 31, 2001, 2000, and 1999
(ACCUMULATED
SERIES A SERIES B ADDITIONAL DEFICIT)
COMPREHENSIVE COMMON PREFERRED PREFERRED PAID-IN RETAINED
INCOME (LOSS) STOCK STOCK STOCK CAPITAL EARNINGS
-------------- ------------ ---------- --------- --------- ------------
Balances at December 31, 1998 $ 20,033 3,000,000 -- 7,362,487 10,728,847
Issuance of 65,378 common
shares for asset acquisition 654 -- -- 391,614 --
Issuance of 26,000 common
shares pursuant to exercise
of options 260 -- -- 100,820 --
Acquisition of 6,000 common
shares -- -- -- -- --
Preferred stock dividends paid -- -- -- -- (163,750)
Comprehensive income:
Net income $ 1,668,957 -- -- -- -- 1,668,957
Change in unrealized loss
on investment securities -- -- -- -- -- --
--------------
Total comprehensive income $ 1,668,957
============== ------------ ---------- --------- --------- ------------
Balances at December 31, 1999 20,947 3,000,000 -- 7,854,921 12,234,054
Issuance of 19,226 common
shares for asset acquisition 192 -- -- 95,938 --
Acquisition of 23,516 common
shares -- -- -- -- --
Preferred stock dividends paid -- -- -- -- (231,250)
Exchange of Series A preferred
stock for Series B preferred
stock -- (3,000,000) 3,000,000 (53,329) --
Comprehensive loss:
Net loss $ (8,273,121) -- -- -- -- (8,273,121)
Change in unrealized loss
on investment securities (97,206) -- -- -- -- --
--------------
Total comprehensive loss $ (8,370,327)
============== ------------ ---------- --------- --------- ------------
Balances at December 31, 2000 21,139 -- 3,000,000 7,897,530 3,729,683
Acquisition of 9,138 common
shares -- -- -- -- --
Preferred stock dividends paid -- -- -- -- (208,125)
Comprehensive loss:
Net loss $(14,423,423) -- -- -- -- (14,423,423)
Change in unrealized loss
on investment securities
(see below) 245,229 -- -- -- -- --
--------------
Total comprehensive loss $(14,178,194)
============== ------------ ---------- --------- --------- ------------
Balances at December 31, 2001 $ 21,139 -- 3,000,000 7,897,530 (10,901,865)
============ ========== ========= ========= ============
2001 2000 1999
------------ ---------- ---------
Disclosure of reclassification
amount:
Unrealized holding losses arising
during the period $ (42,771) (97,906) --
Less reclassification adjustment for
losses included in income 288,000 -- --
------------ ---------- ---------
$ 245,229 (97,906) --
============ ========== =========
ACCUMULATED TOTAL
OTHER SHAREHOLDERS'
COMPREHENSIVE TREASURY EQUITY
LOSS STOCK (DEFICIT)
------------- ---------- -----------
Balances at December 31, 1998 (148,023) (471,019) 20,492,325
Issuance of 65,378 common
shares for asset acquisition -- -- 392,268
Issuance of 26,000 common
shares pursuant to exercise
of options -- -- 101,080
Acquisition of 6,000 common
shares -- (36,261) (36,261)
Preferred stock dividends paid -- -- (163,750)
Comprehensive income:
Net income -- -- 1,668,957
Change in unrealized loss
on investment securities -- -- --
Total comprehensive income
------------- ---------- -----------
Balances at December 31, 1999 (148,023) (507,280) 22,454,619
Issuance of 19,226 common
shares for asset acquisition -- -- 96,130
Acquisition of 23,516 common
shares -- (141,767) (141,767)
Preferred stock dividends paid -- -- (231,250)
Exchange of Series A preferred
stock for Series B preferred
stock -- -- (53,329)
Comprehensive loss:
Net loss -- -- (8,273,121)
Change in unrealized loss
on investment securities (97,206) -- (97,206)
Total comprehensive loss
------------- ---------- -----------
Balances at December 31, 2000 (245,229) (649,047) 13,754,076
Acquisition of 9,138 common
shares -- (38,270) (38,270)
Preferred stock dividends paid -- -- (208,125)
Comprehensive loss:
Net loss -- -- (14,423,423)
Change in unrealized loss
on investment securities
(see below) 245,229 -- 245,229
Total comprehensive loss
------------- ---------- -----------
Balances at December 31, 2001 -- (687,317) (670,513)
============= ========== ===========
See accompanying notes to consolidated financial
statements.
24
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000, and 1999
2001 2000 1999
------------ ---------- -----------
Cash flows from operating activities:
(Loss) income from continuing operations $(11,748,017) (7,666,973) 1,392,049
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) continuing
operating activities:
Depreciation and amortization 836,060 1,607,648 1,752,372
(Purchases) sales of trading securities, net (8,088) 1,113,599 (1,127,927)
Realized losses (gains) on trading securities 2,505 (114,510) (39,377)
Unrealized holding losses (gains) on trading
securities 17,655 110,417 (16,033)
Realized losses on available-for-sale securities 288,000 -- --
Losses (gains) on property sales and lease
terminations 1,675,699 (608,717) (5,883,451)
Provisions for impairment 6,360,000 2,300,000 373,529
Bad debt expense 478,964 -- --
Minority interest in (loss) income (199,024) 137,543 2,544,050
Equity in joint venture losses 130,807 812,654 131,065
Deferred income tax expense (benefit) -- 2,859,328 880,000
Changes in assets and liabilities:
Accounts receivable, net 22,496 420,972 29,339
Accounts payable and accrued expenses (155,221) 786,093 (830,826)
Other, net 72,007 340,501 (45,069)
------------ ---------- -----------
Net cash (used in) provided by
continuing operating activities (2,226,157) 2,098,555 (840,279)
Net cash (used in) provided by discontinued operations (640,166) (430,525) 508,379
------------ ---------- -----------
Net cash (used in) provided by operations (2,866,323) 1,668,030 (331,900)
------------ ---------- -----------
Cash flows from investing activities:
Principal receipts on notes receivable 615,861 695,094 288,075
Originations of notes receivable (140,000) (897,500) (400,000)
Acquisitions of businesses and hotels -- (1,127,144) (506,041)
Capital expenditures (553,010) (3,430,915) (2,990,276)
Investments in joint ventures -- (604,114) --
Proceeds from property sales and lease terminations 3,271,909 1,202,088 8,043,247
Acquisition of additional partnership interests (9,832) -- (110,000)
------------ ---------- -----------
Net cash provided by (used in) investing
activities 3,184,928 (4,162,491) 4,325,005
------------ ---------- -----------
Cash flows from financing activities:
Proceeds from notes payable 240,000 3,309,119 2,762,902
Repayments of notes payable (1,065,184) (1,209,732) (2,663,520)
Contributions by minority interest holders 65,284 -- --
Distributions to minority interest holders (32,976) (223,765) (3,206,894)
Proceeds from issuance of common shares -- -- 101,080
Issuance costs of preferred stock -- (53,329) --
Purchase of treasury shares (38,270) (141,767) (36,261)
Preferred stock dividends paid (208,125) (231,250) (163,750)
------------ ---------- -----------
Net cash (used in) provided by financing
activities (1,039,271) 1,449,276 (3,206,443)
------------ ---------- -----------
Net (decrease) increase in cash and cash
equivalents (720,666) (1,045,185) 786,662
Cash and cash equivalents at beginning of year 1,345,671 2,390,856 1,604,194
------------ ---------- -----------
Cash and cash equivalents at end of year $ 625,005 1,345,671 2,390,856
============ ========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of interest
capitalized of $-0- in 2001, $30,571 in 2000, and
$34,024 in 1999 $ 2,691,424 2,857,421 3,362,708
Cash paid during the year for income taxes 2,038 71,328 12,000
(Continued)
25
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000, and 1999
2001 2000 1999
------------ ---------- -----------
Supplemental disclosure of noncash and partial cash
investing and financing activities:
During 2001, the Company recorded the following partial cash activity
relating to the sale of 12 owned or leased hotels, three parcels of
land, and the termination of seven long-term leases on hotel properties:
Proceeds:
Cash, net of closing costs and debt repayments $ 3,271,909
Notes receivable 975,000
------------------
4,246,909
------------------
Basis of assets sold:
Property, equipment, and leasehold
interests, net of
impairment allowances of
$1,218,185 15,429,852
Deferred costs 78,909
Notes payable (9,586,153)
------------------
5,922,608
------------------
Loss on sales, net $ (1,675,699)
==================
During 2000, the Company recorded the following partial cash activity
relating to the sale of three hotels and a parcel of unimproved land:
Proceeds:
Cash, net of closing costs $ 1,202,088
Notes receivable 550,000
-------------
1,752,088
-------------
Basis of assets sold:
Property, equipment, and leasehold
interests, net 4,563,459
Notes payable (3,509,808)
Other, net 89,720
-------------
1,143,371
-------------
Gain on sales, net $ 608,717
=============
During 2000, the Company recorded the following partial cash activity
relating to the acquisition of three hotels:
Costs:
Cash $ 992,556
Notes receivable applied 225,694
Notes payable issued or assumed 3,767,800
Minority interest holder's contribution 400,000
-------------
$ 5,386,050
=============
Allocated to:
Property and equipment $ 5,283,331
Deferred costs 102,719
-------------
$ 5,386,050
=============
During 2000, the Company recorded the following partial cash activity
relating to the acquisition of management contracts on three hotel
properties:
Costs:
Cash $ 134,588
Common stock issued - 19,226 shares 96,130
-------------
Allocated to deferred costs $ 230,718
=============
(Continued)
26
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000, and 1999
2001 2000 1999
------------ ---------- -----------
During 1999, the Company recorded the following partial cash activity
relating to the sale of a 150-room hotel in Orlando, Florida:
Gross sales price $ 13,500,000
Gross sales price allocated to management
and franchise contract termination (1,446,590)
-------------
Net sales price 12,053,410
Payoff of note payable 4,383,335
Other costs 330,505
-------------
Net cash proceeds 7,339,570
-------------
Basis of assets sold:
Property and equipment, net 6,191,988
Note payable (4,383,335)
Other 149,305
-------------
1,957,958
-------------
Gain on sale 5,381,612
Minority interest holders' share of gain on sale (2,319,182)
-------------
Company share of gain on sale $ 3,062,430
=============
During 1999, the Company also recorded the following partial cash
activity relating to the sale of one other hotel and leasehold interests
in four hotels:
Proceeds:
Cash, net of closing costs $ 703,677
Notes receivable 825,000
-------------
1,528,677
-------------
Basis of assets sold:
Property and equipment, net 896,829
Leasehold interests, net 655,009
Note payable (525,000)
-------------
1,026,838
-------------
Gain on sales, net $ 501,839
=============
During 1999, the Company recorded the following partial cash activity
relating to the acquisition of management contracts on nine hotel
properties:
Costs:
Cash $ 506,041
Common stock issued - 65,378 shares 392,268
-------------
Allocated to deferred costs $ 898,309
=============
(Continued)
27
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000, and 1999
2001 2000 1999
------------ ---------- -----------
During 1999, the Company acquired additional control in a partnership which
owns a hotel property subject to mortgage notes payable. Prior to 1999, the
Company's investment in the partnership had been accounted for on the
equity method. Due to the increase in control, the 1999 financial
statements include the accounts of the partnership on a consolidated basis.
The noncash impact on investing and financing activities of consolidating
the partnership in 1999 was as follows:
Investing:
Increase in property and equipment, net $ 3,956,581
Decrease in investments in partnerships (365,907)
---------------
$ 3,590,674
===============
Financing:
Increase in notes payable $ 3,091,339
Increase in minority interests 502,015
Other, net (2,680)
---------------
$ 3,590,674
===============
See accompanying notes to consolidated financial statements.
28
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(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.
The primary activities of the Company involve the franchising of the
Country Hearth Inn chain, limited-service hotel management and the
operation, development, and sales of hotel properties.
The Company's operations did not generate sufficient cash to cover its
current obligations during 2001. The Company used proceeds from sales of
its operating assets in order to remain liquid and implemented a plan to
discontinue its hotel management segment, a personnel reduction, a salary
deferment program, and other cost reduction strategies. The Company has
also negotiated extensions, and sometimes reductions, of certain of its
obligations.
These activities are ongoing and management believes that the negative cash
flow from operations will be significantly reduced in 2002, but will still
be negative. Thus, the Company's program of selling assets is continuing.
Current economic conditions affecting the hospitality industry are not
favorable and the Company did not receive its invested values from sales
occurring in 2001 and expects similar results for sales occurring in 2002.
During the fourth quarter of 2001, economic conditions affecting the
hospitality industry worsened, and the Company accordingly recognized
significant write-downs of various assets in the fourth quarter of 2001.
As of March 29, 2002, the Company was in default of certain of its note
payable obligations. Management is continuing negotiations with creditors
for extensions and/or reductions of obligations. Management believes that
it is possible that current obligations in 2002 could be met through assets
sales and restructuring of certain obligations. However, no assurance can
be given that such activities will be successful. These circumstances raise
substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. They also
include, on a consolidated basis, the accounts of two partnerships and
one company controlled by the Company, each of which owns a hotel
subject to a nonrecourse mortgage. The accounts of these entities are
consolidated on a gross basis with the minority interests reflected
separately on a net basis. All significant intercompany balances 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 accounting
principles generally accepted in the United States of America. Actual
results could differ from those estimates.
29 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(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 generally 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 franchisee's room
revenues. These continuing fees are recognized when earned. Management
fees are generally based on a percentage of each managed hotel's gross
revenues and are recognized when earned.
Investment income is recognized as earned. Changes in the market value
of investments classified as trading securities are included in
investment income.
(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 (loss).
Available-for-sale securities are classified as long-term, while
trading securities are classified as current in the accompanying
consolidated balance sheets.
30 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(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) PROPERTY, EQUIPMENT, AND LEASEHOLD INTERESTS HELD FOR SALE
Property, equipment, and leasehold interests held for sale are stated
at the lower of cost or fair value less costs to sell. Fair value of
property and leasehold interests held for sale has been determined by
the Company based upon current market information. At the date on
which a decision is made to dispose of a property or leasehold
interest, any amount by which the carrying amount of an asset exceeds
the fair value less cost to sell is reported as a provision for
impairment. Due to the intent of the Company to dispose of such
properties and leasehold interests in the short-term, the properties,
leasehold interests, and all related notes payable are intially
reflected as current in the accompanying consolidated balance sheets.
Properties and leasehold interests which have remained held for sale
for more than one year and are not under contract for sale are
classified as noncurrent. The Company has the ability to remove such
properties and leasehold interests from operations at the current
time.
(H) DEFERRED COSTS
Deferred costs include the costs associated with the acquisition of
trademark rights and franchise licenses which are amortized on a
straight-line basis over the estimated useful lives of the assets,
which range from 10 to 20 years. Deferred costs also include
unamortized note payable issuance costs which are amortized over the
term of the related notes payable. Deferred costs also included the
acquisition costs of long-term hotel management contracts which are
amortized over the related terms of the contracts.
31 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(I) 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.
(J) 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.
(K) TREASURY STOCK
Treasury stock is stated at cost. In noncash exchanges, fair value
represents cost.
(L) 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 $984,972,
$1,235,054, and $1,156,983 for the years ended December 31, 2001,
2000, and 1999, respectively, and are included in franchise operations
expense ($60,436, $335,147, and $101,161, respectively) and in hotel
operations expense ($924,536, $899,907, and $1,055,822, respectively)
in the accompanying consolidated statements of income (loss).
(M) 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.
(N) FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes that the carrying amounts of cash and cash
equivalents, accounts receivable, 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.
32 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Investment securities (both trading and available-for-sale) are stated
at fair value in the accompanying consolidated balance sheets. 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.
(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 disclosures required by 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 (LOSS)
Comprehensive income (loss) of the Company consists of net income
(loss) and net unrealized losses on investment securities available
for sale (other comprehensive loss) and is presented in the
consolidated statements of shareholders' equity and comprehensive
income (loss). Other comprehensive loss does not affect the Company's
consolidated results of operations.
(R) REPORTABLE SEGMENTS
The Company reports both quantitative and qualitative information
regarding its reportable operating segments. Operating segments are
determined by assessing what information is reviewed by the chief
operating decision maker in evaluating the performance of the Company.
33 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
The Company has determined its reportable operating segments to be
hotel operations, management, and franchising and has presented the
required information for each of these segments. During 2001, the
Company committed to a plan to dispose of its management segment.
(S) DISCONTINUED OPERATIONS
The Company reports its results of discontinued operations in
accordance with APB Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions. Under APB Opinion No. 30, since the Company has
determined to discontinue the management segment of its business, the
net results of operations and cash flows from the management segment
are segregated and reported separately from the results of operations
and cash flows from continuing operations. Additionally, costs
associated with the phasing out of the management segment and the
expected losses to be sustained during the phase out period have been
accrued and reported as an additional component of discontinued
operations.
(T) RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 and 1999 balances
to conform with the presentation used in 2001.
(U) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, SFAS No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets, was issued. SFAS No. 141
requires the use of purchase accounting for all business combinations
entered into after June 30, 2001. The Company adopted the provisions
of SFAS No. 141 as of July 1, 2001; however, there was no material
impact on the Company's financial position, results of operations, or
cash flows. SFAS No. 142 specifies that goodwill and certain
intangible assets will no longer be amortized but instead will be
subject to periodic impairment testing. The Company is required to
adopt the provisions of SFAS No. 142 as of January 1, 2002. The
Company does not expect any material impact on the Company's financial
position, results of operations, or cash flows from the adoption of
SFAS No. 142 due to the fact that there is no goodwill recorded in the
consolidated financial statements.
In August 2001, SFAS No. 143, Accounting for Asset Retirement
Obligations, was issued. SFAS No. 143 addresses financial accounting
and reporting obligations associated with the retirement of tangible
long-lived assets and for the related retirement costs. SFAS No. 143
is required to be adopted on January 1, 2003. Management does not
anticipate that the adoption of SFAS No. 143 will have a material
impact on the Company's financial position, results of operations or
cash flows.
In October 2001, SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets, was issued. SFAS No. 144 supersedes and
amends SFAS No. 121 and relevant portions of APB Opinion No. 30. SFAS
No. 144 is required to be adopted on January 1, 2002. Management does
not anticipate that the adoption of SFAS No. 144 will have a material
impact on the Company's financial position, results of operations or
cash flows.
34 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(3) CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 2001 and 2000 included the
following:
2001 2000
-------------------- --------------------
Unrestricted cash:
Operating accounts, money market funds, and overnight investments $ 189,175 660,304
Hotel operating accounts, savings accounts, and cash on hand 106,351 302,721
-------------------- --------------------
295,526 963,025
Restricted cash - mortgage-related escrows 329,479 382,646
-------------------- --------------------
$ 625,005 1,345,671
==================== ====================
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.
(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, 2001
and 2000, are as follows:
2001
----------------------------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
------------------- ------------------- ------------------- --------------------
Trading securities:
Equity securities $ 9,332 16,488 (3,401) 22,419
Third-party managed funds 184,701 -- (16,442) 168,259
------------------- ------------------- ------------------- --------------------
$ 194,033 16,488 (19,843) 190,678
=================== =================== =================== ====================
35 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
2000
----------------------------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
------------------- ------------------- ------------------- --------------------
Trading securities:
Equity securities $ 9,332 14,728 (3,377) 20,683
Third-party managed funds 179,118 2,949 -- 182,067
------------------- ------------------- ------------------- --------------------
188,450 17,677 (3,377) 202,750
Available-for-sale
securities - equity
securities 288,000 -- (245,229) 42,771
------------------- ------------------- ------------------- --------------------
Total $ 476,450 17,677 (248,606) 245,521
=================== =================== =================== ====================
Equity securities are primarily concentrated in hospitality related
companies.
The available-for-sale securities were acquired in 1998 in connection with
the purchase of certain leases (note 7) and are restricted as to their
sale. During 2001, it was determined that these securities had experienced
an other-than-temporary impairment. Therefore, the Company has recognized a
writedown of $288,000 in the accompanying consolidated statement of income
(loss) for 2001. Other comprehensive loss in 2000 consists of an unrealized
loss on available-for-sale securities of $97,206. There was no change in
this unrealized loss in 1999.
Third party managed funds consist of trading securities held by a Rabbi
Trust for the benefit of certain employees who participate in a Company
deferred compensation plan. Such funds are restricted to the payment of
deferred compensation liabilities. Such liabilities are included in "other
liabilities" in the accompanying consolidated balances sheets at amounts
equal to the fair value of the restricted funds. None of the third-party
managed funds are invested in the common stock of the Company.
Proceeds from the sale of trading securities were $27,297, $1,133,099, and
$3,500,000 in 2001, 2000, and 1999, respectively. Net realized gross gains
(losses) calculated on a specific identification basis and included in
investment income were $(2,505), $114,510, and $39,377 in 2001, 2000, and
1999, respectively.
36 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(5) NOTES RECEIVABLE
Notes receivable at December 31, 2001 and 2000 consist of the following:
2001
-----------------------------------------------------------------
OTHER
SECURED NOTES TOTAL
------------------- -------------------- --------------------
Principal $ 4,585,403 779,282 5,364,685
Less allowances 380,110 437,185 817,295
------------------- -------------------- --------------------
4,205,293 342,097 4,547,390
Less current portions 459,252 216,765 676,017
------------------- -------------------- --------------------
Noncurrent portions $ 3,746,041 125,332 3,871,373
=================== ==================== ====================
Number of notes 23 11 34
=================== ==================== ====================
2000
-----------------------------------------------------------------
OTHER
SECURED NOTES TOTAL
------------------- -------------------- --------------------
Principal $ 3,899,005 1,004,361 4,903,366
Less allowances 284,071 92,080 376,151
------------------- ------------------- --------------------
3,614,934 912,281 4,527,215
Less current portions 388,908 443,147 832,055
------------------- ------------------- --------------------
Noncurrent portions $ 3,226,026 469,134 3,695,160
=================== =================== ====================
Number of notes 19 15 34
=================== =================== ====================
The secured notes are primarily collateralized by mortgages and leasehold
interests on hotel properties.
Seven notes with aggregate balances of $1,945,302 as of December 31, 2001,
collateralized by leasehold interests on hotel properties, have been
pledged by the Company as collateral for a line-of-credit with a bank (note
8).
The recorded investment in impaired notes receivable as of December 31,
2001 and 2000 was $83,950 and $906, respectively, and the Company has fully
reserved for these notes. Cash received in payment of impaired notes
amounted to $-0- in 2001 and 2000, and $16,174 in 1999.
37 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
The activity in the allowance for doubtful notes receivable for the years
ended December 31, 2001, 2000, and 1999 was as follows:
2001 2000 1999
------------------- -------------------- --------------------
Allowance for doubtful notes receivable at
beginning of year $ 376,151 376,151 376,151
Additions charged to bad debt expense 478,964 -- 16,174
Write-downs charged against the allowance (37,820) -- --
Collections on impaired notes -- -- (16,174)
------------------- -------------------- --------------------
Allowance for doubtful notes receivable at end
of year $ 817,295 376,151 376,151
=================== ==================== ====================
(6) PROPERTY, EQUIPMENT, AND LEASEHOLD INTERESTS HELD FOR SALE AND OTHER
PROPERTY AND EQUIPMENT
Property and leasehold interests held for sale at December 31, 2001 and
2000 consist of the following:
2001 2000
------------------- -------------------
Current:
Property and equipment (six hotels at December 31, 2001 and 13
hotels at December 31, 2000) $ 12,682,360 20,194,012
Leasehold interests (one hotel at December 31, 2001 and four
hotels at December 31, 2000) 814,755 2,879,591
Other, principally land -- 323,443
Allowance for impairment (2,957,862) (2,123,529)
------------------- -------------------
$ 10,539,253 21,273,517
=================== ===================
Noncurrent:
Property and equipment (seven hotels at December 31, 2001) $ 12,275,358 --
Leasehold interests (one hotel at December 31, 2001) 1,331,852 --
Other, principally land 115,501 --
Allowance for impairment (4,307,482) --
------------------- -------------------
$ 9,415,229 --
=================== ===================
38 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Other property and equipment at December 31, 2001 and 2000 consist of the
following:
2001 2000
-------------------- --------------------
Owned hotel properties (nine in 2000):
Land and buildings $ -- 19,583,047
Furniture, fixtures, and equipment -- 2,307,322
-------------------- --------------------
-- 21,890,369
Accumulated depreciation -- (1,481,080)
-------------------- --------------------
-- 20,409,289
-------------------- --------------------
Leased hotel properties (nine in 2001 and 11 in 2000):
Leasehold improvements 417,929 282,169
Furniture, fixtures, and equipment 526,307 158,612
-------------------- --------------------
944,236 440,781
Accumulated depreciation (139,342) (80,267)
-------------------- --------------------
804,894 360,514
-------------------- --------------------
Other:
Land -- 39,317
Other, principally office furniture, fixtures,
and other equipment 419,470 348,581
-------------------- --------------------
419,470 387,898
Accumulated depreciation (257,724) (190,625)
-------------------- --------------------
161,746 197,273
-------------------- --------------------
$ 966,640 20,967,076
==================== ====================
In 1999, the Company completed the sale of the Country Hearth Inn located
in Orlando, Florida for $13.5 million. The Company held an approximate 59%
interest in the partnership which owned the hotel in addition to holding
franchise and hotel management contracts relating to the operation of the
property. After retirement of an approximate $4.4 million first mortgage
loan, payment of certain fees, costs, bonuses, and minority interest
shares, the Company's share of net proceeds was approximately $5.5 million.
The Company continued to operate the property under an agreement with
Orange County, Florida (the purchaser) until January 2001 at which time the
property was demolished to make way for expansion of the Orange County
Convention Center.
The Company's share of the 1999 gain on sale, net of the minority
interests' share approximated $3.1 million. The Company also received
franchise termination fees and hotel management fees of approximately
$640,000 and $605,000, respectively. Such fees were included in the
Company's franchising and management operating segments.
39 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
During 1999, the Company began to actively market for sale five hotel
properties. The statement of income for the year ended December 31, 1999
includes a provision for impairment of $373,529 which represented
management's estimate of losses expected to be incurred in connection with
the hotel sales. One of the hotel properties was sold in 1999 resulting in
a loss of $123,529 which was charged to the allowance for impairment. As of
December 31, 1999, four properties with an aggregate net carrying value of
$8,114,083 remained held for sale. In January 2000, another hotel property
was sold resulting in a charge to the remaining allowance for impairment of
$176,471.
As of December 31, 2000, the Company had 13 properties and four leasehold
interests classified as held for sale. The Company recorded additional
provisions for impairment of $2,050,000 relating to these hotels. Also, the
Company recorded a $250,000 impairment provision relating to certain
leasehold interests which were not held for sale (note 7).
During 2001, the Company continued to market its owned and leased hotels
and classified almost all of its owned and leased hotels as held for sale.
During 2001, the Company sold nine owned hotels, sold the leasehold
interest in one hotel, sold three parcels of land, and negotiated the
termination of seven long-term leases relating to hotel properties
previously operated by the Company. Additionally, the Company sold
leasehold interests in two of its owned hotel properties. The leases
include purchase options, one of which was exercised in February 2002.
In connection with the sales mentioned above, the Company incurred net
losses of $1,218,185 which were charged to previously established
impairment allowances. Also, the Company recorded a loss of $280,778 in
connection with the termination of seven long-term hotel leases. Such
amount is also included in the 2001 results of operations. In connection
with the 2001 sales, aggregate notes payable were reduced by $9,586,153 and
the Company generated net cash proceeds of $3,271,909 and notes receivable
of $975,000. Related to certain of these sales, the Company agreed to
guarantee mortgage notes assumed by the buyer and remains contingently
liable with respect to certain lease payments should the buyer default
(notes 8 and 9).
Additionally, during the fourth quarter of 2001, the Company incurred
losses of $1,394,921 on the sale of two of the sold hotel properties for
which no impairment allowances had previously been provided. Such amount is
included in the 2001 results of operations.
During the fourth quarter of 2001, economic conditions affecting the
hospitality industry worsened significantly. The Company evaluated the
carrying values of its 13 owned and two leased hotel properties which are
classified as held for sale as of December 31, 2001. The Company recorded
additional impairment provisions of $6,360,000 relating to these hotels in
the fourth quarter of 2001. As of December 31, 2001, aggregate impairment
allowances amounted to $7,265,344.
40 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Revenues and expenses included in the consolidated financial statements for
the years ended December 31, 2001, 2000, and 1999 relating to the
properties sold during those years were as follows:
2001 2000 1999
-------------------- ------------------- -------------------
Hotel revenues $ 5,773,690 13,760,811 16,128,205
Less:
Hotel operations expense 4,268,306 11,010,298 11,700,623
Rent 1,547,552 1,729,174 1,973,773
Depreciation 185,874 604,749 818,908
Interest 450,318 1,023,306 1,421,497
-------------------- ------------------- -------------------
(Loss) income before income taxes $ (678,360) (606,716) 213,404
==================== =================== ===================
Revenues and expenses for the years ended December 31, 2001, 2000, and 1999
relating to the properties held for sale were as follows:
2001 2000 1999
-------------------- ------------------- -------------------
Hotel revenues $ 8,515,798 7,536,758 7,355,149
Less:
Hotel operations expense 6,911,042 5,966,881 5,362,617
Rent 162,919 160,410 160,410
Depreciation 402,225 740,648 763,004
Interest 1,723,717 1,366,715 1,177,725
-------------------- ------------------- -------------------
Loss before income taxes $ (684,105) (697,896) (108,607)
==================== =================== ===================
The revenues and expenses relating to hotel properties held for sale are
included in the Company's hotel operations business segment (note 16).
All of the Company's owned hotel properties are encumbered by mortgage
obligations (note 8).
41 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(7) DEFERRED COSTS, LEASEHOLD INTERESTS, AND OTHER ASSETS
Deferred costs at December 31, 2001 and 2000 consist of the following:
2001 2000
-------------------- --------------------
Country Hearth Inn franchise system:
Trademark rights $ 584,300 584,300
Franchise licenses 939,778 939,778
Other deferred costs 260,400 260,400
-------------------- --------------------
1,784,478 1,784,478
Accumulated amortization (842,333) (716,333)
-------------------- --------------------
942,145 1,068,145
-------------------- --------------------
Hotel management contract acquisition costs -- 1,254,027
Accumulated amortization -- (161,886)
-------------------- --------------------
-- 1,092,141
-------------------- --------------------
Notes payable acquisition costs, net 207,686 375,175
-------------------- --------------------
$ 1,149,831 2,535,461
==================== ====================
Hotel management contract acquisition rights were written off in connection
with the Company's plan to discontinue its hotel management operating
segment (note 16) and litigation related to the management contracts.
Discontinued operations expenses in 2001 include $1,092,141 relating to the
amortization and write-off of such costs.
Leasehold interests represent the cost of leasehold rights in real property
acquired by the Company and consist of the following at December 31, 2001
and 2000:
2001 2000
-------------------- --------------------
Leasehold interests $ -- 1,028,635
Accumulated amortization -- (108,105)
-------------------- --------------------
-- 920,530
Allowance for impairment -- (250,000)
-------------------- --------------------
$ -- 670,530
==================== ====================
During 2001, the Company negotiated the termination of seven long-term
leases on hotel properties. As a result, the Company recorded a loss of
$280,778 in 2001 which is included in losses on property sales and lease
42 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
terminations (note 6). The Company recorded a $250,000 provision for
impairment in 2000 relating to these leases because a lender had initiated
foreclosure activities against the owner on two of the properties.
The Company's remaining two leasehold interests are classified as property,
equipment, and leasehold interests held for sale.
During 1999, the Company sold four leasehold interests in hotel properties.
The Company received net proceeds of approximately $500,000 in cash and
$825,000 in notes receivable. The notes receivable are secured by the
related leasehold interests. The Company recorded approximately $500,000 in
gains in connection with those sales. The Company remains contingently
liable for rent payments due in accordance with the leases on certain of
the properties (note 9).
Other assets at December 31, 2000 consist of investments in joint ventures
and partnerships.
Investments in joint ventures/partnerships consists of investments in five
partnership 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 $130,807, $812,654, and $131,065
during 2001, 2000, and 1999, respectively. Such losses are included in
hotel operations expense in the Company's hotel operations business segment
(note 16). One of the partnerships sold its hotel in 2000 and is no longer
active. The aggregate losses described above include losses from this
partnership of $587,558 and $87,056 in 2000 and 1999, respectively.
(8) NOTES PAYABLE
Notes payable at December 31, 2001 and 2000 consist of the following:
2001 2000
------------------- --------------------
Variable rate mortgage notes $ 990,028 2,866,907
Fixed rate mortgage notes 16,485,558 24,963,189
Unsecured subordinated notes 1,154,613 1,286,991
Convertible debenture notes, net of unamortized discount 4,980,555 4,960,555
Bank note 1,000,000 850,000
Other notes payable 33,549 113,082
Capital lease obligations (note 9) 121,081 115,997
------------------- --------------------
24,765,384 35,156,721
Less current portions 15,227,767 18,803,712
------------------- --------------------
Noncurrent portions of notes payable $ 9,537,617 16,353,009
=================== ====================
The variable rate mortgage notes at December 31, 2001 consist of two notes
secured by one hotel property. The notes bear interest at prime plus 1%
(6.0% at December 31, 2001), require aggregate monthly payments of $12,479,
and mature at various dates through 2015.
43 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
The fixed rate mortgage notes at December 31, 2001 consist of 13 notes
secured by 12 hotel properties. The notes bear interest at rates ranging
from 8.25% to 10.25% (weighted average at December 31, 2001 of 9.15%). The
notes require aggregate monthly payments of $161,920 and mature at various
dates through 2020.
The unsecured subordinated notes consist of three notes which are due in
varying amounts of monthly and quarterly payments and mature at various
dates through December 2005. The stated balances represent the present
value of amounts to be paid at a discount rate of 9%.
The convertible debentures, which were issued to investment funds managed
by a related party (note 14), consist of five notes aggregating $5,000,000
net of unamortized original issue discount of $19,445 in 2001 and $39,445
in 2000. 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 bank note at December 31, 2001 consists of the remaining balance of a
revolving line of credit which had expired. In February 2002, the balance
was reduced to $625,000 and a new note was executed. The new note bears
interest at prime plus 2% and requires monthly payments of $20,827 through
February 2005.
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:
2002 $ 15,227,767
2003 762,004
2004 692,507
2005 468,305
2006 325,669
Thereafter 7,289,132
-------------------
$ 24,765,384
===================
Current portions of notes payable include $8,158,542 relating to seven
notes secured by six hotel properties classified as currently held for sale
(note 6). The actual amount required to be paid in the year 2002 under the
terms of these notes is $2,550,903.
The Company remains contingently liable on three mortgage notes payable on
which the Company is guarantor relating to properties sold in 2000 and
2001. The notes' balances at December 31, 2001 were approximately $3.7
million and the notes are due in aggregate monthly installments of $34,318
until 2018.
44 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(9) LEASES
The Company leases certain equipment under agreements that are classified
as capital leases. The leases have remaining terms ranging from one to four
years and have purchase options at the end of the original lease terms.
Capital lease assets included in property and equipment at December 31,
2001 and 2000 are as follows:
2001 2000
-------------------- --------------------
Furniture, fixtures, and equipment $ 152,905 134,531
Accumulated amortization (27,961) (20,240)
-------------------- --------------------
$ 124,944 114,291
==================== ====================
The Company operates several of its locations in leased facilities. These
leases are treated as operating leases and have terms ranging 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 revenues. Some leased
vehicles and equipment are also 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, 2001:
CAPITAL OPERATING LEASES
LEASES
-------------------- --------------------
Year ending December 31:
2002 $ 41,036 1,301,995
2003 41,036 1,012,598
2004 41,036 983,213
2005 34,196 925,916
2006 -- 843,649
Subsequent years -- 6,748,940
-------------------- --------------------
Total minimum lease payments 157,304 $ 11,816,311
====================
Amounts representing interest 36,223
--------------------
Present value of net minimum payments 121,081
Current portions 25,627
--------------------
Long-term capitalized lease obligation $ 95,454
====================
Rental expense, including contingent rentals of $4,810 in 2001, $116,052 in
2000, and $176,774 in 1999, and net of sublease rentals of $122,921 in 2000
and $78,040 in 1999, for all operating leases was $2,862,803 in 2001,
$3,190,125 in 2000, and $3,350,064 in 1999.
45 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Leases described in the preceding paragraphs include leases between the
Company and an operating company whose principal shareholder was a director
and executive officer of the Company. Such amounts totaled $61,586 in 2001,
$62,402 in 2000, and $60,512 in 1999. Total future minimum payments under
this related party lease amount to $311,464. The Company also has lease
agreements with certain other related parties (note 14).
The Company remains contingently liable for future minimum rental payments
totaling $1,926,825 ($610,177 in 2002, $598,511 in 2003, $360,488 in 2004,
and $357,649 in later years) on sold leasehold interests (note 7) and on
subleased and assigned properties and equipment in the event of default by
the purchasers, sublessees and/or assignees.
(10) CAPITAL STRUCTURE AND NET INCOME (LOSS) PER SHARE
PREFERRED STOCK
In connection with an acquisition in 1997, the Company issued 30,000 shares
of Series A (par value $100) preferred stock. The Series A preferred stock
was nonvoting and accrued cumulative dividends at the rate of 10% per
annum, payable when and to the extent declared by the Company's board of
directors. Pursuant to a settlement agreement finalized in 2000, all of the
outstanding shares of Series A preferred stock were exchanged for an equal
number of shares of Series B (par value $100) preferred stock. The Series B
preferred stock is nonvoting and accrues cumulative dividends at the rate
of 9.25% per annum, payable when and to the extent declared by the
Company's board of directors. All accrued but unpaid dividends of the
Series B preferred stock must be paid in full before any cash dividend may
be declared on the Company's common stock. As of December 31, 2001, there
was $92,500 of cumulative preferred dividends in arrears.
In the event of any voluntary or involuntary liquidation, dissolution, or
winding-up of the Company, the holders of the Series B 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 B 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 B 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 B 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.
46 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
NET INCOME (LOSS) PER SHARE
The following tables set forth the computations of basic and diluted income
(loss) per common share for the years ended December 31, 2001, 2000, and
1999:
2001
----------------------------------------------------------------------------------------------------------------------
CONTINUING DISCONTINUED NET LOSS
OPERATIONS OPERATIONS
------------------- -------------------- --------------------
Basic and diluted:
Numerator:
Loss $ (11,748,017) (2,675,406) (14,423,423)
Less preferred stock dividends (277,500) -- (277,500)
------------------- -------------------- --------------------
Numerator for per common share
amounts (basic and diluted) $ (12,025,517) (2,675,406) (14,700,923)
=================== ==================== ====================
Denominator for per common share
amounts (basic and diluted):
Actual weighted average shares
outstanding 2,016,672 2,016,672 2,016,672
=================== ==================== ====================
Loss per common share (basic and diluted) $ (5.96) (1.33) (7.29)
=================== ==================== ====================
2000
----------------------------------------------------------------------------------------------------------------------
CONTINUING DISCONTINUED NET LOSS
OPERATIONS OPERATIONS
------------------- -------------------- --------------------
Basic and diluted:
Numerator:
Loss $ (7,666,973) (606,148) (8,273,121)
Less preferred stock dividends (277,500) -- (277,500)
------------------- -------------------- --------------------
Numerator for per common share
amounts (basic and diluted) $ (7,944,473) (606,148) (8,550,621)
=================== ==================== ====================
Denominator for per common share
amounts (basic and diluted):
Actual weighted average shares
outstanding 2,022,946 2,022,946 2,022,946
=================== ==================== ====================
Loss per common share (basic and diluted) $ (3.93) (0.30) (4.23)
=================== ==================== ====================
47 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
1999
----------------------------------------------------------------------------------------------------------------------
CONTINUING DISCONTINUED NET INCOME
OPERATIONS OPERATIONS
------------------- -------------------- --------------------
Basic:
Numerator:
Income $ 1,392,049 276,908 1,668,957
Less preferred stock dividends (300,000) -- (300,000)
------------------- -------------------- --------------------
Numerator for basic per common
share amounts $ 1,092,049 276,908 1,368,957
=================== ==================== ====================
Denominator for basic per common share amounts:
Actual weighted average shares
outstanding 1,983,114 1,983,114 1,983,114
=================== ==================== ====================
Basic income per common share $ 0.55 0.14 0.69
=================== ==================== ====================
Diluted:
Numerator:
Numerator for basic per common share
amounts $ 1,092,049 276,908 1,368,957
Add back preferred stock dividends
(assumed converted) 300,000 -- 300,000
Add back debenture interest, net of tax
(assumed converted) 248,000 -- 248,000
------------------- -------------------- --------------------
Numerator for diluted per common
share amounts $ 1,640,049 276,908 1,916,957
=================== ==================== ====================
Denominator:
Actual weighted average shares outstanding 1,983,114 1,983,114 1,983,114
Effect of dilutive securities:
Preferred stock 558,423 558,423 558,423
Convertible debentures 555,555 555,555 555,555
Outstanding stock options 30,189 30,189 30,189
------------------- -------------------- --------------------
Denominator for diluted per
common share amounts 3,127,281 3,127,281 3,127,281
=================== ==================== ====================
Diluted income per common share $ 0.52 0.09 0.61
=================== ==================== ====================
48 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
The assumed conversion of the convertible preferred stock, convertible
debentures, and in-the-money stock options was excluded from the
computation of the diluted per common share computations in 2001 and 2000
because the effect would be antidilutive.
(11) OTHER EXPENSE
During the fourth quarter of 2000, the employment of an executive officer
and certain other officers and employees of the Company terminated. The
Company recognized severance and other one-time costs relating to such
terminations of $207,000 in 2000.
(12) INCOME TAXES
Total income tax expense (benefit), principally Federal and all deferred,
recognized differs from the amount computed by applying the U.S. Federal
income tax rate of 34% to pretax income (loss) before discontinued
operations as a result of the following:
2001 2000 1999
------------------- -------------------- --------------------
Computed "expected" tax expense (benefit) $ (3,994,000) (1,635,000) 772,000
Increase (reduction) in income taxes resulting
from:
State taxes, net of Federal tax effect (470,000) (192,000) 91,000
Increase in valuation allowance for
deferred tax assets 5,481,000 4,845,000 65,000
Portion of valuation allowance increase
attributable to discontinued operations (1,017,000) (230,000) --
Other -- 71,328 (48,000)
------------------- -------------------- --------------------
$ -- 2,859,328 880,000
=================== ==================== ====================
At December 31, 2001, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $16.6 million which are
available to offset future taxable income, if any, and expire at dates from
2006 through 2021.
49 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 2001 and
2000 are presented below:
2001 2000
------------------- -------------------
Deferred tax assets:
Notes and accounts receivable allowances $ 430,000 128,000
Asset impairment allowances 2,405,000 890,000
Net operating loss and AMT carryforwards 5,836,000 3,536,000
Partnership basis differences 660,000 650,000
Effect of state income taxes 1,060,000 523,000
Other 442,000 45,000
------------------- -------------------
Total deferred tax assets 10,833,000 5,772,000
Less valuation allowance (10,453,000) (4,972,000)
------------------- -------------------
Deferred tax assets 380,000 800,000
Deferred tax liabilities - Acquired property and equipment basis
differences (380,000) (800,000)
------------------- -------------------
Net deferred tax assets $ -- --
=================== ===================
The valuation allowance for deferred tax assets as of December 31, 2001 and
2000 was $10,453,000 and $4,972,000, respectively. The net change in the
total valuation allowance for the year ended December 31, 2001 was an
increase of $5,481,000, for the year ended December 31, 2000 was an
increase of $4,845,000, and for the year ended December 31, 1999 an
increase of $65,000.
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 the valuation allowance.
(13) STOCK OPTION PLANS
The Company's various Stock Option Plans authorized the issuance of options
for up to 520,000 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. Plan options terminate ten years after vesting, or
earlier under certain conditions.
50 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
The granted stock option activity is as follows:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
-------------------- --------------------
Balance December 31, 1998 296,000 $ 5.91
Granted in 1999 93,000 5.26
Exercised in 1999 (26,000) 3.89
Forfeited in 1999 (52,000) 6.59
-------------------- --------------------
Balance December 31, 1999 311,000 5.77
Granted in 2000 118,000 4.95
Exercised in 2000 -- --
Forfeited in 2000 (81,000) 6.04
-------------------- --------------------
Balance December 31, 2000 348,000 5.43
Granted in 2001 -- --
Exercised in 2001 -- --
Forfeited in 2001 (38,000) 5.53
-------------------- --------------------
Balance December 31, 2001 310,000 $ 5.42
==================== ====================
The following table summarizes information concerning stock options
outstanding as of December 31, 2001:
OUTSTANDING EXERCISABLE
------------------------------------------------------ -----------------------------------
RANGE OF WEIGHTED WEIGHTED WEIGHTED
EXERCISE AVERAGE AVERAGE AVERAGE
PRICES SHARES REMAINING LIFE EXERCISE PRICE SHARES EXERCISE PRICE
------------------- --------------- ---------------- ---------------- ---------------- ----------------
$ 3.44 60,000 4.3 years $ 3.44 60,000 $ 3.44
4.31 - 6.13 25,000 6.0 years 5.17 23,333 5.23
6.88 45,000 6.5 years 6.88 45,000 6.88
7.37 51,000 7.5 years 7.37 51,000 7.37
5.25 57,000 8.4 years 5.25 57,000 5.25
5.00 72,000 8.4 years 5.00 48,000 5.00
---------------- ---------------- ---------------- ----------------
310,000 $ 5.42 284,333 $ 5.46
================ ================ ================ ================
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 loss would have been increased by approximately
$117,000 or approximately $0.06 per common share (basic and diluted) in
51 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
2001, and $168,000 or approximately $0.08 per common share (basic and
diluted) in 2000 and the Company's net income would have been reduced by
approximately $113,000 or approximately $0.06 per common share (basic) and
$0.04 per common share (diluted) in 1999. 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 options granted during 2000 and 1999 is estimated as $1.57
per share, and $1.65 per share, respectively, on the dates of grant using
the Black-Scholes 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.
(14) RELATED PARTY TRANSACTIONS
The Company acted as administrator and was a beneficiary of the Days Inns
of America, Inc. (Days Inns) Chapter 11 bankruptcy. The Company also acted
as trustee for the Days Inns Creditors' Trust. The Company was reimbursed
$100,000 in 2001, 2000, and 1999 for expenses incurred related to the
Creditors' Trust. Other operating and administrative expenses in the
accompanying 2001, 2000, and 1999 consolidated statements of income are
presented net of such amounts.
Other notes receivable (note 5) at December 31, 2000 includes $72,316 due
from a former officer and director of the Company. Such note bore interest
at 10% and was fully repaid in March 2001.
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 32.6% of the Company's outstanding common stock. An executive
officer of Bay Harbour is on the Company's board of directors.
A director of the Company is a principal in a hotel brokerage company. Such
company acted as the broker in the sales of hotels in which the Company
owned or held an interest and received aggregate commissions of $403,250 in
2001, $210,875 in 2000, and $63,000 in 1999 in connection therewith.
In conjunction with various agreements with Marion and Cass St. Corporation
(Cassland), owned by a significant shareholder, the Company was required to
advance a total of $135,000 per hotel property constructed by Cassland. The
Company then operates the properties under operating leases. As of December
31, 2001, the Company had net advances to Cassland of $684,082. These
advances are recorded as notes receivable with interest accruing at a rate
of 8% per annum. Hotel operations expense in 2001, 2000, and 1999 includes
rent expense of $463,114, $374,642, and $220,049, respectively, to
Cassland.
(15) LITIGATION
In April 2001, nine management contracts relating to hotels owned by
affiliates of Quality Lodging LLC were purportedly terminated by the hotel
owners. The Company is contesting the validity of such terminations and is
seeking to recover damages through arbitration and litigation. The
defendants have alleged certain counterclaims and presently the outcome of
the dispute is uncertain. Discontinued operations' loss from operations of
hotel management segment in 2001 includes charges of approximately $1.1
million relating to the termination of these contracts.
52 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(16) OPERATING SEGMENTS AND DISCONTINUED OPERATIONS
The Company conducted recurring operations in three segments of the
limited-service hotel industry - hotel franchising, hotel management, and
hotel operations. The Company generates additional revenues and results of
operations from hotel development activities.
Hotel franchising involves the selling and servicing of rights and licenses
comprising the Country Hearth Inn lodging system. Revenues include initial
fees and continuing royalty, marketing and reservation fees from Company
owned and leased hotels and from unaffiliated customers. Continuing fees
are based on each franchised hotel's room revenues.
Hotel management involved the oversight of day-to-day hotel operations and
accounting for limited-service and some full-service hotels. Revenues
included continuing fees from Company owned and leased hotels and from
unaffiliated customers. Continuing fees were based on each managed hotel's
revenues.
Hotel operations involves the operations of Company owned and leased
hotels. Revenues are generated from unaffiliated hotel guests. Hotel
operations also include the Company's share (equity method) of
unconsolidated entities which also operate hotels and the minority
interests' share of consolidated entities' results which are included in
hotel operations.
Hotel development activities involve the development and construction or
purchase of existing hotel properties and subsequent sale thereof along
with related activities such as servicing notes receivable generated from
sales. Corporate activities are generally administrative and also include
all interest income and expense which does not specifically relate to other
segment operations.
Franchise and management fees were charged to Company owned and leased
hotels at the same rates as charged to unaffiliated customers and were
eliminated in consolidation.
During the fourth quarter of 2001, the Company adopted a plan to
discontinue its hotel management activities. The Company terminated its
management contracts relating to hotels owned by third parties and entered
into management contracts with an unrelated company for the management of
Company owned and leased hotels. The Company continues to perform certain
accounting functions relating to these hotels and anticipates that all such
activities will be discontinued during the second quarter of 2002.
Remaining assets of the discontinued segment are not significant. Remaining
liabilities of the discontinued segment primarily consist of lease
obligations and severance. The estimated costs associated with such
obligations have been accrued and are included in the 2001 estimated loss
on disposal of hotel management segment.
53 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Condensed operating results, assets, and notes payable related to each
segment as of and for the years ended December 31, 2001, 2000, and 1999 are
presented below. Segment assets and notes payable exclude intercompany
balances which eliminate in consolidation. No specific assets or notes
payable relate to development activities and such activities are generally
conducted by corporate personnel on a nonrecurring basis. Thus, development
results are included with corporate results. Assets of hotel operations and
the related notes payable are reflected in the hotel operations segment
through the date of sale. Net gains (losses) from such sales are reflected
in the development and corporate segment. Capital expenditures in 2001,
2000, and 1999 amounted to $553,010, $3,430,915, and $2,990,276,
respectively, and principally related to hotel operations. Income tax
expense (benefit) is not allocated to the various segments.
2001
----------------------------------------------------------------------------------
DEVELOPMENT
HOTEL HOTEL AND
OPERATIONS FRANCHISING CORPORATE ELIMINATIONS CONSOLIDATED
--------------- ------------- ------------- ------------- -------------
Revenues $ 17,517,237 1,975,271 172,574 (739,080) 18,926,002
Expenses 14,039,076 1,122,255 1,924,470 (739,080) 16,346,721
--------------- ------------- ------------- -------------
EBITDAR* 3,478,161 853,016 (1,751,896) 2,579,281
Rent 2,621,336 -- -- 2,621,336
Depreciation and amortization 686,060 126,000 24,000 836,060
Property losses** -- -- 8,035,699 8,035,699
Interest 2,174,035 -- 660,168 2,834,203
--------------- ------------- ------------- -------------
(Loss) income before income
taxes $ (2,003,270) 727,016 (10,471,763) (11,748,017)
=============== ============= ============= =============
Assets*** $ 22,023,869 1,530,396 4,800,338 28,354,603
=============== ============= ============= =============
Notes payable $ 17,630,216 7,135,168 24,765,384
=============== ============= =============
2000
----------------------------------------------------------------------------------
DEVELOPMENT
HOTEL HOTEL AND
OPERATIONS FRANCHISING CORPORATE ELIMINATIONS CONSOLIDATED
--------------- ------------- ------------- ------------- -------------
Revenues $ 23,717,220 1,784,142 1,065,673 (911,572) 25,655,463
Expenses 18,785,484 1,233,379 1,847,550 (911,572) 20,954,841
--------------- ------------- ------------- -------------
EBITDAR* 4,931,736 550,763 (781,877) 4,700,622
Rent 2,601,020 -- -- 2,601,020
Depreciation and amortization 1,457,648 126,000 24,000 1,607,648
Provision for impairment -- -- 2,300,000 2,300,000
Interest 2,390,021 -- 609,578 2,999,599
--------------- ------------- ------------- -------------
(Loss) income before income
taxes $ (1,516,953) 424,763 (3,715,455) (4,807,645)
=============== ============= ============= =============
Assets*** $ 44,556,598 1,205,057 5,852,584 51,614,239
=============== ============= ============= =============
Notes payable $ 28,059,175 7,097,546 35,156,721
=============== ============= =============
54 (Continued)
BUCKHEAD AMERICA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
1999
----------------------------------------------------------------------------------
DEVELOPMENT
HOTEL HOTEL AND
OPERATIONS FRANCHISING CORPORATE ELIMINATIONS CONSOLIDATED
--------------- ------------- ------------- ------------- -------------
Revenues $ 25,886,594 2,141,373 4,121,761 (809,624) 31,340,104
Expenses 18,770,851 1,120,353 1,702,913 (809,624) 20,784,493
--------------- ------------- ------------- -------------
EBITDAR* 7,115,743 1,021,020 2,418,848 10,555,611
Rent 2,858,378 -- -- 2,858,378
Depreciation and amortization 1,620,372 120,000 12,000 1,752,372
Provision for impairment -- -- 373,529 373,529
Interest 2,599,222 -- 700,061 3,299,283
--------------- ------------- ------------- -------------
Income before income taxes $ 37,771 901,020 1,333,258 2,272,049
=============== ============= ============= =============
Assets*** $ 45,934,343 1,424,376 9,669,756 57,028,475
=============== ============= ============= =============
Notes payable $ 26,083,007 6,696,335 32,779,342
=============== ============= =============
*Earnings before interest, taxes, depreciation, amortization, and rent.
**Property losses includes provisions for impairment and losses on property
sales and lease terminations.
***Excludes hotel management segment.
55
1457938v1
SUPPLEMENTARY FINANCIAL INFORMATION
Selected Quarterly Financial Data
The following selected quarterly financial data was derived from the
unaudited condensed consolidated financial statements of Buckhead America
Corporation and subsidiaries included in the Company's Form 10-Q's for the
quarterly periods ended March 31, June 30, and September 30, 2001 and from the
audited consolidated financial statements for the years ended December 31, 2001
and 2000 which are included herein. The selected quarterly financial data should
be read in conjunction with such consolidated financial statements, including
the notes to those financial statements, which are incorporated by reference
herein.
2001
----------------------------------------------------------
First Qtr Second Qtr Third Qtr Fourth Qtr
------------- -------------- ------------- ------------
Total revenues (excluding discontinued operations) $ 4,737,712 5,505,070 5,442,996 3,240,224
EBITDAR* (excluding discontinued operations) 570,432 1,399,746 1,331,659 (722,556)
Net income (loss) (1,382,541) (434,732) (450,508) (12,155,642)
Net income (loss) per common share - diluted (0.72) (0.25) (0.26) (6.06)
2000
----------------------------------------------------------
First Qtr Second Qtr Third Qtr Fourth Qtr
------------- -------------- ------------- ------------
Total revenues (excluding discontinued operations) $ 6,338,273 6,732,684 7,489,719 5,094,787
EBITDAR* (excluding discontinued operations) 1,481,893 1,817,532 1,937,287 (536,090)
Net income (loss) (232,215) 10,888 19,511 (8,071,305)
Net income (loss) per common share - diluted (0.15) (0.03) (0.03) (4.02)
* Earnings before interest, taxes, depreciation, amortization, and rent
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
56
PART III
All information required by PART III (ITEMS 10, 11, 12, AND 13) is
incorporated by reference to the Company's definitive proxy statement relating
to the 2002 Annual Meeting of Stockholders.
57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT.
(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income (Loss) for the Years ended December
31, 2001, 2000, and 1999
Consolidated Statements of Shareholders' Equity (Deficit) and
Comprehensive Income (Loss) for the Years ended December 31,
2001, 2000, and 1999
Consolidated Statements of Cash Flows for the Years ended December 31,
2001, 2000, and 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All financial statement schedules are omitted since the required
information is either not applicable, or is not significant, or is
included in the consolidated financial statements and notes thereto.
(3) Index to Exhibits
Exhibit Description
------- -----------
2.1 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.)
2.2 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.)
2.3 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.)
2.4 Post Closing Amendment to Agreement of Merger, dated as of May 31,
2000 among the Company, BLM-RH, Inc., Hatfield Inns, LLC, Guy
Hatfield, Dorothy Hatfield, and Hatfield Inn Advisors, LLC.
(Incorporated by reference to Exhibit 2.4 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.)
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.)
3.3 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.)
3.4 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 May 5,
1998.)
58
3.5 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 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.
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 Certificate of Designation, Preferences and Rights of Series B
Preferred Stock of the Registrant. (Incorporated by reference to
Exhibit 4(i) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001.)
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.)
10.2 First Amendment to Douglas C. Collins Employment Agreement.
(Incorporated by reference to Exhibit 10(ii)(b) to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1995.)
10.3 Second Amendment to Douglas C. Collins Employment Agreement.
(Incorporated by reference to Exhibit 10.3 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999.)
10.4 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.)
10.5 First 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.)
10.6 Second Amendment to Robert B. Lee Employment Agreement. (Incorporated
by reference to Exhibit 10.6 to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1999.)
10.7 Employment Agreement dated as of May 8, 1997 between the Company and
Ronald L. Devine. (Incorporated by reference to Exhibit 10.7 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1999.)
10.8 First Amendment to Ronald L. Devine Employment Agreement.
(Incorporated by reference to Exhibit 10.8 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999.)
10.9 Ronald L. Devine Termination Agreement. (Incorporated by reference to
Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)
10.10 1995 Stock Option Plan. (Incorporated by reference to Appendix A to
the Registrant's Definitive Proxy Statement dated April 25, 1995.)
10.11 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.)
10.12 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.)
10.13 1999 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 April 29, 1999.)
10.14 2000 Employee Stock Option Plan (Incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000.)
59
21* Subsidiaries of the Company
23* Accountants' Consent
------------------
* 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.
(C) EXHIBITS
The required exhibits as listed in Item 14(a)3 - "Index to Exhibits" herein
follows.
(D) FINANCIAL STATEMENT SCHEDULES
None. See Item 14(a)2 herein.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) BUCKHEAD AMERICA CORPORATION
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 , 2002 March 29, 2002
--------------------------------- -----------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: (Signature and Title) Date
/s/ Douglas C. Collins March 29, 2002
------------------------------- --------------------
Douglas C. Collins
Director
March 29, 2002
------------------------------- ---------------------
David C. Glickman
Director
/s/ Robert B. Lee March 29, 2002
------------------------------- --------------------
Robert B. Lee
Director
/s/ David B. Mumford March 29, 2002
------------------------------- ---------------------
David B. Mumford
Director
/s/ William K. Stern March 29, 2002
------------------------------- ---------------------
William K. Stern
Director
/s/ Steven A. Van Dyke March 29, 2002
------------------------------- ---------------------
Steven A. Van Dyke
Director
62
1457946v1