-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BcDrx4HcG4q4qmFQDAp3wNXlV74pH14VaFiLmQ5f1iLx3zSk8b9aO04AMtfFznbj Wu391xUYcYxJh38cObW8ow== 0000891554-01-503488.txt : 20010717 0000891554-01-503488.hdr.sgml : 20010717 ACCESSION NUMBER: 0000891554-01-503488 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010716 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIDGEWOOD HOTELS INC CENTRAL INDEX KEY: 0000783728 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 581656330 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14019 FILM NUMBER: 1682539 BUSINESS ADDRESS: STREET 1: 2859 PACES FERRY RD STE 700 CITY: ATLANTA STATE: GA ZIP: 30339 BUSINESS PHONE: 7704343670 MAIL ADDRESS: STREET 1: 2859 PACES FERRY ROAD STREET 2: SUITE 700 CITY: ATLANTA STATE: GA ZIP: 30339 FORMER COMPANY: FORMER CONFORMED NAME: RIDGEWOOD PROPERTIES INC DATE OF NAME CHANGE: 19920703 10-K 1 d26248_10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 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 0-14019 Ridgewood Hotels, Inc. (Exact name of Registrant as specified in its charter) Delaware 58-1656330 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 1106 Highway 124 Hoschton, Georgia 30548 ----------------- ----- (Address of principal executive officers) (Zip Code) Registrant's telephone number, including area code (770) 867-9830 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (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. Yes _X_ 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. _X_ Aggregate market value of voting stock held by non-affiliates on June 30, 2001 - $452,000; common shares outstanding on June 30, 2001 - 2,513,480 shares (1) Portions of the Registrant's Annual Report to Shareholders for the twelve months ended March 31, 2001 (the "2001 Annual Report to Shareholders") are incorporated by reference in Parts I and II of this Report. 1 PART I Item 1. Business General Ridgewood Hotels, Inc. (the "Company") is primarily engaged in the hotel management business. The Company currently manages thirteen mid to luxury hotels containing 2,413 rooms located in three states, including the Chateau Elan Winery & Resort in Braselton, Georgia ("Chateau Elan Georgia"). The Company also has an ownership interest in one hotel and owns undeveloped land that it holds for sale. Fountainhead Transactions Fountainhead Development Corp. ("Fountainhead") is primarily engaged in the business of developing, owning and operating luxury resort properties, including Chateau Elan Georgia and St. Andrews Bay ("St. Andrews") in Scotland. In January 2000, the Company entered into a management agreement ("Management Agreement") with Fountainhead to perform management services at Chateau Elan Georgia for five years. Chateau Elan Georgia is a 306-room luxury resort located in Braselton, Georgia, which includes an inn, conference center, winery and luxury amenities such as a spa and golf club. In consideration for the Management Agreement, the Company issued to Fountainhead 1,000,000 shares of its common stock ("Fountainhead Shares"). The determined market value of the management contract was $2,000,000 at the time of the transaction. Pursuant to the Management Agreement, the Company will receive a base management fee equal to 2% of the gross revenues of the properties being managed, plus an annual incentive management fee to be determined each year based on the profitability of the properties being managed during that year. Also in January 2000, Fountainhead purchased 650,000 shares of common stock from N. Russell Walden (a principal stockholder and then President of the Company). Fountainhead also purchased 450,000 shares of the Company's convertible preferred stock from ADT Security Services, Inc. ("ADT"). After these transactions, Fountainhead has beneficial ownership of approximately 78% of the Company. As a result of the Fountainhead transaction, the Board of Directors was expanded from three directors to seven directors, with the four vacancies filled by Fountainhead designees. In addition, Mr. Walden resigned as President and was replaced by Henk Evers, who previously served as the President and Chief Executive Officer of Fountainhead and general manager of Chateau Elan Georgia. The Company continues to seek new hotel management opportunities, including possible opportunities to manage other properties being developed by Fountainhead. In addition to Chateau Elan Georgia, the Company manages Fountainhead's Chateau Elan Sebring ("Chateau Elan Sebring"), which is located in Sebring, Florida. The Company has also received a development fee for providing development services for 2 Fountainhead's St. Andrews resort. St. Andrews is a 209-room luxury resort that has been under development and opened on June 14, 2001. The Company anticipates entering into a management contract to manage St. Andrews. While the Company intends to seek management opportunities with other Fountainhead properties, Fountainhead has no obligation to enter into further management relationships with the Company, and there can be no assurance that the Company will manage any Fountainhead properties, including St. Andrews, in the future. For the fiscal year ended March 31, 2001, the combined management and development fees for these Fountainhead hotels were approximately $1,123,000 representing 44% of the total management fee revenue for the year ended March 31, 2001. The Company's management may, under appropriate circumstances, seek to acquire ownership interests in hotels to be managed by the Company. Management Agreements In addition to the two management agreements with Fountainhead properties, the Company presently manages eleven other hotel properties pursuant to management agreements that generally provide the Company with a fee calculated as a percentage of gross revenues of the hotel property and generally include an incentive management fee based on a percentage of gross revenues exceeding a negotiated amount. The contract terms governing management fees vary depending on the size and location of the hotel and other factors relative to such hotel property. The hotel properties currently managed by the Company are located in Georgia, Florida and Kentucky, and are generally affiliated with nationally recognized hospitality franchises including Holiday Inn and Ramada. Under the terms of franchise agreements with respect to certain properties, the Company is required to comply with standards established by the franchisers, including property upgrades and renovations. Under the terms of the management agreements, the owners of the hotels are responsible for all operating expenses, including property upgrades and renovations. The hotel properties managed by the Company are primarily full service properties that offer food and beverage services and meeting and banquet facilities. The Company's current management agreements generally have initial terms of one to eight years. Currently the Company has several agreements that may be terminated with sixty days' notice. During the twelve months ended March 31, 2001, the Company entered into seven new management agreements. During the same period, property owners terminated ten management agreements. Ownership Interests During the year ending March 31, 2001, the Company had ownership interests in two hotel properties, a Ramada hotel in Longwood, Florida (the "Longwood Hotel") and a Holiday Inn hotel in Louisville, Kentucky (the "Louisville Hotel"). In May 2000, the Company sold the Longwood Hotel for $5,350,000. The Company received net proceeds from the sale of approximately $1,310,000 and a 3 $250,000 note receivable. The $250,000 note was paid in full in 2001. The Company also entered into a management agreement in connection with the sale. The agreement was terminated prior to March 31, 2001. The Louisville Hotel is owned by RW Louisville Hotel Associates, LLC ("Associates"), a Delaware limited liability company. As of March 31, 2001, the Company, through its wholly-owned subsidiaries, was the manager of and had a minority ownership interest in Associates. In April 2001, the Company through its wholly-owned subsidiaries, acquired 100% of the membership interests in Associates as further described below. The membership interests are pledged as security for a $3,623,690 loan made by Louisville Hotel, LLC (the "LLC"). The membership interests are also subject to an option pursuant to which the LLC has the right to acquire the membership interests for a nominal value. Pursuant to the terms of the loan, all revenues (including proceeds from sale or refinancing) of Associates (after payment of expenses including a management fee to the Company) are required to be paid to the LLC until principal and interest on the loan are paid in full. On September 30, 1999, the Company, which already owned a 10% interest in the LLC, acquired an additional interest in the LLC for $2,500,000. As a result of the transaction, the Company has an 80% economic interest in the LLC. The $2,500,000 consideration included $124,000 in cash, the transfer of the Company's 10% ownership interest in a hotel property in Houston, Texas and promissory notes in the aggregate amount of $1,933,000 (the "Louisville Notes") secured by the Company's membership interest in the LLC and the Company's undeveloped land in Longwood, Florida and Phoenix, Arizona. The Louisville Notes are non-recourse to the Company. The Company also entered into a new management agreement with the Louisville Hotel pursuant to which the Company manages the Louisville Hotel in return for a management fee equal to 3% of gross revenues plus incentive fees for above budget revenues. With 80% ownership, the Company is the Managing Member of the LLC. Louisville Hotel, L.P. ("Louisville LP") has the remaining 20% ownership in the LLC. Pursuant to the LLC's Operating Agreement dated as of May 1998, as amended on September 30, 1999 (the "Operating Agreement"), the Company has the right at any time to purchase the remaining 20% interest in the LLC (the "Purchase Option"). The Operating Agreement provides that the purchase price for Louisville's interest is equal to the sum of (a) Louisville's total capital contributions to the LLC ($3,061,000), plus (b) any accrued but unpaid preferred return on such capital contributions, plus (c) the residual value of the remaining interest (the amount that would be distributed to Louisville LP if the LLC sold the Louisville Hotel for its fair market value and distributed the proceeds to the members pursuant to the Operating Agreement) (the "Option Price"). Under the terms of the Operating Agreement, the Company is required, no later than September 30, 2002, to purchase Louisville LP's remaining interest in the LLC for the Option Price. 4 Associates is a licensee under a franchise agreement with Holiday Inn (the "Franchise Agreement"). The Company has guaranteed Associates' obligations under the Franchise Agreement. In the event that the Franchise Agreement is terminated as a result of a breach of the Franchise Agreement by Associates, Associates may be subject to liquidated damages under the Franchise Agreement equal to approximately 36 times the monthly franchise fees payable pursuant to the Franchise Agreement. The current monthly franchise fees are approximately $41,000 which would result in liquidated damages of approximately $1,500,000. In conjunction with the Franchise Agreement, Associates is subject to a Property Improvement Plan ("the Plan"). Under the Plan, Associates is required to make certain improvements to the hotel by December 31, 2002, with certain interim milestones. The Company estimates that the total required improvements will cost approximately $1,858,000. As of March 31, 2001, the Louisville Hotel has spent approximately $330,000 on improvements and has approximately $348,000 in escrow to spend on improvements. The Company has not determined whether Associates will be able to fund the remainder of the Plan. If Associates is unable to fund the remainder of the Plan, the Company may be required to complete the Plan pursuant to the Company's guaranty of the Franchise Agreement. In March 2001 and 2000, the Company recognized writedowns of $2,000,000 and $1,200,000, respectively, on its investment in the LLC. The March 2000 writedown was due to the anticipated shortfall of the company's return of equity as a result of the decreased operating performance of the Hotel. In March 2001, in light of the deterioration of market conditions affecting the hotel industry during the fourth quarter and subsequent to year-end and due to a further decrease in the operating performance of the Hotel, management of the Company concluded that their economic ownership interest had been totally impaired. The carrying value of the investment in the LLC on the Company's books is $0 as of March 31, 2001. In April 2001, Ridgewood Georgia, Inc., a Georgia corporation ("Ridgewood Georgia") and a wholly-owned subsidiary of the Company entered into that certain Assignment and Assumption Agreement (the "Assignment Agreement") with RW Hotel Investment Associates, L.L.C., a Delaware limited liability company ("Transferee") pursuant to which Transferee assigned to Ridgewood Georgia, Transferee's 99% membership interest in RW Louisville Hotel Investors, L.L.C., a Delaware limited liability company ("RW Hotel Investors"). As a result, Ridgewood Georgia, which previously owned the remaining 1% membership interest in RW Hotel Investors, owns 100% of the membership interests in RW Hotel Investors (the "Membership Interests"). RW Hotel Investors, in turn, owns 99% of Associates, which owns the Hotel. The remaining 1% interest in Associates is owned by RW Hurstbourne Hotel, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company. Therefore, as a 5 result of the Assignment Agreement, the Company became the indirect owner of 100% of the membership interests of Associates. Competition and Seasonality The hotel business is highly competitive. The demand for accommodations and the resulting cash flow vary seasonally. Levels of demand are dependent upon many factors, including general and local economic conditions and changes in the number of leisure and business related travelers. The hotels managed by the Company compete with other hotels on various bases including room prices, quality, service, location and amenities. An increase in the number of competitive hotel properties in a particular area could have an adverse effect on the revenues of a Company-managed hotel in the same area that would reduce the fees paid to the Company with respect to such property. Undeveloped Land The Company also owns six parcels of undeveloped land for sale, two of which are located in Florida, and one each in Georgia, Texas, Ohio and Arizona. The parcel located in Phoenix, Arizona and the parcel located in Longwood, Florida are pledged as security for the Company's obligations under the Louisville Notes and the LLC Operating Agreement. The Company has no plans to develop these properties. The Company intends to sell the properties at such time as the Company is able to negotiate sales on terms acceptable to the Company. During the twelve month period ending March 31, 2001, the Company sold two parcels of undeveloped land for a gain of approximately $19,000. There can be no assurance that the Company will be able to sell its undeveloped land on terms favorable to the Company. These undeveloped properties are more fully described on pages 27 to 29 of the 2001 Annual Report to Shareholders and on Schedule III, Real Estate and Accumulated Depreciation included therein. Principal Office/Employees The Company was incorporated under the laws of the State of Delaware on October 29, 1985. In January 1997, the Company changed its name from Ridgewood Properties, Inc. to Ridgewood Hotels, Inc. Prior to December 31, 1985, the Company operated under the name CMEI, Inc. The Company's principal office is located at 1106 Highway 124, Hoschton, Georgia 30548 (telephone number (770) 867-9830). As of March 31, 2001, the Company employed approximately 1,080 persons, of which 933 were located at the hotels owned by third parties and managed by the Company, 135 were located at the Louisville Hotel and 12 were located at its principal office. Payroll costs associated with employees located at hotels are funded by the owners of such hotels. The Company considers its relations with employees to be good. 6 Item 2. Properties The Company does not own any real property material to conducting the administrative aspects of its business operations. Its principal office in Hoschton, Georgia is a month-to-month lease and consists of approximately 2,400 square feet. The space has been leased at market rates and is owned by one of the Company's directors. As of March 31, 2001, the Company had ownership interest in one operating property as follows: Name of Hotel Location # of Rooms Ownership Interest ------------- -------- ---------- ------------------ Holiday Inn Louisville, KY 267 (a) (a) As of March 31, 2001, the Company had a 2% ownership interest in this hotel as a member of Associates, the entity that owns the Hotel. The Hotel serves as collateral for a $17,791,000 term loan with a commercial lender. Through its ownership in the LLC, the Company has an 80% economic interest in the Hotel. Subsequent to March 31, 2001, the Company, through its subsidiaries, acquired the remaining membership interest in Associates. The LLC has an option to acquire the membership interests in Associates for nominal value. The Company also owns six undeveloped properties for sale, two of which are located in Florida, one in Georgia and one each in Texas, Ohio and Arizona. The Company does not expect to develop these properties. These properties are more fully described in Note 2 to the Company's consolidated financial statements set forth in the 2001 Annual Report on pages 26 to 28 and in Schedule III, Real Estate and Accumulated Depreciation, set forth. Item 3. Legal Proceedings On May 2, 1995 a complaint was filed in the Court of Chancery of the State of Delaware (New Castle County) entitled William N. Strassburger v. Michael M. Earley, Luther A. Henderson, John C. Stiska, N. Russell Walden, and Triton Group, Ltd., defendants, and Ridgewood Hotels, Inc., nominal defendant, C.A. No. 14267 (the "Complaint"). The plaintiff is an individual shareholder of the Company who purports to file the Complaint individually, representatively on behalf of all similarly situated shareholders, and derivatively on behalf of the Company. The Complaint challenges the actions of the Company and its directors in consummating the Company's August 1994 repurchases of its common stock held by Triton Group, Ltd. and Hesperus Partners Ltd. in five counts, denominated Waste of Corporate Assets, Breach of Duty of Loyalty to Ridgewood, Breach of Duty of Good Faith, Intentional Misconduct, and Breach of Duty of Loyalty and Good Faith to Class. On July 5, 1995, the Company filed a timely answer generally denying the material allegations of the complaint and asserting several affirmative defenses. Discovery has been concluded, and on March 19, 1998, the Court dismissed all class claims, with only the derivative claims remaining for trial. The case was tried by Vice Chancellor Jacobs during the period February 1 through February 3, 1999. 7 On January 24, 2000, the Court rendered its Opinion. The Court found in favor of the plaintiff and against three of the four individual director-defendants (Messrs. Walden, Stiska and Earley). The Court held that the repurchase transactions being challenged were unlawful under Delaware law, for two primary reasons: (1) the transactions were entered into for the improper purpose of entrenching Mr. Walden in his then-current position of President and Director, and thus constituted an unlawful self-dealing transaction; and (2) the use of the Company's assets to repurchase its common stock held by Triton Group, Ltd. and Hesperus Partners Ltd. was not demonstrated to the Court's satisfaction to be "entirely fair" to the minority shareholders under the entire fairness doctrine as enunciated under Delaware law. Having found that the challenged transactions were unlawful, the Court determined that further proceedings would be necessary to identify the precise form that the final decree in this case should take. Although the Court's opinion contemplates further proceedings, no further hearing date has yet been scheduled to address the remaining remedy issues. On May 15, 2000, the plaintiff filed a Memorandum in Support of Judgment After Trial requesting that the Court enter an order rescinding the Company's issuance of preferred stock in connection with repurchase transactions and requesting that the Court enter a judgment for damages against Messrs. Stiska, Earley and Walden. The Company and the defendants filed written responses to plaintiff's memorandum in August 2000. In November 2000, the Court entered an Order Partially Implementing Decisions and Scheduling Proceedings on Rescissory Damages (the "November 2000 Order"). The November 2000 Order, among other things, orders the rescission of the Company's outstanding preferred stock and the issuance of 1,350,000 shares of the Company's common stock in return therefor, but the rescission of the preferred stock is stayed subject to the Court's entry of a final order on the remaining issues. The November 2000 Order also provides that the Court must determine (i) if defendant Triton will be required to return to the Company $1,162,000 in dividends previously paid on the preferred stock and whether interest will be required to be paid on such dividends and (ii) the amount of rescissory damages, if any, that defendants Walden, Stiska and Earley should be required to pay to the Company and whether such damages are subject to pre-judgment interest from September 1, 1994. The November 2000 Order requires the parties to provide additional evidence and briefs to the Court with respect to the damages issues. Since November 2000, the parties have conducted additional discovery with respect to the remedy issues. To date, no additional briefs have been filed and no further hearing has been scheduled. As a derivative action, the Company does not believe that the ultimate outcome of the litigation will result in a material adverse effect on its financial condition. However, the Company may be required to pay plaintiff's attorneys' fees. In addition, while the Company had been advancing the legal fees and expenses of the director-defendants prior to the Opinion, the Company believes that it is not required to advance legal fees and expenses to the director-defendants who were found to be liable to the Company. However, Mr. Walden has asserted that he has the right to the continued advancement of 8 his legal fees and expenses under the Company's Certificate of Incorporation (as amended), subject to an undertaking to pay such advances back if required under Delaware law. Mr. Walden, through his counsel, has threatened to file a complaint against the Company seeking to compel the advancement of such fees and expenses and the Company is currently attempting to resolve the dispute with Mr. Walden regarding the advancement of his fees and expenses. If the Company is required to advance such fees and expenses, and the defendants are required to repay such advances in the future, the defendants' financial ability to make such repayment is not known to the Company. On March 15, 2001, the Company filed a complaint in Fulton County State Court entitled Ridgewood Hotels, Inc. v. Excelsior Hospitality, LLC, Fulton County State Court, Civil Action File No. 01-VS-015898A. The Company seeks amounts due under a management agreement pursuant to which Ridgewood was to manage a hotel property owned by defendant Excelsior. The Company believes that Excelsior wrongfully terminated and otherwise breached the management agreement and seeks damages in the total amount of approximately $310,000, together with attorneys' fees. On April 27, 2001, Excelsior filed its Answer, denying the material allegations in the Complaint. Excelsior also filed a Counterclaim against the Company arising out of the same management agreement, claiming that the Company mismanaged the hotel, acted in bad faith, and otherwise failed to perform under the management agreement. Excelsior seeks compensatory damages in excess of $900,000, together with punitive damages and attorneys' fees. The Company intends to prosecute its claim and to vigorously defend against the counterclaims. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ended March 31, 2001. 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information regarding the market for the Company's common stock, the Company's dividend policy and the approximate number of holders of the common stock at March 31, 2001 is included under the caption "Market for Registrant's Common Equity and Related Stockholder Matters" on page 1 of the 2001 Annual Report to Shareholders and is incorporated herein by reference. The Company made no sales of unregistered equity securities of the Company in the twelve months ended March 31, 2001. Item 6. Selected Financial Data A summary of selected financial data for the Company for the fiscal year ended March 31, 2001, the seven months ended March 31, 2000 and the fiscal years ended August 31, 1996 through 1999 is included under the caption entitled "Selected Financial Data" on page 2 of the 2001 Annual Report to Shareholders and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information regarding the Company's financial condition, changes in financial condition and results of operations is included under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 5 through 14 of the 2001 Annual Report to Shareholders and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company has no material exposure to the market risks covered by this Item. Item 8. Financial Statements The Company's consolidated financial statements and notes thereto, which are included on pages 15 through 50 of the 2001 Annual Report to Shareholders under the following captions listed below, are incorporated herein by reference. Consolidated Balance Sheets at March 31, 2001 and 2000. Consolidated Statements of Operations for the year ended March 31, 2001, for the seven months ended March 31, 2000 and 1999 (unaudited) and for the years ended August 31, 1999 and 1998. 10 Consolidated Statements of Shareholders' Investment for the year ended March 31, 2001, for the seven months ended March 31, 2000 and for the years ended August 31, 1999 and 1998. Consolidated Statements of Cash Flows for the year ended March 31, 2001, for the seven months ended March 31, 2000 and 1999 (unaudited) and for the years ended August 31, 1999 and 1998. Notes to Consolidated Financial Statements. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (a) Previous Independent Accountants (i) On March 28, 2000, the Company dismissed PricewaterhouseCoopers LLP as its independent accountants. (ii) The reports of PricewaterhouseCoopers LLP on the financial statements for the fiscal years ended August 31, 1998 and August 31, 1999 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. (iii) The members of the Company's Board of Directors were consulted and approved the decision to change independent accountants. (iv) In connection with its audits for the fiscal years ended August 31, 1998 and August 31, 1999 and through March 28, 2000, there have been no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused them to make reference thereto in their report on the financial statements for such years. (v) During the fiscal years ended August 31, 1998 and August 31, 1999 and through March 28, 2000, there have been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)) with PricewaterhouseCoopers LLP. (vi) PricewaterhouseCoopers LLP furnished the Company with a letter addressed to the SEC stating that it agrees with the above statements. A copy of such letter, dated March 31, 2000, is filed as an Exhibit 16 to the Company's Current Report on Form 8-K filed on March 31, 2000. 11 (b) New Independent Accountants (i) The Company engaged Arthur Andersen LLP as its new independent accountants as of March 28, 2000. During the two most recent fiscal years prior to retaining Arthur Andersen, LLP and through March 28, 2000, the Company had not consulted with Arthur Andersen LLP regarding (1) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered; or (2) the matter of a disagreement or reportable event with the former auditor (as described in Regulation S-K Item 304(a)(2)). 12 PART III Item 10. Directors and Executive Officers Set forth below are the names, ages (as of March 31, 2001), positions and offices held and a brief description of the business experience during the past five years of the directors and executive officers of the Company. Stacey H. Davis (age 38) has served as a director of the Company since February 23, 2001. Ms. Davis is currently the President and Chief Executive Officer of the Fannie Mae Foundation. Prior to her appointment as President and Chief Executive Officer with the Fannie Mae Foundation, Ms. Davis served as vice president for Housing and Community Development in the Fannie Mae Foundation's Southeastern Regional Office. She was also a public finance investment banker for five years in New York and Atlanta. While in Atlanta, she served as treasurer and chair of the Finance Committee for the Fulton-Dekalb Hospital Authority, and on the Atlanta Urban League, Research Atlanta, and the Herndon Foundation Boards. She currently serves on the Policy Advisory Board of the Joint Center for Housing Studies at Harvard University, Woman's in Street Village, Woman's Policy Inc., the Museum of African Art and the Washington Ballet. Henk H. Evers (age 42) has served as President and Chief Operating Officer of the Company since January 11, 2000 and as a director of the Company since February 3, 2000. Since January 1999, Mr. Evers has served as the Chief Executive Officer of Fountainhead Development Corp., Inc. ("Fountainhead"). From November 1994 until January 1999, Mr. Evers was the General Manager of the Chateau Elan Winery and Resort, where he was in charge of developing the Chateau Elan brand name and properties in Georgia, California, Florida and Scotland. Prior to that, Mr. Evers was a member of the executive committee for various Marriott International properties for approximately 13 years. Luther A. Henderson (age 80) has been a director of the Company since its formation in 1985. From 1983 to 1985, Mr. Henderson served as a director of CMEI, Inc., the Company's predecessor. From 1980 to 1993, Mr. Henderson served as a director of Pier 1 Imports Inc., a commercial retailer. Mr. Henderson is also a member of the Board of Directors of Beeba's Creations, Inc. and is President of Pirvest, Inc. Sheldon E. Misher (age 60) has served as Secretary of the Company since January 11, 2000 and as a director of the Company since February 3, 2000. Since May 1999, Mr. Misher has been associated with Commonwealth Associates, a venture capital and merchant banking firm located in New York, New York. From 1969 to 1999, Mr. Misher practiced law with the firm of Bacher, Tally, Polevoy & Misher, located in New York, New York, where he was most recently a Senior Partner. Donald E. Panoz (age 65) has served as Chief Executive Officer of the Company since January 11, 2000 and as Chairman of the Board since February 3, 2000. In 1986, Mr. Panoz founded Fountainhead and has served as its Chairman since inception. Since 13 July 1999, Mr. Panoz has served as the Chairman of Elan Motor Sports Technologies, Inc., an auto racing design, development and manufacturing company located in Braselton, Georgia. Since 1997, Mr. Panoz has served as the Chairman of Panoz Motor Sports, a race car manufacturer and competitor that he founded. Since 1996, Mr. Panoz has served as the Chairman and Chief Executive Officer of L'Auberge International Hospitality Company, a hotel and resort management company that he co-founded with Nancy C. Panoz. From 1969 until 1996, Mr. Panoz served as the Chairman and Chief Executive Officer of Elan Corporation plc, a leading worldwide pharmaceutical research and development company located near Dublin, Ireland that he co-founded with Nancy C. Panoz. Since 1992, Mr. Panoz has been a director of Warner Chilcott plc, a publicly traded pharmaceutical company headquartered in Dublin, Ireland, and served as its Chairman from 1995 to 1998. Since 1981, Mr. Panoz has served as the Chairman and Chief Executive Officer of Chateau Elan Winery and Resort, a 422-room inn, conference center and winery located approximately 40 miles northeast of Atlanta, Georgia. Mr. Panoz also serves on the Board of Directors of the Georgia Chamber of Commerce. Mr. Panoz is married to Nancy C. Panoz. Nancy C. Panoz (age 64) has served as Vice Chairman of the Board of Directors of the Company since February 3, 2000. Since 1996, Mrs. Panoz has also served as the Vice Chairman of L'Auberge International Hospitality Company, a company that she co-founded with her husband. In 1989, Mrs. Panoz became President of the Chateau Elan Winery and Resort that she founded with Donald E. Panoz in 1981. In 1985, Mrs. Panoz founded Elan Natural Waters, Inc., a company that owns and operates a mineral water bottling plant in Blairsville, Georgia, and has served as its President and Chairman since inception. In 1985, Mrs. Panoz founded Nanco Holdings, Inc., an investment and real estate holding company. In 1969, Mrs. Panoz co-founded Elan Corporation with Donald E. Panoz, and served as Elan's Managing Director from 1977 to 1983 and its Vice Chairman from 1983 to 1995. Mrs. Panoz currently serves on the board of directors of numerous non-profit organizations, including the Atlanta Convention and Visitors Bureau, the Georgia Chamber of Commerce and the Gwinnett Foundation, Inc. Mrs. Panoz is married to Donald E. Panoz. Anthony Mastandrea (age 35) is a director of the Company. Since December 1998, Mr. Mastandrea has been the Chief Financial Officer and a director of Fountainhead Holdings, Ltd. From May 1994 until November 1998, Mr. Mastandrea was the Controller for Fountainhead Development Corp., Inc. Prior to joining Fountainhead Development Corp., Inc., Mr. Mastandrea was a manager with KPMG Peat Marwick in Atlanta, Georgia and is a Certified Public Accountant. With the exception of Donald E. Panoz and Nancy C. Panoz, there are no family relationships among any of the executive officers or directors of the Company. Executive officers of the Company are elected or appointed by the Board and hold office until their successors are elected or until death, resignation or removal. 14 Item 11. Executive Compensation Compensation of Non-Employee Directors During fiscal year ending March 31, 2001, directors who were not officers of the Company received a retainer of $13,200 plus $800 for each Board meeting attended. All directors were reimbursed for expenses incurred in connection with attending Board and committee meetings. On June 13, 2000, the Company issued non-qualified stock options to purchase up to 25,000 shares of common stock at an exercise price of $2.25 per share to Mr. Misher in connection with his serving as a director and Secretary of the Company. Executive Compensation The following Summary Compensation Table sets forth the compensation for the past three fiscal years awarded or paid by the Company to all individuals serving as Chief Executive Officer or President of the Company at any time during the fiscal year ended March 31, 2001. Summary Compensation Table Annual Compensation Name and Fiscal Principal Position Year Salary Henk H. Evers 2001(2) $205,000 President 2000(1) 75,000 Donald E. Panoz 2001(2) 0 Chief Executive Officer 2000(1) 0 - --------------- (1) Information shown is for the seven month period ending March 31, 2000. Mr. Evers was appointed as President and Chief Operating Officer effective January 11, 2000. At the Company's request, Fountainhead paid Mr. Evers' salary for the 15 period ending March 31, 2000 as an advance to the Company. The Company accrued $75,000 in expenses relating to the advanced compensation for the period ending March 31, 2000. Mr. Panoz was appointed Chief Executive Officer of the Company on January 11, 2000. Mr. Panoz received no compensation for serving as Chief Executive Officer of the Company for the period ending March 31, 2000. (2) Information shown is for the fiscal year ending March 31, 2001. The Company has accrued $221,000 in expenses relating to the advanced compensation and benefits for the year ended March 31, 2001. Mr. Panoz received no compensation for serving as Chief Executive Officer of the Company during the fiscal year ended March 31, 2001. The accrued expenses represent Mr. Evers' salary of $305,000 and the cost of his and benefits of $16,000, less $71,000 allocated to Chateau Elan Georgia in return for services Mr. Evers provided to Chateau Elan Georgia from September, 2000 through March 31, 2001 and $29,000 allocated to Fountainhead in return for services Mr. Evers provided to Fountainhead during the fiscal year ended March 31, 2001. (3) The amounts shown in this column consist of Company matching contributions on behalf of the named person under the Ridgewood Hotels Employee Savings Plan. On July 1, 2000, the Company issued stock options to purchase up to 90,000 shares of common stock at an exercise price of $2.00 per share to Mr. Evers in connection with his serving as President of the Company. The options vest over a four year period at the rate of 25% per year. Aggregated Stock Option Exercises in Fiscal Year 2001 and Fiscal Year-End Option Values During the fiscal year ending March 31, 2001, no officers named in the Summary Compensation Table exercised any options. In connection with his resignation as President and Chief Executive Officer on January 11, 2000 and the execution of a Consulting Agreement between Mr. Walden and the Company (described below), Mr. Walden agreed to the cancellation of 150,000 options to purchase common stock of the Company. The Company paid Mr. Walden $25,000 as consideration for his cancellation of the options. Mr. Walden currently has no unexercised options. Employment and Termination Agreements Mr. Walden, the Company's former President and Chief Executive Officer, was a party to a Post-Employment Consulting Agreement with the Company, dated September 4, 1991 and amended as of August 13, 1998 (the "Employment Agreement"), until such agreement was terminated effective January 11, 2000. 16 On January 11, 2000, Mr. Walden entered into a Consulting Agreement with the Company (the "Consulting Agreement"). Pursuant to the terms of the Consulting Agreement, Mr. Walden served as a consultant to the Company for a period of six months, for which he received a payment of $50,000. The Company also agreed to provide Mr. Walden with health insurance benefits substantially similar to those offered to employees of the Company for a period of three years. In the Consulting Agreement, Mr. Walden released all claims against the Company except with respect to such health insurance benefits and compensation and terminated his Employment Agreement and participation in the Company's Supplemental Retirement and Death Benefit Plan (as described below). Mr. Walden also agreed to the cancellation of 150,000 options to purchase common stock of the Company, for which the Company agreed to pay him $25,000. Supplemental Retirement and Death Benefit Plan The Ridgewood Hotels, Inc. Supplemental Retirement and Death Benefit Plan (the "SERP") was adopted, effective January 1, 1987, to provide supplemental retirement benefits for selected employees of the Company. As of March 31, 2001 no employees of the Company were participating in the SERP. Mr. Walden was the sole participant in the SERP until January 11, 2000, when he was replaced as an officer of the Company. He subsequently entered into a Consulting Agreement with the Company in which he agreed to a full termination of his rights and benefits under the SERP. In connection therewith, the Company agreed to pay Mr. Walden $55,000 per year for a period of 15 years beginning at the age of 65 in accordance with the terms and conditions of the SERP. Such annual payment represented a decrease in the amount of benefit to which Mr. Walden would otherwise have been entitled under the SERP. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information as of June 30, 2001 regarding the beneficial ownership of the capital stock of the Company by (i) each person who is currently a director of the Company; (ii) each person who is a nominee for election as a director of the Company; (iii) each executive officer of the Company named in the Summary Compensation table included elsewhere herein; (iv) each beneficial owner of more than 5% of the common stock and preferred stock of the Company; and (v) all directors and executive officers as a group. 17
Class of No. of Shares Name and Address of Shares Bene- Beneficially Percentage Beneficial Owner (1) ficially Owned Owned of Class -------------------- -------------- ----- -------- Fountainhead Development Corp., Inc. Common Stock 3,000,000 (2) 77.7% 1394 Broadway Avenue Series A Braselton, GA 30157 Preferred Stock 450,000 (3) 100.0% Donald E. Panoz + Common Stock 3,000,000 (4)(5) 77.7% Series A Preferred Stock 450,000 (3)(5) 100.0% Nancy C. Panoz + Common Stock 3,000,000 (4)(5) 77.7% Series A Preferred Stock 450,000 (3)(5) 100.0% Sheldon E. Misher + Common Stock 25,000 (6) 1% Henk H. Evers + ++ Common Stock 0 0% Stacey H. Davis + Common Stock 0 0% Anthony Mestandrea + Common Stock 0 0% Luther A. Henderson + 5608 Malvey Avenue, Suite 104-A Ft. Worth, TX 76107 Common Stock 58,800 (7) 2.3% All executive officers and directors Common Stock 3,083,800 (5)(8) 79.8% as a group (7 persons) Series A Preferred Stock 450,000 (3)(5) 100.0%
- --------------- + Director of the Company ++ Executive Officer (1) Unless otherwise indicated, the mailing address of each beneficial owner is 1106 Highway 124, Hoschton, Georgia 30548. Information as to the beneficial ownership of common stock has either been furnished to the Company by or on behalf of the indicated persons or is taken from reports on file with the Securities and Exchange Commission. (2) Includes (i) 1,350,000 shares of common stock that may be received upon the conversion of the preferred shares. (3) Fountainhead acquired the preferred stock from ADT Security Services, Inc. ("ADT"). Under the terms of the stock purchase agreement with respect to the shares, Fountainhead may be required to return the shares to ADT in the event that ADT is required by court order, in litigation pending in the Court of Chancery in Delaware involving ADT (see "Legal Proceedings"), to return the preferred stock to the Company. If, as a result of the return of the preferred stock, ADT receives common stock, Fountainhead has agreed to acquire such shares from ADT. 18 (4) Includes (i) 1,350,000 shares of common stock that may be received upon the conversion of the preferred shares held by Fountainhead, (ii) 1,650,000 shares of common stock held by Fountainhead, and (iii) 65,000 shares of common stock underlying an option granted to Fountainhead by Mr. Walden that is immediately exercisable. (5) Mr. and Mrs. Panoz, who are husband and wife, are directors and collectively may be deemed to beneficially own all of the voting stock of Fountainhead Holdings, Ltd. ("Holdings"), which in turn owns all of the voting stock of Fountainhead. Although they may be deemed to meet the definition of beneficial ownership with respect to the voting stock of Holdings, they have no economic interest in such voting stock. Because these shares of the Company are held of record by Fountainhead, each of Mr. and Mrs. Panoz may be deemed to be a beneficial owner of all such shares. (6) Represents 25,000 shares of common stock underlying options that are currently exercisable. (7) Includes 18,000 shares of common stock underlying options that are currently exercisable. (8) Includes (i) 1,350,000 shares of common stock that may be received upon the conversion of the preferred shares held by Fountainhead; and (ii) 43,000 shares of common stock underlying options that are currently exercisable. Item 13. Certain Relationships and Related Transactions On January 10, 2000, the Company entered into the Management Agreement with Fountainhead, pursuant to which Fountainhead retained the Company to perform management services at Chateau Elan Winery and Resort, one of Fountainhead's properties, for a period of five years. In consideration of Fountainhead's agreement to enter into the Management Agreement and a payment of $10,000 by Fountainhead to the Company, the Company issued to Fountainhead 1,000,000 shares of common stock. The determined market value of the management contract was $2,000,000 at the time of the transaction. In the Management Agreement, Fountainhead agreed to pay the Company a base management fee equal to 2% of the gross revenues of the properties being managed, plus an annual incentive management fee to be determined each year based on the profitability of the properties being managed during that year. The Management Agreement has a term of five years, but is terminable upon the transfer by Fountainhead of all or a material portion of the properties covered by the management agreement. If the management agreement is terminated upon such a transfer or upon the occurrence of an event of default by Fountainhead, Fountainhead shall pay to the Company a portion of the projected fees owed to the Company under the Agreement, with adjustments based on the term of the management agreement remaining. In such 19 event, Fountainhead may elect to surrender to the Company shares of common stock in lieu of a cash payment. The Company also manages one other Fountainhead hotel in Sebring, Florida and received a development fee with respect to Fountainhead's resort under development in St. Andrews, Scotland. The resort opened on June 14, 2001. The Company anticipates receiving a management contract to manage the resort but there are no assurances that it will receive a contract. See further discussion below. At the request of the Company, since January 11, 2000, Fountainhead has paid the salary of the Company's President as an advance to the Company. The Company accrued $296,000 in expenses relating to the advanced compensation and benefits. In March 2001, the Company reduced the advanced compensation liability for the Company's President by $90,000 by netting accrued development fees owed to the Company by Fountainhead for managing their resort in St. Andrews against this liability. After reducing the advanced compensation by $90,000, there is $206,000 of accrued liability remaining at March 31, 2001. Effective September, 2000, the Company's President has assumed certain responsibilities previously handled by the general manager of Chateau Elan Georgia and Chateau Elan Georgia has agreed to assume $125,000 of the President's annual salary of $305,000. In addition, the Company's President is performing certain services for Fountainhead (in addition to the services for which the Company received a development fee) and, while he continues to perform such services, Fountainhead has agreed to assume $50,000 of the President's annual salary. For the fiscal year ended March 31, 2001, the portion of the President's salary charged to Chateau Elan Georgia and Fountainhead was $71,000 and $29,000, respectively. In the normal course of its business of managing hotels, the Company may incur various expenses on behalf of Fountainhead or its subsidiaries that the Company pays and is reimbursed by Fountainhead for these expenditures. As of March 31, 2001, Fountainhead owed the Company approximately $402,000 for such unpaid management fees and expenses. The Company has an agreement with Chateau Elan Georgia pursuant to which Chateau Elan Georgia's Human Resource Director serves part-time as the Company's Human Resource Director in return for which the Company is responsible for a portion of his salary. For the year ending March 31, 2001, the Company incurred charges of approximately $40,000 representing approximately 30% of his salary. Chateau Elan Georgia deducts the Company's portion of the salary from the monthly management fees Chateau Elan Georgia owed to the Company. The Company leases its office space for $1,850 per month from Nanco Co., which is owned by one of the Company's directors. The lease terms are month-to-month and at market rates for comparable space. 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) The following financial statements, together with the applicable reports of independent public accountants, are set forth on pages 15 through 52 of the 2001 Annual Report to Shareholders and are incorporated by reference at Item 8 herein. Reports of Independent Public Accountants. Consolidated Balance Sheets at March 31, 2001 and 2000. Consolidated Statements of Operations for the year ended March 31, 2001, the seven months ended March 31, 2000 and 1999 (unaudited) and for the years ended August 31, 1999 and 1998. Consolidated Statements of Shareholders' Investment for the year ended March 31, 2001, for the seven months ended March 31, 2000 and for the years ended August 31, 1999 and 1998. Consolidated Statements of Cash Flows for the year ended March 31, 2001, for the seven months ended March 31, 2000 and 1999 (unaudited) and for the years ended August 31, 1999 and 1998. Notes to Consolidated Financial Statements. (a)(2) The following financial statement schedule, together with the applicable report of independent public accountants, are filed as a part of this Report: Page Number(s) In Form 10-K Reports of Independent Public Accountants on Financial Statement Schedule S-1 thru S-2 III - Real Estate and Accumulated Depreciation - March 31, 2001 S-3 thru S-5 All other schedules are omitted because they are not applicable or because the required information is given in the financial statements or notes thereto set forth on pages 15 through 50 of the 2001 Annual Report to Shareholders incorporated herein by reference. (a)(3) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on pages E-1 through E-9 hereof. 21 No reports on Form 8-K were filed during the fourth quarter of the Company's fiscal year ended March 31, 2001. 22 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. RIDGEWOOD HOTELS, INC. By: /s/ Henk H. Evers ---------------------------------- Henk H. Evers, President, Chief Operating Officer Dated: July 16, 2001 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 date indicated: /s/ Peter M. Conboy /s/ Anthony Mastandrea - ------------------------------- ------------------------------------ Peter M. Conboy Anthony Mastandrea, Director Director of Finance and Accounting /s/ Sheldon E. Misher - ------------------------------- ------------------------------------ Stacey H. Davis, Director Sheldon E. Misher, Director /s/ Henk H. Evers /s/ Donald E. Panoz - ------------------------------- ------------------------------------ Henk H. Evers, President, Chief Donald E. Panoz, Director Operating Officer and Director /s/ Nancy C. Panoz - ------------------------------- ------------------------------------ Luther A. Henderson, Director Nancy C. Panoz, Director Dated: July 16, 2001 23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To Ridgewood Hotels, Inc.: We have audited in accordance with auditing standards generally accepted in the United States the consolidated financial statements included in RIDGEWOOD HOTELS, INC.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated July 10, 2001. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The financial statement schedule listed in Item 14(a) of this Form 10-K is the responsibility of the Company's management, is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule as it relates to the information as of March 31, 2001 and for the fiscal year ended March 31, 2001 and the seven months ended March 31, 2000 has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Atlanta, Georgia July 10, 2001 S-1 Report of Independent Accountants on Financial Statement Schedule November 17, 1999 To the Board of Directors of Ridgewood Hotels, Inc. Our audits of the consolidated financial statements referred to in our report dated November 17, 1999 appearing in the 1999 Annual Report to Shareholders of Ridgewood Hotels, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICEWATERHOUSECOOPERSLLP Atlanta, Georgia S-2
SCHEDULE III Page 1 of 3 RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION MARCH 31, 2001 (000's Omitted) Cost Capitalized Gross Amount at Which Initial Cost Subsequent to Carried at March 31, 2001 to Company Acquisition (A)(B)(D) -------------------------- -------------------------- ---------------------------------------- Building Building Accumu- Encum- and and lated Date of brances Improve- Improve- Carrying Improve- Deprecia- Construc- Date Description (E) Land ments ments Costs Land ments Total tion (C) tion Acquired - -------------- ----------- --------- --------- ---------- -------- ------ -------- -------- ------- -------- --------- Land- Georgia $ -- $ 58 $ -- $ -- $ -- $ 35 $ -- $ 35 $ -- -- Dec-75 Texas -- 5,338 -- 2 -- 3,582 2 3,584 -- -- Dec-85 Florida 1,933,000 516 -- 10 -- 225 10 235 -- -- Mar-85 Florida -- -- -- -- -- -- -- -- -- -- Jul-88 Arizona 1,933,000 978 -- 110 -- 445 110 555 -- -- Mar-85 Ohio -- 1,006 -- 180 -- 67 79 146 -- -- Dec-77 ---------- --------- ------- ------- ------- ------- ------ -------- ------ TOTAL $1,933,000 $ 7,896 $ -- $ 302 $ -- $ 4,354 $ 201 $ 4,555 $ -- ========== ========= ======= ======= ======= ======= ====== ======== ======
S-3 SCHEDULE III Page 2 of 3 (A) Except as discussed in Note 1 to the "Notes to Consolidated Financial Statements," real estate owned is carried at the lower of cost or fair value less costs to sell. At March 31, 2001, the amount of the allowance for possible losses was approximately $3,155,000, which related to land held for sale. (B) Reconciliation of real estate properties (000's omitted):
For the Year For the Seven Ended Months Ended For the Year Ended 3/31/01 3/31/00 8/31/99 8/31/98 ------- -------------- ------- ------- Balance, Beginning $8,086 $8,300 $8,735 $9,553 of period Additions During the Period: Acquisitions -- -- -- -- Capitalized -- 13 65 88 Costs Deductions during the period: Real estate sold or assets retired (on which financing was pro- vided by the Company in certain cases) 3,531 227 500 906 ------ ------ ------ ------ Balance, end of period $4,555 $8,086 $8,300 $8,753 ====== ====== ====== ======
S-4 SCHEDULE III Page 3 of 3 (C) Operating properties and any related improvements are being depreciated by the "straight line" method over the estimated useful lives of such assets, which are generally 30 years for buildings and 5 years for furniture and fixtures. Reconciliation of accumulated depreciation (000's omitted):
For the Year For the Seven Months For the Year Ended Ended 3/31/01 Ended 3/31/00 8/31/99 8/31/98 ------------- -------------------- ------- ------- Balance, Beginning $ 1,855 $ 1,781 $ 1,679 $ 1,567 of period Additions during the period -- 74 130 139 Depreciation associated with assets sold or retired 1,855 -- (28) (27) ------- ------- ------- ------- Balance, end of period $-0- $ 1,855 $ 1,781 1,679 ======= ======= ======= =======
(D) The aggregate cost for federal income tax purposes is approximately $6,667,000 at March 31, 2001. (E) These parcels of land cross-collateralize three promissory notes totaling $1,933,000 that the Company is obligated to pay by September 30, 2002 in conjunction with the Company's ownership of a hotel in Louisville, Kentucky. S-5 EXHIBIT INDEX Report on Form 10-K for the fiscal year ended March 31, 2001
Page Number Exhibit In Manually Number Description Signed Original - ------ ----------- --------------- 3 (a) Certificate of Incorporation of Registrant.* 3 (b) By-Laws of Registrant.* 3 (c) Certificate of Amendment to the Certificate of Incorporation (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1987 and incorporated herein by reference). 3 (d) Certificate of Amendment to the Certificate of Incorporation of the Registrant (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1989 and incorporated herein by reference). 3 (e) Certificate of Amendment to the Certificate of Incorporation of Ridgewood Properties, Inc. dated May 23, 1991 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1991 and incorporated herein by reference). 3(f) Certificate of Amendment to the Certificate of Incorporation of Ridgewood Properties, Inc. dated March 30, 1993 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended February 28, 1993 and incorporated herein by reference). 3 (g) Certificate of Amendment to the Certificate of Incorporation of Ridgewood Properties, Inc. dated January 26, 1994 (filed as Exhibit 3 to Registrant's Form 10-Q for the quarter ended February 28, 1994 and incorporated herein by reference). 3 (h) Certificate of Amendment to the Certificate of Incorporation of Ridgewood Hotels, Inc. (filed as an Exhibit to Registrant's Form 8-K on February 5, 1997, and incorporated herein by reference).
E-1 4 (a) Stock Purchase Agreement between Ridgewood Properties, Inc. and Triton Group Ltd., dated as of August 15, 1994 (filed as an Exhibit to Registrant's Form 8-K on August 15, 1994, and incorporated herein by reference). 4 (b) August 15, 1994 Press Release issued by Ridgewood Properties, Inc. (filed as an Exhibit to Registrant's Form 8-K on August 15, 1994, and incorporated herein by reference). 4 (c) Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock of the Registrant (filed as an Exhibit to Registrant's Registration Statement on Form S-8 filed on November 8, 1994 (No. 33-866084) and incorporated herein by reference). 4 (d) Notice of Exercise by N. Russell Walden dated January 31, 1997 (filed as an Exhibit to Registrant's Form 8-K on February 5, 1997, and incorporated herein by reference). 4(e) Notice of Exercise by Karen S. Hughes dated January 31, 1997 (filed as an Exhibit to Registrant's Form 8-K on February 5, 1997, and incorporated herein by reference). 4(f) Share Security Agreement between N. Russell Walden and Ridgewood Properties, Inc. dated January 31, 1997 (filed as an Exhibit to Registrant's Form 8-K on February 5, 1997, and incorporated herein by reference). 4 (g) Share Security Agreement between Karen S. Hughes and Ridgewood Properties, Inc. dated January 31, 1997 (filed as an Exhibit to Registrant's Form 8-K on February 5, 1997, and incorporated herein by reference). 10 (a) Employment Agreement between N. R. Walden and CMEI, Inc., dated March 28, 1985.* 10 (b) Bill of Sale and Assumption of Liabilities between CMEI, Inc. and Ridgewood Properties, Inc. dated December 9, 1985.* E-2 10 (c) Ridgewood Properties, Inc. Supplemental Retirement and Death Benefit Plan dated January 1, 1987 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1988 and incorporated herein by reference). 10 (d) Post-Employment Consulting Agreement between N. R. Walden and Ridgewood Properties, Inc. dated September 4, 1991 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1991 and incorporated herein by reference). 10 (e) Post-Employment Consulting Agreement between Karen S. Hughes and Ridgewood Properties, Inc. dated September 4, 1991 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1991 and incorporated herein by reference). 10 (f) Post-Employment Consulting Agreement between Byron T. Cooper and Ridgewood Properties, Inc. dated September 4, 1991 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1991 and incorporated herein by reference). 10 (g) Post-Employment Consulting Agreement between M. M. McCullough and Ridgewood Properties, Inc. dated September 4, 1991 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1991 and incorporated herein by reference). 10 (h) Ridgewood Properties, Inc. Stock Option Plan dated March 30, 1993 and as amended September 14, 1993 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended February 28, 1994, and incorporated herein by reference). 10 (i) Stock Option Agreement between Luther A. Henderson and Ridgewood Properties, Inc. dated April 1, 1993 and as approved on January 12, 1994 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended February 28, 1994, and incorporated herein by reference). E-3 10 (j) Stock Option Agreement between Karen S. Hughes and Ridgewood Properties, Inc. dated April 1, 1993 and as approved on January 12, 1994 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended February 28, 1994, and incorporated herein by reference). 10 (k) Stock Option Agreement between N. R. Walden and Ridgewood Properties, Inc. dated April 1, 1993 and as approved on January 12, 1994 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended February 28, 1994, and incorporated herein by reference). 10 (l) Stock Option Agreement between Karen S. Hughes and Ridgewood Properties, Inc. dated January 31, 1994 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended February 28, 1994, and incorporated herein by reference). 10 (m) Stock Option Agreement between N. R. Walden and Ridgewood Properties, Inc. dated January 31, 1994 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended February 28, 1994, and incorporated herein by reference). 10 (n) Ridgewood Properties, Inc. 1993 Stock Option Plan, as amended on October 26, 1994 (filed as an Exhibit to Registrant's Registration Statement on Form S-8 filed on November 8, 1994 (No. 33-86084) and incorporated herein by reference). 10 (o) Amended and Restated Basic Agreement between RW Hotel Investment Partners, L.P. and Ridgewood Hotels, Inc. dated August 14, 1995 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). 10 (p) Amended and Restated Limited Partnership Agreement of RW Hotel Partners, L.P. dated September 8, 1995 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). E-4 10 (q) Management Agreement (Holiday Inn Hurstbourne) between RW Hotel Partners, L.P. and Ridgewood Properties, Inc. dated August 16, 1995 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). 10 (r) Mortgage, Assignment of Leases and Rents and Security Agreement Between Bloomfield Acceptance Company, L.L.C. and Ridgewood Orlando, Inc. dated June 30, 1995 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). 10 (s) Security Agreement between Ridgewood Orlando, Inc. and Bloomfield Acceptance Company, L.L.C. dated June 30, 1995 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). 10 (t) Mortgage Note between Bloomfield Acceptance Company and Ridgewood Orlando, Inc. dated June 30, 1995 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). 10 (u) Agreement and Plan of Merger between and among Ridgewood Properties, Inc., Ridgewood Acquisition Corp., Wesley Hotel Group, Inc., Wayne McAteer and Samuel King dated December 7, 1995 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended November 30, 1995, and incorporated herein by reference). 10 (v) Shareholders' Agreement by and between Samuel King and Ridgewood Properties, Inc. dated December 1995 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1996, and incorporated herein by reference). 10 (w) Warrants to Purchase Shares of Common Stock of Ridgewood Properties, Inc. issued to Hugh Jones on December 16, 1996 (filed as an Exhibit to E-5 Registrant's Form 10-Q for the quarter ended November 30, 1996, and incorporated herein by reference). 10 (x) Promissory Note between N. Russell Walden and Ridgewood Properties, Inc. dated January 31, 1997 (filed as an Exhibit to Registrant's Form 8-K on February 5, 1997 and incorporated herein by reference). 10 (y) Promissory Note between Karen S. Hughes and Ridgewood Properties, Inc. dated January 31, 1997 (filed as an Exhibit to Registrant's Form 8-K on February 5, 1997 and incorporated herein by reference). 10 (z) Operating Agreement between Houston Hotel, LLC and Ridgewood Hotels, Inc. effective December 9, 1997 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended May 31, 1998). 10 (aa) Operating Agreement between RW Hurstbourne Hotel, Inc. and RW Louisville Hotel Investors, LLC effective May 13, 1998 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended May 31, 1998). 10 (bb) Operating Agreement between Ridgewood Hotels, Inc. and Louisville Hotel, L.P. effective June 5, 1998 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended May 31, 1998). 10 (cc) Amendment No. 1 to Post-Employment Consulting Agreement between Ridgewood Hotels, Inc. and N. Russell Walden dated August 13, 1998 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1998 and incorporated herein by reference). 10 (dd) Amendment No. 1 to Post-Employment Consulting Agreement between Ridgewood Hotels, Inc. and Byron T. Cooper dated August 18, 1998 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1998 and incorporated herein by reference). E-6 10 (ee) Amendment No. 1 to Post-Employment Consulting Agreement between Ridgewood Hotels, Inc. and Karen S. Hughes dated August 13, 1998 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1998 and incorporated herein by reference). 10 (ff) First Amendment to Operating Agreement of Louisville, LLC dated September 30, 1999 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1999 and incorporated herein by reference). 10 (gg) Secured Promissory Note in the amount of $1,333,000 by Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated September 30, 1999 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1999 and incorporated herein by reference). 10 (hh) Secured Promissory Note (Arizona) in the amount of $300,000 by Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated September 30, 1999 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1999 and incorporated herein by reference). 10 (ii) Secured Promissory Note (Florida) in the amount of $300,000 by Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated September 30, 1999 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1999 and incorporated herein by reference). 10 (jj) Management Agreement between Fountainhead Development Corp., Inc., as Owner, and Ridgewood Hotels, Inc., as Manager, dated January 10, 2000 (filed as an Exhibit to Registrant's Form 8K on January 11, 2000 and incorporated herein by reference). 10 (kk) Agreement between Fountainhead Development Corp., Inc. and Ridgewood Hotels, Inc. dated January 10, 2000 (filed as an Exhibit to Registrant's Form 8K on January 11, 2000 and incorporated herein by reference). E-7 10 (ll) Assignment and Assumption Agreement dated as of April, 2001 between RW Hotel Investment Associates, LLC and Ridgewood Georgia, Inc. (filed as an Exhibit to Registrant's Form 8K on July 2, 2001 10 (mm) Contract for the Purchase and Sale of Property dated June, 1999 between the Company, Ridgewood Orlando, Inc., Fulgent Street Motel & Hotel, Inc. and Brokers Title, LLC (filed as an Exhibit to Registrant's Form 8K on July 2, 2001 10 (nn) Reinstatement of and Second Amendment to Contract for the Purchase and Sale of Property Dated January 24th, 2000. (filed as an Exhibit to Registrant's Form 8K on July 2, 2001) 13 2001 Annual Report to Shareholders. 16 Letter to the Securities and Exchange Commission from PricewaterhouseCoopers LLP (filed as an Exhibit to Registrant's Form 8K on March 28, 2000). 21 Subsidiaries of Registrant. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of PricewaterhouseCoopers, LLP. 99 (a) Opinion of the Court of Chancery of the State of Delaware, New Castle County, in Strassburger v. Early, et al., C.A. 1427 (filed as an Exhibit to Registrant's Form 8K on January 24, 2000 and incorporated herein by reference). 99 (b) Motion of Triton Defendants for a New Trial in Strassburger v. Early, et al. (filed as an Exhibit to Registrant's Form 8K on January 24, 2000 and incorporated herein by reference). 99 (c) Motion for a New Trial of, In the Alternative, to Reopen the Record to Allow for the Introduction of Newly Discovered Evidence in Strassburger v. Early, et al. (filed as an Exhibit to Registrant's Form 8K on January 24, 2000 and incorporated herein by reference). E-8 - --------------- * Previously filed as an Exhibit to Registrant's Registration Statement on Form 10 filed on November 19, 1985 (Securities Exchange Act File No. 0-14019), and incorporated herein by reference. E-9 EX-13 2 d26248_ex13.txt ANNUAL REPORT EXHIBIT 13 RIDGEWOOD HOTELS, INC. ANNUAL REPORT 2001 FINANCIAL STATEMENTS Ridgewood Hotels, Inc. (the "Company") is primarily engaged in the hotel management business. The Company also has an ownership interest in one hotel and owns several land parcels that are held for sale. BOARD OF DIRECTORS OFFICERS Stacey H. Davis Donald E. Panoz Henk H. Evers Chief Executive Officer Luther A. Henderson Anthony Mastandrea Henk H. Evers Sheldon E. Misher President Donald E. Panoz Nancy C. Panoz Sheldon E. Misher Secretary Corporate Offices 1106 Highway 124 Hoschton, Georgia 30548 Telephone: (770) 867-9830 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock, $0.01 par value per share (the "common stock"), of the Company is quoted in the National Association of Securities Dealers (NASDAQ) over-the-counter bulletin board service under the symbol "RWHT". However, there effectively has been an absence of an established public trading market for the Common Stock. The following sets forth, for the respective periods indicated, the closing prices of the common stock in the over-the-counter market, as reported and summarized by the OTC-BB. Quarter Ended High Low ------------- ---- --- September 30, 1999 .850 .625 December 31, 1999 .937 .750 March 31, 2000 5.625 .937 June 30, 2000 3.125 1.750 September 30, 2000 1.875 .625 December 31, 2000 1.500 .531 March 31, 2001 .843 .531 On June 30, 2001, the high and low bid prices quoted by broker-dealer firms effecting transactions in the Common Stock were $0.55. On March 31, 2001, there were 2,513,480 shares of common stock outstanding held by approximately 194 shareholders of record. The Company paid its first and only cash dividend on the common stock during fiscal year 1990. The dividend paid was approximately $0.06 per share of common stock that totaled approximately $397,000. The Company may pay future dividends if and when earnings and cash are available but has no present intention to do so. The declaration of dividends on the common stock is within the discretion of the Board of Directors of the Company and is, therefore, subject to many considerations, including operating results, business and capital requirements and other factors. The Company is currently in arrears with respect to $750,000 of dividends with respect to the Company's outstanding shares of the Company's Series A Convertible Cumulative Preferred Stock. The Company is prohibited from paying dividends on its shares of common stock at any time that the Company is in arrears with respect to such preferred stock dividends. 1 SELECTED FINANCIAL DATA (000's omitted, except per share data) - --------------------------------------------------------------------------------------------------------------------------------
March 31 August 31 ------------------------- --------------------------------------------- Balance Sheet Data as of 2001 2000 1999 1998 1997 1996 - ---------------------------- ------------------------- --------------------------------------------- Total Assets $ 5,771 $ 8,243 $ 5,910 $ 7,280 $ 8,266 $ 8,724 Long-Term Debt 1,933 4,553 2,682 2,744 2,804 2,858 Shareholders' Investment 1,700 1,740 1,556 2,944 4,038 4,441 Year Ended Seven Months Ended Income Statement Data March 31 March 31 Years Ended August 31 ----------------------------------------------------------------------------------- for the 2001 2000 1999 1999 1998 1997 1996 ----------------------------------------------------------------------------------- Net Revenues $ 10,466 $ 3,378 $ 2,769 $ 4,547 $ 5,830 $ 8,209 $ 4,314 Net Loss (40) (1,816) (593) (1,283) (622) (463) (1,178) Net Loss Applicable To Common Shareholders (400) (2,026) (803) (1,643) (982) (823) (1,538) Basic and Diluted Loss Per Share (0.16) (1.07) (0.53) (1.09) (0.64) (0.58) (1.29)
2 SUPPLEMENTARY FINANCIAL INFORMATION (000's omitted, except per share data) - ---------------------------------------------------------------------------------- 2001 For Quarter Ended March 31 December 31 September 30 June 30 - -------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 1,225 $ 1,039 $ 1,169 $ 7,033 Net (Loss) Income (1,723) (577) (210) 2,470 Net (Loss) Income Applicable To Common Shareholders (1,813) (667) (300) 2,380 Basic (Loss) Earnings Per Share $ (0.72) $ (0.27) $ (0.12) $ 0.95 2000 For Quarter Ended (1) March 31 December 31 - ------------------------------------------------------------------------------------- Net Revenues $ 1,855 $ 1,077 Net Loss (1,437) (389) Net Loss Applicable To Common Shareholders (1,527) (479) Basic Loss Per Share $( 0.61) $ (0.32) 1999 For Quarter Ended August 31 May 31 February 28 November 30 - -------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 1,000 $ 1,575 992 $ 980 Net Loss (466) (168) (371) (278) Net Loss Applicable To Common Shareholders (556) (258) (461) (368) Basic Loss Per Share $ (0.38) $ (0.17) (0.30) $ (0.24)
(1) This period is for seven months ended March 31, 2000. In turn, there are only two full quarters. 3 Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of Ridgewood Hotels, Inc. and its subsidiaries (collectively, the "Company"). The discussion should be read in conjunction with the Company's consolidated financial statements for the fiscal year ending March 31, 2001. Certain statements included in this document are forward-looking, such as statements relating to estimates of operating and capital expenditure requirements, future revenue and operating income, and cash flow and liquidity. Such forward-looking statements are based on the Company's current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by the Company, and are subject to a number of risks and uncertainties that could cause actual results in the future to differ significantly from results expressed or implied in any such forward-looking statements. These risks and uncertainties include, but are not limited to, uncertainties relating to economic and business conditions, governmental and regulatory policies, and the competitive environment in which the Company operates. Words such as "anticipates," "expects," "intends," "plans," "believes," "may," "will," or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to the risks and uncertainties referred to above. Therefore, the Company's actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this document is not a complete description of the Company's business or the risks associated with an investment in the Company's common stock. The Company urges you to carefully review and consider the various disclosures made in this report and in the Company's other reports filed with the Securities and Exchange Commission. Results of Operations - Sales of real estate properties for the year ended March 31, 2001 increased compared to the seven months ended March 31, 2000 and year ended August 31, 1999 due to the sale of the hotel in Longwood, Florida. Sales of real estate properties for the seven months ended March 31, 2000 increased compared to the seven months ended March 31, 1999 due primarily to sales in Texas and Georgia. Sales of real estate properties for the fiscal year ended August 31, 1999 decreased compared to 1998 due primarily to greater sales in Ohio and Florida during 1998. The Company had a gain from real estate sales of approximately $2,876,000 for the fiscal year ended March 31, 2001 and $335,000 for the seven months ended March 31, 2000. The Company had gains from real estate sales of approximately $79,000 and $744,000 during fiscal years 4 1999 and 1998, respectively. Gains or losses on real estate sales are dependent upon the timing, sales price and the Company's basis in specific assets sold and will vary considerably from period to period. The Company presently manages 13 hotel properties pursuant to management agreements that generally provide the Company with a fee calculated as a percentage of gross revenues of the hotel based on a percentage of gross revenues exceeding a negotiated amount. The contract terms governing management fees vary depending on the size and location of the hotel and other factors relative to such hotel property. The hotel properties managed by the Company are located in Georgia, Florida and Kentucky and are generally affiliated with nationally recognized hospitality franchises including Holiday Inn and Ramada Inn. Under the terms of franchise agreements on certain properties, the Company is required to comply with standards established by the franchisers, including property upgrades and renovations. Under the terms of the management agreements, the owners of the hotels are responsible for all operating expenses, including property upgrades and renovations. The hotel properties managed by the Company are primarily full service properties that offer food and beverage services and meeting and banquet facilities. The Company's current management agreements generally have initial terms of one to eight years. Currently the Company has several agreements that may be terminated with sixty days notice. During the fiscal year ended March 31, 2001 the Company managed for Fountainhead Development Corp., a Georgia corporation ("Fountainhead"), the Chateau Elan Winery & Resort in Braselton, Georgia ("Chateau Elan Georgia") and the Chateau Elan Sebring, Florida ("Chateau Elan Sebring"). The Company also received a development fee in connection with Fountainhead's property in St. Andrews, Scotland ("St. Andrews"). The combined management and development fees for these Fountainhead hotels were approximately $1,123,000, including $973,000 relating to Chateau Elan Georgia, $60,000 relating to Chateau Elan Sebring and $90,000 relating to St. Andrews. The management and development fees from these Fountainhead properties represent approximately 44% of the Company's total management fee revenue for the year ended March 31, 2001. During the year ended March 31, 2001, the Company entered into seven new management agreements. During the same period, ten management agreements were terminated by property owners. Revenues from wholly-owned hotel operations for the fiscal year ended March 31, 2001 decreased $914,000, or 34%, compared to the year ended August 31, 1999. The decrease was due to the sale of the Company's hotel in Longwood, Florida in May 2000. Revenues from wholly-owned hotel operations for the seven months ended March 31, 2000 increased $47,000, or 3%, compared to the seven months ended March 31, 1999. The net increase was the result of an additional $262,000 of revenues from a hotel leased by the Company in Lubbock, Texas and a $215,000 decrease in revenue from the hotel in Longwood, Florida. Revenues from wholly-owned hotel operations for fiscal year 1999 5 decreased $331,000, or 11%, compared to fiscal year 1998. The decrease was due to lower occupancy at the Company's hotel in Longwood, Florida in 1999. As of February 2001, the Company no longer leases the Ramada Inn in Lubbock, Texas. The total revenues for this hotel for the year ended March 31, 2001 were $1,432,000. The Company will have no revenues relating to the hotels in Longwood, Florida or Lubbock, Texas on a going forward basis. Revenues from hotel management for the year ended March 31, 2001 compared to August 31, 1999 increased $1,321,000, or 109%, The increase is due primarily to the management and development fees from hotel properties owned by Fountainhead. Revenues from hotel management for the seven months ended March 31, 2000 increased $265,000, or 40%, compared to the seven months ended March 31, 1999. Revenues from hotel management increased $137,000, or 13% for the fiscal year ended August 31, 1999 compared to the year ended August 31, 1998. The increases were due to a larger number of hotels under management compared to prior periods. Revenues from hotel management are generally based on agreements, which provide monthly base management fees, accounting fees, and periodic incentive fees. The base management fees are typically a percentage of total revenue for a managed property, while incentive fees are typically based on net income and/or ownership returns on investment for the managed property. Accounting fees are set monthly fees charged to hotels, which utilize centralized accounting services provided by the Company. In compliance with Staff Accounting Bulletin ("SAB") No.101, the Company does not accrue or realize incentive management fee revenues until earned. The management agreements identify when incentive fees are earned and how they are calculated. Some of the Company's management agreements have provisions that incentive fees are earned quarterly while others provide for annual incentive fees. Some of the agreements' incentive fee provisions are based on a calendar year while others are based on a fiscal year. The Company recorded an incentive fee of $247,000 related to the performance of Chateau Elan Georgia for the year ended March 31, 2001. This fee is based on the actual results of the resort. During the year ended March 31, 2001, the Company's management agreements were terminated for the following properties: (i) a 184 room hotel in Lackland, Texas as of July 2000, (ii) a 176 room Hampton Inn in Houston, Texas as of September 2000, (iii) a 123 room Ramada Inn in Marietta, Georgia as of October 2000, (iv) a 324 room Sheraton Four Points in San Antonio, Texas as of November 2000, (v) a 243 room Holiday Inn in Lynchburg, Virginia as of November 2000, (vi) a 131 room Ramada Inn in Duluth, Georgia as of November 2000, (vii) an 83 room Best Western In Plainview, Texas as of January 2001, (viii) a 120 room Holiday Inn in Sweetwater, Texas, (ix) a 205 room Ramada Inn in Lubbock, Texas as of February 2001, and (x) a 414 room Ramada Plaza Hotel in Atlanta, Georgia as of March 2001. The Company received approximately $534,000 of management and accounting fees during the year ended March 31, 2001 related to these hotels. 6 In relation to the Company's investment in unconsolidated entities, the Company recognized equity in the income of these entities of $251,000 for the year ended March 31, 2001 relating to the Company's ownership interest in Louisville Hotel LLC (the "LLC") and $133,000 and $85,000, respectively, for the seven months ended March 31, 2000 and 1999. During fiscal years ended August 31, 1999 and 1998, the Company recognized equity in the income (loss) of these entities of approximately $156,000 and $(98,000), respectively. Interest income increased for the year ended March 31, 2001 compared to prior years due to a larger amount of cash on hand primarily from the sale of the hotel in Longwood, Florida. The other revenue of $22,000 received during the year ended March 31, 2001 was primarily from the amortization of an incentive fee the Company received from a long distance phone carrier to utilize their long distance service. The other revenue of $23,000 received during the seven months ended March 31, 2000 was primarily from a favorable adjustment received for workers' compensation claims. The other revenue of $117,000 received during fiscal year 1998 was primarily from profits received on land joint ventures in Atlanta, Georgia and a worker's compensation insurance adjustment. Expenses of wholly-owned real estate decreased $185,000, or 8%, for the year ended March 31, 2001 compared to the year ended August 31, 1999. The decrease was due to the sale of the Company's hotel in Longwood, Florida. Expenses of wholly-owned real estate increased $167,000, or 12%, for the seven months ended March 31, 2000 compared to the seven months ended March 31, 1999. The increase was primarily due to the hotel leased by the Company in Lubbock, Texas. Expenses of wholly-owned real estate increased $38,000, or 2%, for the fiscal year ended August 31, 1999 compared to 1998 due to increased expenses at the Company's hotel in Longwood, Florida. As of January 1, 2001 the Company has implemented an organizational restructuring that relocated corporate regional directors of operations positions into area general manager positions that are physically located at individual properties. The salaries of the area general managers are funded by the individual properties. Therefore, the Company expects reduced payroll costs and does not expect to incur any additional costs in connection with this organizational restructuring. The Company is also in the process of de-centralizing accounting services it provides for several of the managed properties. With this plan the Company will reduce its payroll costs associated with centralized accounting of these properties, and these managed properties will no longer provide an accounting fee to the Company. On January 4, 2001 the Company moved its principle executive offices to Hoschton, Georgia. The lease expense for vacated office of approximately $107,000 in the year ended March 31, 2001 is related to the lease obligations on 7 the Company's previous office in Atlanta, Georgia that it vacated in December 2000. The Company currently pays $13,107 per month and the lease expires May 2002. In April, 2001, the vacated office was sublet for $8,738 per month. Depreciation and amortization increased $87,000, or 19%, for the year ended March 31, 2001 compared to the year ended August 31, 1999. Depreciation and amortization expense increased by $199,000, or 77%, during year ended August 31, 1999 compared to 1998. These increases were due to greater amortization of the Company's hotel management agreements and the write-off of the remaining investment in a hotel management company. Interest expense decreased $69,000, or 20%, for the year ended March 31, 2001 compared to the year ended August 31, 1999 due to the sale of the hotel in Longwood, Florida. The debt on this hotel was transferred when it was sold in May 2000. Interest expense increased $150,000, or 76%, for the seven months ended March 31, 2000 compared to the seven months ended March 31, 1999. The increase was due to the additional debt incurred by the Company for its acquisition of an interest in the hotel in Louisville, Kentucky. General, administrative and other expenses increased $65,000, or 3% for the year ended March 31, 2001 compared to the year ended August 31, 1999. The increase was due to various expenses. General, administrative and other expenses increased $328,000, or 28%, for the seven months ended March 31, 2000 compared to the seven months ended March 31, 1999. The increase was due to several reasons. Payroll and benefits increased due to additional staff required to manage a larger number of hotels. Additionally, consulting fees increased due primarily to a consulting agreement with the Company's former President, and legal expense increased due to an ongoing lawsuit. See further discussion below and see Note 3 in the Notes to Consolidated Financial Statements. General, administrative and other expenses decreased $116,000, or 5%, for fiscal year 1999 compared to 1998. Expenses in fiscal year 1998 were unusually high due to severance paid to the executive in charge of hotel operations. The majority of the increase in legal expenses between the seven months ended March 31, 2000 and 1999 relates to the shareholder derivative action pending in the Delaware Court of Chancery that is described more fully in Note 3 in the Notes to Consolidated Financial Statements. In addition to the Company's legal expenses, certain of the defendants have asserted that they have the right to require the Company to continue to advance their legal fees and expenses, subject to such defendants undertaking to repay the advances if required under Delaware law. The Company is in the process of attempting to resolve these claims with one of the director-defendants. If the Company is required to advance such expenses, the Company does not know whether such defendants have the financial ability to repay such advances. Provision for doubtful accounts increased by approximately $189,000 for the year ended March 31, 2001 compared to the year ended August 31, 1999 due to the loss of 8 several management contracts in which the Company was still owed management fees and other expenses normally reimbursed by the hotels under management. Business development expenses decreased $131,000, or 89%, for the year ended March 31, 2001 compared to the year ended August 31, 1999. Business development expenses decreased $28,000, or 32%, for the seven months ended March 31, 2000 compared to the seven months ended March 31, 1999. The decreases were primarily due to the termination of a consultant used by the Company. During fiscal years 1999 and 1998, while the Company was aggressively pursuing the business of acquiring, developing, operating and selling hotel properties throughout the country, the Company incurred business development costs of $148,000 and $361,000, respectively. In March 2001 and 2000, the Company recognized writedowns of $2,000,000 and $1,200,000, respectively, on its investment in the LLC. The March 2000 writedown was due to the anticipated shortfall of the Company's return of equity as a result of the decreased operating performance of the Hotel. In March 2001, in light of the deterioration of market conditions affecting the hotel industry during the fourth quarter and subsequent to year-end and due to a further decrease in the operating performance of the Hotel, management of the Company concluded that their economic ownership interest in the LLC had been totally impaired. The carrying value of the investment in the LLC on the Company's books is $0 as of March 31, 2001. The Company's income before income taxes of $30,000 for the fiscal year ended March 31, 2001 was comprised of the following: (a) a $2,856,000 gain on the sale of the hotel in Longwood, Florida (b) a $2,000,000 writedown on the investment in the hotel in Louisville, Kentucky (c) additional bad debt reserve of $189,000 and, (d) an operating loss of $637,000. Liquidity and Capital Resources - Land Sales- During the fiscal year ended March 31, 2001, the Company received net proceeds of approximately $404,000 from the sale of undeveloped land in Arizona and Ohio. The proceeds were used to provide additional working capital to the Company. Longwood Hotel- In June 1995, the Company received a loan from a commercial lender to refinance the Ramada Inn in Longwood, Florida (the "Longwood Hotel"), which was owned by the Company through a subsidiary. The loan proceeds were $2,800,000. The loan was for a term of 20 years with an amortization period of 25 years, and an interest rate of 10.35%. Principal and interest payments were approximately $26,000 per month beginning August 1, 1995. In addition, the Company was required to make a repair escrow payment comprised of 4% of estimated revenues, as well as real estate tax and insurance escrow 9 payments. The total payment with respect to the loan was approximately $22,000 per month subject to annual adjustments. On May 31, 2000 the Company sold the Longwood Hotel for $5,350,000 and received net cash proceeds of approximately $1,310,000 and a $250,000 note from the purchaser. Approximately $3,500,000 of the sales proceeds were used to settle the mortgage and defeasance penalty on the hotel. In June 2001 the $250,000 note was paid in full. Fountainhead Transactions- On January 10, 2000, the Company entered into a management agreement ("Management Agreement") with Fountainhead, to perform management services at Chateau Elan Georgia, one of Fountainhead's properties, for a period of five years beginning on March 24, 2000. In consideration of the Management Agreement, the Company issued to Fountainhead 1,000,000 shares of common stock ("Fountainhead Shares") at a fair value of $2.00 per share. In the Management Agreement, Fountainhead agreed to pay the Company a base management fee equal to 2% of the gross revenues of the properties being managed, plus an annual incentive management fee to be determined each year based on the profitability of the properties being managed during that year. The Management Agreement has a term of five years but is terminable upon the transfer by Fountainhead of all or a material portion of the properties covered by the Management Agreement. If the Management Agreement is terminated upon such a transfer or upon the occurrence of an event of default by Fountainhead, Fountainhead shall pay to the Company a portion of the projected fees owed to the Company under the agreement, with adjustments based on the term of the Management Agreement remaining. In such event, Fountainhead may elect to surrender to the Company shares of common stock in lieu of a cash payment. In connection with the issuance of the Fountainhead Shares, the number of directors constituting the full Board of Directors of the Company was increased from three to seven members, effective on February 3, 2000. See also Note 6 to the financial statements. As a result of the Fountainhead transactions, the Company's President resigned, and Henk H. Evers was appointed as President and Chief Operating Officer effective January 11, 2000. At the Company's request, Fountainhead continues to pay Mr. Evers' salary as an advance to the Company. Effective September, 2000, Mr. Evers has assumed certain responsibilities previously handled by the general manager of Chateau Elan Georgia. As a result, Chateau Elan Georgia has agreed to assume $125,000 of Mr. Evers' annual salary of $305,000. In addition, Mr. Evers has performed certain services for Fountainhead (in addition to the services for which the Company received a development fee) and, in consideration therefore, Fountainhead has agreed to assume $50,000 of Mr. Evers annual salary while he continues to perform such services. For the fiscal year ended March 31, 2001, the portion of Mr. Evers' salary charged to Chateau Elan and Fountainhead is $71,000 and $29,000, respectively. The Company has accrued $296,000 in salary and benefits relating to the advanced compensation including $75,000 for the 10 seven months ended March 31, 2000 and $221,000 for the fiscal year ended March 31, 2001 (after taking into account the portions assumed by Chateau Elan Georgia and Fountainhead). The Company reduced the advanced compensation liability by $90,000 by netting accrued development fees owed to the Company by Fountainhead for managing one of Fountainhead's properties in St. Andrews, Scotland ("St. Andrews") against this liability. After reducing the advanced compensation by $90,000, there is $206,000 of accrued liability remaining at March 31, 2001. Louisville Hotel- The Company has an ownership interest in a Holiday Inn hotel in Hurstbourne, Kentucky (the "Hotel"). The Hotel is owned by RW Louisville Hotel Associates, LLC ("Associates"). As of March 31, 2001, the Company, through its wholly-owned subsidiaries, was the manager of and had a minority ownership interest in Associates. In April, 2001, the Company, through its wholly-owned subsidiaries, acquired 100% of the membership interests in Associates. The membership interests are pledged as security for a $3,623,690 loan made by the LLC. The membership interests are also subject to an option pursuant to which the LLC has the right to acquire the membership interests for nominal value. Pursuant to the terms of the loan, all revenues (including proceeds from sale or refinancing) of Associates (after payment of expenses including a management fee to the Company) are required to be paid to the LLC until principal and interest on the loan are paid in full. On September 30, 1999, the Company, which already owned a 10% interest in the LLC, acquired an additional interest in the LLC from Louisville Hotel, L.P. ("Louisville LP") for $2,500,000. As a result of the transaction, the Company has an 80% economic interest in the LLC. The $2,500,000 consideration included the following: Transfer of 10% ownership interest in Houston Hotel, LLC $443,000 Cash payment (1) 124,000 Promissory note to Louisville LP secured by the Company's ownership interest in the LLC (2) 1,333,000 Promissory note to Louisville LP secured by the Company's Phoenix, Arizona land (2) 300,000 Promissory note to Louisville LP secured by one parcel of the Company's Longwood, Florida land (2) 300,000 ---------- Total additional equity in the LLC $2,500,000 ========== (1) The cash to make this payment was obtained from the LLC in connection with a modification of the management contract of the Hotel. This amount 11 represents the unamortized portion of the original $200,000 participation fee paid to the LLC to acquire the management contract of the Hotel. (2) The three promissory notes (the "Notes") are cross-defaulted. The Notes bear interest at 13% and mature on September 30, 2002. With 80% ownership, the Company is the Managing Member of the LLC. Louisville LP has the remaining 20% ownership in the LLC. Pursuant to the LLC's operating agreement dated as of May 1998, as amended on September 30, 1999 (the "Operating Agreement"), the Company has the right at any time to purchase the remaining interest in the LLC (the "Purchase Option"). The Operating Agreement provides that the purchase price for Louisville LP's interest is equal to the sum of (a) Louisville's total capital contributions to the LLC ($3,061,000), plus (b) any accrued but unpaid preferred return on such capital contributions, plus (c) the residual value of the remaining interest (the amount that would be distributed to Louisville LP if the LLC sold the Hotel for its fair market value and distributed the proceeds to the members pursuant to the Operating Agreement) (the "Option Price"). However, the Purchase Option is only exercisable in connection with concurrent payment in full of all remaining amounts due under the Notes. Further, under the terms of the Operating Agreement, the Company is required, no later than September 30, 2002, to purchase Louisville LP's remaining interest in the LLC for the Option Price. Based on the estimated market value of the Hotel as of March 31, 2001, the estimated Option Price is $3,061,000. The failure of the Company to satisfy its obligations under the Operating Agreement may constitute an event of default under the Notes. The LLC's Operating Agreement provides that distributions to the LLC's owners are made as follows: Distributable cash is defined as the net cash realized from operations but after payment of management fees, principal and interest, capital improvements and other such retentions as the Managing Member determines to be necessary. Distributions of distributable cash from the LLC is made as follows: |X| First, to the Company in an amount equal to the cumulative interest paid on the Notes. The Company has been using these funds to make the interest payments to Louisville LP. |X| Second, a 13% preferred return to Louisville LP on its original capital contribution of $3,061,000. |X| Third, a 13% preferred return to the Company on its capital contribution of $1,207,000. |X| Fourth, 80% to the Company and 20% to Louisville LP. Cash from a sale or refinancing would be distributed as follows: 12 |X| First, to the Company in an amount equal to the cumulative interest paid on the Notes. |X| Second, to the Company in an amount equal to the Notes. |X| Third, to Louisville LP until it has received aggregate distributions in an amount equal to its 13% preferred return on its capital contribution. |X| Fourth, to Louisville LP until its net capital contribution is reduced to zero. |X| Fifth, to the Company until it has received an amount equal to its 13% preferred return. |X| Sixth, to the Company until its net capital contribution is reduced to zero. |X| Thereafter, 10% to Louisville LP and 90% to the Company. If a sale or refinancing occurs after September 30, 2000 but before September 30, 2001, then the distribution would change to 15% and 85%, respectively. Effective September 30, 1999, a new management agreement was entered into between the Company and Associates. In connection with the original management agreement, the Company received management fees totaling approximately $285,000 and $57,000 for the years ended August 31, 1999 and 1998, respectively. In connection with the new management agreement effective September 30, 1999, the Company received management fees totaling approximately $258,000 for the fiscal year ended March 31, 2001 and $153,000 for the seven months ended March 31, 2000. Associates is a licensee under a franchise agreement with Holiday Inn (the "Franchise Agreement"). The Company has guaranteed Associates obligations under the Franchise Agreement. In the event that the Franchise Agreement is terminated as a result of a breach of the Franchise Agreement by Associates, Associates may be subject to liquidated damages under the Franchise Agreement equal to approximately 36 times the monthly franchise fees payable pursuant to the Franchise Agreement. The current monthly franchise fees are approximately $41,000 which would result in liquidated damages of approximately $1,500,000. In conjunction with the Franchise Agreement, Associates is subject to a Property Improvement Plan ("the Plan"). Under the Plan, Associates is required to make certain improvements to the Hotel by December 31, 2002, with certain interim milestones. The Company estimates the costs of these improvements will be approximately $1,858,000 As of March 31, 2001, Associates has spent approximately 13 $330,000 on improvements and has approximately $348,000 in escrow to spend on improvements. The Company has not determined whether Associates will be able to fund the remainder of the Plan. If Associates is unable to fund the remainder of the Plan, the Company may be required to complete the Plan pursuant to the Company's guaranty of the Franchise Agreement. The Company has approximately $1,700,000 of available cash as of June 15, 2001. Based on the Company's current assessment of market conditions effecting the hotel industry and the current operating performance of the Louisville Hotel, the Company has written down its remaining interest in the LLC. In addition, unless current market conditions change or the Company is able to obtain an additional source of funds (whether through operations, financing or otherwise) the Company currently does not have sufficient liquidity to acquire Louisville LP's interest in the LLC for the Option Price and to pay off the Notes in September 30, 2002. Under the terms of the Operating Agreement and the Notes, the failure of the Company to acquire Louisville LP's interest by September 30, 2002 and pay off the Notes could result in the Company forfeiting its interests in the LLC, the Longwood, Florida property and the Phoenix, Arizona property. As a result, management is currently evaluating all of its options with respect to the Louisville Hotel, including its potential sale prior to September 30, 2002. Effect of Inflation - Inflation tends to increase the Company's cash flow from income-producing properties since rental rates generally increase by a greater amount than associated expenses. Inflation also generally tends to increase the value of the Company's land portfolio. Offsetting these beneficial effects of inflation are the increased cost of the Company's operating expenses and the increased costs and decreased supply of investment capital for real estate that generally accompany inflation. 14 RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND 2000 ($000's omitted, except share and per share data)
March 31, March 31, Assets: 2001 2000 - ------ --------- ---------- Current assets: Cash and cash equivalents $1,478 $ 258 Receivables from affiliates (note 6) 402 62 Other operating receivables, net of allowance for doubtful accounts of $262 and $34, respectively (note 1) 407 332 Note receivable (note 10) 250 -- Other current assets 109 320 ------ ------ Total current assets 2,646 972 Real estate investments (note 2): Real estate properties Operating properties, net of accumulated depreciation of $-0- and $1,855, respectively -- 1,106 Land held for sale, net of allowance for possible losses of $3,155 and $3,319, respectively 1,400 1,806 Investment in unconsolidated hotel entity, net of writedown of $3,200 and $1,200, respectively (notes 3 and 8) -- 2,000 ------ ------ Total real estate investments, net 1,400 4,912 Management contracts, net of accumulated amortization of $728 and $224, respectively (note 6) 1,688 2,192 Other assets, net of accumulated depreciation of $95 and $204, respectively 37 167 ------ ------ $5,771 $8,243 ====== ======
The accompanying notes are an integral part of these consolidated balance sheets. 15 RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND 2000 LIABILITIES AND SHAREHOLDERS' INVESTMENT ($000's omitted, except share and per share data)
March 31, March 31, Liabilities: 2001 2000 - ----------- --------- --------- Current liabilities: Current maturities of long-term debt $ -- $ 37 Accounts payable 296 284 Payables to affiliates (note 6) 206 75 Accrued salaries, bonuses and other compensation (note 9) 101 97 Accrued legal and audit expense 207 135 Lease commitment for vacated office (note 3) 94 -- Accrued interest and other liabilities 310 428 -------- -------- Total current liabilities 1,214 1,056 Accrued pension liability, including deferred curtailment gain (note 7) 894 894 Other long-term liabilities 30 -- Long-term debt (note 4) 1,933 4,553 -------- -------- Total liabilities 4,071 6,503 -------- -------- Commitments and contingencies: (notes 3, 4, 7, 8 and 9) Shareholders' investment: (note 6) Series A convertible cumulative preferred stock, $1 par value, 1,000,000 shares authorized, 450,000 shares issued and outstanding in 2001 and 2000 450 450 Common stock, $0.01 par value, 5,000,000 shares authorized, 2,513,480 shares issued and outstanding in 2001 and 2000 25 25 Paid-in surplus 17,671 17,671 Accumulated deficit (16,446) (16,406) -------- -------- Total shareholders' investment 1,700 1,740 -------- -------- $ 5,771 $ 8,243 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 16 RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 31, 2001 AND AUGUST 31, 1999 AND 1998 AND FOR THE SEVEN MONTHS ENDED MARCH 31, 2000 AND 1999 ($000's omitted, except share and per share data)
For the Fiscal Year For the Seven For the Fiscal Ended Months Ended Year Ended --------------------------------------------------------------------------- March 31, March 31, March 31, August 31, August 31, 2001 2000 1999 1999 1998 (Unaudited) --------------------------------------------------------------------------- Revenues: Revenues from wholly- owned hotel operations $ 1,789 $ 1,696 $ 1,649 $ 2,703 $ 3,034 Revenues from hotel management 2,534 927 662 1,213 1,076 Sales of real estate properties 5,798 598 363 458 1,655 Equity in net income (loss) of unconsolidated entities 251 133 85 156 (98) Interest income 72 1 10 15 46 Other 22 23 -- 2 117 ---------------------------------------------------------------------------------- 10,466 3,378 2,769 4,547 5,830 Costs and expenses: Expenses of wholly- owned real estate properties 2,180 1,566 1,399 2,365 2,327 Costs of real estate sold 2,922 263 283 379 911 Lease expense for vacated office 107 -- -- -- -- Depreciation and amortization 546 218 217 459 260 Interest expense 273 348 198 342 340 General, administrative and other 2,202 1,506 1,178 2,137 2,253 Provision for doubtful accounts 189 34 -- -- -- Business development 17 59 87 148 361 Writedown on hotel investment 2,000 1,200 -- -- -- ---------------------------------------------------------------------------------- 10,436 5,194 3,362 5,830 6,452 ---------------------------------------------------------------------------------- Income (loss) before taxes 30 (1,816) (593) (1,283) (622) Income taxes (70) -- -- -- -- ---------------------------------------------------------------------------------- Net loss (40) (1,816) (593) (1,283) (622) Preferred dividends (360) (210) (210) (360) (360) ---------------------------------------------------------------------------------- Net loss applicable to common shareholders $ (400) $ (2,026) $ (803) $ (1,643) $ (982) ---------------------------------------------------------------------------------- Basic and diluted loss per common share $ (0.16) $ (1.07) $ (0.53) $ (1.09) $ (0.64) ==================================================================================
The accompanying notes are an integral part of these consolidated statements. 17 RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT FOR THE PERIODS ENDED MARCH 31, 2001 AND 2000 AND AUGUST 31, 1999 AND 1998 (000's Omitted)
Note Receivable from Preferred Common Officer for Total Stock Stock Paid-in Purchase of Accumulated Shareholders' Shares Amount Shares Amount Surplus Common Stock Deficit Investment -------------------------------------------------------------------------------------------------- Balance, August 31, 1997 450,000 $ 450 1,538,480 $ 15 $ 16,333 $ (75) $ (12,685) $ 4,038 Repurchase of common stock -- -- (25,000) -- (112) -- -- (112) Dividends on preferred stock -- -- -- -- (360) -- -- (360) Net loss -- -- -- -- -- -- (622) (622) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, August 31, 1998 450,000 450 1,513,480 15 15,861 (75) (13,307) 2,944 Repayment of note receivable -- -- -- -- -- 75 -- 75 Dividends on preferred stock -- -- -- -- (180) -- -- (180) Net loss -- -- -- -- -- -- (1,283) (1,283) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, August 31, 1999 450,000 450 1,513,480 15 15,681 -- (14,590) 1,556 Issuance of common stock -- -- 1,000,000 10 1,990 -- -- 2,000 Net loss -- -- -- -- -- -- (1,816) (1,816) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 2000 450,000 450 2,513,480 25 17,671 -- (16,406) 1,740 Net loss -- -- -- -- -- -- (40) (40) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 2001 450,000 $ 450 2,513,480 $ 25 $ 17,671 $ -- $ (16,446) $ 1,700 ====================================================================================================================================
The accompanying notes are an integral part of these consolidated statements. 18 RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED MARCH 31, 2001 AND AUGUST 31, 1999 AND 1998 AND FOR THE SEVEN MONTHS ENDED MARCH 31, 2000 AND 1999 ($000's omitted)
For the Fiscal For the Seven For the Fiscal Year Ended Months Ended Year Ended -------------------------------------------------------------------------- March 31, March 31, March 31, August 31, August 31, 2001 2000 1999 1999 1998 (Unaudited) -------------------------------------------------------------------------- Cash flows from operating activities: Net loss $ (40) $(1,816) $ (593) $(1,283) $ (622) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 546 218 217 459 260 Provision for doubtful accounts 189 34 -- -- -- Increase in note receivable (250) -- -- -- -- Writedown on hotel investment 2,000 1,200 -- -- -- Gain from sale of real estate properties (2,876) (335) (80) (79) (744) Distributions from unconsolidated entities greater than equity in net loss -- -- -- -- 184 Increase in receivables from affiliates (340) (62) -- -- -- Increase in payables to affiliates 131 75 -- -- -- Increase in other operating receivables (264) (125) (233) (143) 189 Decrease (increase) in other assets 316 (34) 220 175 (4) Increase (decrease) in accounts payable and accrued liabilities 94 236 (228) 80 168 ------------------------------------------------------------------ Total adjustments (454) 1,207 (104) 492 53 ------------------------------------------------------------------ Net cash used in operating activities (494) (609) (697) (791) (569) ------------------------------------------------------------------ Cash flows from investing activities: Investment in unconsolidated entities -- (124) -- (184) (678) Proceeds from sale of real estate 4,371 562 340 423 1,526 Additions to real estate properties -- (17) (42) (65) (88) ------------------------------------------------------------------ Net cash provided by investing activities 4,371 421 298 174 760 ------------------------------------------------------------------ Cash flows from financing activities: Dividends on preferred stock -- -- (180) (180) (360) Repurchase of common stock -- -- -- -- (112) Repayments of debt (2,657) (25) (37) (62) (60) Payment received on note receivable from stock issuance -- -- -- 75 -- ------------------------------------------------------------------ Net cash used in financing activities (2,657) (25) (217) (167) (532) ------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 1,220 (213) (616) (784) (341) Cash and cash equivalents at the beginning of period 258 471 1,255 1,255 1,596 ------------------------------------------------------------------ Cash and cash equivalents at end of period $ 1,478 $ 258 $ 639 $ 471 $ 1,255 ==================================================================
The accompanying notes are an integral part of these consolidated statements 19 RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED MARCH 31, 2001 AND AUGUST 31, 1999 AND 1998 AND FOR THE SEVEN MONTHS ENDED MARCH 31, 2000 AND 1999 ($000's omitted) - -------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH ACTIVITY:
For the Fiscal Year For the Seven For the Fiscal Ended Months Ended Year Ended --------------------------------------------------------------------------------- March 31, March 31, March 31, August 31, August 31, 2001 2000 1999 1999 1998 (Unaudited) --------------------------------------------------------------------------------- Interest paid $ 257 $ 322 $ 198 $ 342 $ 340 Income taxes paid 35 -- -- -- -- Issuance of 1,000,000 common shares in exchange for management contract -- 2,000 -- -- -- Notes payable issued in conjunction with additional investment in Louisville Hotel, LLC -- 1,933 -- -- -- Transfer of 10% ownership interest in Louisville Hotel, LLC -- 443 -- -- --
The accompanying notes are an integral part of these consolidated statements. 20 Ridgewood Hotels, Inc. and Subsidiaries Notes to Consolidated Financial Statements March 31, 2001 and 2000 and August 31, 1999 and 1998 1. Description of Business and Significant Accounting Policies Description of the Business - Ridgewood Hotels, Inc. (the "Company") is a Delaware corporation primarily engaged in the hotel management business. The Company also has an ownership interest in one hotel and owns several land parcels that are held for sale. The Company's common stock is listed in the National Association of Securities Dealers (NASDAQ) over-the-counter bulletin board service. On January 10, 2000, the Company entered into a management agreement ("Management Agreement") with Fountainhead Development Corp. ("Fountainhead") to perform management services at Chateau Elan Winery and Resort, one of Fountainhead's properties, for a period of five years beginning on March 24, 2000. In consideration of the Management Agreement, the Company issued to Fountainhead 1,000,000 shares of common stock ("Fountainhead Shares"). The determined market value of the management contract was $2,000,000 at the time of the transaction. In connection with the issuance of the Fountainhead Shares, the number of directors constituting the full Board of Directors of the Company was increased from three to seven members, effective on February 3, 2000. See also note 6. On January 11, 2000, one of the principal stockholders and President of the Company, N. Russell Walden, sold 650,000 shares of the common stock to Fountainhead, and a new President of the Company was elected. Another principal shareholder, ADT Security Services, Inc. ("ADT"), sold 450,000 shares of preferred stock of the Company to Fountainhead. Through the issuance of the common stock pursuant to the Management Agreement and the acquisitions of existing common stock and preferred stock, Fountainhead has obtained beneficial ownership of approximately 78% of the Company. Fountainhead is engaged principally in the business of owning and operating hotels, resorts and other real estate properties. See also note 6. Basis of Presentation and Consolidation - The consolidated financial statements of the Company include the accounts of all of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The investments in unconsolidated entities are being accounted for using the equity method of accounting (see Note 8). 21 In 1997, the Emerging Issues Task Force ("EITF") issued Issue No. 97-2, "Application of Financial Accounting Standards Board ("FASB") Statement No. 94 and Accounting Principles Board ("APB") Opinion No.16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements". EITF Issue No. 97-2 establishes that physician practice management entities have a controlling interest in a physician practice if certain requirements are met. None of the Company's hotel management agreements meet these requirements. Accordingly, the Company does not consolidate the financial statements of hotels under a management agreement. On March 28, 2000 the Company changed its fiscal year from August 31 to March 31. Per Share Data - Basic earnings per share is based on the weighted average effect of all common shares issued and outstanding, and is calculated by dividing net earnings (loss) available to common shareholders by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net earnings available to common shareholders, adjusted for the effect, if any, from assumed conversion of all potentially dilutive common shares outstanding, by the weighted average number of common shares used in the basic earning per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding. Capitalization Policies - Repairs and maintenance costs are expensed in the period incurred. Major improvements to existing properties that increase the usefulness or useful life of the property are capitalized. Management contracts are capitalized based on their estimated fair value at the date of the contract. Valuation of Real Estate Properties - Under Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of" ("SFAS 121"), properties are classified as either operating properties or properties held for sale. Operating properties are carried at cost, less accumulated depreciation. If determined to be impaired, operating properties are written down to their fair value, and the associated writedown cannot be restored if the fair value of the property increases. Properties held for sale are carried at the lower of cost or their fair value less cost to sell, but the associated loss can be recovered in the event the fair value of the property increases. 22 Depreciation and Amortization Policies - The Company depreciates operating properties and any related improvements by using the straight-line method over the estimated useful lives of such assets, which are generally 30 years for building and land improvements and 5 years for furniture, fixtures and equipment. Depreciation expense for the fiscal year ended March 31, 2001 was approximately $41,000, $145,000 for the seven months ended March 31, 2000 and $89,000 for the seven months ended March 31, 1999 (unaudited). Depreciation expense for the fiscal years ended August 31, 1999 and 1998 was approximately $180,000 and $172,000, respectively. The Company amortizes certain intangible assets over the useful life of those assets. Management contracts for which consideration is given are amortized over the life of the contract. Amortization expense for the fiscal year ended March 31, 2001 was approximately $505,000, $73,000 for the seven months ended March 31, 2000 and $117,000 for the seven months ended March 31, 1999 (unaudited). Amortization expense for the years ended August 31, 1999 and 1998 was approximately $279,000 and $88,000, respectively. Sales of Real Estate - All revenue related to sales of real estate is recognized at the time of closing. The Company allocates costs of real estate sold using the specific identification or relative sales value methods based on the nature of the development. Profit recognition is based upon the Company receiving adequate cash down payments and other criteria specified by existing accounting literature. Stock-Based Compensation - Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), provides entities with a choice between fair value and intrinsic value based methods of accounting for stock-based compensation plans. The Company has elected to use the intrinsic value method for all periods presented in these financial statements. Cash and Cash Equivalents - For the purpose of the consolidated statements of cash flows, cash and cash equivalents include all highly liquid investments with original maturities of three months or less when purchased. 23 Fair Value of Financial Instruments - The recorded values of financial instruments including cash, accounts receivable, accounts payable and accrued liabilities reflected in the financial statements are representative of their fair value due to the short-term nature of the instruments. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Reclassifications - Certain prior year amounts have been reclassified to conform with the current year presentation. Revenue Recognition - Revenue related to management contracts is recognized in the month that the services are provided. Incentive revenue is recognized when earned. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin ("SAB") No. 101: "Revenue Recognition in Financial Statements". SAB No.101 summarizes certain of the staff's views in applying accounting principles generally accepted in the United States to selected revenue recognition issues in financial statements. The Company adopted SAB No. 101 in December 1999, and the effect of adopting SAB No. 101 was immaterial. Reserve for Doubtful Accounts- The Company provides reserves for doubtful accounts after considering such factors as the nature and age of the receivable and the willingness and ability of the owner to pay. 24 The Company's provision for doubtful accounts is as follows: March 31, March 31, 2001 2000 --------- --------- Beginning balance- $ 34,000 $ -- Provision for doubtful accounts (1) 189,000 34,000 Provision for doubtful collections related to the leased hotel in Lubbock, Texas (2) 128,000 -- Writeoffs (89,000) -- ------------------------- Ending balance- $ 262,000 $ 34,000 ========================= (1) The provision has been provided for several doubtful accounts which the Company believes will not be collected, but efforts are still being made to collect. (2) This provision relates to the balance of estimated uncollectible assets related to the terminated lease on the hotel in Lubbock, Texas and has been recorded under expenses of wholly-owned real estate properties in the accompanying Consolidated Statements of Operations. New Accounting Pronouncements - In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allow a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133", which delays the original effective date of 25 SFAS No. 133 until fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which amends SFAS No. 133. SFAS No. 138 addresses a limited number of issues related to the implementation of SFAS No. 133. On April 1, 2001, the Company adopted SFAS No. 133, as amended. The adoption did not have a material effect on the Company's financial position or results of operations. Segment Reporting - In fiscal year 1999, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). This standard requires that enterprises report financial and descriptive information about its reportable operating segments. The Company currently has only one segment, real estate hotel ownership and management, that is the basis for the consolidated information in the financial statements. 2. Real Estate Investments The Company's real estate properties by type at March 31, 2001 and 2000 were as follows ($000's omitted): 26 March 31, 2001 Type of Project Land Other Total --------------- ---------- ---------- ---------- Land $ 4,555 $ -- $ 4,555 Less allowance for possible losses (3,155) -- (3,155) ---------- ---------- ---------- Net land 1,400 -- 1,400 Investment in unconsolidated hotel entity -- 3,200 3,200 Less investment writedown -- (3,200) (3,200) ---------- ---------- ---------- Net investment in unconsolidated hotel entity -- -- -- ---------- ---------- ---------- Total net real estate investments $ 1,400 $ -- $ 1,400 ========== ========== ==========
Furniture, March 31, 2000 Land & Fixtures & Type of Project Buildings Equipment Other Total --------------- --------- --------- --------- --------- Wholly-owned hotel $ 2,535 $ 426 $ -- $ 2,961 Less accumulated depreciation (1,429) (426) -- (1,855) --------- --------- --------- --------- Net operating property 1,106 -- -- 1,106 --------- --------- --------- --------- Land 5,125 -- -- 5,125 Less allowance for possible losses (3,319) -- -- (3,319) --------- --------- --------- --------- Net land 1,806 -- -- 1,806 --------- --------- --------- --------- Investment in unconsolidated hotel entity -- -- 3,200 3,200 Less investment writedown -- -- (1,200) (1,200) --------- --------- --------- --------- Net investment in unconsolidated hotel entity -- -- 2,000 2,000 --------- --------- --------- --------- Total net real estate investments $ 2,912 $ -- $ 2,000 $ 4,912 ========= ========= ========= =========
27 Changes in the allowance for possible losses and writedown on real estate investments for the year ended March 31, 2001 and for the seven months ended March 31, 2000 and the years ended August 31, 1999 and 1998 were as follows ($000's omitted):
For the Year For the Seven For the Year For the Year Ended March Months Ended Ended August Ended August 31, 2001 March 31, 2000 31, 1999 31, 1998 ------------- --------------- ---------------- ----------- Allowance and writedown, beginning of period $ 4,519 $ 3,319 $ 3,447 $ 3,544 Reversal of reserves associated with sales of real estate assets (1) (164) -- (128) (97) Writedown of investment (note 8) 2,000 1,200 -- -- ------- ------- ------- ------- Allowance and writedown, end of period $ 6,355 $ 4,519 $ 3,319 $ 3,447 ======= ======= ======= =======
(1) These amounts reduce the net cost of the real estate sold and in turn are included in the costs of real estate sold on the consolidated statement of operations. 3. Commitments and Contingencies Consulting Agreements- In August 1991, each executive officer was offered a two-year Post-Employment Consulting Agreement (the "Consulting Agreement(s)") whereby the officer agrees that if he or she is terminated by the Company for other than good cause, the officer will be available for consulting at a rate equal to their annual compensation immediately prior to termination. All officers have chosen to enter into Consulting Agreements. In August 1998, an amendment was signed by the two executive officers reducing the consulting period by one month for each month that the executive continued to be employed by the Company through August 31, 1999, such that if the executive remains employed by the Company through August 31, 2000, the consulting period shall be twelve months in duration. In addition, two other executives were offered and have chosen to enter into one year Consulting Agreements. In January 2000, one of the executives was terminated and entered into an amended six-month consulting agreement. In May 2000, one of the executives and one of the employees was terminated, and each has entered into the one-year consulting fee 28 arrangement. In June 2000, the other executive was terminated and entered into an arrangement that was less than one year. Litigation - On May 2, 1995 a complaint was filed in the Court of Chancery of the State of Delaware (New Castle County) entitled William N. Strassburger v. Michael M. Early, Luther A. Henderson, John C. Stiska, N. Russell Walden, and Triton Group, Ltd., defendants, and Ridgewood Hotels, Inc., nominal defendant, C.A. No. 14267 (the "Complaint"). The plaintiff is an individual shareholder of the Company who purports to file the Complaint individually, representatively on behalf of all similarly situated shareholders, and derivatively on behalf of the Company. The Complaint challenges the actions of the Company and its directors in consummating the Company's August 1994 repurchase of its common stock held by Triton Group, Ltd. and Hesperus Partners Ltd. in five counts, denominated Waste of Corporate Assets, Breach of Duty of Loyalty to Ridgewood, Breach of Duty of Good Faith, Intentional Misconduct, and Breach of Duty of Loyalty and Good Faith to Class. On July 5, 1995, the Company filed a timely answer generally denying the material allegations of the complaint and asserting several affirmative defenses. Discovery has been concluded, and on March 19, 1998, the Court dismissed all class claims, with only the derivative claims remaining for trial. The case was tried by Vice Chancellor Jacobs during the period February 1, through February 3, 1999. On January 24, 2000, the Court rendered its Opinion. The Court found in favor of the plaintiff and against three of the four individual director-defendants (Messrs. Walden, Stiska and Earley). The Court held that the repurchase transactions being challenged were unlawful under Delaware law, for two primary reasons: (1) the transactions were entered into for the improper purpose of entrenching Mr. Walden in his then-current position of President and Director, and thus constituted an unlawful self-dealing transaction; and (2) the use of the Company's assets to repurchase its common stock held by Triton Group, Ltd. and Hesperus Partners Ltd. was not demonstrated to the Court's satisfaction to be "entirely fair" to the minority shareholders under the entire fairness doctrine as enunciated under Delaware law. Having found that the challenged transactions were unlawful, the Court determined that further proceedings would be necessary to identify the precise form that the final decree in this case should take. Although the Court's opinion contemplates further proceedings, no further hearing date has yet been scheduled to address the remaining remedy issues. On May 15, 2000, the plaintiff filed a Memorandum in Support of Judgment After Trial requesting that the Court enter an order rescinding the Company's issuance of preferred stock in connection with repurchase transactions and requesting that the Court enter a judgment for damages against Messrs. Stiska, Earley and Walden. The Company and the defendants filed written responses to plaintiff's memorandum in August 2000. In November 2000, the Court entered an Order Partially Implementing Decisions and Scheduling Proceedings on Rescissory Damages (the "November 2000 Order"). The November 2000 Order, among other things, orders the rescission of the Company's outstanding preferred stock and the issuance of 1,350,000 shares of the Company's common 29 stock in return therefor, but the rescission of the preferred stock is stayed subject to the Court's entry of a final order on the remaining issues. The November 2000 Order also provides that the Court must determine (i) if defendant Triton will be required to return to the Company $1,162,000 in dividends previously paid on the preferred stock and whether interest will be required to be paid on such dividends and (ii) the amount of rescissory damages, if any, that defendants Walden, Stiska and Earley should be required to pay to the Company and whether such damages are subject to pre-judgment interest from September 1, 1994. The November 2000 Order provides for the parties to present additional evidence and briefs to the Court with respect to the damages issues. Since November, 2000, the parties have conducted additional discovery with respect to the remedy issues. To date, no additional briefs have been filed and no further hearings have been scheduled. As a derivative action, the Company does not believe that the ultimate outcome of the litigation will result in a material adverse effect on its financial condition. However, the Company may be required to pay plaintiff's attorneys' fees. In addition, while the Company had been advancing the legal fees and expenses of the director-defendants prior to the Opinion, the Company believes that it is not required to advance legal fees and expenses to the director-defendants who were found to be liable to the Company. However, Mr. Walden has asserted that he has the right to the continued advancement of his legal fees and expenses under the Company's Certificate of Incorporation (as amended), subject to an undertaking to pay such advances back if required under Delaware law. If the Company is required to advance such fees and expenses, and the defendants are required to repay such advances in the future, the defendants' financial ability to make such repayment is not known to the Company. Mr. Walden, through his counsel, has threatened to file a complaint against the Company seeking to compel the advancement of such fees and expenses. On March 15, 2001, the Company filed a complaint in Fulton County State Court entitled Ridgewood Hotels, Inc. v. Excelsior Hospitality, LLC, Fulton County State Court, Civil Action File No. 01-VS-015898A. The Company seeks amounts due under a management agreement pursuant to which Ridgewood was to manage a hotel property owned by Defendant Excelsior. The Company believes that Excelsior wrongfully terminated and otherwise breached the management agreement and claims damages in the total amount of approximately $310,000, together with attorneys' fees. On April 27, 2001, Excelsior filed its Answer, denying the material allegations in the Complaint. Excelsior also filed a Counterclaim against the Company arising out of the same management agreement, claiming that the Company mismanaged the hotel, acted in bad faith, and otherwise failed to perform under the management agreement. Excelsior seeks compensatory damages in excess of $900,000, together with punitive damages and attorneys' fees. Management believes that it has valid claims against Excelsior and that the Counterclaim is meritless. Accordingly, the Company has not recorded any liability in relation with this case in the accompanying financial statements. 30 Louisville Hotel - (See also Note 8) On May 13, 1998, RW Louisville Hotel Associates LLC ("Associates") was organized as a limited liability company under the laws of the State of Delaware. Associates was organized to own and manage a Holiday Inn hotel ("the Hotel") in Louisville, Kentucky. The Company's investment in RW Hotel Partners, L.P. of $337,500 was transferred to Associates at its historical basis. Simultaneously, the Company invested $362,000 into Louisville Hotel, LLC, a Delaware limited liability company (the "LLC"). The combined equity of $699,500 represented a 10% interest in the Hotel. The LLC loaned $3,620,000 to the Hotel in return for all cash flows generated from the Hotel (after payment of expenses including a management fee to the Company). On September 30, 1999, the Company purchased additional equity in the LLC. The Company increased its ownership from 10% to 80%. The consideration paid to acquire the increased ownership was $2,500,000. The majority of the purchase price was evidenced by three promissory notes (the "Notes") totaling $1,933,000. The Notes are cross-defaulted, bear interest at 13% and mature on September 30, 2002. With 80% ownership, the Company is now the Managing Member of the LLC. Louisville Hotel, L.P. ("LP") now has 20% ownership in the LLC and is the Non-Managing Member. Pursuant to the LLC's operating agreement dated as of May 1998, as amended on September 30, 1999 (the "Operating Agreement"), the Company has the right at any time to purchase Louisville's remaining interest in the LLC (the "Purchase Option"). The Operating Agreement provides that the purchase price for Louisville's interest is equal to the sum of (a) Louisville's total capital contributions to the LLC ($3,061,000), plus (b) any accrued but unpaid preferred return on such capital contributions, plus (c) the residual value of the remaining interest (the amount that would be distributed to Louisville if the LLC sold the Hotel for its fair market value and distributed the proceeds to the members pursuant to the Operating Agreement) (the "Option Price"). However, the Purchase Option is only exercisable in connection with concurrent payment in full of all remaining amounts due under the Notes. Under the terms of the Operating Agreement, the Company is required, no later than September 30, 2002, to purchase Louisville's remaining interest in the LLC for the Option Price. Based on the estimated value of the Hotel as of March 31, 2001, the estimated Option Price is approximately $3,061,000. The Company's obligation to purchase the remaining LLC `s interest is secured by the Company's interest in the LLC, the Longwood, Florida property and the Phoenix, Arizona property. Unless current market conditions change or the Company is able to obtain an additional source of funds (whether through operations, financing or otherwise) the Company currently does not have sufficient liquidity to acquire Louisville LP's interest in the LLC for the Option Price and to pay off the Notes in September 30, 2002. Under the terms of the Operating Agreement, the failure of the Company to acquire Louisville LP's interest by September 30, 2002 could result in the Company forfeiting its interests in the LLC, the Longwood, Florida property and the Phoenix, Arizona property. As a result, management is currently evaluating all of its options with respect to the Louisville Hotel, including its potential sale prior to September 30, 2002. Associates is a licensee under a franchise agreement with Holiday Inn (the "Franchise Agreement"). The Company has guaranteed Associates obligations under the Franchise Agreement. In the event that the Franchise Agreement is terminated as a result of a breach of the Franchise Agreement by Associates, Associates may be subject to liquidated damages under the Franchise Agreement equal to approximately 36 times the monthly franchise fees payable pursuant to the Franchise Agreement. The current monthly franchise fees are approximately $41,000. In conjunction with the Franchise Agreement, the Hotel is subject to a Property Improvement Plan ("the Plan"). Under the Plan, the Hotel is required to make certain improvements by December 31, 2002, with certain interim milestones. The Company 31 estimates that the cost of these improvements is approximately $1,858,000. As of March 31, 2001, Associates has spent approximately $330,000 on improvements and has approximately $348,000 in escrow to spend on improvements. The Company has not determined whether Associates will be able to fund the remainder of the Plan. If the Hotel is unable to fund the remainder of the Plan, the Company may be required to complete the Plan pursuant to the Company's guaranty of the Franchise Agreement. Vacated Office Space- In January 2001, the Company changed the location of its principle executive offices. The new space is being leased on a month-to-month basis for $1,850 per month. In March 2001 the Company signed a sublease agreement ("Sublease") on the space previously used for its executive offices. The Sublease is for a term of fourteen months and commenced on April 1, 2001. The Company will receive $8,738 per month for thirteen months. The Company currently pays $13,107 per month for the existing lease, which will expire in May 2002. The Company recognized expense for the vacated space of approximately $107,000 during the fiscal year ended March 31, 2001. The Company has also recorded a lease commitment liability of approximately $94,000 as of March 31, 2001. 4. Long-Term Debt In June 1995, the Company entered into a loan with a commercial lender to refinance the Ramada Inn in Longwood, Florida. The loan proceeds were $2,800,000, and the hotel served as collateral for the loan. The loan was for a term of 20 years with an amortization period of 25 years, at a fixed interest rate of 10.35%. Principal and interest payments were approximately $26,000 per month beginning August 1, 1995. In addition, the Company was required to make a repair escrow payment comprised of 4% of estimated revenues, as well as real estate tax and insurance escrow payments. The total amount for these items was a payment of approximately $22,000 per month and could be adjusted annually. The escrow funds were used as tax, insurance and repair needs arise. Also, commitment fees and loan costs of approximately $159,000 were deferred and were being amortized over 20 years. These costs were expensed as part of the cost of sale when the Longwood property was sold and the loan transferred. The approximate average amount of borrowings on the term loan during the fiscal year ended March 31, 2001 was $2,657,000. The maximum amount of borrowings outstanding under this loan during that period was $2,657,000. This loan was transferred upon the sale of the property in May 2000, and is no longer an obligation of the Company. See Note 10. On September 30, 1999, the Company entered into three promissory notes in order to purchase additional equity in the LLC (see Note 3). A promissory note for $1,333,000 is secured by the Company's ownership interest in the LLC. The two other promissory notes are for $300,000 each, with one secured by the Company's Phoenix, Arizona land and the other secured by the Company's Longwood, Florida land. The total carrying value of the assets pledged as collateral is approximately $620,000 as of March 32 31, 2001. The Notes are cross-defaulted, bear interest at 13%, mature on September 30, 2002 and are non-recourse to the Company. Interest payments are $20,941 per month beginning in November 1999. Interest expense was $251,000 and $126,000, respectively, for the fiscal years ended March 31, 2001 and 2000. See also Notes 3 and 8. The combined approximately average amount of borrowings on the Notes during the year ended March 31, 2001 was $1,933,000. The combined maximum amount of borrowings outstanding under these notes was $1,933,000, and the balance of the notes at March 31, 2001 was $1,933,000. The carrying value of the notes approximate their fair value at March 31, 2001. Maturities of long-term debt as of March 31, 2001 during the Company's next five fiscal years are as follows: 2002 -- $-0-; 2003 -- $1,933,000; and none thereafter. 5. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," that requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The income tax provision is as follows: 33 (000's omitted)
For the Fiscal Year For the Seven For the Fiscal Ended Months Ended Year Ended ------------------------------------------------------------------------ March 31, March 31, March 31, August 31, August 31, 2001 2000 1999 1999 1998 (Unaudited) ------------------------------------------------------------------------ Current: Federal $ 70 $ -- $ -- $ -- $ -- State -- -- -- -- -- ------------------------------------------------------------------------ Total current 70 -- -- -- -- Deferred: Federal -- -- -- -- -- State -- -- -- -- -- ------------------------------------------------------------------------ Total deferred -- -- -- -- -- ------------------------------------------------------------------------ Total $ 70 $ -- $ -- $ -- $ -- ========================================================================
A reconciliation of the provision for income taxes to the federal statutory rate is as follows: (000's omitted)
For the Fiscal Year For the Seven For the Fiscal Ended Months Ended Year Ended ------------------------------------------------------------------ March 31, March 31, March 31, August 31, August 31, 2001 2000 1999 1999 1998 (Unaudited) ------------------------------------------------------------------ Tax at statutory rate $ 10 $ (617) $ (202) $ (404) $ (194) State taxes, net of federal benefit 1 (66) (21) (43) -- Permanent items 2 2 2 36 17 Valuation reserve (13) 646 221 1,101 186 Other 70 35 -- (690) (9) ------------------------------------------------------------------ $ 70 $ -- $ -- $ -- $ -- ==================================================================
34 Deferred tax assets (liabilities) are composed of the following at March 31, 2001 and 2000, respectively: (000's omitted) March 31, 2001 March 31, 2000 -------------- -------------- Allowance for Possible Losses and writedowns - Impairments $ 2,580 $ 1,700 Excess of Book over Tax Depreciation 108 80 Other 329 425 Tax Loss Carryforwards 5,264 6,092 ------------- ------------- Gross Deferred Tax Assets 8,281 8,297 ------------- ------------- Excess of Book over Tax Basis, Income from Partnership (114) (230) Loan Amortization (41) (44) ------------- ------------- Gross Deferred Tax Liabilities (155) (274) ------------- ------------- Deferred Tax Assets Valuation Allowance (8,126) (8,023) ------------- ------------- $ 0 $ 0 ============= ============= For financial reporting purposes, a valuation allowance has been recognized at March 31, 2001 and 2000 to reduce the net deferred income tax assets to zero. The net change in the valuation allowance for deferred tax assets in the fiscal year ended March 31, 2001 was an increase of $103,000. This change resulted primarily from an increase in the Company's deferred tax assets relating to the writedown of the investment in the LLC and from the utilization of net operating loss carrforwards that had previously been reserved for. On March 31, 2001, the Company has federal net operating loss carryforwards for income tax purposes of approximately $13,521,000, that will begin to expire in 2005. In January 2000, the Company had an ownership change as defined in Section 382 of the Internal Revenue Code. As such, the net operating loss available to offset future income is limited. The amount of net operating loss available in any year may increase if certain assets are sold. 6. Shareholders' Investment Common and Preferred Stock - There are currently 5,000,000 shares of common stock authorized, of which 2,513,480 are outstanding, of which approximately 66% is owned by Fountainhead. In 35 addition, Fountainhead owns 450,000 shares of convertible preferred stock such that Fountainhead has beneficial ownership of approximately 78% of the Company. There are currently 1,000,000 authorized shares of the Company's Series A Convertible Preferred Stock and 450,000 shares issued and outstanding. The preferred stock is redeemable by the Company at $8.00 per share and accrues dividends at a rate of $0.40 per share annually for the first two years and at a rate of $0.80 per share annually thereafter. Dividends are payable quarterly commencing on November 1, 1994. Each share of the preferred stock is convertible into three shares of the Company's common stock effective August 16, 1996 and is subject to certain anti-dilution adjustments. As of March 31, 2001, no shares have been converted. In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the shares of preferred stock shall be entitled to receive $8.00 per share of preferred stock plus all dividends not previously declared and unpaid thereon. As of March 31, 2001, there are $750,000 of dividends in arrears owed to Fountainhead. Preferred dividends paid in fiscal years 1998 and 1999 have been charged against paid-in-surplus since the Company has accumulated deficits. Fountainhead Transaction - On January 10, 2000, the Company entered into a Management Agreement with Fountainhead to perform management services at Chateau Elan Winery and Resort, one of Fountainhead's properties, for a period of five years beginning on March 24, 2000. In consideration of the Management Agreement, the Company issued to Fountainhead 1,000,000 shares of common stock at a fair value of $2.00 per share. The determined market value of the management contract was $2,000,000 at the time of the transaction. This asset is being amortized over the life of the contract. In connection with the issuance of the Fountainhead Shares, the number of directors constituting the full Board of Directors of the Company was increased from three to seven members, effective on February 3, 2000. On January 11, 2000, one of the principal stockholders and President of the Company, N. Russell Walden, sold 650,000 shares of the common stock to Fountainhead, and a new President of the Company was elected. Another principal shareholder, ADT, sold 450,000 shares of preferred stock of the Company to Fountainhead. Through the issuance of the common stock pursuant to the Management Agreement and the acquisitions of the Walden common stock and ADT preferred stock, Fountainhead has obtained beneficial ownership of approximately 79% of the common stock. Fountainhead is engaged principally in the business of owning and operating hotel, resort and other real estate properties. 36 Loss Per Share - The following table sets forth the computation of basic and diluted loss per share:
For the Fiscal Year For the Seven For the Fiscal Ended Months Ended Years Ended ----------- -------------------------------- ----------------------------- March 31, March 31, March 31, 1999 Aug. 31, Aug. 31, 2001 2000 (Unaudited) 1999 1998 ----------- ----------- ----------- ----------- ----------- Net loss $ (40,000) $(1,816,000) $ (593,000) $(1,283,000) $ (622,000) Less preferred dividends paid -- -- (90,000) (180,000) (360,000) Less undeclared preferred dividends (360,000) (210,000) (120,000) (180,000) -- ----------- ----------- ----------- ----------- ----------- Net loss applicable to common shareholders $ (400,000) $(2,026,000) $ (803,000) $(1,643,000) $ (982,000) Weighted average shares outstanding - basic and diluted 2,513,480 1,898,000 1,513,000 1,513,000 1,526,000 =========== =========== =========== =========== =========== Basic and diluted loss per common share $ (0.16) $ (1.07) $ (0.53) $ (1.09) $ (0.64) =========== =========== =========== =========== ===========
The effect of the Company's stock options and convertible securities was excluded from the computations for the twelve months ended March 31, 2001, the seven months ended March 31, 2000 and 1999 and for the two years ended August 31, 1999 and 1998, as they are antidilutive. Accordingly, for the periods presented, diluted net loss per share is the same as basic net loss per share. 37 1993 Stock Option Plan - On March 30, 1993, the Company granted options to purchase 378,000 shares of common stock at a price of approximately $1.83 per share to its key employees and one director under the Ridgewood Hotels, Inc. 1993 stock option plan (the "Option Plan"). The exercise price equaled the fair market value at the date of grant. The options vested over a four-year period in 25% increments. All options expire ten year from the date of grant, unless earlier by reason of death, disability, termination of employment, or for other reasons outlined in the Option Plan. On June 13, 2000, 25,000 additional grants were issued to a director at an exercise price of $2.25, which was no less than the fair market value at the date of the grant. These options vest immediately and expire five years after the date of grant, unless earlier by reason of death, disability, termination of employment, or for other reasons outlined in the Option Plan. None of these options were exercised as of March 31, 2001. On July 1, 2000, 258,500 additional grants were issued to key employees at a price of $2.00 per share, which was no less than the fair market value at the date of the grant. Certain employees' options vest over a four-year period in 25% increments while certain others vest over a four-year period with 10% the first year, 25% the second year, 50% the third year and 100% the fourth year. All options granted on July 1, 2000 expire ten years from the date of grant, unless earlier by reason of death, disability, termination of employment, or for other reasons outlined in the Option Plan. None of these options were exercised as of March 31, 2001. The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost for stock options is recognized for stock option awards granted with an exercise price at or above fair market value. Had compensation expense for the Option Plan been determined based upon fair values at the grant date for awards under the Option Plan in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss for the fiscal year ended March 31, 2001 would have decreased to the pro forma amount indicated below: 2001 ------ Net loss: As reported $ (40) Pro forma (158) Basic and diluted loss per common share: As reported (0.16) Pro forma (0.21) The weighted average fair value of options granted estimated on the date of grant using the Black-Scholes model was $1.48 for options granted in 2000. The fair value of the options granted was based on the following assumptions: volatility of 139 38 percent, dividend yield of 0 percent, risk free interest rate of 6.09 percent for options granted on July 1, 2000 and 6.49 percent for options granted on June 13, 2000, and a forfeiture rate of 0 percent. Warrants - On December 16, 1996, 75,000 warrants were issued to a hotel acquisitions consultant for the Company. Each warrant represents the right to purchase from the Company one share of common stock at the exercise price of $3.50 per share. The warrants may be exercised at any time within five years from the date of issuance, but none have been exercised as of March 31, 2001. Related Party Transactions- In the Management Agreement, Fountainhead agreed to pay the Company a base management fee equal to 2% of the gross revenues of the properties being managed, plus an annual incentive management fee to be determined each year based on the profitability of the properties being managed during that year. The Management Agreement has a term of five years but is terminable upon the transfer by Fountainhead of all or a material portion of the properties covered by the Management Agreement. If the Management Agreement is terminated upon such a transfer or upon the occurrence of an event of default by Fountainhead, Fountainhead shall pay to the Company a portion of the projected fees owed to the Company under the agreement, with adjustments based on the term of the Management Agreement remaining. In such event, Fountainhead may elect to surrender to the Company shares of common stock in lieu of a cash payment. As a result of the Fountainhead transactions, the Company's President resigned, and Henk H. Evers was appointed as President and Chief Operating Officer effective January 11, 2000. At the Company's request, Fountainhead continues to pay the President's salary as an advance to the Company. Effective September, 2000, the President has assumed certain responsibilities previously handled by the general manager of Chateau Elan Georgia. As a result, Chateau Elan Georgia has agreed to assume $125,000 of the President's annual salary of $305,000. In addition, the President has performed certain services for Fountainhead (in addition to the services for which the Company received a development fee) and, in consideration therefore, Fountainhead has agreed to assume $50,000 of the President's annual salary while he continues to perform such services. For the fiscal year ended March 31, 2001, the portion of the President's salary charged to Chateau Elan and Fountainhead is $71,000 and $29,000, respectively. The Company has accrued $296,000 in expenses relating to the advanced compensation including $75,000 for the seven months ended March 31, 2000 and $221,000 for the fiscal year ended March 31, 2001 (after taking into account the portions assumed by Chateau Elan Georgia and Fountainhead). The Company reduced the advanced compensation liability by $90,000 by netting accrued development fees owed to the Company by Fountainhead for managing one of Fountainhead's properties in St. Andrews, against this liability. After reducing the advanced compensation by $90,000, there is $206,000 of accrued liability remaining at March 31, 2001. As of March 31, 2001 the Company manages Chateau Elan Georgia ("Georgia") and Chateau Elan Sebring ("Sebring"). Both of these hotels are Fountainhead properties. St. Andrews opened on June 14, 2001. The Company has received $6,000 per month since January 2000 as a development fee while St. Andrews was under construction. The Company anticipates receiving a management contract to manage this property similar to the contracts for managing Georgia and Sebring. For the year ended March 31, 2001 the Company earned management fees of approximately $973,000 and $60,000 for Georgia and Sebring, respectively. The combined management and development fees for these 39 Fountainhead hotels were approximately $1,123,000 and represented 44% of the total management fee revenue for the fiscal year ended March 31, 2001. In the normal course of its business of managing hotels, the Company may incur various expenses on behalf of Fountainhead or its subsidiaries that the Company pays and is reimbursed by Fountainhead for these expenditures. As of March 31, 2001 and 2000, Fountainhead owed the Company approximately $402,000 and $62,000, respectively, for such unpaid management fees and expenses, which represents 50% of the Company's total operating receivables. For the year ending March 31, 2001, the Company was charged approximately $40,000 of salary related to the Human Resources Director of Georgia. The Company does not have a full-time Human Resources Director and utilizes Georgia's part-time. Georgia deducts the salary from the monthly management fees owed to the Company. The Company leases its office space for $1,850 per month from Nanco Co., which is owned by one of the Company's directors. The lease terms are month-to-month and at market rates for comparable space. 7. Supplemental Retirement and Death Benefit Plan The Company implemented a non-qualified Supplemental Retirement and Death Benefit Plan with an effective date of January 1, 1987. The Plan supplements other retirement plans and also provides pre-retirement death benefits to participants' beneficiaries. The net periodic pension cost includes the following components: 40 August 31, 1999 August 31, 1998 -------------- --------------- Service cost for the period $ 39,256 $ 34,628 Interest cost on projected benefit obligation 52,014 46,170 Net amortization of transition liability 11,026 11,026 Recognized net actuarial gain (28,848) (39,938) ------------- ------------- Net periodic pension cost $ 73,448 $ 51,886 ============= ============= On January 11, 2000, the Plan's only participant waived all of his rights under or benefits accrued pursuant to the Plan, except that he shall have the right to receive $55,000 per year for 15 years beginning at the age of 65. The gain from the decreased benefit obligation is approximately $374,000 and is being amortized over the remaining period of this obligation. The Company has recorded a total pension liability of approximately $894,000 as of March 31, 2001. Concurrent with the implementation of the Supplemental Retirement and Death Benefit Plan, the Company purchased key person life insurance contracts on the life of the Plan participant. The policies are owned by and payable to the Company and are "increasing whole life" insurance. The Company pays level annual premiums, may borrow against cash values earned, and pays interest annually on any loans that may be cumulatively outstanding. Since the Plan's benefits were waived as described above, the Company chose to cancel the policies and received approximately $7,000 during the seven months ended March 31, 2000. 41 8. Investments in Unconsolidated Hotel Entities RW Hotel Partners, L.P. On August 16, 1995, RW Hotel Partners, L.P. was organized as a limited partnership (the "Partnership") under the laws of the State of Delaware. Concurrently, the Company formed Ridgewood Georgia, Inc., a Georgia corporation ("Ridgewood Georgia") that became the sole general partner in the Partnership with RW Hotel Investments Associates, L.L.C. ("Investor") as the limited partner. Ridgewood Georgia has a 1% base distribution percentage versus 99% for the Investor. However, distribution percentages do vary depending on certain defined preferences and priorities pursuant to the Partnership Agreement ("Agreement"), which are discussed below. The Partnership was originally formed to acquire a hotel property in Louisville, Kentucky, but subsequently purchased five additional hotels. The Partnership purchased the hotel in Louisville, Kentucky for approximately $16,000,000. In December 1995 and January 1996, the Partnership purchased four hotel properties in Georgia for approximately $15,000,000 and a hotel in South Carolina for $4,000,000, respectively. Three of the Georgia hotels were sold at a loss in March 1998, and the hotel in Louisville was transferred to a new entity in June 1998 in conjunction with refinancing that hotel (see "Louisville Hotel Associates LLC" below). The hotel in Orangeburg, South Carolina was sold at a loss in November 1998. In November 1999, the remaining hotel in Thomasville, Georgia was sold at a loss. The Partnership will be dissolved, and the Company will neither receive cash nor be required to pay out cash related to the Partnership. Total management fees related to these hotels for the seven months ended March 31, 2000 were $10,000 and for the years ended August 31, 1999 and 1998 were approximately $68,000 and $233,000, respectively. In connection with the sale of three of its six hotels in March 1998, the Company signed a management agreement with the new owner of the three hotels wherein it will receive a management fee equal to 3% of revenues plus 15% of the net operating income plus 5% of any profit realized upon the sale of the hotels. In connection with the management agreement, the Company received management fees totaling approximately $202,000 for the year ended March 31, 2001, $107,000 for the seven months ended March 31, 2000 and $191,000 and $114,000 for the years ended August 31, 1999 and 1998, respectively. Houston Hotel, LLC On December 9, 1997, Houston Hotel, LLC ("Houston Hotel") was organized as a limited liability company under the laws of the State of Delaware. The purpose that Houston Hotel was organized is limited solely to owning and managing the Hampton Inn Galleria in Houston, Texas. The Company contributed approximately $316,000 into Houston Hotel that represents a 10% interest, and the other 90% interest is owned by Houston Hotel, Inc. (the "Manager"), a Nevada corporation. 42 Income or loss allocated to the Company and the Managing Member is based upon the formula for distributing cash. Distributable cash is defined as the cash from operations and capital contributions determined by the Manager to be available for distribution. Cash from operations is defined as the net cash realized from the operations of Houston Hotel after payment of all cash expenditures of Houston Hotel including, but not limited to, operating expenses, fees, payments of principal and interest on indebtedness, capital improvements and replacements, and such reserves and retentions as the Manager reasonably determines to be necessary. Distributions of distributable cash shall be made as follows: o First, 100% to the Manager until it has been distributed an amount equal to its accrued but unpaid 13% preferred return. o Second, 100% to the Company until the Company has been distributed an amount equal to its accrued but unpaid 13% preferred return. o Third, 80% to the Manager and 20% to the Company. A Property Management Agreement exists between Houston Hotel, LLC and the Company as property manager ("Property Manager") for the purpose of managing the hotel. The Property Manager shall be entitled to the following property management fees: (1) 1.5% of the gross revenues from the hotel property. (2) 1.5% of the gross revenues from the hotel property as an incentive fee if 85% of the budgeted net operating income is met. In connection with the management agreement, the Company received management fees totaling approximately $78,000 for the year ended March 31, 2001, $56,000 for the seven months ended March 31, 2000 and $98,000 and $83,000 for the fiscal years ended August 31, 1999 and 1998, respectively. On September 30, 1999 the Company transferred its 10% ownership in Houston Hotel, LLC for additional equity in Louisville Hotel, LLC. See further discussion below under "Louisville Hotel Associates, LLC." Effective September 30, 1999 a new management agreement exists between the Company and Houston Hotel, LLC. The Company ("Manager") shall be entitled to the following property management fees: (1) A Base Management Fee equal to 3% of gross revenues from the hotel property. 43 (2) An Incentive Management Fee in an amount up to 1% of gross revenue per period calculated as follows: (a) 0.5% of gross revenue per year in which the actual net operating income ("NOI") reaches 105% of the budgeted NOI for that period, and (b) an additional 0.5% of gross revenue per year in which the actual NOI reaches 110% of the budgeted NOI for that period. (c) The Incentive Management Fee will be accrued monthly and disbursed quarterly. The quarterly disbursements for the Incentive Management Fee will be reconciled quarterly and annually. In August 2000 the Company's management agreement was terminated. Louisville Hotel (see also Note 3) The Company has an ownership interest in a Holiday Inn hotel in Louisville, Kentucky (the "Hotel"). The Hotel is owned by Associates. As of March 31, 2001, the Company, through its wholly-owned subsidiaries, was the manager of and had a minority ownership interest in Associates. In April, 2001, the Company, through its wholly-owned subsidiaries, acquired 100% of the membership interests in Associates. The membership interests are pledged as security for a $3,623,690 loan made by the LLC . The membership interests are also subject to an option pursuant to which the LLC has the right to acquire the membership interests for nominal value. Pursuant to the terms of the loan, all revenues (including proceeds from sale or refinancing) of Associates (after payment of expenses including a management fee to the Company) are required to be paid to the LLC until principal and interest on the loan are paid in full. As a result, the LLC has all of the economic interests in the Hotel. On September 30, 1999, the Company purchased additional equity in the LLC. The Company increased its ownership from 10% to 80%. The consideration issued to acquire the increased ownership was $2,500,000, composed of the following: Transfer of 10% ownership interest in Houston Hotel, LLC $443,000 Cash payment (1) 124,000 Promissory note to Louisville LP secured by the Company's ownership interest in the LLC (2) 1,333,000 Promissory note to Louisville LP secured by the Company's Phoenix, Arizona land (2) 300,000 Promissory note to Louisville LP secured by one parcel of the Company's Longwood, Florida land (2) 300,000 ------------- Total additional equity in the LLC $2,500,000 ============= 44 (1) The cash to make this payment was obtained from the LLC in connection with a modification of the management contract of the Hotel. This amount represents the unamortized portion of the original $200,000 participation fee paid to the LLC to acquire the management contract of the Hotel. (2) The Notes are cross-defaulted. The Notes bear interest at 13% and mature on September 30, 2002. See Notes 3 and 4. In accordance with EITF Issue M:96-16 "Investor's accounting for an investor when the investor has a majority of the voting interest but the minority shareholder or shareholders have certain approval or veto rights", the LLC is not consolidated in the accompanying financial statements as the minority member has kept substantial participation rights in this entity. Income or loss allocated by the LLC to the Company is based upon the formula for distributing cash. Distributable cash is defined as the net cash realized from operations but after payment of management fees, principal and interest, capital improvements and other such retentions as the managing member determines to be necessary. Distributions of distributable cash from the LLC shall be made as follows: o First, to the Company in an amount equal to the cumulative interest paid on the acquisition loans of $1,333,000, $300,000 and $300,000. The Company has been using these funds to pay Louisville LP. o Second, a 13% preferred return to Louisville LP on their original $3,061,000 investment. o Third, a 13% preferred return to the Company on its capital contribution of $1,207,000. o Fourth, 80% to the Company and 20% to Louisville LP. Cash from a sale or refinancing would be distributed as follows: o First, to the Company in an amount equal to the cumulative interest paid on the acquisition loans of $1,333,000, $300,000 and $300,000. 45 o Second, to the Company in an amount equal to the acquisition loans of $1,333,000, $300,000 and $300,000. o Third, to Louisville LP until it has received aggregate distributions in an amount equal to its 13% preferred return. o Fourth, to Louisville LP until its net capital contribution is reduced to zero. o Fifth, to the Company until it has received an amount equal to its 13% preferred return. o Sixth, to the Company until its net capital contribution is reduced to zero. o Thereafter, 10% to Louisville LP and 90% to the Company. If a sale or refinancing occurs after September 30, 2000 but before September 30, 2001, then the distribution would change to 15% and 85%, respectively. In March 2001 and 2000, the Company recognized writedowns of $2,000,000 and $1,200,000, respectively, on its investment in the LLC. The March 2000 writedown was due to the anticipated shortfall of the Company's return of equity as a result of the decreased operating performance of the Hotel. In March 2001, in light of the deterioration of market conditions affecting the hotel industry during the fourth quarter and subsequent to year-end and due to a further decrease in the operating performance of the Hotel, management of the Company concluded that their economic ownership interest had been totally impaired. The carrying value of the investment in the LLC on the Company's books is $0 as of March 31, 2001. In 1998, the Company paid an additional $200,000 to the LLC as a fee to acquire the management contract for the Hotel. This amount was included in other assets. The Company was amortizing the fee $70,000 per year for the first two years and $20,000 per year for the next three years. With respect to the sum of $100,000, in the event that the management contract is terminated by the LLC with or without cause and not pursuant to a third party sale prior to June 5, 2000, the LLC will pay to the Company the sum of $4,166.67 times the number of months prior to June 5, 2000 that the management contract is terminated. With respect to the second sum of $100,000, in the event that the management contract is terminated by the LLC prior to June 5, 2003, the LLC will pay to the Company the sum of $1,666.67 times the number of months prior to June 5, 2003 that the management contract is terminated. In connection with the management agreement, the Company received management fees totaling approximately $258,000 for the year ended March 31, 2001, $153,000 for the seven months ended 46 March 31, 2000, $_______ for the seven months ended March 31, 1999 (unaudited) and $285,000 and $57,000 for the years ended August 31, 1999 and 1998, respectively. A summary of the investment in unconsolidated entities is as follows:
For the Year For the Seven For the Year For the Year Ended Months Ended Ended Ended March 31, 2001 March 31, 2000 Aug. 31, 1999 Aug. 31, 1998 -------------- -------------- ------------- ------------- Beginning net balance of investment in unconsoli- dated entities $ 2,000 $ 1,016 $ 832 $ 338 Capital contributions (1) -- 2,184 184 678 Writedown (2) ($2,000) (1,200) -- -- Equity in loss -- -- -- (98) Distributions -- -- -- (86) ------- ------- ------- ------- Ending net balance of investment in uncon- solidated entities $ 0 $ 2,000 $ 1,016 $ 832 ======= ======= ======= =======
(1) The capital contribution shown here of $2,184,000 plus the original investment in Houston Hotel, LLC of $316,000 equals the total additional investment in the LLC of $2,500,000. (2) In March 2001 and 2000, the Company recognized writedowns of $2,000,000 and $1,200,000, respectively, on its investment in the LLC. This writedowns are due to the anticipated shortfall of the Company's return of equity as a result of the decreased operating performance of the Hotel. The unaudited combined balance sheet and statement of operations of the unconsolidated entities are as follows: 47 COMBINED UNCONSOLIDATED ENTITIES CONDENSED BALANCE SHEET UNAUDITED (000's omitted) March 31, March 31, 2001 2000 -------------------------- Current Assets $ 1,423 $ 732 Property and Equipment, net 20,067 20,811 Intangible Assets, net 209 577 ------------------------- Total Assets $ 21,699 $ 22,120 ========================= Current Liabilities 594 608 Long-Term Debt 21,415 21,684 ------------------------- Total Liabilities 22,009 22,292 Deficit, net (310) (172) ------------------------- Total Liabilities and Deficit $ 21,699 $ 22,120 ========================= COMBINED UNCONSOLIDATED ENTITIES CONDENSED STATEMENT OF OPERATIONS UNAUDITED (000's omitted)
For the Fiscal Year For the Seven For the Fiscal Ended Months Ended Year Ended ----------------------------------------------------------------------- March 31, March 31, March 31, August 31, August 31, 2001 2000 1999 1999 1998 ----------------------------------------------------------------------- HOTEL OPERATIONS: Revenues $ 8,598 $ 5,224 $ 8,120 $ 11,681 $ 17,057 Operating Expenses 6,074 3,777 5,498 10,146 12,781 ----------------------------------------------------------------------- Income from Hotel Operations 2,524 1,447 2,622 1,535 4,276 ----------------------------------------------------------------------- Interest Expense 1,690 1,096 1,552 2,632 2,059 Depreciation/Amortization 972 819 838 1,562 1,943 Loss due to change to liquidation basis of accounting for RW Hotel Partners, L.P. -- -- -- -- 2,828 ----------------------------------------------------------------------- NET LOSS $ (138) $ (468) $ 232 $ (2,659) $ (2,554) =======================================================================
48 9. Employee Savings Plan The Ridgewood Hotels Employee Savings Plan ("Savings Plan") is a savings and salary deferral plan that is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986. The Savings Plan includes all employees of the Company who have completed one year of service and have attained age twenty-one. Each participant in the Savings Plan may elect to reduce his or her compensation by any percentage, not to exceed 15% of compensation when combined with any Matching Basic or Discretionary Employer Contributions (below) made on behalf of the participant, and have such amount contributed to his or her account under the Savings Plan. Elective Employer Contributions are made prior to the withholding of income taxes on such amounts. Prior to January 1, 2000, the Savings Plan provided for an employer matching contribution in an amount equal to 50% of the elective employer contributions, provided that in no event shall such employer matching contributions exceed 3% of the participant's compensation. In addition, the Board of Directors of the Company was authorized to make discretionary contributions to the Savings Plan out of the Company's current or accumulated profits ("Discretionary Contributions"). Discretionary Contributions were allocated among those participants who completed at least 1,000 hours of service during the plan year and were employed by the Company on the last day of the plan year. Beginning on January 1, 2000, the Savings Plan now provides for an employer matching contribution in an amount equal to 100% of the first 3% of pay that an employee contributes to the Plan and an amount equal to 50% of the next 2% of pay that an employee contributes to the Plan. In no event shall such employer matching contributions exceed 4% of the participant's compensation. In addition, the Board of Directors of the Company is authorized to make discretionary contributions to the Savings Plan out of the Company's current or accumulated profits. Discretionary Contributions are allocated among those participants who complete at least 1,000 hours of service during the plan year and are employed by the Company on the last day of the plan year. Employees are subject to a seven-year graduated vesting schedule with respect to Basic Employer Contributions, Matching Employer Contributions and Discretionary Contributions. Distributions from the Savings Plan will generally be available upon or shortly following a participant's termination of employment with the Company, with additional rights with respect to Voluntary Contributions. Expense for the Employee Savings Plan was approximately $21,000 for the fiscal year ended March 31, 2001 and $17,000, respectively, for the seven months ended March 31, 2000 and March 31, 1999 (unaudited). For the fiscal years ending August 49 31, 1999 and 1998, expense for the Employee Savings Plan was approximately $18,000 each year. 10. Sale of Operating Property On May 31, 2000, the Company sold its hotel in Longwood, Florida for $5,350,000. Approximately $3,500,000 of the sales proceeds were used to settle the mortgage and defeasance penalty on the hotel. The Company recognized approximately $2,856,000 in profit on the sale before tax. In conjunction with the transaction, the Company received a $250,000 note from the purchaser. The note was paid in full in June 2001. During the fiscal year ended March 31, 2001, the Company sold a parcel of land in Phoenix, Arizona for net proceeds of approximately $381,000 and recognized approximately a $12,000 gain on the sale. The Company also sold a parcel of land in Fairfield, Ohio for approximately $23,000 and recognized approximately an $8,000 gain on the sale. 11. Subsequent Event Ridgewood Georgia has entered into an Assignment and Assumption Agreement (the "Assignment Agreement") dated as of April, 2001 with RW Hotel Investment Associates, LLC, ("Transferee") pursuant to which Transferee assigned to Ridgewood Georgia, Transferee's 99% membership interest in RW Louisville Hotel Investors, LLC, a Delaware limited liability company ("RW Hotel Investors"). As a result, Ridgewood Georgia, which previously owned the remaining 1% membership interest in RW Hotel Investors, owns 100% of the membership interests in RW Hotel Investors (the "Membership Interests"). RW Hotel Investors, in turn, owns 99% of Associates, which owns the Hotel in Hurstbourne, Kentucky. The remaining 1% interest in Associates is owned by RW Hurstbourne Hotel, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company. Therefore, as a result of the Assignment Agreement, the Company became the indirect owner of 100% of the Membership Interests in Associates. The Assignment Agreement was entered into to provide the Company with ownership of Associates in connection with Associates' application for a new franchise agreement for its Holiday Inn franchise. The Assignment Agreement is being reported herein because, as a result of the acquisition by RW Louisville Hotel Associates, the Hotel will be included in the Company's consolidated financial statements on a going forward basis. 50 Report of Independent Public Accountants To Ridgewood Hotels, Inc. We have audited the accompanying consolidated balance sheets of RIDGEWOOD HOTELS, INC. (a Delaware corporation) AND SUBSIDIARIES as of March 31, 2001 and 2000 and the related consolidated statements of operations, shareholders' investment and cash flows for the year ended March 31, 2001 and the seven months ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ridgewood Hotels, Inc. and Subsidiaries as of March 31, 2001 and 2000 and the results of their operations and their cash flows for the year ended March 31, 2001 and the seven months ended March 31, 2000 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Atlanta, Georgia July 10, 2001 51 Report of Independent Accountants To the Board of Directors and Shareholders of Ridgewood Hotels, Inc. In our opinion, the accompanying consolidated statements of operations and cash flows present fairly, in all material respects, the results of operations and of cash flows for each of the two years in the period ended August 31, 1999 of Ridgewood Hotels, Inc. and its subsidiaries (the "Company"), in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLC PRICEWATERHOUSECOOPERS LLC Atlanta, Georgia November 17, 1999 52 Market Information The Company's common stock is listed in the National Association of Securities Dealers (NASDAQ) over-the-counter bulletin board service. Transfer Agent Computershare Investor Services, Dallas, Texas is the Company's stock transfer agent. Computershare maintains the Company's shareholder records. To change name, address or ownership of stock, to report lost certificates, or to consolidate accounts, contact: Computershare Investor Services 1601 Elm Street Thanksgiving Tower, Suite 4340 Dallas, Texas 75201 General Counsel Rogers & Hardin 2700 International Tower 229 Peachtree Street, N.E. Atlanta, Georgia 30303 Independent Public Accountants Arthur Andersen LLP Suite 2500 133 Peachtree Street, N.E. Atlanta, Georgia 30303-1816 53 Shareholder and General Inquiries The Company is required to file an Annual Report on Form 10-K for its fiscal year ended March 31, 2001 with the Securities and Exchange Commission. Copies of this annual report may be obtained without charge upon written request to: Ridgewood Hotels, Inc. Shareholder Relations 1106 Highway 124 Hoschton, Georgia 30548 (770) 867-9830 54 EX-21 3 d26248_ex21.txt SUBSIDIARIES EXHIBIT 21 RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT State or Jurisdiction Percentage of Voting of Incorporation Securities Owned --------------------- -------------------- Florida Communities, Inc. Florida 100% Ridgewood Orlando, Inc. Florida 100% Ridgewood Georgia, Inc. Georgia 100% Wesley Hotel Group, Inc. Georgia 100% Florida Beta Hotel Corp. Florida 100% California Zeta Hotel Corp. California 100% California Eta Hotel Corp. California 100% The foregoing subsidiaries are included in the consolidated financial statements of the Company. The Company also has the following ownership interests: Louisville Hotel, LLC Delaware 80% RW Hurstbourne Hotel, Inc. Delaware 100% Subsequent to March 31, 2001, the Company has the following additional subsidiaries: RW Louisville Hotel Investors, LLC Delaware 100% RW Louisville Hotel Associates, LLC Delaware 100% EX-23.1 4 d26248_ex23-1.txt CONSENT EXHIBIT 23.1 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K into the Company's previously filed Registration Statement File No. 033-866084. Arthur Andersen LLP Atlanta, Georgia July 16, 2001 EX-23.2 5 d26248_ex23-2.txt CONSENT EXHIBIT 23.2 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 033-866084) of Ridgewood Hotels, Inc. of our report dated November 17, 1999 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Atlanta, Georgia July 16, 2001 -----END PRIVACY-ENHANCED MESSAGE-----