EXHIBIT 13 RIDGEWOOD HOTELS, INC. ANNUAL REPORT 2000 FINANCIAL STATEMENTS Ridgewood Hotels, Inc. (the "Company") is primarily engaged in the business of acquiring, developing, operating and managing hotel properties in the Southeast and "Sunbelt" areas. Additionally, the Company owns several land parcels which are held for sale. Board of Directors Officers Michael M. Earley Donald E. Panoz Henk H. Evers Chief Executive Officer Luther A. Henderson Sheldon E. Misher Henk H. Evers Donald E. Panoz President Nancy C. Panoz N. Russell Walden* Byron T. Cooper*** Vice President, Construction & Planning Karen S. Hughes Vice President, Chief Financial Officer** Sheldon E. Misher Secretary * Mr. Walden retired as an officer of the Company on January 11, 2000. ** Ms. Hughes resigned as of May 12, 2000. *** Mr. Cooper resigned as of June 27, 2000. Corporate Offices 2859 Paces Ferry Road, Suite 700 Atlanta, Georgia 30339 Telephone: (770) 434-3670 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 listed in the National Association of Securities Dealers (NASDAQ) over-the-counter bulletin board service. However, there effectively has been an absence of an established public trading market for the Common Stock. Shares outstanding and per share amounts for all periods presented have been retroactively adjusted for a three-for-one stock split effected in the form of a stock dividend on October 31, 1994. On March 31, 2000, 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, which 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 $390,000 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 dividend. Selected Financial Data ($000's omitted, except per share data) - ------------------------------------------------------------------------------------------------------------- March 31, August 31, --------- -------------------------------------------------------- Balance Sheet Data as of 2000 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- ---- Total Assets $ 8,243 $ 5,910 $ 7,280 $ 8,266 $ 8,724 $ 9,673 Long-Term Debt 4,590 2,682 2,744 2,804 2,858 2,796 Shareholders' Investment 1,740 1,556 2,944 4,038 4,441 5,612 Seven Months Ended Income Statement Data for the March 31, March 31, Fiscal Years Ended August 31, -------- --------- ------------------------------------------------------------ 2000 1999 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- ---- ---- Net Revenues $ 3,378 $2,769 $ 4,547 $ 5,830 $ 8,209 $ 4,314 $ 8,675 Net Loss (1,816) (593) (1,283) (622) (463) (1,178) (1,656) Basic and Diluted Loss Per Common Share (1.07) (0.53) (1.09) (0.64) (0.58) (1.29) (1.90) 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 seven months ending March 31, 2000. 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 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. Sales of real estate properties for the fiscal year ended August 31, 1998 decreased compared to 1997 due primarily to the sale of the Company's undeveloped land in Maitland, Florida in 1997. The Company had a gain from real estate sales of approximately $335,000 for the seven months ended March 31, 2000. The Company had gains from real estate sales of approximately $79,000, $744,000 and $1,354,000 during fiscal years 1999, 1998 and 1997, 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. During the period ending March 31, 2000, the Company owned and operated a hotel in Longwood, Florida. The hotel was sold in May 2000 (see Subsequent Events in Notes to Consolidated Financial Statements) and has an 80% ownership interest in another hotel. The Company presently manages seventeen 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 managed by the Company are located in Georgia, Florida, Texas, Virginia, Indiana and Kentucky, and are generally affiliated with nationally recognized hospitality franchises including Holiday Inn, Ramada, Sheraton and Hampton Inns. 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 which offer food and beverage services and meeting and banquet facilities. The Company's current management agreements generally have initial terms of one to five years. Currently the Company has several agreements that may be terminated with sixty days notice, including four properties owned by the same third party which, if terminated, would result in a significant reduction of management fees to the Company. During the seven months ended March 31, 2000, the Company entered into four new management agreements. During the same period, three management agreements were terminated by property owners. 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 decreased $331,000, or 11%, compared to 1998. Revenues from wholly-owned hotel operations for fiscal year 1998 decreased $14,000, or .5%, compared to 1997. The decreases were due to lower occupancy at the Company's hotel in Longwood, Florida in 1999 and 1998. 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%, and $26,000, or 2%, compared to fiscal year 1999 and fiscal year 1998 compared to fiscal year 1997, respectively. The increases were due to a larger number of hotels under management each year. In relation to the Company's investment in unconsolidated entities, the Company recognized equity in the income of these entities of $133,000 and $85,000, respectively, for the seven months ended March 31, 2000 and March 31, 1999. During fiscal years 1999, 1998 and 1997, the Company recognized equity in the income (loss) of these entities of approximately $156,000, $(98,000), and $65,000, respectively. A provision of $199,000 for possible losses on investments in unconsolidated entities in fiscal year 1997 was recorded as there was no indication that the Company would be able to recover the equity income in the partnership. In turn, the equity in net loss of the unconsolidated entities reported for 1997 was $134,000. 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. The Company received approximately $398,000 as a consulting fee during fiscal year 1997. This consulting fee was earned by the Company for its involvement in the negotiations and purchase of a large hotel by another hotel company. 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. Expenses of wholly-owned real estate decreased $69,000, or 3%, for the fiscal year ended August 31, 1998 compared to 1997 due primarily to fewer land parcels (and their associated expenses) held by the Company. 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. There was no significant change in depreciation and amortization expense for the seven months ended March 31, 2000 compared to the seven months ended March 31, 1999. Depreciation and amortization expense increased by $199,000, or 77%, during fiscal year 1999 compared to 1998. The increase was due to greater amortization of the Company's hotel management agreements and the write-off of the remaining investment in a hotel management company. General, administrative and other expenses increased $362,000, or 31%, 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 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. General, administrative and other expenses increased $101,000, or 5%, for fiscal year 1998 compared to 1997. Expenses in fiscal year 1998 were unusually high due to severance paid to the executive in charge of hotel operations. 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 decrease was due to the termination of a consultant used by the Company. During fiscal years 1999, 1998 and 1997, 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, $361,000 and $1,067,000, respectively. Approximately $878,000 of the business development expense in fiscal year 1997 related to costs on the unsuccessful purchase of a hotel in Atlanta, Georgia. In March 2000, the Company recognized a writedown of $1,200,000 on its investment in Louisville Hotel, LLC. This 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. Liquidity and Capital Resources - During the seven months ended March 31, 2000, the Company received net proceeds of approximately $423,000 from the sale of undeveloped land in Florida and Georgia. The proceeds were used to provide additional working capital to the Company. In June 1995, the Company received a loan from a commercial lender to refinance the Ramada Inn in Longwood, Florida. The loan proceeds were $2,800,000. The loan is 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. A portion of the proceeds from the loan was used to repay a term loan, and the remaining proceeds of approximately $1,500,000 were used for working capital. In addition, the Company is 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 amount to a payment of approximately $22,000 per month and are adjusted annually. The escrow funds are used as tax, insurance and repair needs arise. As of March 31, 2000, there was approximately $239,000 of escrowed funds related to this loan agreement. On May 31, 2000 the Company sold its hotel in Longwood, Florida for $5,350,000 and received net cash proceeds of approximately $1,300,000 and a $250,000 note from the purchaser. Approximately $3,500,000 of the sales proceeds were used to pay off the mortgage and defeasance penalty on the hotel. See Subsequent Events in the Notes to Consolidated Financial Statements. On January 10, 2000, the Company entered into a management agreement ("Management Agreement") with Fountainhead Development Corp., a Georgia corporation ("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") 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. On January 11, 2000, one of the principal stockholders and President of the Company, N. Russell Walden ("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 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. See also note 6 to the financial statements. As a result of the Fountainhead transactions, the Company's President resigned and Mr. Evers was appointed as President and Chief Operating Officer effective January 11, 2000. At the Company's request, Fountainhead continued to pay Mr. Evers' salary as an advance to the Company through June 30, 2000. Fountainhead has agreed that the Company may repay the advance by issuing additional shares of common stock to Fountainhead at $2.00 per share. The Company has accrued $75,000 in expenses relating to the advanced compensation for the seven month period ending March 31, 2000. Effective July 1, 2000, the Company will commence paying Mr. Evers' salary directly. The Company has invested in a hotel entity as follows: RW Louisville Hotel Associates, LLC On May 13, 1998, RW Louisville Hotel Associates LLC ("RW Louisville Hotel Associates") was organized as a limited liability company under the laws of the State of Delaware. RW Louisville Hotel Associates was organized to own and manage the Holiday Inn ("the Hotel") in Louisville, Kentucky. The Company's investment in RW Hotel Partners, L.P. of $337,500 was transferred to RW Louisville Hotel Associates at its historical basis. Simultaneously, the Company invested $362,000 into Louisville Hotel, LLC. The combined equity of $699,500 represented a 10% interest in the Hotel. Louisville Hotel, LLC loaned $3,620,000 to the Hotel in return for all cash flows generated from the Hotel. On September 30, 1999, the Company purchased additional equity in Louisville Hotel, LLC. The Company increased its ownership from 10% to 80%. The consideration paid 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 Hotel, L.P. secured by the Company's ownership interest in Louisville Hotel, LLC(2) 1,333,000 Promissory note to Louisville Hotel, L.P. secured by the Company's Phoenix, Arizona land(2) 300,000 Promissory note to Louisville Hotel, L.P. secured by one parcel of the Company's Longwood, Florida land (2) 300,000 ---------- Total additional equity in Louisville Hotel, LLC $2,500,000 ========== (1) The cash to make this payment was obtained from Louisville Hotel, 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 Louisville Hotel, LLC to acquire the management contract of the hotel. (2) The three promissory notes are cross defaulted. The three promissory notes bear interest at 13% and mature on September 30, 2002. With 80% ownership, the Company is now the Managing Member of Louisville Hotel, LLC. Louisville Hotel, L.P. now has 20% ownership in Louisville Hotel, LLC and is the Non-Managing Member. Income or loss allocated 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 Louisville Hotel, LLC shall be made as follows: - 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 would then use these funds to pay Louisville Hotel, L.P. - Second, a 13% preferred return to Louisville Hotel, L.P. on their original $3,061,000 investment. - Third, a 13% preferred return to the Company on its capital contribution of $1,207,000. - Fourth, 80% to the Company and 20% to Louisville Hotel, L.P. Cash from a sale or refinancing would be distributed as follows: - 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 would then use these funds to pay Louisville Hotel, L.P. - Second, to the Company in an amount equal to the acquisition loans of $1,333,000, $300,000 and $300,000. - Third, to Louisville Hotel, L.P. until it has received aggregate distributions in an amount equal to its 13% preferred return. - Fourth, to Louisville Hotel, L.P. until its net capital contribution is reduced to zero. - Fifth, to the Company until it has received an amount equal to its 13% preferred return. - Sixth, to the Company until its net capital contribution is reduced to zero. - Thereafter, 10% to Louisville 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 2000, the Company recognized a writedown of $1,200,000 on its investment in Louisville Hotel, LLC. This 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. Effective September 30, 1999 a new management agreement was entered into between the Company and RW Louisville Hotel Associates, LLC. The Company ("Manager") is entitled to the following property management fees: (1) A Base Management Fee equal to 3% of gross revenues from the hotel property. (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 net operating income ("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 connection with the management agreement prior to September 30, 1999, the Company received management fees totaling approximately $32,000 for the seven months ended March 31, 2000 and $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 $131,000 for the seven months ended March 31, 2000. There is approximately $1,900,000 of available cash as of June 15, 2000. The increase in cash since March 31, 2000 is due to the sale of land in Phoenix, Arizona and the sale of the hotel in Longwood, Florida. The Company intends to aggressively pursue the acquisition of hotels and hotel management contracts with this cash. 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 and decreased supply of investment capital for real estate that generally accompany inflation. Year 2000 - The Company did not experience any disruptions to its business related to the Year 2000. The total costs of compliance have been minimal, and the Company does not anticipate any disruptions in the future. RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2000 AND AUGUST 31, 1999 AND 1998 ($000'S omitted, except share and per share data) March 31, August 31, August 31, ASSETS: 2000 1999 1998 ------ --------- --------- --------- Current Assets: Cash and Cash Equivalents $ 258 $ 471 $ 1,255 Receivables 394 241 240 Other Current Assets 320 394 438 ---------- ---------- ---------- Total Current Assets 972 1,106 1,933 Real Estate Investments: Real Estate Properties Operating Properties, net 1,106 1,172 1,248 Land Held for Sale, net 1,806 2,028 2,361 Investments in Unconsolidated Hotel Entities 2,000 1,016 832 ---------- ---------- ---------- Total real estate investments 4,912 4,216 4,441 Management Contracts, net 2,192 260 -- Other Assets 167 328 906 ---------- ---------- ---------- $ 8,243 $ 5,910 $ 7,280 ========== ========== ========== <FN> The accompanying notes are an integral part of these consolidated balance sheets. </FN> RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2000 AND AUGUST 31, 1999 AND 1998 ($000's omitted, except share and per share data) LIABILITIES AND SHAREHOLDERS' INVESTMENT March 31, August 31, August 31, 2000 1999 1998 ---------- ---------- --------- LIABILITIES: - ----------- Current Liabilities: Current Maturities of Long-Term Debt $ 37 $ 40 $ 53 Accounts Payable 284 246 260 Accrued Salaries, Bonuses and Other Compensation 172 84 107 Accrued Property Tax Expense 39 111 116 Accrued Interest and Other Liabilities 524 338 289 ---------- ---------- ---------- Total Current Liabilities 1,056 819 825 Accrued Pension Liability 520 893 820 Deferred Curtailment Gain on Pension Liability 374 -- -- Long-Term Debt 4,553 2,642 2,691 ---------- ---------- ---------- Total Liabilities 6,503 4,354 4,336 ---------- ---------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' INVESTMENT: Series A Convertible Cumulative Preferred Stock, $1 par value, 1,000,000 shares authorized, 450,000 shares issued and outstanding in 2000, 1999 and 1998 450 450 450 Common stock, $0.01 par value, 5,000,000 shares authorized, 2,513,480 shares issued and outstanding in 2000, and 1,513,480 shares issued and outstanding in 1999 and 1998 25 15 15 Paid-in Surplus 17,671 15,681 15,861 Note receivable from officer for purchase of common stock -- -- (75) Accumulated deficit (16,406) (14,590) (13,307) ---------- ---------- ---------- Total Shareholders' Investment 1,740 1,556 2,944 ---------- ---------- ---------- $ 8,243 $ 5,910 $ 7,280 ========== ========== ========== <FN> The accompanying notes are an integral part of these consolidated balance sheets. </FN> RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SEVEN MONTHS ENDED MARCH 31, 2000 AND 1999 AND FOR THE YEARS ENDED AUGUST 31, 1999, 1998 AND 1997 ($000's Omitted, except per share data) For the Seven Months Ended For the Fiscal Year Ended --------------------- ------------------------------- March 31, March 31, August 31, August 31, August 31, 2000 1999 1999 1998 1997 (Unaudited) --------- ---------- --------- ------- --------- REVENUES: Revenues from wholly-owned hotel operations........ $ 1,696 $ 1,649 $ 2,703 $ 3,034 $ 3,048 Revenues from hotel management .................... 927 662 1,213 1,076 1,050 Sales of real estate properties ................... 598 363 458 1,655 3,808 Equity in net income (loss) of unconsolidated entities ......................... 133 85 156 (98) (134) Interest income ................................... 1 10 15 46 40 Other.............................................. 23 -- 2 117 397 ---------- ----------- ---------- ---------- ---------- $ 3,378 $ 2,769 $ 4,547 $ 5,830 $ 8,209 ---------- ----------- ---------- ---------- ---------- COSTS AND EXPENSES: Expenses of wholly-owned real estate properties ... $ 1,566 $ 1,399 $ 2,365 $ 2,327 $ 2,396 Costs of real estate sold ......................... 263 283 379 911 2,454 Depreciation and amortization ..................... 218 217 459 260 258 Interest expense .................................. 348 198 342 340 345 General, administrative and other.................. 1,540 1,178 2,137 2,253 2,152 Business development .............................. 59 87 148 361 1,067 Writedown on hotel investment ..................... 1,200 -- -- -- -- ---------- ----------- ---------- ---------- ---------- $ 5,194 $ 3,362 $ 5,830 $ 6,452 $ 8,672 ---------- ----------- ---------- ---------- ---------- NET LOSS $ (1,816) $ (593) $ (1,283) $ (622) $ (463) PREFERRED DIVIDENDS (210) (210) (360) (360) (315) ---------- ----------- ---------- ---------- ---------- NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (2,026) $ (803) (1,643) (982) (778) ---------- ----------- ---------- ---------- ---------- BASIC AND DILUTED LOSS PER COMMON SHARE $ (1.07) $ (0.53) $ (1.09) $ (0.64) $ (0.58) ========== =========== ========== ========== ========== <FN> The accompanying notes are an integral part of these consolidated statements. </FN> RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT FOR THE SEVEN MONTHS ENDED MARCH 31, 2000 AND FOR THE YEARS ENDED AUGUST 31, 1999, 1998 AND 1997 ($000's Omitted) Note Receivable Preferred Common From Stock Stock Officer for Total ---------------------- ------------------------ Paid-in Purchase of Accumulated Shareholders' Shares Amount Shares Amount Surplus Common Stock Deficit Investment ---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- Balance, August 31, 1996 450,000 $ 450 1,088,480 $ 11 $ 16,202 $ -- $ (12,222) $ 4,441 Dividends on Preferred Stock -- -- -- -- (315) -- -- (315) Issuance of Common Stock -- -- 450,000 4 446 (75) -- 375 Net Loss -- -- -- -- -- -- (463) (463) ----------- ----------- ------------- ----------- ----------- ------------- ----------- ----------- 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 =========== =========== ============ =========== =========== ============= =========== =========== <FN> The accompanying notes are an integral part of these consolidated statements. </FN> Ridgewood Hotels, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Seven Months Ended March 31, 2000 and 1999 and For the Years Ended August 31, 1999, 1998 and 1997 For the Seven ($000's Omitted) Months Ended ------------ For the Fiscal Years Ended March 31, -------------------------- March 31, 1999 August 31, August 31, August 31, 2000 (Unaudited) 1999 1998 1997 Cash flows from operating activities: --------- --------- --------- --------- --------- Net loss ................................................... $ (1,816) $ (593) $ (1,283) $ (622) $ (463) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .......................... 218 217 459 260 258 Writedown on hotel investment .......................... 1,200 -- -- -- -- Increase in allowance for possible losses on investment in unconsolidated entities ............. -- -- -- -- 199 Gain from sale of real estate properties ............... (335) (72) (79) (744) (1,354) Distributions from unconsolidated entities greater (less) than equity in net (loss) income .............. -- -- -- 184 (14) (Increase) decrease in other assets .................... (112) (13) 32 185 (571) Increase (decrease) in accounts payable and accrued liabilities .............................. 236 (236) 80 168 (1) ---------- ---------- ---------- ---------- ---------- Total adjustments ...................................... 1,207 (104) 492 53 (1,483) ---------- ---------- ---------- ---------- ---------- Net cash used in operating activities .................. (609) (697) (791) (569) (1,946) ---------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Principal payments received on mortgage loans ............ -- -- -- -- 3 Investment in unconsolidated entities .................... (124) -- (184) (678) -- Proceeds from sale of real estate ........................ 562 340 423 1,526 3,313 Additions to real estate properties ...................... (17) (42) (65) (88) (78) ---------- ---------- ---------- ---------- ---------- Net cash provided by investing activities .............. 421 298 174 760 3,238 ---------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Dividends on preferred stock ............................. -- (180) (180) (360) (315) Issuance of common stock upon exercise of stock options .. -- -- -- -- 375 Repurchase of common stock ............................... -- -- -- (112) -- Repayments of debt ....................................... (25) (37) (62) (60) (54) Payment received on note receivable from stock issuance... -- -- 75 -- -- ---------- ---------- ---------- ---------- ---------- Net cash (used in) provided by financing activities .... (25) (217) (167) (532) 6 ---------- ---------- ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents ......... (213) (616) (784) (341) 1,298 Cash and cash equivalents at beginning of period ............. 471 1,255 1,255 1,596 298 ---------------------- ---------- ---------- ---------- Cash and cash equivalents at end of period ................... $ 258 $ 639 $ 471 $ 1,255 $ 1,596 ========== ========== ========== ========== ========== <FN> The accompanying notes are an integral part of these consolidated statements. </FN> Ridgewood Hotels, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Seven Months Ended March 31, 2000 and 1999 and For the Years Ended August 31, 1999, 1998 and 1997 - ---------------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information and non-cash activity: For the Seven Months Ended For the Fiscal Year Ended --------------------- ---------------------------------- March 31, March 31, August 31, August 31, August 31, 2000 1999 1999 1998 1997 (Unaudited) ---------- ---------- ---------- ---------- ---------- Interest paid ....................................... $ 322,000 $ 198,000 $ 342,000 $ 340,000 $ 345,000 Issuance of 1,000,000 common shares in exchange for management contract ........................... 2,000,000 -- -- -- -- Notes payable issued in conjunction with additional investment in Louisville Hotel, LLC .. 1,933,000 -- -- -- -- Transfer of 10% ownership interest in Houston Hotel, LLC for additional investment in Louisville Hotel, LLC ....................................... 443,000 -- -- -- -- Decrease in allowance for possible losses due to sale of parcel of land ......................... -- -- $ 128,000 $ 97,000 $1,156,000 Repurchase of 25,000 shares of common stock subject to a Put Agreement, at $4.50 per share ............ -- -- -- $ 112,500 -- During the second quarter of fiscal year 1997, the Company's President and Chief Financial Officer exercised their stock options for 450,000 shares of the Company's common stock. In conjunction with the exercise, a promissory note and cash were received by the Company and common stock issued as follows: Cash received from Company's President .............. -- -- -- -- $ 375,000 Promissory Note received from Chief Financial Officer upon exercise of stock options ........... -- -- -- -- $ 75,000 Issuance of 450,000 shares of common stock, $0.01 par value, in 1997 ........................ -- -- -- -- $ 450,000 - ---------------------------------------------------------------------------------------------------------------------- <FN> The accompanying notes are an integral part of these consolidated statements. </FN> Ridgewood Hotels, Inc. and Subsidiaries Notes to Consolidated Financial Statements March 31, 2000 and August 31, 1999, 1998 and 1997 1. Description of Business and Significant Accounting Policies Description of the Business Ridgewood Hotels, Inc. (the "Company") is primarily engaged in the business of acquiring, developing, operating and managing hotel properties in the Southeast and "Sunbelt" areas. Additionally, the Company owns several land parcels which 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. During the fourth quarter of fiscal year 1994, the Company purchased and retired all of the shares of common stock owned by the Company's then-majority stockholder, Triton Group, Ltd. On April 15, 1997, Security Systems Holdings, Inc. merged with Triton Group Ltd., and the newly-combined entity was named Alarmguard Holdings, Inc. ("Alarmguard"). Alarmguard later merged with ADT Security Services, Inc. ("ADT"). 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, 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 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 the unconsolidated entities are being accounted for using the equity method of accounting (See Note 8). On March 28, 2000 the Company changed its fiscal year from August 31 to March 31. Per Share Data - In fiscal year 1998, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). Basic earnings per share is based on the weighted average effect of all common shares issued and outstanding, and is calculated by dividing net income available to common shareholders by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income 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. All historical earnings per share amounts have been restated to conform to provisions of this statement. Valuation of Real Estate Properties - In 1997, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS 121"). This statement requires that long-lived assets and certain identified intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The statement requires the use of undiscounted estimated cash flows expected from the asset's operations and eventual disposition. If the sum of the expected future cash flows is less than the carrying value of the asset, an impairment loss is recognized based on the fair value of the asset. Under SFAS 121, properties are classified as either operating properties or properties held for sale. 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 written down to their fair value less cost to sell, but the associated loss can be recovered in the event the fair value of the property increases. Stock-Based Compensation - During 1997, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This statement provides entities a choice between fair value and intrinsic value based methods of accounting for stock based compensation plans. The Company has elected to continue using the intrinsic value method. 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 seven months ended March 31, 2000 was approximately $145,000 and for the years ended August 31, 1999, 1998 and 1997 was approximately $180,000, $172,000 and $166,000, 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 seven months ended March 31, 2000 was approximately $73,000 and for the years ended August 31, 1999, 1998 and 1997 was approximately $279,000, $88,000 and $92,000, respectively. Capitalization Policies - Repairs and maintenance costs are expensed in the period incurred. Major improvements to existing properties which 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 and amortized on a straight-line basis over the duration of the contract. Sale of Real Estate - All revenue related to the sale 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. Cash and Cash Equivalents - For the purpose of the Consolidated Statements of Cash Flows, cash includes cash equivalents. Cash equivalents include all highly liquid investments with original maturities of three months or less. 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 generally accepted accounting principles 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. Significant estimates included in the Company's financial statements include allowances for impairment of real estate assets and for deferred tax assets. 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 in which the services are provided. Incentive revenue is recognized when earned. New Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities at fair value. It is effective for financial statements for fiscal years beginning after June 15, 2000, as amended by SFAS No. 137. Management is evaluating the impact of SFAS No. 133 on the Company's future earnings and financial position, but does not expect it to be material. In fiscal year 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement requires enterprises to classify items of other comprehensive income by their nature in the financial statements and to display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the equity statement of the financial statements. Adoption of this pronouncement had no material effect on the consolidated statement of operations for the year ended August 31, 1999. The Company has no other comprehensive income and as a result, there is no difference between comprehensive income and net income for the year ended August 31, 1999 and for the seven months ended March 31, 2000. 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 ownership and management, which 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, 2000 and August 31, 1999 were as follows ($000's omitted): Furniture, March 31, 2000 Land & Fixtures & Type of Project Buildings Equipment Total Wholly-owned hotel $ 2,535 $ 426 $2,961 Less -- accumulated depreciation (1,855) -------- Net operating property 1,106 -------- Land $ 5,125 -- 5,125 Less -- allowance for possible losses (3,319) -------- Net land 1,806 Investment in unconsolidated hotel entities 3,200 Less -- allowance for possible losses (1,200) -------- Net investment in unconsolidated hotel entities 2,000 -------- Total net real estate investments $ 4,912 ======== Furniture August 31, 1999 Land & Fixtures & Type of Project Buildings Equipment Total Wholly-owned hotel $ 2,535 $ 418 $2,953 Less -- accumulated depreciation (1,781) -------- Net operating property 1,172 Land $ 5,347 -- 5,347 Less -- allowance for possible losses (3,319) -------- Net land 2,028 Investment in unconsolidated hotel entities 1,016 -------- Total net real estate investments $ 4,216 ======== Changes in the allowance for possible losses on real estate investments for the seven months ended March 31, 2000 and years ended August 31, 1999, 1998 and 1997 were as follows ($000's omitted): For the Seven Months Ended For the Years Ended March 31, Aug. 31, Aug. 31, Aug. 31, 2000 1999 1998 1997 Allowance, beginning of period $3,319 $3,447 $3,544 $4,700 Reversal of reserves associated with sales of real estate assets -- (128) (97) (1,156) Writedown of investment 1,200 -- -- -- ------ ------ ------ ------ Allowance, end of period $4,519 $3,319 $3,447 $3,544 ====== ====== ====== ====== 3. Commitments and Contingencies 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 continues to be employed by the Company through August 31, 1999, such that if the executive remains employed by the Company through August 31, 1999, the consulting period shall be twelve months in duration. In addition, two other employees were offered and have chosen to enter into one year Consulting Agreements. The executives and two other employees, upon termination, agree to sign an unconditional release of all claims and liability in exchange for a one year consulting fee arrangement. 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 were terminated, and each has entered into the one-year consulting fee arrangement. 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 to 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 expects that the defendants will file written responses to plaintiff's memorandum, but no scheduling order has been entered. The Company does not believe that the ultimate outcome of the Complaint will result in material adverse effects on its financial condition. 4. Notes Payable In June 1995, the Company entered into a loan with a commercial lender to refinance the Ramada Inn in Longwood, Florida. The loan proceeds are $2,800,000, and the hotel serves as collateral for the loan. The loan is 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 are approximately $26,000 per month beginning August 1, 1995. In addition, the Company is 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 will be a payment of approximately $22,000 per month and can be adjusted annually. The escrow funds will be used as tax, insurance and repair needs arise. As of March 31, 2000, there was approximately $239,000 of escrowed funds related to this loan agreement that are included with Other Current Assets on the balance sheet. Also, commitment fees and loan costs of approximately $159,000 were deferred and are being amortized over 20 years. The approximate average amount of borrowings on the term loan during the seven months ended March 31, 2000 was $2,657,000, at an average interest rate of 10.35%. The maximum amount of borrowings outstanding under this loan during that period was $2,676,000. The balance of the loan at March 31, 2000 was approximately $2,657,000. The carrying value of the note approximates its fair value at March 31, 2000. This loan was transferred upon the sale of the property in May 2000, and is no longer an obligation of the Company. See Subsequent Events in note 10. On September 30, 1999, the Company entered into three promissory notes in order to purchase additional equity in Louisville Hotel, LLC. A promissory note for $1,333,000 is secured by the Company's ownership interest in Louisville Hotel, 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 three promissory notes are cross-defaulted, bear interest at 13% and mature on September 30, 2002. Interest payments are $20,941 per month beginning in November 1999. See also note 8. The combined approximate average amount of borrowings on the promissory notes during the seven months ended March 31, 2000 was $1,933,000 at an average interest rate of 13%. The combined maximum amount of borrowings outstanding under these notes was $1,933,000, and the balance of the notes at March 31, 2000 was $1,933,000. The carrying value of the note approximates its fair value at March 31, 2000. Maturities of long-term debt as of March 31, 2000 during the Company's next five fiscal years are as follows: 2001 - $40,000; 2002 - $45,000; 2003 - $1,983,000; 2004 - $55,000; 2005 - $61,000; thereafter - $2,406,000. 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", which 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: March 31, August 31, 2000 1999 1998 Current: Federal $ -- $ -- $ -- State -- -- -- ---- ---- ---- Total Current -- -- -- Deferred: Federal -- -- -- State -- -- -- ---- ---- ---- Total Deferred $ -- $ -- $ -- ==== ==== ==== A reconciliation of the provision for income taxes (benefit) to the federal statutory rate is as follows: March 31, August 31, 2000 1999 1998 Tax at statutory rate $(617) $ (404) $(194) State taxes, net of federal benefit (66) (43) -- Permanent items 2 36 17 Valuation reserve 646 1,101 186 Other 35 (690) (9) ----- ------ ----- $ -- $ -- $ -- ===== ====== ===== Deferred tax assets (liabilities) are composed of the following at August 31, 1999 and August 31, 1998, respectively: (000's Omitted) March 31, August 31, 2000 1999 1998 Allowance for Possible Losses- Impairments $1,700 $ 1,246 $ 1,169 Excess of Tax over Book Basis -- -- 16 Excess of Book over Tax Depreciation 80 86 71 Excess of Tax over Book Basis, Income from Partnership -- -- 40 Other 425 378 331 Tax Loss Carryforwards 6,092 5,966 4,724 ------ ------- -------- Gross Deferred Tax Assets 8,297 7,676 6,351 ------ ------- -------- Excess of Book over Tax Basis, Income from Partnership (230) (213) -- Excess of Tax over Book Basis -- Loan Amortization (44) (37) (26) ------ ------- -------- Gross Deferred Tax Liabilities (274) (250) (26) ------ ------- -------- Deferred Tax Assets Valuation Allowance (8,023) (7,426) (6,325) ------ ------- -------- $ 0 $ 0 $ 0 ====== ======= ======== For financial reporting purposes, a valuation allowance has been recognized at March 31, 2000 and August 31, 1999 to reduce the net deferred income tax assets to zero. The net change in the valuation allowance for deferred tax asset was an increase of $597,000. This change resulted primarily from an increase in the Company's deferred tax assets relating to the impairment in the investment in Louisville Hotel LLC. On March 31, 2000, the Company had federal net operating loss carryforwards for income tax purposes of approximately $15,727,000, which 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 Authorized Shares of Common and Preferred Stock - On January 4, 1995, the Company approved an increase in the authorized number of shares of the Company's common stock from 3,000,000 shares to 5,000,000 shares and increased the number of authorized shares of the Company's preferred stock from 500,000 shares to 1,000,000 shares. In addition, the Company increased the number of shares reserved under the Ridgewood Hotels, Inc. 1993 Stock Option Plan from 900,000 to 1,200,000 shares. There are currently 2,513,480 shares of common stock outstanding, of which approximately 79% is owned by Fountainhead Development Corp. 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, 2000, 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, 2000, there are $390,000 of dividends in arrears. Issuance and Repurchase of Common Shares - 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 Security Services, Inc., 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. Since January 10, 2000, the Company's new President has been compensated by Fountainhead on behalf of the Company to assist the liquidity of the Company. As of March 31, 2000, the Company has accrued $75,000 for the President's salary. In consideration of the President's salary, Fountainhead will be issued an amount of common stock with a determined market value of $2.00 per share or be reimbursed directly for these expenditures. In December 1995, the Company acquired the Wesley Hotel Group ("Wesley"), a hotel management company located in Atlanta, Georgia. At the time of acquisition, Wesley managed five hotels. The acquisition has been accounted for using the purchase method of accounting. In conjunction with the acquisition, the Company issued 125,000 shares of common stock with a determined market value of $1.50 per share and assumed three promissory notes with a combined outstanding principal of approximately $106,000, bringing the total investment in Wesley to $293,000. The investment recorded by the Company for the acquisition is being amortized over the useful life of the assets acquired. As of March 31, 2000 the useful life of the assets acquired was determined to be -0-, as the entire investment has been fully amortized. 100,000 shares and 25,000 shares of the Company's common stock was issued to the President and Senior Vice President of Wesley, respectively. The 25,000 shares issued to the Senior Vice President of Wesley were subject to a Put Agreement ("Agreement"). The Agreement states that within ninety days after the two year anniversary of the effective date of the Agreement (which was effective in December 1995), the Company shall be obligated to purchase all or part of the 25,000 shares from the Senior Vice President of Wesley at a purchase price of $4.50 per share. In March 1998, the Put Agreement was exercised, whereby the shares were repurchased by the Company and subsequently cancelled. Loss Per Share - The following table sets forth the computation of basic and diluted loss per share: For the Seven Months Ended For the Years Ended March 31, March 31, Aug. 31, Aug, 31, Aug, 31, 2000 1999 1999 1998 1997 Net loss $(1,816,000) $ (593,000) $(1,283,000) $(622,000) $ (463,000) Less preferred dividends paid -- (90,000) (180,000) (360,000) (315,000) Less undeclared preferred dividends (210,000) (120,000) (180,000) -- -- --------- --------- ---------- ---------- ----------- Net loss applicable to common share- holders ($2,026,000) $(803,000) $(1,643,000) $(982,000) $ (778,000) Weighted average shares outstanding - basic and diluted 1,898,000 1,513,000 1,513,000 1,526,000 1,350,000 ========== =========== =========== ========== ========== Basic and diluted loss per common share $ (1.07) $ (0.53) $ (1.09) $ (0.64) $ (0.58) ========== =========== ============ ========= ========== The effect of the Company's stock options and convertible securities was excluded from the computations for the seven months ended March 31, 2000, 1999 and each of the three years ended August 31, 1999, 1998 and 1997 as it is antidilutive. Accordingly, for the periods presented, diluted net loss per share is the same as basic net loss per share. 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 "Plan"). The options vested over a four year period in 25% increments. All options 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 Plan. As of March 31, 2000, there are remaining options for the exercise of 228,000 shares of Common Stock. On January 28, 1994, the Company granted options to purchase 375,000 and 75,000 shares of common stock at a price of $1.00 per share to its President and Chief Financial Officer, respectively, under the Plan. On January 31, 1997, all of the options were exercised. In conjunction with the exercise, a promissory note for $75,000 was received from the Chief Financial Officer in exchange for the Company's common stock. The $75,000 promissory note due from the Chief Financial Officer was payable in full on January 31, 1998 and accrues interest at a rate per annum of 8.25%. The note was extended and was payable in full on January 31, 1999, along with any accrued interest. The note was paid in full in April 1999. Warrants - On December 16, 1996, 75,000 warrants were issued to Hugh Jones, 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, 2000. 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: 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 ======= ======= The following sets forth the funded status of the plan and the amounts shown in the accompanying balance sheet as of August 31, 1999 and 1998. August 31, 1999 August 31, 1998 Unfunded excess of projected benefit obligation over plan assets $(893,274) $(819,826) ========= ========= Projected benefit obligation (778,536) (654,260) Unrecognized net obligation at transition 33,074 44,100 Unrecognized net gain (147,812) (209,666) --------- --------- Net accrued pension liability $(893,274) $(819,826) ========= ========= The weighted average discount rate used to measure the projected benefit obligation was 7.0% in 1999 and 7.5% in 1998. There was no compensation increase and no expected return on plan assets assumed for 1998. 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 will be amortized over 15 years when payments to the participant begin. The Company has recorded a total pension liability of approximately $520,000 as of March 31, 2000. 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 which may be cumulatively outstanding. Since the Plan's benefits were waived as described above, the Company chose to cancel the policies and will receive approximately $7,000. 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") which 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, 1998 and 1997 were approximately $68,000, $233,000 and $301,000 respectively. On March 17, 1998, the Partnership sold three of its six hotels. 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 $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. For the fiscal year ended August 31, 1997, the Company recorded equity in income (loss) of the Partnership totaling $(134,000) net of provision for possible losses. The Company has recorded during 1997 a provision for possible losses of approximately $199,000 as there was no indication that the Company would be able to recover the equity income in the Partnership given the provisions of the partnership agreement regarding the distribution of cash to the partners upon liquidation. 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 which 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 which represents a 10% interest, and the other 90% interest is owned by Houston Hotel, Inc. (the "Manager"), a Nevada corporation. 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: - First, 100% to the Manager until it has been distributed an amount equal to its accrued but unpaid 13% preferred return. - Second, 100% to the Company until the Company has been distributed an amount equal to its accrued but unpaid 13% preferred return. - 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 $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. (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 net operating income ("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. RW Louisville Hotel Associates, LLC On May 13, 1998, RW Louisville Hotel Associates LLC ("RW Louisville Hotel Associates") was organized as a limited liability company under the laws of the State of Delaware. The purpose which RW Louisville Hotel Associates was organized is limited solely to owning and managing the Holiday Inn ("the Hotel") in Louisville, Kentucky. The Company's investment in RW Hotel Partners, L.P. of $337,500 (see above) was transferred to RW Louisville Hotel Associates at its historical basis. Simultaneously, the Company invested $362,000 into Louisville Hotel, LLC. The combined equity of $699,500 represented a 10% interest in the Hotel. Louisville Hotel, LLC loaned $3,620,000 to the Hotel in return for all cash flows generated from the Hotel. Income or loss allocated to the Company was 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 Louisville Hotel, LLC were made as follows: - First, to the managing member until the managing member was distributed an amount equal to its accrued but unpaid 13% preferred return. - Second, to the Company until the Company was distributed an amount equal to its accrued but unpaid 13% preferred return. - Third, 20% to the Company and 80% to the managing member. Cash from a sale or refinancing would have been distributed 10% to the Company and 90% to the managing member. A Management Agreement existed between the Owner and the Company as Property Manager ("Property Manager") for the purpose of managing the hotel. The Property Manager was entitled to the following property management fees: (1) Base Management Fee equal to 1.5% of gross revenues from the hotel property. (2) Incentive Management Fee equal to 1.5% of gross revenues from the hotel in which the actual net operating income exceeds 85% of the budgeted goal for the year. (3) Super Incentive Management fee equal to: (a) .25% of gross revenues from the hotel in which the net operating income exceeds 106% of the budgeted goal for the year; (b) an additional .25% of gross revenues in which the net operating income exceeded 112% of the budgeted goal; and (c) an additional .50% of gross revenues in which the net operating income exceeded 120% of the budgeted goal. The Company paid an additional $200,000 to Louisville Hotel, 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 Louisville Hotel, LLC with or without cause and not pursuant to a third party sale prior to June 5, 2000, Louisville Hotel, 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 Louisville Hotel, LLC prior to June 5, 2003, Louisville Hotel, 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 $32,000 for the seven months ended March 31, 2000 and $285,000 and $57,000 for the years ended August 31, 1999 and 1998, respectively. On September 30, 1999, the Company purchased additional equity in Louisville Hotel, 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 Hotel, L.P. secured by the Company's ownership interest in Louisville Hotel, LLC(2) 1,333,000 Promissory note to Louisville Hotel, L.P. secured by the Company's Phoenix, Arizona land(2) 300,000 Promissory note to Louisville Hotel, L.P. secured by one parcel of the Company's Longwood, Florida land (2) 300,000 ---------- Total additional equity in Louisville Hotel, LLC $2,500,000 ========== (1) The cash to make this payment was obtained from Louisville Hotel, 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 Louisville Hotel, LLC to acquire the management contract of the hotel. (2) The three promissory notes are cross defaulted. The three promissory notes bear interest at 13% and mature on September 30, 2002. With 80% ownership, the Company is now the Managing Member of Louisville Hotel, LLC. Louisville Hotel, L.P. now has 20% ownership in Louisville Hotel, LLC and is the Non-Managing Member. Income or loss allocated 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 Louisville Hotel, LLC shall be made as follows: - 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 would then use these funds to pay Louisville Hotel, L.P. - Second, a 13% preferred return to Louisville Hotel, L.P. on their original $3,061,000 investment. - Third, a 13% preferred return to the Company on its capital contribution of $1,207,000. - Fourth, 80% to the Company and 20% to Louisville Hotel, L.P. Cash from a sale or refinancing would be distributed as follows: - 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 would then use these funds to pay Louisville Hotel, L.P. - Second, to the Company in an amount equal to the acquisition loans of $1,333,000, $300,000 and $300,000. - Third, to Louisville Hotel, L.P. until it has received aggregate distributions in an amount equal to its 13% preferred return. - Fourth, to Louisville Hotel, L.P. until its net capital contribution is reduced to zero. - Fifth, to the Company until it has received an amount equal to its 13% preferred return. - Sixth, to the Company until its net capital contribution is reduced to zero. - Thereafter, 10% to Louisville 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 2000, the Company recognized a writedown of $1,200,000 on its investment in Louisville Hotel, LLC. This 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. Effective September 30, 1999 a new management agreement exists between the Company and RW Louisville Hotel Associates, 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. (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 net operating income ("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 connection with the management agreement, the Company received management fees totaling approximately $131,000 for the seven months ended March 31, 2000. A summary of the investment in unconsolidated entities is as follows: For the Seven Months Ended For the Years Ended March 31, Aug. 31, Aug 31, 2000 1999 1998 Beginning balance of investment in unconsolidated entities $1,016 $ 832 $ 338 Capital contributions(1) 2,184 184 678 Writedown(2) (1,200) -- -- Equity in loss -- -- (98) Distributions -- -- (86) ------ ------ ------ Ending balance of investment in unconsolidated entities $2,000 $1,016 $ 832 ====== ====== ====== <FN> (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 Louisville Hotel, LLC of $2,500,000. (2) In March 2000, the Company recognized a writedown of $1,200,000 on its investment in Louisville Hotel, LLC. This 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. </FN> The unaudited combined balance sheet and statement of operations of the unconsolidated entities are as follows: COMBINED UNCONSOLIDATED ENTITIES CONDENSED BALANCE SHEET UNAUDITED (000's omitted) For the Seven Months Ended For the Years Ended 3/31/00 8/31/99 8/31/98 ----------- ---------- ---------- CURRENT ASSETS $ 732 $ 2,018 $ 2,730 PROPERTY AND EQUIPMENT, net 20,811 37,499 36,410 INTANGIBLE ASSETS, net 577 629 565 ------------ ---------- ---------- TOTAL ASSETS $ 22,120 $ 40,146 $ 39,705 ============ ========== ========== CURRENT LIABILITIES $ 608 $ 1,854 $ 1,850 LONG-TERM DEBT 21,684 31,622 28,382 ------------ ---------- ---------- TOTAL LIABILITIES 22,292 33,476 30,232 (DEFICIT) CAPITAL, net $ (172) 6,670 9,473 ------------ ---------- ---------- TOTAL LIABILITIES AND CAPITAL $ 22,120 $ 40,146 $ 39,705 ============ ========== ========== COMBINED UNCONSOLIDATED ENTITIES CONDENSED STATEMENT OF OPERATIONS UNAUDITED ($000's Omitted) For the Seven Months Ended For the Years Ended 3/31/00 3/31/99 8/31/99 8/31/98 8/31/97 HOTEL OPERATIONS: ----------- --------- --------- --------- --------- Revenues $ 5,224 $ 8,120 $ 11,681 $ 17,057 $ 17,058 Operating Expenses 3,777 5,498 10,146 12,781 13,696 ------------ ---------- ---------- ---------- ---------- Income From Hotel Operations 1,447 2,622 1,535 4,276 3,362 ------------ ---------- ---------- ---------- ---------- Interest Expense 1,096 1,552 2,632 2,059 1,682 Depreciation/Amortization 819 838 1,562 1,943 1,926 Loss due to change to liquidation basis of accounting for RW Hotel Partners, L.P. -- -- -- 2,828 -- ------------ ---------- ---------- ---------- ---------- NET (LOSS) INCOME $ (468) $ 232 $ (2,659) $ (2,554) $ (246) ============ ========== ========== ========== ========== 9. Employee Savings Plan The Ridgewood Hotels Employee Savings Plan ("Savings Plan") is a savings and salary deferral plan which 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. The Savings Plan provides 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 is authorized to make discretionary contributions to the Savings Plan out of the Company's current or accumulated profits ("Discretionary Contributions"). 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. 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% on 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"). 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 withdrawal rights with respect to Voluntary Contributions. For the seven months ended March 31, 2000, expense for the Employee Savings Plan was approximately $17,000. For the fiscal years ending August 31, 1999, 1998 and 1997, expense for the Employee Savings Plan was approximately $18,000, $18,000 and $21,000, respectively. 10. Subsequent Events On May 22, 2000, the Company sold a parcel of land in Phoenix, Arizona for net proceeds of approximately $381,000. On May 31, 2000, the Company sold its hotel in Longwood, Florida for $5,350,000. The Company received net proceeds from the sale of approximately $1,300,000, and a $250,000 note from the purchaser payable in installments through June 1, 2005. The Company will recognize approximately a $2,700,000 profit on the sale before tax. Due to ownership changes, the entire gain may not be offset by existing net operating losses for tax purposes. Report of Independent Public Accountants To Ridgewood Hotels, Inc. We have audited the accompanying consolidated balance sheet of RIDGEWOOD HOTELS, INC. (a Delaware Corporation) as of March 31, 2000 and the related consolidated statements of operations, shareholders' investment and cash flows for the seven months then ended. 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 audit. We conducted our audit 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 audit provides 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. as of March 31, 2000 and the results of their operations and their cash flows for the seven months then ended in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Atlanta, Georgia May 26, 2000, except with respect to the matter discussed in Note 10, as to which the date is May 31, 2000. Report of Independent Accountants To the Board of Directors and Shareholders of Ridgewood Hotels, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of shareholders' investment present fairly, in all material respects, the financial position of Ridgewood Hotels, Inc. and its subsidiaries (the "Company") at August 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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. PRICEWATERHOUSECOOPERS LLP Atlanta, Georgia November 17, 1999 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 Harris Trust and Savings Bank, Dallas, Texas is the Company's stock transfer agent. Harris maintains the Company's shareholder records. To change name, address or ownership of stock, to report lost certificates, or to consolidate accounts, contact: Harris Trust and Savings Bank 1601 Elm Street Thanksgiving Tower, Suite 2320 Dallas, Texas 75201 (214) 665-6033 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 Shareholder and General Inquiries The Company is required to file an Annual Report on Form 10-K for its fiscal year ended August 31, 1999 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 2859 Paces Ferry Road Suite 700 Atlanta, Georgia 30339 (770) 434-3670