SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-14019
Ridgewood Hotels, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 58-1656330
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1106 Highway 124, Hoschton, Georgia
30548
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(Address of principal executive offices)
(Zip Code)
(770) 867-9830
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(Registrant's telephone number, including area code)
2859 Paces Ferry Rd. Suite 700 , Atlanta, Georgia, 30339
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
----- -----
Common stock, par value $.01 per share - 2,513,480 shares outstanding at Dec.
31, 2000.
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND MARCH 31, 2000
($000'S omitted, except share and per share data)
------------------------------------------------
(Unaudited)
December 31, March 31,
ASSETS 2000 2000
- ------ ----------- -----------
Current Assets:
Cash and Cash Equivalents $ 1,848 $ 258
Receivables from Affiliates 171 62
Other Receivables, net 409 332
Other Current Assets 154 320
------- -------
Total Current Assets 2,582 972
Real Estate Investments:
Real Estate Properties
Operating Properties, net -- 1,106
Land Held for Sale, net 1,416 1,806
Investment in Unconsolidated
Hotel Entities, net 2,000 2,000
------- -------
Total Real Estate Investments 3,416 4,912
Management Contracts, net 1,814 2,192
Other Assets, net 37 167
------- -------
Total Assets $ 7,849 $ 8,243
======= ======
The accompanying notes are an integral part of
these consolidated balance sheets.
2
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND MARCH 31, 2000
($000'S omitted, except share and per share data)
------------------------------------------------
(Unaudited)
December 31, March 31,
LIABILITIES: 2000 2000
- ----------- ------------ ------------
Current Liabilities:
Current Maturities of Long-Term Debt $ - $ 37
Accounts Payable 383 284
Payables to Affiliates 345 75
Accrued Salaries, Bonuses and Other Compensation 85 97
Accrued Property Tax Expense 12 39
Accrued Interest and Other Liabilities 772 524
------- -------
Total Current Liabilities 1,597 1,056
Accrued Pension Liability 520 520
Deferred Curtailment Gain on Pension Liability 374 374
Long-Term Debt 1,933 4,553
------- -------
Total Liabilities 4,424 6,503
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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 450 450
Common Stock, $.01 par value, 5,000,000 shares authorized,
2,513,480 shares issued and outstanding 25 25
Paid-in surplus 17,671 17,671
Accumulated deficit (14,721) (16,406)
------------------- ------- -------
Total Shareholders' Investment 3,425 1,740
------- -------
Total Liabilities and Shareholders' Investment $ 7,849 $ 8,243
======= =======
The accompanying notes are an integral part of
these consolidated balance sheets.
3
RIDGEWOOD HOTELS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($000's omitted, except per share data)
Unaudited
---------
For the Three Months Ended For the Nine Months Ended
----------- ----------- ----------- -----------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUES:
Revenues from hotel operations ................................. $ 414 $ 526 $ 1,599 $ 1,739
Revenues from hotel management ................................. 530 377 1,867 1,067
Sales of real estate properties ................................ -- 87 5,525 322
Equity in net income of unconsolidated entities ................ 63 67 189 124
Interest income ................................................ 22 0 46 27
Other .......................................................... 10 20 16 23
................................................................ ------- ------- ------- -------
Total Revenues ................................................. 1,039 1,077 9,242 3,302
------- ------- ------- -------
COSTS AND EXPENSES:
Expenses of real estate properties ............................. 485 524 1,797 1,669
Cost of real estate sold ....................................... 8 3 2,887 99
Lease commitment for vacated office, net ...................... 106 -- 106 --
Depreciation and amortization .................................. 131 87 415 358
Interest expense ............................................... 63 146 210 318
General, administration and other .............................. 823 706 2,142 1,931
------- ------- ------- -------
Total Costs and Expenses ....................................... 1,616 1,466 7,557 4,375
------- ------- ------- -------
NET (LOSS) PROFIT .............................................. (577) (389) 1,685 (1,073)
PREFERRED DIVIDENDS ............................................ (90) (90) (270) (270)
------- ------- ------- -------
NET (LOSS) PROFIT APPLICABLE TO ................................ $ (667) $ (479) $ 1,415 $(1,343)
COMMON SHAREHOLDERS ............................................ -- -- -- --
(LOSS) EARNINGS PER COMMON SHARE:
Basic .......................................................... $ (0.27) $ (0.32) $ 0.56 $ (0.89)
Diluted ........................................................ (0.27) (0.32) 0.37 (0.89)
======= ======= ======= =======
The accompanying notes are an integral part of
these consolidated statements.
4
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's Omitted)
Unaudited
---------
For the Nine Months Ended
December 31, December 31,
2000 1999
------ ------
Cash flows from operating activities: ......................................................... -- --
Net profit (loss) ............................................................................. 1,685 (1,073)
Adjustments to reconcile net profit (loss) to net cash used by operating activities:
Depreciation and amortization ................................................................. 415 358
Increase in allowance for doubtful accounts ................................................... 148 --
Gain from sales of real estate properties ..................................................... (2,638) (223)
(Increase) decrease in other assets ........................................................... (325) 285
Increase in accounts payable and accrued liabilities .......................................... 578 212
------ ------
Total adjustments ............................................................................. (1,822) 632
------ ------
Net cash used by operating activities ......................................................... (137) (441)
Cash flows from investing activities:
Proceeds from sales of real estate ............................................................ 4,384 283
Additions to real estate properties ........................................................... -- (15)
Investment in unconsolidated entity ........................................................... -- (2,184)
------ ------
Net cash received by investing activities ..................................................... 4,384 (1,916)
Cash flows from financing activities:
(Repayments) isuance of notes payable ......................................................... (2,657) 1,893
Payment received from officer for purchase of common stock .................................... -- 75
------ ------
Net cash (used) received in financing activities .............................................. (2,657) 1,968
------ ------
Net increase (decrease) in cash and cash equivalents .......................................... 1,590 (389)
Cash and cash equivalents at beginning of period .............................................. 258 639
------ ------
Cash and cash equivalents at end of period .................................................... 1,848 250
====== ======
Supplemental disclosure of cash flow information and non-cash activity ........................ 2000 1999
------ ------
Interest paid ................................................................................. 210 318
Income Taxes Paid.............................................................................. 35 --
The accompanying notes are an integral part of these consolidated statements
5
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND DECEMBER 31, 1999
(Unaudited)
1. GENERAL:
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. 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").
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 ("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.
2. BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
consolidated financial statements reflect all adjustments, consisting of normal
recurring adjustments, which are necessary to present fairly the financial
position, results of operations and changes in cash flows for the interim
periods covered by this report. Although certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, management believes that the disclosures
are adequate to
6
make the information presented not misleading. These financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's annual report for the fiscal year ended
March 31, 2000. The results of operations for the nine months ended December 31,
2000 are not necessarily indicative of the results to be expected for the fiscal
year ending March 31, 2001.
The accompanying financial statements of the Company present the historical
cost basis amount of assets, liabilities and shareholders' investment of the
real estate business for the periods presented. The consolidated financial
statements include the accounts of the Company, its wholly-owned subsidiaries
and its investments in unconsolidated entities after the elimination of all
inter-company amounts.
For the purpose of the Statement of Cash Flows, cash includes cash
equivalents which are highly liquid investments with maturity of three months or
less.
The Company accounts for its investments in unconsolidated entities under
the equity method of accounting after the elimination of all inter-company
transactions.
In February 2000, the Company began leasing a hotel in Lubbock, Texas. All
revenues and expenses of the hotel are included in the Consolidated Statements
of Operations.
On March 28, 2000, the Company changed its fiscal year from August 31 to
March 31.
Certain prior year amounts have been reclassified to conform with the
current presentation.
In 1997, the Emerging Issues Task Force issued EITF No. 97-2, "Application
of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF No. 97-2 establishes that physician practice management entities have a
controlling interest in a physician practice if certain requirements are met.
None of the Company's hotel management agreements meet these requirements.
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. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities"
("SFAS No. 138"). This Statement establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 138 also addresses issues
when implementing SFAS No. 133. This Statement should be adopted concurrently
with SFAS 133 and is effective for fiscal years beginning after June 15, 2000.
Management is evaluating the impact of SFAS No. 133 and SFAS No. 138 on the
Company's future earnings and financial position, but does not expect it to be
material.
7
On December 3, 1999, the Securities Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101: "Revenue Recognition in Financial
Statements". The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues
in financial statements. The Company adopted SAB 101 on December 3, 1999 and is
in compliance.
3. INCOME TAXES:
The Company has net operating loss carry-forwards for both book and tax
purposes which may be used to offset future taxable income. However, due to the
change of control of the Company discussed in note 1 above, there are
limitations on the amount of net operating loss carry-forwards that may be
utilized each year to offset taxable income.
The Company's income tax provision for the nine months ended December 31,
2000 and December 31, 1999 is as follows:
For the Nine
Months Ended
--------------------------
Dec. 31, Dec. 31,
2000 1999
--------- --------
Income Tax Provision $ 894 $ --
Utilization of Net Operating
Loss Carry-forwards (894) --
----- -------
Regular Income Tax Provision -- --
Alternative Minimum Income Tax
Provision 70 --
Deferred Income Tax Benefit
from AMT Tax Credit (70) --
----- -------
Net Income Tax Provision $ -- $ --
===== =======
A taxable gain resulted from the Company's sale of its hotel in Longwood,
Florida in May of 2000. Net operating losses generated in prior years were
sufficient to offset this gain for regular Federal and state tax purposes.
However, for fiscal year ending March 31, 2001, the Company is subject to
Federal alternative minimum tax resulting from this sale.
8
4. SHAREHOLDERS' INVESTMENT:
Earnings Per Share --
The following table sets forth the computation of basic and diluted (loss)
earnings per share:
For the Three Months Ended For the Nine Months Ended
------------ ------------- ------------ -------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
-------- -------- -------- --------
Net (loss) profit $ (577,000) $ (389,000) $ 1,685,000 $(1,073,000)
Less undeclared
preferred dividends (90,000) (90,000) (270,000) (270,000)
----------- ----------- ----------- -----------
Net (loss) profit
applicable to common shareholders $ (667,000) $ (479,000) $ 1,415,000 $(1,343,000)
----------- ----------- ----------- -----------
Weighted average shares outstanding
basic 2,513,480 1,513,480 2,513,480 1,513,480
diluted 2,513,480 1,513,480 3,863,480 1,513,480
=========== =========== =========== ===========
Net (loss) profit per share --
basic $ (0.27) $ (0.32) $ 0.56 $ (0.89)
diluted (0.27) (0.32) 0.37 (0.89)
=========== =========== =========== ===========
As of December 31, 2000 there are $660,000 of preferred stock dividends in
arrears and due to Fountainhead. The last time the Company declared preferred
dividends in February 1999, dividends were declared out of paid-in surplus and
recorded against that account in accordance with applicable Delaware law.
The effect of the Company's stock options and convertible securities was
excluded from the computations for the three months ended December 31, 1999 and
2000 as it is antidilutive.
Options Granted -
On June 13, 2000 the Company granted options to purchase 25,000 shares of
common stock at a price of $2.25 per share to one of its directors. The options
expire in five years.
With an effective date of July 1, 2000 the Company granted options to
purchase 258,500 shares of common stock at a price of $2.00 per share to its key
employees under the Ridgewood Hotels, Inc. 1993 Stock Option Plan. Certain
employees' options vest over a four-year period in 25% increments while certain
others vest over a four-year period with 10% the first year, 25% the second
year, 50% the third year and 100% the fourth year. All options 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.
9
On June 26, 2000 the Company authorized that the compensation committee may
grant options to the Company's employees to acquire no more than an aggregate of
20,000 shares of common stock on such terms and conditions as the compensation
committee shall determine from time to time.
Options Expired -
On March 30, 1993 the company granted options to certain key employees to
purchase 378,000 shares of common stock at a price of approximately $1.83 per
share. As of December 31, 2000, 18,000 of these options remain outstanding.
These remaining options expire ten years from date of grant, unless earlier by
reason of death, disability, termination of employment by other reasons outlined
in plan.
5. INVESTMENT IN UNCONSOLIDATED ENTITY
On September 30, 1999, the Company purchased an additional interest in
Louisville Hotel, LLC. The Company increased its ownership 10% to 80%. The
consideration issued to acquire the increased interest was $2,500,000.
In accordance with EITF # 96-16 "Investor's accounting for an investor when
the investor has a majority of the voting interest but the minority shareholder
or shareholders have certain approval or veto rights", Louisville Hotel, LLC is
not consolidated in the accompanying financial statements as the minority member
has kept substantial participation rights in this entity.
In March 2000, the Company recognized a write-down of $1,200,000 on its
investment in Louisville Hotel, LLC. This write-down was due to the anticipated
shortfall of the Company's return of equity as a result of the decreased
operating performance of the Louisville Hotel. Per the Louisville Hotel's
franchise agreement, the franchisor determined that an ownership change occurred
in conjunction with Fountainhead's purchase of the majority shares of the
Company. In turn, a new franchise agreement and a Property Improvement Plan (the
"Plan") are being discussed with the franchisor. Under the Plan, the Louisville
Hotel will be required to make approximately $1,858,000 of improvements by
December 31, 2002. At this time, it has not been determined whether the
Louisville Hotel will be able to self-fund the Plan.
6. MANAGEMENT AGREEMENT
On January 10, 2000, the Company entered into the Management Agreement with
Fountainhead (see note 1), pursuant to which Fountainhead retained the Company
to perform management services at Chateau Elan Winery and Resort, one of
Fountainhead's properties, for a period of five years beginning on March 24,
2000. In consideration of Fountainhead's agreement to enter into the Management
Agreement and a payment of $10,000 by Fountainhead to the Company, the Company
issued to Fountainhead 1,000,000 shares of common stock at a fair market 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 at the end of Chateau Elan Winery and resort's fiscal year,
March 31. The annual incentive fee is 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
10
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.
7. SALE OF OPERATING PROPERTY --
On May 31, 2000, the Company sold its hotel in Longwood, Florida for
$5,100,000. Approximately $3,500,000 of the sales proceeds were used to pay off
the mortgage and defeasance penalty on the hotel. The Company recognized
approximately $2,626,000 in profit on the sale before tax.
8. SUBSEQUENT EVENTS --
As of January 1, 2001 the company has implemented an organizational
restructure which relocated corporate regional directors of operations positions
into area general manager positions who will be physically located at individual
properties. The salaries of the area general managers will be funded by the
individual properties. Therefore, the Company expects reduced payroll costs and
does not expect to incur any additional costs in connection with this
organizational restructure. The company is also in the process of
de-centralizing accounting services it provides for several of the managed
properties. With this plan the Company would reduce its payroll costs associated
with centralized accounting of these properties, and these managed properties
would no longer provide an accounting fee to the Company.
On January 4, 2001 the Company changed the location and phone number of its
principle executive offices to 1106 Highway 124, Hoschton, Georgia, 30548. The
Company's new phone number is (770) 867-9830 and new fax number is (404)
307-0836. The space at this new location will be leased from Nanco Co. at rates
not to exceed market. Nanco Co. is owned by one of the Company's directors.
The Company intends to sublet the space it previously occupied at 2859
Paces Ferry Road suite 700, Atlanta, Georgia (the "Space"). The lease commitment
at the Company's former location expires May 31, 2002 with approximately
$224,000 in future lease payments remaining at December 31, 2000. The Company
entered into an agreement with Carter and Associates Real Estate Services to
market the Space and broker any sublease agreement. The Space is currently being
marketed for sublet at rates which are approximately 75% of the Company's lease
rate. The Company has recorded $106,000 of cost for the remaining term of this
lease net of anticipated sublet income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2000
COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 1999
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 nine
months ending December 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
11
Company's industry, Management's beliefs and certain assumptions made by the
Company, and are subject to 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 --
Revenues from hotel operations decreased approximately $112,000 (21%) for
the three months ended December 31, 2000 compared to the three months ended
December 31, 1999. Revenues decreased approximately $140,000 (8%) for the nine
months ended December 31, 2000 compared to the nine months ended December 31,
1999. In 1999, the hotel in Longwood, Florida (the "Longwood Property") was the
only source of revenue from hotel operations. This hotel was sold in May 2000;
however, the Company began leasing a hotel in Texas in February 2000 (the "Texas
Property"). The Longwood Property provided approximately $357,000 in revenues
until its sale in May, 2000 as compared to $1,739,000 during the nine month
period ending December 31, 1999. During the nine month period ended December 31,
2000, the Texas Property provided approximately $1,242,000 in revenues.
Revenues from hotel management is generally based on agreements which
provide monthly base management fees, accounting fees, and periodic incentive
fees. The base management fees are typically a percentage of total revenue for a
managed property, while incentive fees are typically based on net income and/or
ownership returns on investment for the managed property. Accounting fees are
set monthly fees charged to hotels which utilize centralized accounting services
provided by the Company.
As there tends to be some seasonality inherent within the hotel industry,
it is common to see fluctuations in hotel revenues from quarter to quarter. The
three months ending December 31, 2000 is generally a slower quarter for the
majority of the hotels managed by the Company. The fluctuations in the hotels'
revenues has a direct impact on the Company's base management fee revenues
generated in the quarter.
12
Revenues from hotel management increased approximately $153,000 (41%) for
the three months ended December 31, 2000 compared to the three months ended
December 31, 1999. Management of Fountainhead Development Corporation
("Fountainhead") Chateau Elan properties in Georgia and Florida and technical
advising for development of Chateau Elan St. Andrews, Scotland accounted for
approximately $223,000 in hotel management revenues for the three month period
ending December 31, 2000. For the nine months ended December 31, 2000 as
compared to the nine months ended December 31, 1999, hotel management revenues
increased $800,000 (75%) due to overall increased revenues at the hotels managed
by the Company and a larger number of hotels under management. A significant
portion of the increase in hotel management revenues is attributed to the
Company's management of the Chateau Elan properties in Georgia and Florida and
technical advising for the development of Chateau Elan St. Andrews Scotland.
These Chateau Elan properties accounted for approximately $729,000 of management
fees during the nine month period ending December 31, 2000.
In compliance with Staff Accounting Bulletin ("SAB") No. 101, the company
does not accrue or realize incentive management fee revenues until earned. The
management agreements identify when incentive fees are earned and how they are
calculated. Some of the Company's management agreements have provisions that
incentives are earned quarterly while others provide for annual incentive fees.
Some of the agreements' incentive fee provisions are based on a calendar year
while others are based on a fiscal year. The only agreement which is anticipated
to have a material impact on the Company's results for fiscal year ending March
31, 2001 is the management agreement with Fountainhead for the Chateau Elan
Winery and Resort. This Incentive Fee is earned at the end of Chateau Elan's
fiscal year at March 31, 2001. The Company anticipates recording an incentive
fee of approximately $300,000 at March 31, 2001 based on current projections
provided by Chateau Elan management. The amount of this fee may vary if Chateau
Elan's actual results differ from current projections.
The Company entered into eight new management agreements during the nine
months ended December 31, 2000. Included in these agreements are (i) an
agreement to continue managing the Longwood Property which the Company sold in
May, 2000, (ii) an agreement which went into effect as of June 27 to manage a
131 room Ramada Inn in Duluth Georgia, and (iii) agreements for four properties
which began providing revenues as of October 15. These four properties include a
346 room Ramada Midtown Atlanta Hotel & Conference Center, a 224 room Ramada Inn
Spartanburg, South Carolina, a 132 room Ramada Suites Norcross, Georgia, and a
199 room Howard Johnson Northeast Atlanta, (iv) an agreement to manage the
Atlanta Capitol Plaza which is a 416 room Ramada hotel and conference center in
downtown Atlanta which opened February 6 2001, (v) an agreement to manage a 144
room Holiday Inn Express in Smyrna, Georgia which began providing revenues as of
January 11, 2001.
The Company's management agreements with respect to seven properties which
the Company derived approximately $45,000 and $ 341,000 of base management
revenues during the three and nine month periods ending December 31, 2000,
respectively, have been terminated as follows: (i) a 184 room hotel in Lackland
Texas as of July 1, (ii) a 176 room Hampton Inn in Houston Texas as of September
1, (iii) a 123 room Ramada Inn Marietta, Georgia as of October 17, (iv) a 324
room Sheraton Four Points in San Antonio Texas as of November 1, (v) a 243 room
Holiday Inn in
13
Lynchburg Virginia as of November 1, (vi) a 131 room Ramada Inn in Duluth
Georgia as of November 17, (vii) and an 83 room Best Western in Plainview Texas
as of January 23, 2001.
Equity in net income of unconsolidated entities for the three and nine
months ended December 31, 2000 was received from Louisville Hotel, LLC. This
equity is offset, on a dollar for dollar basis, by interest payments on notes
outstanding with Louisville Hotel, LP, and is recorded as interest expense.
Expenses of real estate properties decreased $39,000 (7%) for the three
months ended December 31, 2000 compared to the three months ended December 31,
1999. The leased property in Lubbock Texas incurred $473,000 in expenses in the
three months ended December 31, 2000 compared to expenses for the Longwood
Property of $513,000 for the same period in 1999. Expenses of real estate
properties increased $128,000 (8%) for the nine months ended December 31, 2000
compared to the nine months ended December 31, 1999. The changes in expenses for
real estate properties for these time periods is due to the timing of the
addition of the leased Texas Property and the sale of the Longwood Property.
During the three months ended December 31, 2000 the Company incurred
approximately $8,000 of additional costs associated with the sale of the
Longwood Property. During the nine months ending December 31, 2000, the Company
had gains from real estate sales of approximately $2,638,000. Approximately
$2,626,000 of the gain was due to the sale of the Longwood Property and $12,000
was due to the sale of a parcel of land in Phoenix, Arizona. Gains or losses on
sales are dependent upon the specific assets sold in a particular period and the
terms of each sale.
The Company has recorded a $106,000 cost, which is net of anticipated
sublet income, for the remaining term of a lease of the space previously
occupied at 2859 Paces Ferry Road suite 700, Atlanta, Georgia (the "Space"). The
lease commitment for this former location expires May 31, 2002 with
approximately $224,000 in future lease payments remaining at December 31, 2000.
The Company entered into an agreement with Carter and Associates Real Estate
Services to market the Space and broker any sublease agreement. The Space is
currently being marketed for sublet at rates which are approximately 75% of the
Company's lease rate.
Depreciation and amortization expense increased approximately $44,000 (51%)
and $57,000 (16%), respectively for the three and nine months ended December 31,
2000 compared to the three and nine months ended December 31, 1999. These
variances are due to the addition of amortization on the $2,000,000 Management
Agreement with Fountainhead, and the elimination of depreciation on the Longwood
Property immediately following its sale.
General, administration and other expenses increased approximately $117,000
(17%) for the three months ended December 31, 2000 compared to the three months
ended December 31, 1999. During the three months ending December 31, 2000, the
Company recorded $120,000 as additional allowance for doubtful accounts in
association with properties the Company no longer manages which have balances
owed the Company that have aged beyond 90 days since the termination of their
agreements. Also during the three months ended December 31, 2000 the company
recorded approximately $104,000
14
of legal expenses, of which approximately $69,000 relates to the shareholder
derivative action pending in the Delaware Court of Chancery which is described
more fully herein at Part II, Item 1, Legal Proceedings. In addition to the
Company's legal expenses, certain of the defendants have asserted that they have
the right to require the Company to continue to advance their legal fees and
expenses, subject to such defendants undertaking to repay the advances if
required under Delaware law. As a result of these claims, while the Company
believes that it is not required to continue to advance legal fees and expenses
to the defendants that were found to be liable to the Company, the Company has
accrued for these claims. If the Company is required to advance such expenses,
the Company does not know whether such defendants have the financial ability to
repay such advances.
General. administration and other expenses increased approximately $211,000
(11%) for the nine months ended December 31, 2000 compared to the nine months
ended December 31, 1999. General, administrative and other expenses include the
cost of two employment agreements for individuals who are no longer employees of
the Company. The cost of these two employment agreements was approximately
$135,000 during the nine month period ending December 31, 2000. One of these
agreements expired on December 25, 2000 and the other agreement will expire on
May 25, 2001.
The Company has implemented a bonus program for certain key employees to
earn up to 25 % their base salary earnings in bonus compensation. The awarding
of these bonuses is contingent upon Company results with the exclusion of income
derived from real estate sales or proceeds. The bonus criteria includes overall
results of managed properties as well. All criteria has been outlined in writing
and provided to eligible employees. Certain Participants in this plan may also
be eligible to receive a deferred stock bonus award which will be 20% of the
cash bonus awarded.
Chateau Elan incentive management fees may have a material impact on the
company's earnings for fiscal year end March 31, 2001. As a result, if the
projected incentive fee is earned, certain Company employees may become eligible
for bonus compensation. Since criteria for these employees to earn bonuses would
likely not be met without the impact of anticipated Chateau Elan incentive fees,
the Company has not accrued or realized any bonuses for the fiscal year ending
March 31, 2001 as of December 31, 2000.
As of January 1, 2001 the Company has implemented an organizational
restructure which relocated corporate regional directors of operations positions
into area general manager positions who will be physically located at individual
properties. The salaries of the area general managers will be funded by the
individual properties. Therefore, the Company expects reduced payroll costs and
does not expect to incur any additional costs in connection with this
organizational restructure. The Company is also in the process of
de-centralizing accounting services it provides for several of the managed
properties. With this plan the Company would reduce its payroll costs associated
with centralized accounting of these properties, and these managed properties
would no longer provide an accounting fee to the Company.
15
LIQUIDITY AND CAPITAL RESOURCES -
On January 10, 2000, the Company entered into the Management Agreement with
Fountainhead, pursuant to which Fountainhead retained the Company to perform
management services at Chateau Elan Winery and Resort, one of Fountainhead's
properties, for a period of five years. In consideration of Fountainhead's
agreement to enter into the Management Agreement and a payment of $10,000 by
Fountainhead to the Company, the Company issued to Fountainhead 1,000,000 shares
of common stock at a fair market 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. The
Company's new management continues to seek new hotel management opportunities,
including possible opportunities to manage other properties being developed by
Fountainhead. In addition to Chateau Elan Georgia, the Company manages the
Chateau Elan Sebring which is a Fountainhead property located in Sebring,
Florida. The Company also entered an agreement with Fountainhead in August, 2000
to provide development and pre-opening services for a hotel development project
in St. Andrews, Scotland. The Company will receive a total of $102,000 for these
pre-opening services. The Company intends to seek management opportunities with
other Fountainhead properties; however, Fountainhead has no obligation to enter
into further management relationships with the Company, and there can be no
assurance that the Company will manage any Fountainhead properties in the
future.
On May 31, 2000, the Company sold its hotel in Longwood, Florida for
$5,100,000. Approximately $3,500,000 of the sales proceeds were used to pay off
the mortgage and defeasance penalty on the hotel. The Company recognized
approximately $2,626,000 in profit on the sale before tax.
In May 2000, the Company sold a parcel of land in Phoenix, Arizona for net
proceeds of approximately $381,000.
On January 4, 2001 the Company changed the location and phone number of its
principle executive offices to 1106 Highway 124, Hoschton, Georgia, 30548. The
Company's new phone number is (770) 867-9830 and fax number is (770) 307-0836.
The space at this new location will be leased from Nanco Co. at rates not to
exceed market. Nanco Co. is owned by one of the Company's directors.
The Company intends to sublet the space it previously occupied at 2859
Paces Ferry Road suite 700, Atlanta, Georgia (the "Space"). The lease commitment
at the Company's former location expires May 31, 2002 with approximately
$224,000 in future lease
16
payments remaining at December 31, 2000. The Company entered into an agreement
with Carter and Associates Real Estate Services to market the Space and broker
any sublease agreement. The Space is currently being marketed for sublet at
rates which are approximately 75% of the Company's lease rate. The Company has
recorded $106,000 of cost for the remaining term of this lease net of
anticipated sublet income.
Upon subletting the Space, the Company will subsidize the cost of the
remaining portion of the lease monthly. Also upon subletting, the Company
expects significant reductions in monthly office rent payments for the space at
its new location combined with its portioned payment on the sublet Space as
compared to the monthly lease payments on the Space prior to the Company's
relocation. The Company will incur full payments of both locations as long as
the Space is not sublet.
In February 2000, the Company entered into a six month lease agreement for
a hotel in Lubbock, Texas ("Lubbock Hotel"). The lease was subsequently extended
until July 31, 2001. All revenues and expenses of Lubbock Hotel are included in
the Consolidated Statements of Operations. As of December 31, 2000 the
accumulated deficit incurred for this property is approximately $132,000, of
which an approximate $141,000 loss was incurred during the nine months ending
December 31, 2000 and an approximate $9,000 gain was recorded at the Company's
prior fiscal year end. The Company is currently discussing its options and /or
attempting to renegotiate terms within the lease agreement with the Lubbock
Hotel's owner.
The Company has an 80% economic rights interest in the operating cash flows
of a hotel in Louisville, Kentucky (the "Louisville Hotel"). Per the Louisville
Hotel's franchise agreement, the franchisor determined that an ownership change
occurred in conjunction with Fountainhead's purchase of the majority shares of
the Company. As a result, a new franchise agreement and a Property Improvement
Plan (the "Plan") are being discussed with the franchisor. Under the Plan, the
Louisville Hotel will be required to make approximately $1,858,000 of
improvements by December 31, 2002. At this time, it has not been determined
whether the Louisville Hotel will be able to self-fund the Plan.
The Company also currently has 17 other hotels which it manages. Under the
terms of franchise agreements, the Company is required to comply with standards
established by franchisers, including property renovations and upgrades. The
success of the Company's operations continues to be dependent upon such
unpredictable factors as the general and local economic conditions to which the
real estate and hotel industry is particularly sensitive: labor, environmental
issues, weather conditions, consumer spending or general business conditions and
the availability of satisfactory financing.
Many of the properties managed by the Company operate with annual net
deficits and experience seasonally slower business during November, December and
January. These particular managed properties tend to experience critical cash
flow issues throughout the year. These cash flow issues have affected timely
payments to the Company for management fees, employer expenses, reimbursable
expenses, and property & liability insurance premiums carried on the Company's
policy. The Company has had success working directly with some property owners
to resolve cash flow issues at certain properties. The Company continues to
discuss these issues with other owners.
17
The Company is also currently discussing terms for collections of
management fees, employer expenses, advances, and insurance premium payments for
properties which management agreements have been terminated. The Company has
reserved an allowance for doubtful accounts of $148,000 in association with
certain of these properties as their balances have aged beyond 90 days since the
termination of their agreements.
The Company has recorded a total of $345,000 payable to affiliates for the
salary of Mr. Henk Evers, President and Chief Operating Officer, which continues
to be advanced by Fountainhead Development Corporation. During the nine month
period ending December 31, 2000, $270,000 of this payable was incurred. Balances
receivable from affiliates are approximately $171,000 for Fountainhead's Chateau
Elan properties in Georgia, Florida, and St. Andrews, Scotland.
PART II. OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
On May 2, 1995, a complaint was filed in the Court of Chancery of the State
of Delaware (New Castle County) entitled William N. Strassburger v. Michael M.
Earley, Luther A. Henderson, John C. Stiska, N. Russell Walden, and Triton
Group, Ltd., defendants, and Ridgewood Hotels, Inc., nominal defendant, C.A. No.
14267 (the "Complaint"). The plaintiff is an individual shareholder of the
Company who purported to file the Complaint individually, representatively on
behalf of all similarly situated shareholders, and derivatively on behalf of the
Company. The Complaint challenged the actions of the Company and its directors
in consummating the Company's August 1994 repurchases of its common stock held
by Triton Group, Ltd. ("Triton") and Hesperus Partners Ltd. ("Hesperus") 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 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 after trial. 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 and
Hesperus 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.
18
On May 15, 2000, the plaintiff filed a Memorandum in support of Judgment
after Trial requesting that the Court enter an order rescinding the Company's
issuance of preferred stock in connection with repurchase transactions and
requesting that the Court enter a judgment for damages against Messrs. Stiska,
Earley and Walden. The Company and the defendants filed written responses to
plaintiff's memorandum in August, 2000.
In November, 2000, the Court entered an Order Partially Implementing
Decisions and Scheduling Proceedings on Rescissory Damages (the "November 2000
Order"). The November 2000 Order, among other things, orders the recision of the
Company's outstanding preferred stock and the issuance of 1,350,000 shares of
the Company's Common Stock in return therefor but the recision of the preferred
stock is stayed subject to the Court's entry of a final order on the remaining
issues. The November 2000 Order also provides that the Court must determine (i)
if defendant Triton will be required to return to the Company $1,162,000 in
dividends previously paid on the preferred stock and whether interest will be
required to be paid on such dividends and (ii) the amount of rescissory damages,
if any, that defendants Walden, Stiska and Earley should be required to pay to
the Company and whether such damages are subject to pre-judgment interest from
September 1, 1994. The November 2000 Order provides a schedule for the parties
to provide additional evidence and briefs to the Court with respect to the
damages issues.
As a derivative action, the Company does not believe that the ultimate
outcome of the litigation will result in a material adverse effect on its
financial condition. However, the Company may be required to pay plaintiff's
attorneys' fees. In addition, while the Company had been advancing the legal
fees and expenses of the director-defendants prior to the Opinion, the Company
believes that it is not required to advance legal fees and expenses to the
director-defendants who were found to be liable to the Company. However, Mr.
Walden has asserted that he has the right to the continued advancement of his
legal fees and expenses under the Company's Certificate of Incorporation (as
amended), subject to an undertaking to pay such advances back if required under
Delaware law. If the Company is required to advance such fees and expenses, and
the defendants are required to repay such advances in the future, the
defendants' financial ability to make such repayment is not known to the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
27 Financial Data Schedule
B. Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
December 31, 2000.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIDGEWOOD HOTELS, INC.
By: /s/ Henk H. Evers
Henk H. Evers
President
By: /s/ David Chiodi
David Chiodi
Director of Finance &
Accounting
Date: February 14, 2000