EXHIBIT 13
RIDGEWOOD
HOTELS, INC.
ANNUAL REPORT
2001
FINANCIAL STATEMENTS
Ridgewood Hotels, Inc. (the "Company") is primarily engaged in the hotel
management business. The Company also has an ownership interest in one hotel and
owns several land parcels that are held for sale.
BOARD OF DIRECTORS OFFICERS
Stacey H. Davis Donald E. Panoz
Henk H. Evers Chief Executive Officer
Luther A. Henderson
Anthony Mastandrea Henk H. Evers
Sheldon E. Misher President
Donald E. Panoz
Nancy C. Panoz Sheldon E. Misher
Secretary
Corporate Offices
1106 Highway 124
Hoschton, Georgia 30548
Telephone: (770) 867-9830
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock, $0.01 par value per share (the "common stock"), of the
Company is quoted in the National Association of Securities Dealers (NASDAQ)
over-the-counter bulletin board service under the symbol "RWHT". However, there
effectively has been an absence of an established public trading market for the
Common Stock.
The following sets forth, for the respective periods indicated, the closing
prices of the common stock in the over-the-counter market, as reported and
summarized by the OTC-BB.
Quarter Ended High Low
------------- ---- ---
September 30, 1999 .850 .625
December 31, 1999 .937 .750
March 31, 2000 5.625 .937
June 30, 2000 3.125 1.750
September 30, 2000 1.875 .625
December 31, 2000 1.500 .531
March 31, 2001 .843 .531
On June 30, 2001, the high and low bid prices quoted by broker-dealer firms
effecting transactions in the Common Stock were $0.55.
On March 31, 2001, there were 2,513,480 shares of common stock outstanding
held by approximately 194 shareholders of record. The Company paid its first and
only cash dividend on the common stock during fiscal year 1990. The dividend
paid was approximately $0.06 per share of common stock that totaled
approximately $397,000. The Company may pay future dividends if and when
earnings and cash are available but has no present intention to do so. The
declaration of dividends on the common stock is within the discretion of the
Board of Directors of the Company and is, therefore, subject to many
considerations, including operating results, business and capital requirements
and other factors. The Company is currently in arrears with respect to $750,000
of dividends with respect to the Company's outstanding shares of the Company's
Series A Convertible Cumulative Preferred Stock. The Company is prohibited from
paying dividends on its shares of common stock at any time that the Company is
in arrears with respect to such preferred stock dividends.
1
SELECTED FINANCIAL DATA
(000's omitted, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
March 31 August 31
------------------------- ---------------------------------------------
Balance Sheet Data as of 2001 2000 1999 1998 1997 1996
- ---------------------------- ------------------------- ---------------------------------------------
Total Assets $ 5,771 $ 8,243 $ 5,910 $ 7,280 $ 8,266 $ 8,724
Long-Term Debt 1,933 4,553 2,682 2,744 2,804 2,858
Shareholders' Investment 1,700 1,740 1,556 2,944 4,038 4,441
Year
Ended Seven Months Ended
Income Statement Data March 31 March 31 Years Ended August 31
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for the 2001 2000 1999 1999 1998 1997 1996
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Net Revenues $ 10,466 $ 3,378 $ 2,769 $ 4,547 $ 5,830 $ 8,209 $ 4,314
Net Loss (40) (1,816) (593) (1,283) (622) (463) (1,178)
Net Loss Applicable To Common Shareholders (400) (2,026) (803) (1,643) (982) (823) (1,538)
Basic and Diluted Loss Per Share (0.16) (1.07) (0.53) (1.09) (0.64) (0.58) (1.29)
2
SUPPLEMENTARY FINANCIAL INFORMATION
(000's omitted, except per share data)
- ----------------------------------------------------------------------------------
2001 For Quarter Ended March 31 December 31 September 30 June 30
- --------------------------------------------------------------------------------------------------------------------------
Net Revenues $ 1,225 $ 1,039 $ 1,169 $ 7,033
Net (Loss) Income (1,723) (577) (210) 2,470
Net (Loss) Income Applicable
To Common Shareholders (1,813) (667) (300) 2,380
Basic (Loss) Earnings Per Share $ (0.72) $ (0.27) $ (0.12) $ 0.95
2000 For Quarter Ended (1) March 31 December 31
- -------------------------------------------------------------------------------------
Net Revenues $ 1,855 $ 1,077
Net Loss (1,437) (389)
Net Loss Applicable
To Common Shareholders (1,527) (479)
Basic Loss Per Share $( 0.61) $ (0.32)
1999 For Quarter Ended August 31 May 31 February 28 November 30
- --------------------------------------------------------------------------------------------------------------------------
Net Revenues $ 1,000 $ 1,575 992 $ 980
Net Loss (466) (168) (371) (278)
Net Loss Applicable
To Common Shareholders (556) (258) (461) (368)
Basic Loss Per Share $ (0.38) $ (0.17) (0.30) $ (0.24)
(1) This period is for seven months ended March 31, 2000. In turn, there are
only two full quarters.
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Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of Ridgewood Hotels, Inc. and its
subsidiaries (collectively, the "Company"). The discussion should be read in
conjunction with the Company's consolidated financial statements for the fiscal
year ending March 31, 2001.
Certain statements included in this document are forward-looking, such as
statements relating to estimates of operating and capital expenditure
requirements, future revenue and operating income, and cash flow and liquidity.
Such forward-looking statements are based on the Company's current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by the Company, and are subject to a number of risks
and uncertainties that could cause actual results in the future to differ
significantly from results expressed or implied in any such forward-looking
statements. These risks and uncertainties include, but are not limited to,
uncertainties relating to economic and business conditions, governmental and
regulatory policies, and the competitive environment in which the Company
operates. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "may," "will," or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. Such statements are not guarantees of future performance and are
subject to the risks and uncertainties referred to above. Therefore, the
Company's actual results could differ materially and adversely from those
expressed in any forward-looking statements as a result of various factors. The
Company undertakes no obligation to revise or update publicly any
forward-looking statements for any reason. The information contained in this
document is not a complete description of the Company's business or the risks
associated with an investment in the Company's common stock. The Company urges
you to carefully review and consider the various disclosures made in this report
and in the Company's other reports filed with the Securities and Exchange
Commission.
Results of Operations -
Sales of real estate properties for the year ended March 31, 2001 increased
compared to the seven months ended March 31, 2000 and year ended August 31, 1999
due to the sale of the hotel in Longwood, Florida. Sales of real estate
properties for the seven months ended March 31, 2000 increased compared to the
seven months ended March 31, 1999 due primarily to sales in Texas and Georgia.
Sales of real estate properties for the fiscal year ended August 31, 1999
decreased compared to 1998 due primarily to greater sales in Ohio and Florida
during 1998. The Company had a gain from real estate sales of approximately
$2,876,000 for the fiscal year ended March 31, 2001 and $335,000 for the seven
months ended March 31, 2000. The Company had gains from real estate sales of
approximately $79,000 and $744,000 during fiscal years
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1999 and 1998, respectively. Gains or losses on real estate sales are dependent
upon the timing, sales price and the Company's basis in specific assets sold and
will vary considerably from period to period.
The Company presently manages 13 hotel properties pursuant to management
agreements that generally provide the Company with a fee calculated as a
percentage of gross revenues of the hotel based on a percentage of gross
revenues exceeding a negotiated amount. The contract terms governing management
fees vary depending on the size and location of the hotel and other factors
relative to such hotel property. The hotel properties managed by the Company are
located in Georgia, Florida and Kentucky and are generally affiliated with
nationally recognized hospitality franchises including Holiday Inn and Ramada
Inn. Under the terms of franchise agreements on certain properties, the Company
is required to comply with standards established by the franchisers, including
property upgrades and renovations. Under the terms of the management agreements,
the owners of the hotels are responsible for all operating expenses, including
property upgrades and renovations. The hotel properties managed by the Company
are primarily full service properties that offer food and beverage services and
meeting and banquet facilities.
The Company's current management agreements generally have initial terms of
one to eight years. Currently the Company has several agreements that may be
terminated with sixty days notice. During the fiscal year ended March 31, 2001
the Company managed for Fountainhead Development Corp., a Georgia corporation
("Fountainhead"), the Chateau Elan Winery & Resort in Braselton, Georgia
("Chateau Elan Georgia") and the Chateau Elan Sebring, Florida ("Chateau Elan
Sebring"). The Company also received a development fee in connection with
Fountainhead's property in St. Andrews, Scotland ("St. Andrews"). The combined
management and development fees for these Fountainhead hotels were approximately
$1,123,000, including $973,000 relating to Chateau Elan Georgia, $60,000
relating to Chateau Elan Sebring and $90,000 relating to St. Andrews. The
management and development fees from these Fountainhead properties represent
approximately 44% of the Company's total management fee revenue for the year
ended March 31, 2001.
During the year ended March 31, 2001, the Company entered into seven new
management agreements. During the same period, ten management agreements were
terminated by property owners.
Revenues from wholly-owned hotel operations for the fiscal year ended March
31, 2001 decreased $914,000, or 34%, compared to the year ended August 31, 1999.
The decrease was due to the sale of the Company's hotel in Longwood, Florida in
May 2000. Revenues from wholly-owned hotel operations for the seven months ended
March 31, 2000 increased $47,000, or 3%, compared to the seven months ended
March 31, 1999. The net increase was the result of an additional $262,000 of
revenues from a hotel leased by the Company in Lubbock, Texas and a $215,000
decrease in revenue from the hotel in Longwood, Florida. Revenues from
wholly-owned hotel operations for fiscal year 1999
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decreased $331,000, or 11%, compared to fiscal year 1998. The decrease was due
to lower occupancy at the Company's hotel in Longwood, Florida in 1999.
As of February 2001, the Company no longer leases the Ramada Inn in
Lubbock, Texas. The total revenues for this hotel for the year ended March 31,
2001 were $1,432,000. The Company will have no revenues relating to the hotels
in Longwood, Florida or Lubbock, Texas on a going forward basis.
Revenues from hotel management for the year ended March 31, 2001 compared
to August 31, 1999 increased $1,321,000, or 109%, The increase is due primarily
to the management and development fees from hotel properties owned by
Fountainhead. Revenues from hotel management for the seven months ended March
31, 2000 increased $265,000, or 40%, compared to the seven months ended March
31, 1999. Revenues from hotel management increased $137,000, or 13% for the
fiscal year ended August 31, 1999 compared to the year ended August 31, 1998.
The increases were due to a larger number of hotels under management compared to
prior periods.
Revenues from hotel management are generally based on agreements, which
provide monthly base management fees, accounting fees, and periodic incentive
fees. The base management fees are typically a percentage of total revenue for a
managed property, while incentive fees are typically based on net income and/or
ownership returns on investment for the managed property. Accounting fees are
set monthly fees charged to hotels, which utilize centralized accounting
services provided by the Company.
In compliance with Staff Accounting Bulletin ("SAB") No.101, the Company
does not accrue or realize incentive management fee revenues until earned. The
management agreements identify when incentive fees are earned and how they are
calculated. Some of the Company's management agreements have provisions that
incentive fees are earned quarterly while others provide for annual incentive
fees. Some of the agreements' incentive fee provisions are based on a calendar
year while others are based on a fiscal year. The Company recorded an incentive
fee of $247,000 related to the performance of Chateau Elan Georgia for the year
ended March 31, 2001. This fee is based on the actual results of the resort.
During the year ended March 31, 2001, the Company's management agreements
were terminated for the following properties: (i) a 184 room hotel in Lackland,
Texas as of July 2000, (ii) a 176 room Hampton Inn in Houston, Texas as of
September 2000, (iii) a 123 room Ramada Inn in Marietta, Georgia as of October
2000, (iv) a 324 room Sheraton Four Points in San Antonio, Texas as of November
2000, (v) a 243 room Holiday Inn in Lynchburg, Virginia as of November 2000,
(vi) a 131 room Ramada Inn in Duluth, Georgia as of November 2000, (vii) an 83
room Best Western In Plainview, Texas as of January 2001, (viii) a 120 room
Holiday Inn in Sweetwater, Texas, (ix) a 205 room Ramada Inn in Lubbock, Texas
as of February 2001, and (x) a 414 room Ramada Plaza Hotel in Atlanta, Georgia
as of March 2001. The Company received approximately $534,000 of management and
accounting fees during the year ended March 31, 2001 related to these hotels.
6
In relation to the Company's investment in unconsolidated entities, the
Company recognized equity in the income of these entities of $251,000 for the
year ended March 31, 2001 relating to the Company's ownership interest in
Louisville Hotel LLC (the "LLC") and $133,000 and $85,000, respectively, for the
seven months ended March 31, 2000 and 1999. During fiscal years ended August 31,
1999 and 1998, the Company recognized equity in the income (loss) of these
entities of approximately $156,000 and $(98,000), respectively.
Interest income increased for the year ended March 31, 2001 compared to
prior years due to a larger amount of cash on hand primarily from the sale of
the hotel in Longwood, Florida.
The other revenue of $22,000 received during the year ended March 31, 2001
was primarily from the amortization of an incentive fee the Company received
from a long distance phone carrier to utilize their long distance service. The
other revenue of $23,000 received during the seven months ended March 31, 2000
was primarily from a favorable adjustment received for workers' compensation
claims. The other revenue of $117,000 received during fiscal year 1998 was
primarily from profits received on land joint ventures in Atlanta, Georgia and a
worker's compensation insurance adjustment.
Expenses of wholly-owned real estate decreased $185,000, or 8%, for the
year ended March 31, 2001 compared to the year ended August 31, 1999. The
decrease was due to the sale of the Company's hotel in Longwood, Florida.
Expenses of wholly-owned real estate increased $167,000, or 12%, for the seven
months ended March 31, 2000 compared to the seven months ended March 31, 1999.
The increase was primarily due to the hotel leased by the Company in Lubbock,
Texas. Expenses of wholly-owned real estate increased $38,000, or 2%, for the
fiscal year ended August 31, 1999 compared to 1998 due to increased expenses at
the Company's hotel in Longwood, Florida.
As of January 1, 2001 the Company has implemented an organizational
restructuring that relocated corporate regional directors of operations
positions into area general manager positions that are physically located at
individual properties. The salaries of the area general managers are funded by
the individual properties. Therefore, the Company expects reduced payroll costs
and does not expect to incur any additional costs in connection with this
organizational restructuring. The Company is also in the process of
de-centralizing accounting services it provides for several of the managed
properties. With this plan the Company will reduce its payroll costs associated
with centralized accounting of these properties, and these managed properties
will no longer provide an accounting fee to the Company.
On January 4, 2001 the Company moved its principle executive offices to
Hoschton, Georgia. The lease expense for vacated office of approximately
$107,000 in the year ended March 31, 2001 is related to the lease obligations on
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the Company's previous office in Atlanta, Georgia that it vacated in December
2000. The Company currently pays $13,107 per month and the lease expires May
2002. In April, 2001, the vacated office was sublet for $8,738 per month.
Depreciation and amortization increased $87,000, or 19%, for the year ended
March 31, 2001 compared to the year ended August 31, 1999. Depreciation and
amortization expense increased by $199,000, or 77%, during year ended August 31,
1999 compared to 1998. These increases were due to greater amortization of the
Company's hotel management agreements and the write-off of the remaining
investment in a hotel management company.
Interest expense decreased $69,000, or 20%, for the year ended March 31,
2001 compared to the year ended August 31, 1999 due to the sale of the hotel in
Longwood, Florida. The debt on this hotel was transferred when it was sold in
May 2000. Interest expense increased $150,000, or 76%, for the seven months
ended March 31, 2000 compared to the seven months ended March 31, 1999. The
increase was due to the additional debt incurred by the Company for its
acquisition of an interest in the hotel in Louisville, Kentucky.
General, administrative and other expenses increased $65,000, or 3% for the
year ended March 31, 2001 compared to the year ended August 31, 1999. The
increase was due to various expenses. General, administrative and other expenses
increased $328,000, or 28%, for the seven months ended March 31, 2000 compared
to the seven months ended March 31, 1999. The increase was due to several
reasons. Payroll and benefits increased due to additional staff required to
manage a larger number of hotels. Additionally, consulting fees increased due
primarily to a consulting agreement with the Company's former President, and
legal expense increased due to an ongoing lawsuit. See further discussion below
and see Note 3 in the Notes to Consolidated Financial Statements. General,
administrative and other expenses decreased $116,000, or 5%, for fiscal year
1999 compared to 1998. Expenses in fiscal year 1998 were unusually high due to
severance paid to the executive in charge of hotel operations.
The majority of the increase in legal expenses between the seven months
ended March 31, 2000 and 1999 relates to the shareholder derivative action
pending in the Delaware Court of Chancery that is described more fully in Note 3
in the Notes to Consolidated Financial Statements. In addition to the Company's
legal expenses, certain of the defendants have asserted that they have the right
to require the Company to continue to advance their legal fees and expenses,
subject to such defendants undertaking to repay the advances if required under
Delaware law. The Company is in the process of attempting to resolve these
claims with one of the director-defendants. If the Company is required to
advance such expenses, the Company does not know whether such defendants have
the financial ability to repay such advances.
Provision for doubtful accounts increased by approximately $189,000 for the
year ended March 31, 2001 compared to the year ended August 31, 1999 due to the
loss of
8
several management contracts in which the Company was still owed management fees
and other expenses normally reimbursed by the hotels under management.
Business development expenses decreased $131,000, or 89%, for the year
ended March 31, 2001 compared to the year ended August 31, 1999. Business
development expenses decreased $28,000, or 32%, for the seven months ended March
31, 2000 compared to the seven months ended March 31, 1999. The decreases were
primarily due to the termination of a consultant used by the Company. During
fiscal years 1999 and 1998, while the Company was aggressively pursuing the
business of acquiring, developing, operating and selling hotel properties
throughout the country, the Company incurred business development costs of
$148,000 and $361,000, respectively.
In March 2001 and 2000, the Company recognized writedowns of $2,000,000 and
$1,200,000, respectively, on its investment in the LLC. The March 2000 writedown
was due to the anticipated shortfall of the Company's return of equity as a
result of the decreased operating performance of the Hotel. In March 2001, in
light of the deterioration of market conditions affecting the hotel industry
during the fourth quarter and subsequent to year-end and due to a further
decrease in the operating performance of the Hotel, management of the Company
concluded that their economic ownership interest in the LLC had been totally
impaired. The carrying value of the investment in the LLC on the Company's books
is $0 as of March 31, 2001.
The Company's income before income taxes of $30,000 for the fiscal year
ended March 31, 2001 was comprised of the following: (a) a $2,856,000 gain on
the sale of the hotel in Longwood, Florida (b) a $2,000,000 writedown on the
investment in the hotel in Louisville, Kentucky (c) additional bad debt reserve
of $189,000 and, (d) an operating loss of $637,000.
Liquidity and Capital Resources -
Land Sales-
During the fiscal year ended March 31, 2001, the Company received net
proceeds of approximately $404,000 from the sale of undeveloped land in Arizona
and Ohio. The proceeds were used to provide additional working capital to the
Company.
Longwood Hotel-
In June 1995, the Company received a loan from a commercial lender to
refinance the Ramada Inn in Longwood, Florida (the "Longwood Hotel"), which was
owned by the Company through a subsidiary. The loan proceeds were $2,800,000.
The loan was for a term of 20 years with an amortization period of 25 years, and
an interest rate of 10.35%. Principal and interest payments were approximately
$26,000 per month beginning August 1, 1995. In addition, the Company was
required to make a repair escrow payment comprised of 4% of estimated revenues,
as well as real estate tax and insurance escrow
9
payments. The total payment with respect to the loan was approximately $22,000
per month subject to annual adjustments.
On May 31, 2000 the Company sold the Longwood Hotel for $5,350,000 and
received net cash proceeds of approximately $1,310,000 and a $250,000 note from
the purchaser. Approximately $3,500,000 of the sales proceeds were used to
settle the mortgage and defeasance penalty on the hotel. In June 2001 the
$250,000 note was paid in full.
Fountainhead Transactions-
On January 10, 2000, the Company entered into a management agreement
("Management Agreement") with Fountainhead, to perform management services at
Chateau Elan Georgia, one of Fountainhead's properties, for a period of five
years beginning on March 24, 2000. In consideration of the Management Agreement,
the Company issued to Fountainhead 1,000,000 shares of common stock
("Fountainhead Shares") at a fair value of $2.00 per share. In the Management
Agreement, Fountainhead agreed to pay the Company a base management fee equal to
2% of the gross revenues of the properties being managed, plus an annual
incentive management fee to be determined each year based on the profitability
of the properties being managed during that year.
The Management Agreement has a term of five years but is terminable upon
the transfer by Fountainhead of all or a material portion of the properties
covered by the Management Agreement. If the Management Agreement is terminated
upon such a transfer or upon the occurrence of an event of default by
Fountainhead, Fountainhead shall pay to the Company a portion of the projected
fees owed to the Company under the agreement, with adjustments based on the term
of the Management Agreement remaining. In such event, Fountainhead may elect to
surrender to the Company shares of common stock in lieu of a cash payment. In
connection with the issuance of the Fountainhead Shares, the number of directors
constituting the full Board of Directors of the Company was increased from three
to seven members, effective on February 3, 2000. See also Note 6 to the
financial statements.
As a result of the Fountainhead transactions, the Company's President
resigned, and Henk H. Evers was appointed as President and Chief Operating
Officer effective January 11, 2000. At the Company's request, Fountainhead
continues to pay Mr. Evers' salary as an advance to the Company. Effective
September, 2000, Mr. Evers has assumed certain responsibilities previously
handled by the general manager of Chateau Elan Georgia. As a result, Chateau
Elan Georgia has agreed to assume $125,000 of Mr. Evers' annual salary of
$305,000. In addition, Mr. Evers has performed certain services for Fountainhead
(in addition to the services for which the Company received a development fee)
and, in consideration therefore, Fountainhead has agreed to assume $50,000 of
Mr. Evers annual salary while he continues to perform such services. For the
fiscal year ended March 31, 2001, the portion of Mr. Evers' salary charged to
Chateau Elan and Fountainhead is $71,000 and $29,000, respectively. The Company
has accrued $296,000 in salary and benefits relating to the advanced
compensation including $75,000 for the
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seven months ended March 31, 2000 and $221,000 for the fiscal year ended March
31, 2001 (after taking into account the portions assumed by Chateau Elan Georgia
and Fountainhead). The Company reduced the advanced compensation liability by
$90,000 by netting accrued development fees owed to the Company by Fountainhead
for managing one of Fountainhead's properties in St. Andrews, Scotland ("St.
Andrews") against this liability. After reducing the advanced compensation by
$90,000, there is $206,000 of accrued liability remaining at March 31, 2001.
Louisville Hotel-
The Company has an ownership interest in a Holiday Inn hotel in
Hurstbourne, Kentucky (the "Hotel"). The Hotel is owned by RW Louisville Hotel
Associates, LLC ("Associates"). As of March 31, 2001, the Company, through its
wholly-owned subsidiaries, was the manager of and had a minority ownership
interest in Associates. In April, 2001, the Company, through its wholly-owned
subsidiaries, acquired 100% of the membership interests in Associates. The
membership interests are pledged as security for a $3,623,690 loan made by the
LLC. The membership interests are also subject to an option pursuant to which
the LLC has the right to acquire the membership interests for nominal value.
Pursuant to the terms of the loan, all revenues (including proceeds from sale or
refinancing) of Associates (after payment of expenses including a management fee
to the Company) are required to be paid to the LLC until principal and interest
on the loan are paid in full.
On September 30, 1999, the Company, which already owned a 10% interest in
the LLC, acquired an additional interest in the LLC from Louisville Hotel, L.P.
("Louisville LP") for $2,500,000. As a result of the transaction, the Company
has an 80% economic interest in the LLC. The $2,500,000 consideration included
the following:
Transfer of 10% ownership interest in Houston Hotel, LLC $443,000
Cash payment (1) 124,000
Promissory note to Louisville LP secured by the
Company's ownership interest in the LLC (2) 1,333,000
Promissory note to Louisville LP secured by the
Company's Phoenix, Arizona land (2) 300,000
Promissory note to Louisville LP secured by one parcel
of the Company's Longwood, Florida land (2) 300,000
----------
Total additional equity in the LLC $2,500,000
==========
(1) The cash to make this payment was obtained from the LLC in connection with
a modification of the management contract of the Hotel. This amount
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represents the unamortized portion of the original $200,000 participation
fee paid to the LLC to acquire the management contract of the Hotel.
(2) The three promissory notes (the "Notes") are cross-defaulted. The Notes
bear interest at 13% and mature on September 30, 2002.
With 80% ownership, the Company is the Managing Member of the LLC.
Louisville LP has the remaining 20% ownership in the LLC. Pursuant to the LLC's
operating agreement dated as of May 1998, as amended on September 30, 1999 (the
"Operating Agreement"), the Company has the right at any time to purchase the
remaining interest in the LLC (the "Purchase Option"). The Operating Agreement
provides that the purchase price for Louisville LP's interest is equal to the
sum of (a) Louisville's total capital contributions to the LLC ($3,061,000),
plus (b) any accrued but unpaid preferred return on such capital contributions,
plus (c) the residual value of the remaining interest (the amount that would be
distributed to Louisville LP if the LLC sold the Hotel for its fair market value
and distributed the proceeds to the members pursuant to the Operating Agreement)
(the "Option Price"). However, the Purchase Option is only exercisable in
connection with concurrent payment in full of all remaining amounts due under
the Notes. Further, under the terms of the Operating Agreement, the Company is
required, no later than September 30, 2002, to purchase Louisville LP's
remaining interest in the LLC for the Option Price. Based on the estimated
market value of the Hotel as of March 31, 2001, the estimated Option Price is
$3,061,000. The failure of the Company to satisfy its obligations under the
Operating Agreement may constitute an event of default under the Notes.
The LLC's Operating Agreement provides that distributions to the LLC's
owners are made as follows:
Distributable cash is defined as the net cash realized from operations but
after payment of management fees, principal and interest, capital improvements
and other such retentions as the Managing Member determines to be necessary.
Distributions of distributable cash from the LLC is made as follows:
|X| First, to the Company in an amount equal to the cumulative interest paid on
the Notes. The Company has been using these funds to make the interest
payments to Louisville LP.
|X| Second, a 13% preferred return to Louisville LP on its original capital
contribution of $3,061,000.
|X| Third, a 13% preferred return to the Company on its capital contribution of
$1,207,000.
|X| Fourth, 80% to the Company and 20% to Louisville LP.
Cash from a sale or refinancing would be distributed as follows:
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|X| First, to the Company in an amount equal to the cumulative interest paid on
the Notes.
|X| Second, to the Company in an amount equal to the Notes.
|X| Third, to Louisville LP until it has received aggregate distributions in an
amount equal to its 13% preferred return on its capital contribution.
|X| Fourth, to Louisville LP until its net capital contribution is reduced to
zero.
|X| Fifth, to the Company until it has received an amount equal to its 13%
preferred return.
|X| Sixth, to the Company until its net capital contribution is reduced to
zero.
|X| Thereafter, 10% to Louisville LP and 90% to the Company.
If a sale or refinancing occurs after September 30, 2000 but before
September 30, 2001, then the distribution would change to 15% and 85%,
respectively.
Effective September 30, 1999, a new management agreement was entered into
between the Company and Associates.
In connection with the original management agreement, the Company received
management fees totaling approximately $285,000 and $57,000 for the years ended
August 31, 1999 and 1998, respectively. In connection with the new management
agreement effective September 30, 1999, the Company received management fees
totaling approximately $258,000 for the fiscal year ended March 31, 2001 and
$153,000 for the seven months ended March 31, 2000.
Associates is a licensee under a franchise agreement with Holiday Inn (the
"Franchise Agreement"). The Company has guaranteed Associates obligations under
the Franchise Agreement. In the event that the Franchise Agreement is terminated
as a result of a breach of the Franchise Agreement by Associates, Associates may
be subject to liquidated damages under the Franchise Agreement equal to
approximately 36 times the monthly franchise fees payable pursuant to the
Franchise Agreement. The current monthly franchise fees are approximately
$41,000 which would result in liquidated damages of approximately $1,500,000.
In conjunction with the Franchise Agreement, Associates is subject to a
Property Improvement Plan ("the Plan"). Under the Plan, Associates is required
to make certain improvements to the Hotel by December 31, 2002, with certain
interim milestones. The Company estimates the costs of these improvements will
be approximately $1,858,000 As of March 31, 2001, Associates has spent
approximately
13
$330,000 on improvements and has approximately $348,000 in escrow to spend on
improvements. The Company has not determined whether Associates will be able to
fund the remainder of the Plan. If Associates is unable to fund the remainder of
the Plan, the Company may be required to complete the Plan pursuant to the
Company's guaranty of the Franchise Agreement.
The Company has approximately $1,700,000 of available cash as of June 15,
2001.
Based on the Company's current assessment of market conditions effecting
the hotel industry and the current operating performance of the Louisville
Hotel, the Company has written down its remaining interest in the LLC. In
addition, unless current market conditions change or the Company is able to
obtain an additional source of funds (whether through operations, financing or
otherwise) the Company currently does not have sufficient liquidity to acquire
Louisville LP's interest in the LLC for the Option Price and to pay off the
Notes in September 30, 2002. Under the terms of the Operating Agreement and the
Notes, the failure of the Company to acquire Louisville LP's interest by
September 30, 2002 and pay off the Notes could result in the Company forfeiting
its interests in the LLC, the Longwood, Florida property and the Phoenix,
Arizona property. As a result, management is currently evaluating all of its
options with respect to the Louisville Hotel, including its potential sale prior
to September 30, 2002.
Effect of Inflation -
Inflation tends to increase the Company's cash flow from income-producing
properties since rental rates generally increase by a greater amount than
associated expenses. Inflation also generally tends to increase the value of the
Company's land portfolio.
Offsetting these beneficial effects of inflation are the increased cost of
the Company's operating expenses and the increased costs and decreased supply of
investment capital for real estate that generally accompany inflation.
14
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND 2000
($000's omitted, except share and per share data)
March 31, March 31,
Assets: 2001 2000
- ------ --------- ----------
Current assets:
Cash and cash equivalents $1,478 $ 258
Receivables from affiliates (note 6) 402 62
Other operating receivables, net of allowance for
doubtful accounts of $262 and $34, respectively (note 1) 407 332
Note receivable (note 10) 250 --
Other current assets 109 320
------ ------
Total current assets 2,646 972
Real estate investments (note 2):
Real estate properties
Operating properties, net of accumulated
depreciation of $-0- and $1,855, respectively -- 1,106
Land held for sale, net of allowance for possible
losses of $3,155 and $3,319, respectively 1,400 1,806
Investment in unconsolidated hotel entity, net of
writedown of $3,200 and $1,200, respectively (notes 3 and 8) -- 2,000
------ ------
Total real estate investments, net 1,400 4,912
Management contracts, net of accumulated amortization of
$728 and $224, respectively (note 6) 1,688 2,192
Other assets, net of accumulated depreciation of $95 and $204,
respectively 37 167
------ ------
$5,771 $8,243
====== ======
The accompanying notes are an integral part of these consolidated balance
sheets.
15
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND 2000
LIABILITIES AND SHAREHOLDERS' INVESTMENT
($000's omitted, except share and per share data)
March 31, March 31,
Liabilities: 2001 2000
- ----------- --------- ---------
Current liabilities:
Current maturities of long-term debt $ -- $ 37
Accounts payable 296 284
Payables to affiliates (note 6) 206 75
Accrued salaries, bonuses and other compensation (note 9) 101 97
Accrued legal and audit expense 207 135
Lease commitment for vacated office (note 3) 94 --
Accrued interest and other liabilities 310 428
-------- --------
Total current liabilities 1,214 1,056
Accrued pension liability, including deferred
curtailment gain (note 7) 894 894
Other long-term liabilities 30 --
Long-term debt (note 4) 1,933 4,553
-------- --------
Total liabilities 4,071 6,503
-------- --------
Commitments and contingencies: (notes 3, 4, 7, 8 and 9)
Shareholders' investment: (note 6)
Series A convertible cumulative preferred
stock, $1 par value, 1,000,000 shares authorized,
450,000 shares issued and outstanding in 2001 and 2000 450 450
Common stock, $0.01 par value, 5,000,000 shares authorized,
2,513,480 shares issued and outstanding in 2001 and 2000 25 25
Paid-in surplus 17,671 17,671
Accumulated deficit (16,446) (16,406)
-------- --------
Total shareholders' investment 1,700 1,740
-------- --------
$ 5,771 $ 8,243
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
16
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED MARCH 31, 2001 AND AUGUST 31, 1999 AND 1998 AND
FOR THE SEVEN MONTHS ENDED MARCH 31, 2000 AND 1999
($000's omitted, except share and per share data)
For the
Fiscal Year For the Seven For the Fiscal
Ended Months Ended Year Ended
---------------------------------------------------------------------------
March 31, March 31, March 31, August 31, August 31,
2001 2000 1999 1999 1998
(Unaudited)
---------------------------------------------------------------------------
Revenues:
Revenues from wholly-
owned hotel operations $ 1,789 $ 1,696 $ 1,649 $ 2,703 $ 3,034
Revenues from
hotel management 2,534 927 662 1,213 1,076
Sales of real estate properties 5,798 598 363 458 1,655
Equity in net income
(loss) of unconsolidated
entities 251 133 85 156 (98)
Interest income 72 1 10 15 46
Other 22 23 -- 2 117
----------------------------------------------------------------------------------
10,466 3,378 2,769 4,547 5,830
Costs and expenses:
Expenses of wholly-
owned real estate properties 2,180 1,566 1,399 2,365 2,327
Costs of real estate sold 2,922 263 283 379 911
Lease expense for
vacated office 107 -- -- -- --
Depreciation and amortization 546 218 217 459 260
Interest expense 273 348 198 342 340
General, administrative
and other 2,202 1,506 1,178 2,137 2,253
Provision for doubtful accounts 189 34 -- -- --
Business development 17 59 87 148 361
Writedown on hotel investment 2,000 1,200 -- -- --
----------------------------------------------------------------------------------
10,436 5,194 3,362 5,830 6,452
----------------------------------------------------------------------------------
Income (loss) before taxes 30 (1,816) (593) (1,283) (622)
Income taxes (70) -- -- -- --
----------------------------------------------------------------------------------
Net loss (40) (1,816) (593) (1,283) (622)
Preferred dividends (360) (210) (210) (360) (360)
----------------------------------------------------------------------------------
Net loss applicable to
common shareholders $ (400) $ (2,026) $ (803) $ (1,643) $ (982)
----------------------------------------------------------------------------------
Basic and diluted loss per
common share $ (0.16) $ (1.07) $ (0.53) $ (1.09) $ (0.64)
==================================================================================
The accompanying notes are an integral part of these consolidated statements.
17
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE PERIODS ENDED MARCH 31, 2001 AND 2000 AND
AUGUST 31, 1999 AND 1998
(000's Omitted)
Note
Receivable
from
Preferred Common Officer for Total
Stock Stock Paid-in Purchase of Accumulated Shareholders'
Shares Amount Shares Amount Surplus Common Stock Deficit Investment
--------------------------------------------------------------------------------------------------
Balance, August 31, 1997 450,000 $ 450 1,538,480 $ 15 $ 16,333 $ (75) $ (12,685) $ 4,038
Repurchase of common stock -- -- (25,000) -- (112) -- -- (112)
Dividends on preferred stock -- -- -- -- (360) -- -- (360)
Net loss -- -- -- -- -- -- (622) (622)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1998 450,000 450 1,513,480 15 15,861 (75) (13,307) 2,944
Repayment of note receivable -- -- -- -- -- 75 -- 75
Dividends on preferred stock -- -- -- -- (180) -- -- (180)
Net loss -- -- -- -- -- -- (1,283) (1,283)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1999 450,000 450 1,513,480 15 15,681 -- (14,590) 1,556
Issuance of common stock -- -- 1,000,000 10 1,990 -- -- 2,000
Net loss -- -- -- -- -- -- (1,816) (1,816)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 450,000 450 2,513,480 25 17,671 -- (16,406) 1,740
Net loss -- -- -- -- -- -- (40) (40)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 450,000 $ 450 2,513,480 $ 25 $ 17,671 $ -- $ (16,446) $ 1,700
====================================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
18
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED MARCH 31, 2001 AND AUGUST 31, 1999 AND 1998 AND
FOR THE SEVEN MONTHS ENDED MARCH 31, 2000 AND 1999
($000's omitted)
For the Fiscal For the Seven For the Fiscal
Year Ended Months Ended Year Ended
--------------------------------------------------------------------------
March 31, March 31, March 31, August 31, August 31,
2001 2000 1999 1999 1998
(Unaudited)
--------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (40) $(1,816) $ (593) $(1,283) $ (622)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 546 218 217 459 260
Provision for doubtful accounts 189 34 -- -- --
Increase in note receivable (250) -- -- -- --
Writedown on hotel investment 2,000 1,200 -- -- --
Gain from sale of real estate
properties (2,876) (335) (80) (79) (744)
Distributions from unconsolidated
entities greater than equity
in net loss -- -- -- -- 184
Increase in receivables from affiliates (340) (62) -- -- --
Increase in payables to affiliates 131 75 -- -- --
Increase in other operating receivables (264) (125) (233) (143) 189
Decrease (increase) in other assets 316 (34) 220 175 (4)
Increase (decrease) in accounts payable
and accrued liabilities 94 236 (228) 80 168
------------------------------------------------------------------
Total adjustments (454) 1,207 (104) 492 53
------------------------------------------------------------------
Net cash used in operating activities (494) (609) (697) (791) (569)
------------------------------------------------------------------
Cash flows from investing activities:
Investment in unconsolidated entities -- (124) -- (184) (678)
Proceeds from sale of real estate 4,371 562 340 423 1,526
Additions to real estate properties -- (17) (42) (65) (88)
------------------------------------------------------------------
Net cash provided by investing activities 4,371 421 298 174 760
------------------------------------------------------------------
Cash flows from financing activities:
Dividends on preferred stock -- -- (180) (180) (360)
Repurchase of common stock -- -- -- -- (112)
Repayments of debt (2,657) (25) (37) (62) (60)
Payment received on note receivable from
stock issuance -- -- -- 75 --
------------------------------------------------------------------
Net cash used in financing activities (2,657) (25) (217) (167) (532)
------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 1,220 (213) (616) (784) (341)
Cash and cash equivalents at the beginning of period 258 471 1,255 1,255 1,596
------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,478 $ 258 $ 639 $ 471 $ 1,255
==================================================================
The accompanying notes are an integral part of these consolidated statements
19
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED MARCH 31, 2001 AND AUGUST 31, 1999 AND 1998 AND
FOR THE SEVEN MONTHS ENDED MARCH 31, 2000 AND 1999
($000's omitted)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION AND NON-CASH ACTIVITY:
For the
Fiscal Year For the Seven For the Fiscal
Ended Months Ended Year Ended
---------------------------------------------------------------------------------
March 31, March 31, March 31, August 31, August 31,
2001 2000 1999 1999 1998
(Unaudited)
---------------------------------------------------------------------------------
Interest paid $ 257 $ 322 $ 198 $ 342 $ 340
Income taxes paid 35 -- -- -- --
Issuance of 1,000,000 common shares
in exchange for management
contract -- 2,000 -- -- --
Notes payable issued in conjunction
with additional investment in
Louisville Hotel, LLC -- 1,933 -- -- --
Transfer of 10% ownership interest
in Louisville Hotel, LLC -- 443 -- -- --
The accompanying notes are an integral part of these consolidated statements.
20
Ridgewood Hotels, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2001 and 2000 and August 31, 1999 and 1998
1. Description of Business and Significant Accounting Policies
Description of the Business -
Ridgewood Hotels, Inc. (the "Company") is a Delaware corporation primarily
engaged in the hotel management business. The Company also has an ownership
interest in one hotel and owns several land parcels that are held for sale.
The Company's common stock is listed in the National Association of
Securities Dealers (NASDAQ) over-the-counter bulletin board service.
On January 10, 2000, the Company entered into a management agreement
("Management Agreement") with Fountainhead Development Corp. ("Fountainhead") to
perform management services at Chateau Elan Winery and Resort, one of
Fountainhead's properties, for a period of five years beginning on March 24,
2000. In consideration of the Management Agreement, the Company issued to
Fountainhead 1,000,000 shares of common stock ("Fountainhead Shares"). The
determined market value of the management contract was $2,000,000 at the time of
the transaction. In connection with the issuance of the Fountainhead Shares, the
number of directors constituting the full Board of Directors of the Company was
increased from three to seven members, effective on February 3, 2000. See also
note 6.
On January 11, 2000, one of the principal stockholders and President of the
Company, N. Russell Walden, sold 650,000 shares of the common stock to
Fountainhead, and a new President of the Company was elected. Another principal
shareholder, ADT Security Services, Inc. ("ADT"), sold 450,000 shares of
preferred stock of the Company to Fountainhead. Through the issuance of the
common stock pursuant to the Management Agreement and the acquisitions of
existing common stock and preferred stock, Fountainhead has obtained beneficial
ownership of approximately 78% of the Company. Fountainhead is engaged
principally in the business of owning and operating hotels, resorts and other
real estate properties. See also note 6.
Basis of Presentation and Consolidation -
The consolidated financial statements of the Company include the accounts
of all of its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The investments in unconsolidated entities are being accounted for using
the equity method of accounting (see Note 8).
21
In 1997, the Emerging Issues Task Force ("EITF") issued Issue No. 97-2,
"Application of Financial Accounting Standards Board ("FASB") Statement No. 94
and Accounting Principles Board ("APB") Opinion No.16 to Physician Practice
Management Entities and Certain Other Entities with Contractual Management
Arrangements". EITF Issue No. 97-2 establishes that physician practice
management entities have a controlling interest in a physician practice if
certain requirements are met. None of the Company's hotel management agreements
meet these requirements. Accordingly, the Company does not consolidate the
financial statements of hotels under a management agreement.
On March 28, 2000 the Company changed its fiscal year from August 31 to
March 31.
Per Share Data -
Basic earnings per share is based on the weighted average effect of all
common shares issued and outstanding, and is calculated by dividing net earnings
(loss) available to common shareholders by the weighted average shares
outstanding during the period. Diluted earnings per share is calculated by
dividing net earnings available to common shareholders, adjusted for the effect,
if any, from assumed conversion of all potentially dilutive common shares
outstanding, by the weighted average number of common shares used in the basic
earning per share calculation plus the number of common shares that would be
issued assuming conversion of all potentially dilutive common shares
outstanding.
Capitalization Policies -
Repairs and maintenance costs are expensed in the period incurred. Major
improvements to existing properties that increase the usefulness or useful life
of the property are capitalized. Management contracts are capitalized based on
their estimated fair value at the date of the contract.
Valuation of Real Estate Properties -
Under Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets to be Disposed of" ("SFAS 121"), properties
are classified as either operating properties or properties held for sale.
Operating properties are carried at cost, less accumulated depreciation. If
determined to be impaired, operating properties are written down to their fair
value, and the associated writedown cannot be restored if the fair value of the
property increases. Properties held for sale are carried at the lower of cost or
their fair value less cost to sell, but the associated loss can be recovered in
the event the fair value of the property increases.
22
Depreciation and Amortization Policies -
The Company depreciates operating properties and any related improvements
by using the straight-line method over the estimated useful lives of such
assets, which are generally 30 years for building and land improvements and 5
years for furniture, fixtures and equipment. Depreciation expense for the fiscal
year ended March 31, 2001 was approximately $41,000, $145,000 for the seven
months ended March 31, 2000 and $89,000 for the seven months ended March 31,
1999 (unaudited). Depreciation expense for the fiscal years ended August 31,
1999 and 1998 was approximately $180,000 and $172,000, respectively.
The Company amortizes certain intangible assets over the useful life of
those assets. Management contracts for which consideration is given are
amortized over the life of the contract. Amortization expense for the fiscal
year ended March 31, 2001 was approximately $505,000, $73,000 for the seven
months ended March 31, 2000 and $117,000 for the seven months ended March 31,
1999 (unaudited). Amortization expense for the years ended August 31, 1999 and
1998 was approximately $279,000 and $88,000, respectively.
Sales of Real Estate -
All revenue related to sales of real estate is recognized at the time of
closing. The Company allocates costs of real estate sold using the specific
identification or relative sales value methods based on the nature of the
development. Profit recognition is based upon the Company receiving adequate
cash down payments and other criteria specified by existing accounting
literature.
Stock-Based Compensation -
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), provides entities with a choice between
fair value and intrinsic value based methods of accounting for stock-based
compensation plans. The Company has elected to use the intrinsic value method
for all periods presented in these financial statements.
Cash and Cash Equivalents -
For the purpose of the consolidated statements of cash flows, cash and cash
equivalents include all highly liquid investments with original maturities of
three months or less when purchased.
23
Fair Value of Financial Instruments -
The recorded values of financial instruments including cash, accounts
receivable, accounts payable and accrued liabilities reflected in the financial
statements are representative of their fair value due to the short-term nature
of the instruments.
Use of Estimates -
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements. Actual results could differ from those estimates.
Reclassifications -
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Revenue Recognition -
Revenue related to management contracts is recognized in the month that the
services are provided. Incentive revenue is recognized when earned.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101: "Revenue Recognition in Financial
Statements". SAB No.101 summarizes certain of the staff's views in applying
accounting principles generally accepted in the United States to selected
revenue recognition issues in financial statements. The Company adopted SAB No.
101 in December 1999, and the effect of adopting SAB No. 101 was immaterial.
Reserve for Doubtful Accounts-
The Company provides reserves for doubtful accounts after considering such
factors as the nature and age of the receivable and the willingness and ability
of the owner to pay.
24
The Company's provision for doubtful accounts is as follows:
March 31, March 31,
2001 2000
--------- ---------
Beginning balance- $ 34,000 $ --
Provision for doubtful accounts (1) 189,000 34,000
Provision for doubtful collections related to the
leased hotel in Lubbock, Texas (2) 128,000 --
Writeoffs (89,000) --
-------------------------
Ending balance- $ 262,000 $ 34,000
=========================
(1) The provision has been provided for several doubtful accounts which the
Company believes will not be collected, but efforts are still being made to
collect.
(2) This provision relates to the balance of estimated uncollectible assets
related to the terminated lease on the hotel in Lubbock, Texas and has been
recorded under expenses of wholly-owned real estate properties in the
accompanying Consolidated Statements of Operations.
New Accounting Pronouncements -
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allow a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133", which delays the original effective
date of
25
SFAS No. 133 until fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities", which amends SFAS No. 133. SFAS No. 138 addresses a
limited number of issues related to the implementation of SFAS No. 133. On April
1, 2001, the Company adopted SFAS No. 133, as amended. The adoption did not have
a material effect on the Company's financial position or results of operations.
Segment Reporting -
In fiscal year 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). This standard requires that enterprises report
financial and descriptive information about its reportable operating segments.
The Company currently has only one segment, real estate hotel ownership and
management, that is the basis for the consolidated information in the financial
statements.
2. Real Estate Investments
The Company's real estate properties by type at March 31, 2001 and 2000
were as follows ($000's omitted):
26
March 31, 2001
Type of Project Land Other Total
--------------- ---------- ---------- ----------
Land $ 4,555 $ -- $ 4,555
Less allowance for possible losses (3,155) -- (3,155)
---------- ---------- ----------
Net land 1,400 -- 1,400
Investment in unconsolidated hotel
entity -- 3,200 3,200
Less investment writedown -- (3,200) (3,200)
---------- ---------- ----------
Net investment in unconsolidated
hotel entity -- -- --
---------- ---------- ----------
Total net real estate investments $ 1,400 $ -- $ 1,400
========== ========== ==========
Furniture,
March 31, 2000 Land & Fixtures &
Type of Project Buildings Equipment Other Total
--------------- --------- --------- --------- ---------
Wholly-owned hotel $ 2,535 $ 426 $ -- $ 2,961
Less accumulated depreciation (1,429) (426) -- (1,855)
--------- --------- --------- ---------
Net operating property 1,106 -- -- 1,106
--------- --------- --------- ---------
Land 5,125 -- -- 5,125
Less allowance for possible losses (3,319) -- -- (3,319)
--------- --------- --------- ---------
Net land 1,806 -- -- 1,806
--------- --------- --------- ---------
Investment in unconsolidated hotel
entity -- -- 3,200 3,200
Less investment writedown -- -- (1,200) (1,200)
--------- --------- --------- ---------
Net investment in unconsolidated
hotel entity -- -- 2,000 2,000
--------- --------- --------- ---------
Total net real estate investments $ 2,912 $ -- $ 2,000 $ 4,912
========= ========= ========= =========
27
Changes in the allowance for possible losses and writedown on real estate
investments for the year ended March 31, 2001 and for the seven months ended
March 31, 2000 and the years ended August 31, 1999 and 1998 were as follows
($000's omitted):
For the Year For the Seven For the Year For the Year
Ended March Months Ended Ended August Ended August
31, 2001 March 31, 2000 31, 1999 31, 1998
------------- --------------- ---------------- -----------
Allowance and writedown,
beginning of period $ 4,519 $ 3,319 $ 3,447 $ 3,544
Reversal of reserves associated
with sales of real estate
assets (1) (164) -- (128) (97)
Writedown of investment (note 8) 2,000 1,200 -- --
------- ------- ------- -------
Allowance and writedown, end
of period $ 6,355 $ 4,519 $ 3,319 $ 3,447
======= ======= ======= =======
(1) These amounts reduce the net cost of the real estate sold and in turn are
included in the costs of real estate sold on the consolidated statement of
operations.
3. Commitments and Contingencies
Consulting Agreements-
In August 1991, each executive officer was offered a two-year
Post-Employment Consulting Agreement (the "Consulting Agreement(s)") whereby the
officer agrees that if he or she is terminated by the Company for other than
good cause, the officer will be available for consulting at a rate equal to
their annual compensation immediately prior to termination. All officers have
chosen to enter into Consulting Agreements. In August 1998, an amendment was
signed by the two executive officers reducing the consulting period by one month
for each month that the executive continued to be employed by the Company
through August 31, 1999, such that if the executive remains employed by the
Company through August 31, 2000, the consulting period shall be twelve months in
duration. In addition, two other executives were offered and have chosen to
enter into one year Consulting Agreements.
In January 2000, one of the executives was terminated and entered into an
amended six-month consulting agreement. In May 2000, one of the executives and
one of the employees was terminated, and each has entered into the one-year
consulting fee
28
arrangement. In June 2000, the other executive was terminated and entered into
an arrangement that was less than one year.
Litigation -
On May 2, 1995 a complaint was filed in the Court of Chancery of the State
of Delaware (New Castle County) entitled William N. Strassburger v. Michael M.
Early, Luther A. Henderson, John C. Stiska, N. Russell Walden, and Triton Group,
Ltd., defendants, and Ridgewood Hotels, Inc., nominal defendant, C.A. No. 14267
(the "Complaint"). The plaintiff is an individual shareholder of the Company who
purports to file the Complaint individually, representatively on behalf of all
similarly situated shareholders, and derivatively on behalf of the Company. The
Complaint challenges the actions of the Company and its directors in
consummating the Company's August 1994 repurchase of its common stock held by
Triton Group, Ltd. and Hesperus Partners Ltd. in five counts, denominated Waste
of Corporate Assets, Breach of Duty of Loyalty to Ridgewood, Breach of Duty of
Good Faith, Intentional Misconduct, and Breach of Duty of Loyalty and Good Faith
to Class. On July 5, 1995, the Company filed a timely answer generally denying
the material allegations of the complaint and asserting several affirmative
defenses. Discovery has been concluded, and on March 19, 1998, the Court
dismissed all class claims, with only the derivative claims remaining for trial.
The case was tried by Vice Chancellor Jacobs during the period February 1,
through February 3, 1999.
On January 24, 2000, the Court rendered its Opinion. The Court found in
favor of the plaintiff and against three of the four individual
director-defendants (Messrs. Walden, Stiska and Earley). The Court held that the
repurchase transactions being challenged were unlawful under Delaware law, for
two primary reasons: (1) the transactions were entered into for the improper
purpose of entrenching Mr. Walden in his then-current position of President and
Director, and thus constituted an unlawful self-dealing transaction; and (2) the
use of the Company's assets to repurchase its common stock held by Triton Group,
Ltd. and Hesperus Partners Ltd. was not demonstrated to the Court's satisfaction
to be "entirely fair" to the minority shareholders under the entire fairness
doctrine as enunciated under Delaware law. Having found that the challenged
transactions were unlawful, the Court determined that further proceedings would
be necessary to identify the precise form that the final decree in this case
should take. Although the Court's opinion contemplates further proceedings, no
further hearing date has yet been scheduled to address the remaining remedy
issues.
On May 15, 2000, the plaintiff filed a Memorandum in Support of Judgment
After Trial requesting that the Court enter an order rescinding the Company's
issuance of preferred stock in connection with repurchase transactions and
requesting that the Court enter a judgment for damages against Messrs. Stiska,
Earley and Walden. The Company and the defendants filed written responses to
plaintiff's memorandum in August 2000.
In November 2000, the Court entered an Order Partially Implementing
Decisions and Scheduling Proceedings on Rescissory Damages (the "November 2000
Order"). The November 2000 Order, among other things, orders the rescission of
the Company's outstanding preferred stock and the issuance of 1,350,000 shares
of the Company's common
29
stock in return therefor, but the rescission of the preferred stock is stayed
subject to the Court's entry of a final order on the remaining issues. The
November 2000 Order also provides that the Court must determine (i) if defendant
Triton will be required to return to the Company $1,162,000 in dividends
previously paid on the preferred stock and whether interest will be required to
be paid on such dividends and (ii) the amount of rescissory damages, if any,
that defendants Walden, Stiska and Earley should be required to pay to the
Company and whether such damages are subject to pre-judgment interest from
September 1, 1994. The November 2000 Order provides for the parties to present
additional evidence and briefs to the Court with respect to the damages issues.
Since November, 2000, the parties have conducted additional discovery with
respect to the remedy issues. To date, no additional briefs have been filed and
no further hearings have been scheduled.
As a derivative action, the Company does not believe that the ultimate
outcome of the litigation will result in a material adverse effect on its
financial condition. However, the Company may be required to pay plaintiff's
attorneys' fees. In addition, while the Company had been advancing the legal
fees and expenses of the director-defendants prior to the Opinion, the Company
believes that it is not required to advance legal fees and expenses to the
director-defendants who were found to be liable to the Company. However, Mr.
Walden has asserted that he has the right to the continued advancement of his
legal fees and expenses under the Company's Certificate of Incorporation (as
amended), subject to an undertaking to pay such advances back if required under
Delaware law. If the Company is required to advance such fees and expenses, and
the defendants are required to repay such advances in the future, the
defendants' financial ability to make such repayment is not known to the
Company. Mr. Walden, through his counsel, has threatened to file a complaint
against the Company seeking to compel the advancement of such fees and expenses.
On March 15, 2001, the Company filed a complaint in Fulton County State
Court entitled Ridgewood Hotels, Inc. v. Excelsior Hospitality, LLC, Fulton
County State Court, Civil Action File No. 01-VS-015898A. The Company seeks
amounts due under a management agreement pursuant to which Ridgewood was to
manage a hotel property owned by Defendant Excelsior. The Company believes that
Excelsior wrongfully terminated and otherwise breached the management agreement
and claims damages in the total amount of approximately $310,000, together with
attorneys' fees.
On April 27, 2001, Excelsior filed its Answer, denying the material
allegations in the Complaint. Excelsior also filed a Counterclaim against the
Company arising out of the same management agreement, claiming that the Company
mismanaged the hotel, acted in bad faith, and otherwise failed to perform under
the management agreement. Excelsior seeks compensatory damages in excess of
$900,000, together with punitive damages and attorneys' fees. Management
believes that it has valid claims against Excelsior and that the Counterclaim is
meritless. Accordingly, the Company has not recorded any liability in relation
with this case in the accompanying financial statements.
30
Louisville Hotel - (See also Note 8)
On May 13, 1998, RW Louisville Hotel Associates LLC ("Associates") was
organized as a limited liability company under the laws of the State of
Delaware. Associates was organized to own and manage a Holiday Inn hotel ("the
Hotel") in Louisville, Kentucky. The Company's investment in RW Hotel Partners,
L.P. of $337,500 was transferred to Associates at its historical basis.
Simultaneously, the Company invested $362,000 into Louisville Hotel, LLC, a
Delaware limited liability company (the "LLC"). The combined equity of $699,500
represented a 10% interest in the Hotel. The LLC loaned $3,620,000 to the Hotel
in return for all cash flows generated from the Hotel (after payment of expenses
including a management fee to the Company). On September 30, 1999, the Company
purchased additional equity in the LLC. The Company increased its ownership from
10% to 80%. The consideration paid to acquire the increased ownership was
$2,500,000. The majority of the purchase price was evidenced by three promissory
notes (the "Notes") totaling $1,933,000. The Notes are cross-defaulted, bear
interest at 13% and mature on September 30, 2002. With 80% ownership, the
Company is now the Managing Member of the LLC. Louisville Hotel, L.P. ("LP") now
has 20% ownership in the LLC and is the Non-Managing Member. Pursuant to the
LLC's operating agreement dated as of May 1998, as amended on September 30, 1999
(the "Operating Agreement"), the Company has the right at any time to purchase
Louisville's remaining interest in the LLC (the "Purchase Option"). The
Operating Agreement provides that the purchase price for Louisville's interest
is equal to the sum of (a) Louisville's total capital contributions to the LLC
($3,061,000), plus (b) any accrued but unpaid preferred return on such capital
contributions, plus (c) the residual value of the remaining interest (the amount
that would be distributed to Louisville if the LLC sold the Hotel for its fair
market value and distributed the proceeds to the members pursuant to the
Operating Agreement) (the "Option Price"). However, the Purchase Option is only
exercisable in connection with concurrent payment in full of all remaining
amounts due under the Notes. Under the terms of the Operating Agreement, the
Company is required, no later than September 30, 2002, to purchase Louisville's
remaining interest in the LLC for the Option Price. Based on the estimated value
of the Hotel as of March 31, 2001, the estimated Option Price is approximately
$3,061,000. The Company's obligation to purchase the remaining LLC `s interest
is secured by the Company's interest in the LLC, the Longwood, Florida property
and the Phoenix, Arizona property.
Unless current market conditions change or the Company is able to obtain an
additional source of funds (whether through operations, financing or otherwise)
the Company currently does not have sufficient liquidity to acquire Louisville
LP's interest in the LLC for the Option Price and to pay off the Notes in
September 30, 2002. Under the terms of the Operating Agreement, the failure of
the Company to acquire Louisville LP's interest by September 30, 2002 could
result in the Company forfeiting its interests in the LLC, the Longwood, Florida
property and the Phoenix, Arizona property. As a result, management is currently
evaluating all of its options with respect to the Louisville Hotel, including
its potential sale prior to September 30, 2002.
Associates is a licensee under a franchise agreement with Holiday Inn (the
"Franchise Agreement"). The Company has guaranteed Associates obligations under
the Franchise Agreement. In the event that the Franchise Agreement is terminated
as a result of a breach of the Franchise Agreement by Associates, Associates may
be subject to liquidated damages under the Franchise Agreement equal to
approximately 36 times the monthly franchise fees payable pursuant to the
Franchise Agreement. The current monthly franchise fees are approximately
$41,000.
In conjunction with the Franchise Agreement, the Hotel is subject to a
Property Improvement Plan ("the Plan"). Under the Plan, the Hotel is required to
make certain improvements by December 31, 2002, with certain interim milestones.
The Company
31
estimates that the cost of these improvements is approximately $1,858,000. As of
March 31, 2001, Associates has spent approximately $330,000 on improvements and
has approximately $348,000 in escrow to spend on improvements. The Company has
not determined whether Associates will be able to fund the remainder of the
Plan. If the Hotel is unable to fund the remainder of the Plan, the Company may
be required to complete the Plan pursuant to the Company's guaranty of the
Franchise Agreement.
Vacated Office Space-
In January 2001, the Company changed the location of its principle
executive offices. The new space is being leased on a month-to-month basis for
$1,850 per month. In March 2001 the Company signed a sublease agreement
("Sublease") on the space previously used for its executive offices. The
Sublease is for a term of fourteen months and commenced on April 1, 2001. The
Company will receive $8,738 per month for thirteen months. The Company currently
pays $13,107 per month for the existing lease, which will expire in May 2002.
The Company recognized expense for the vacated space of approximately $107,000
during the fiscal year ended March 31, 2001. The Company has also recorded a
lease commitment liability of approximately $94,000 as of March 31, 2001.
4. Long-Term Debt
In June 1995, the Company entered into a loan with a commercial lender to
refinance the Ramada Inn in Longwood, Florida. The loan proceeds were
$2,800,000, and the hotel served as collateral for the loan. The loan was for a
term of 20 years with an amortization period of 25 years, at a fixed interest
rate of 10.35%. Principal and interest payments were approximately $26,000 per
month beginning August 1, 1995. In addition, the Company was required to make a
repair escrow payment comprised of 4% of estimated revenues, as well as real
estate tax and insurance escrow payments. The total amount for these items was a
payment of approximately $22,000 per month and could be adjusted annually. The
escrow funds were used as tax, insurance and repair needs arise. Also,
commitment fees and loan costs of approximately $159,000 were deferred and were
being amortized over 20 years. These costs were expensed as part of the cost of
sale when the Longwood property was sold and the loan transferred.
The approximate average amount of borrowings on the term loan during the
fiscal year ended March 31, 2001 was $2,657,000. The maximum amount of
borrowings outstanding under this loan during that period was $2,657,000. This
loan was transferred upon the sale of the property in May 2000, and is no longer
an obligation of the Company. See Note 10.
On September 30, 1999, the Company entered into three promissory notes in
order to purchase additional equity in the LLC (see Note 3). A promissory note
for $1,333,000 is secured by the Company's ownership interest in the LLC. The
two other promissory notes are for $300,000 each, with one secured by the
Company's Phoenix, Arizona land and the other secured by the Company's Longwood,
Florida land. The total carrying value of the assets pledged as collateral is
approximately $620,000 as of March
32
31, 2001. The Notes are cross-defaulted, bear interest at 13%, mature on
September 30, 2002 and are non-recourse to the Company. Interest payments are
$20,941 per month beginning in November 1999. Interest expense was $251,000 and
$126,000, respectively, for the fiscal years ended March 31, 2001 and 2000. See
also Notes 3 and 8.
The combined approximately average amount of borrowings on the Notes during
the year ended March 31, 2001 was $1,933,000. The combined maximum amount of
borrowings outstanding under these notes was $1,933,000, and the balance of the
notes at March 31, 2001 was $1,933,000. The carrying value of the notes
approximate their fair value at March 31, 2001.
Maturities of long-term debt as of March 31, 2001 during the Company's next
five fiscal years are as follows: 2002 -- $-0-; 2003 -- $1,933,000; and none
thereafter.
5. Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes," that requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
The income tax provision is as follows:
33
(000's omitted)
For the
Fiscal Year For the Seven For the Fiscal
Ended Months Ended Year Ended
------------------------------------------------------------------------
March 31, March 31, March 31, August 31, August 31,
2001 2000 1999 1999 1998
(Unaudited)
------------------------------------------------------------------------
Current:
Federal $ 70 $ -- $ -- $ -- $ --
State -- -- -- -- --
------------------------------------------------------------------------
Total current 70 -- -- -- --
Deferred:
Federal -- -- -- -- --
State -- -- -- -- --
------------------------------------------------------------------------
Total deferred -- -- -- -- --
------------------------------------------------------------------------
Total $ 70 $ -- $ -- $ -- $ --
========================================================================
A reconciliation of the provision for income taxes to the federal statutory
rate is as follows:
(000's omitted)
For the
Fiscal Year For the Seven For the Fiscal
Ended Months Ended Year Ended
------------------------------------------------------------------
March 31, March 31, March 31, August 31, August 31,
2001 2000 1999 1999 1998
(Unaudited)
------------------------------------------------------------------
Tax at statutory rate $ 10 $ (617) $ (202) $ (404) $ (194)
State taxes, net of
federal benefit 1 (66) (21) (43) --
Permanent items 2 2 2 36 17
Valuation reserve (13) 646 221 1,101 186
Other 70 35 -- (690) (9)
------------------------------------------------------------------
$ 70 $ -- $ -- $ -- $ --
==================================================================
34
Deferred tax assets (liabilities) are composed of the following at March 31,
2001 and 2000, respectively:
(000's omitted)
March 31, 2001 March 31, 2000
-------------- --------------
Allowance for Possible
Losses and writedowns - Impairments $ 2,580 $ 1,700
Excess of Book over Tax
Depreciation 108 80
Other 329 425
Tax Loss Carryforwards 5,264 6,092
------------- -------------
Gross Deferred Tax
Assets 8,281 8,297
------------- -------------
Excess of Book over Tax
Basis, Income from
Partnership (114) (230)
Loan Amortization (41) (44)
------------- -------------
Gross Deferred Tax
Liabilities (155) (274)
------------- -------------
Deferred Tax Assets
Valuation Allowance (8,126) (8,023)
------------- -------------
$ 0 $ 0
============= =============
For financial reporting purposes, a valuation allowance has been recognized
at March 31, 2001 and 2000 to reduce the net deferred income tax assets to zero.
The net change in the valuation allowance for deferred tax assets in the fiscal
year ended March 31, 2001 was an increase of $103,000. This change resulted
primarily from an increase in the Company's deferred tax assets relating to the
writedown of the investment in the LLC and from the utilization of net operating
loss carrforwards that had previously been reserved for.
On March 31, 2001, the Company has federal net operating loss carryforwards
for income tax purposes of approximately $13,521,000, that will begin to expire
in 2005. In January 2000, the Company had an ownership change as defined in
Section 382 of the Internal Revenue Code. As such, the net operating loss
available to offset future income is limited. The amount of net operating loss
available in any year may increase if certain assets are sold.
6. Shareholders' Investment
Common and Preferred Stock -
There are currently 5,000,000 shares of common stock authorized, of which
2,513,480 are outstanding, of which approximately 66% is owned by Fountainhead.
In
35
addition, Fountainhead owns 450,000 shares of convertible preferred stock such
that Fountainhead has beneficial ownership of approximately 78% of the Company.
There are currently 1,000,000 authorized shares of the Company's Series A
Convertible Preferred Stock and 450,000 shares issued and outstanding. The
preferred stock is redeemable by the Company at $8.00 per share and accrues
dividends at a rate of $0.40 per share annually for the first two years and at a
rate of $0.80 per share annually thereafter. Dividends are payable quarterly
commencing on November 1, 1994. Each share of the preferred stock is convertible
into three shares of the Company's common stock effective August 16, 1996 and is
subject to certain anti-dilution adjustments. As of March 31, 2001, no shares
have been converted. In the event of any liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, the holders of the shares of
preferred stock shall be entitled to receive $8.00 per share of preferred stock
plus all dividends not previously declared and unpaid thereon. As of March 31,
2001, there are $750,000 of dividends in arrears owed to Fountainhead. Preferred
dividends paid in fiscal years 1998 and 1999 have been charged against
paid-in-surplus since the Company has accumulated deficits.
Fountainhead Transaction -
On January 10, 2000, the Company entered into a Management Agreement with
Fountainhead to perform management services at Chateau Elan Winery and Resort,
one of Fountainhead's properties, for a period of five years beginning on March
24, 2000. In consideration of the Management Agreement, the Company issued to
Fountainhead 1,000,000 shares of common stock at a fair value of $2.00 per
share. The determined market value of the management contract was $2,000,000 at
the time of the transaction. This asset is being amortized over the life of the
contract. In connection with the issuance of the Fountainhead Shares, the number
of directors constituting the full Board of Directors of the Company was
increased from three to seven members, effective on February 3, 2000.
On January 11, 2000, one of the principal stockholders and President of the
Company, N. Russell Walden, sold 650,000 shares of the common stock to
Fountainhead, and a new President of the Company was elected. Another principal
shareholder, ADT, sold 450,000 shares of preferred stock of the Company to
Fountainhead. Through the issuance of the common stock pursuant to the
Management Agreement and the acquisitions of the Walden common stock and ADT
preferred stock, Fountainhead has obtained beneficial ownership of approximately
79% of the common stock. Fountainhead is engaged principally in the business of
owning and operating hotel, resort and other real estate properties.
36
Loss Per Share -
The following table sets forth the computation of basic and diluted loss
per share:
For the
Fiscal Year For the Seven For the Fiscal
Ended Months Ended Years Ended
----------- -------------------------------- -----------------------------
March 31,
March 31, March 31, 1999 Aug. 31, Aug. 31,
2001 2000 (Unaudited) 1999 1998
----------- ----------- ----------- ----------- -----------
Net loss $ (40,000) $(1,816,000) $ (593,000) $(1,283,000) $ (622,000)
Less preferred
dividends paid -- -- (90,000) (180,000) (360,000)
Less undeclared
preferred
dividends (360,000) (210,000) (120,000) (180,000) --
----------- ----------- ----------- ----------- -----------
Net loss applicable to
common shareholders
$ (400,000) $(2,026,000) $ (803,000) $(1,643,000) $ (982,000)
Weighted average
shares outstanding
- basic and diluted 2,513,480 1,898,000 1,513,000 1,513,000 1,526,000
=========== =========== =========== =========== ===========
Basic and diluted
loss per common share $ (0.16) $ (1.07) $ (0.53) $ (1.09) $ (0.64)
=========== =========== =========== =========== ===========
The effect of the Company's stock options and convertible securities was
excluded from the computations for the twelve months ended March 31, 2001, the
seven months ended March 31, 2000 and 1999 and for the two years ended August
31, 1999 and 1998, as they are antidilutive. Accordingly, for the periods
presented, diluted net loss per share is the same as basic net loss per share.
37
1993 Stock Option Plan -
On March 30, 1993, the Company granted options to purchase 378,000 shares
of common stock at a price of approximately $1.83 per share to its key employees
and one director under the Ridgewood Hotels, Inc. 1993 stock option plan (the
"Option Plan"). The exercise price equaled the fair market value at the date of
grant. The options vested over a four-year period in 25% increments. All options
expire ten year from the date of grant, unless earlier by reason of death,
disability, termination of employment, or for other reasons outlined in the
Option Plan.
On June 13, 2000, 25,000 additional grants were issued to a director at an
exercise price of $2.25, which was no less than the fair market value at the
date of the grant. These options vest immediately and expire five years after
the date of grant, unless earlier by reason of death, disability, termination of
employment, or for other reasons outlined in the Option Plan. None of these
options were exercised as of March 31, 2001.
On July 1, 2000, 258,500 additional grants were issued to key employees at
a price of $2.00 per share, which was no less than the fair market value at the
date of the grant. Certain employees' options vest over a four-year period in
25% increments while certain others vest over a four-year period with 10% the
first year, 25% the second year, 50% the third year and 100% the fourth year.
All options granted on July 1, 2000 expire ten years from the date of grant,
unless earlier by reason of death, disability, termination of employment, or for
other reasons outlined in the Option Plan. None of these options were exercised
as of March 31, 2001.
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," under which no compensation cost for stock options
is recognized for stock option awards granted with an exercise price at or above
fair market value. Had compensation expense for the Option Plan been determined
based upon fair values at the grant date for awards under the Option Plan in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss for the fiscal year ended March 31, 2001 would have decreased
to the pro forma amount indicated below:
2001
------
Net loss:
As reported $ (40)
Pro forma (158)
Basic and diluted loss
per common share:
As reported (0.16)
Pro forma (0.21)
The weighted average fair value of options granted estimated on the date of
grant using the Black-Scholes model was $1.48 for options granted in 2000. The
fair value of the options granted was based on the following assumptions:
volatility of 139
38
percent, dividend yield of 0 percent, risk free interest rate of 6.09 percent
for options granted on July 1, 2000 and 6.49 percent for options granted on June
13, 2000, and a forfeiture rate of 0 percent.
Warrants -
On December 16, 1996, 75,000 warrants were issued to a hotel acquisitions
consultant for the Company. Each warrant represents the right to purchase from
the Company one share of common stock at the exercise price of $3.50 per share.
The warrants may be exercised at any time within five years from the date of
issuance, but none have been exercised as of March 31, 2001.
Related Party Transactions-
In the Management Agreement, Fountainhead agreed to pay the Company a base
management fee equal to 2% of the gross revenues of the properties being
managed, plus an annual incentive management fee to be determined each year
based on the profitability of the properties being managed during that year.
The Management Agreement has a term of five years but is terminable upon
the transfer by Fountainhead of all or a material portion of the properties
covered by the Management Agreement. If the Management Agreement is terminated
upon such a transfer or upon the occurrence of an event of default by
Fountainhead, Fountainhead shall pay to the Company a portion of the projected
fees owed to the Company under the agreement, with adjustments based on the term
of the Management Agreement remaining. In such event, Fountainhead may elect to
surrender to the Company shares of common stock in lieu of a cash payment. As a
result of the Fountainhead transactions, the Company's President resigned, and
Henk H. Evers was appointed as President and Chief Operating Officer effective
January 11, 2000. At the Company's request, Fountainhead continues to pay the
President's salary as an advance to the Company. Effective September, 2000, the
President has assumed certain responsibilities previously handled by the general
manager of Chateau Elan Georgia. As a result, Chateau Elan Georgia has agreed to
assume $125,000 of the President's annual salary of $305,000. In addition, the
President has performed certain services for Fountainhead (in addition to the
services for which the Company received a development fee) and, in consideration
therefore, Fountainhead has agreed to assume $50,000 of the President's annual
salary while he continues to perform such services. For the fiscal year ended
March 31, 2001, the portion of the President's salary charged to Chateau Elan
and Fountainhead is $71,000 and $29,000, respectively. The Company has accrued
$296,000 in expenses relating to the advanced compensation including $75,000 for
the seven months ended March 31, 2000 and $221,000 for the fiscal year ended
March 31, 2001 (after taking into account the portions assumed by Chateau Elan
Georgia and Fountainhead). The Company reduced the advanced compensation
liability by $90,000 by netting accrued development fees owed to the Company by
Fountainhead for managing one of Fountainhead's properties in St. Andrews,
against this liability. After reducing the advanced compensation by $90,000,
there is $206,000 of accrued liability remaining at March 31, 2001.
As of March 31, 2001 the Company manages Chateau Elan Georgia ("Georgia")
and Chateau Elan Sebring ("Sebring"). Both of these hotels are Fountainhead
properties. St. Andrews opened on June 14, 2001. The Company has received $6,000
per month since January 2000 as a development fee while St. Andrews was under
construction. The Company anticipates receiving a management contract to manage
this property similar to the contracts for managing Georgia and Sebring. For the
year ended March 31, 2001 the Company earned management fees of approximately
$973,000 and $60,000 for Georgia and Sebring, respectively. The combined
management and development fees for these
39
Fountainhead hotels were approximately $1,123,000 and represented 44% of the
total management fee revenue for the fiscal year ended March 31, 2001.
In the normal course of its business of managing hotels, the Company may
incur various expenses on behalf of Fountainhead or its subsidiaries that the
Company pays and is reimbursed by Fountainhead for these expenditures. As of
March 31, 2001 and 2000, Fountainhead owed the Company approximately $402,000
and $62,000, respectively, for such unpaid management fees and expenses, which
represents 50% of the Company's total operating receivables.
For the year ending March 31, 2001, the Company was charged approximately
$40,000 of salary related to the Human Resources Director of Georgia. The
Company does not have a full-time Human Resources Director and utilizes
Georgia's part-time. Georgia deducts the salary from the monthly management fees
owed to the Company.
The Company leases its office space for $1,850 per month from Nanco Co.,
which is owned by one of the Company's directors. The lease terms are
month-to-month and at market rates for comparable space.
7. Supplemental Retirement and Death Benefit Plan
The Company implemented a non-qualified Supplemental Retirement and Death
Benefit Plan with an effective date of January 1, 1987. The Plan supplements
other retirement plans and also provides pre-retirement death benefits to
participants' beneficiaries.
The net periodic pension cost includes the following components:
40
August 31, 1999 August 31, 1998
-------------- ---------------
Service cost for the period $ 39,256 $ 34,628
Interest cost on projected benefit obligation 52,014 46,170
Net amortization of transition liability 11,026 11,026
Recognized net actuarial gain (28,848) (39,938)
------------- -------------
Net periodic pension cost $ 73,448 $ 51,886
============= =============
On January 11, 2000, the Plan's only participant waived all of his rights
under or benefits accrued pursuant to the Plan, except that he shall have the
right to receive $55,000 per year for 15 years beginning at the age of 65. The
gain from the decreased benefit obligation is approximately $374,000 and is
being amortized over the remaining period of this obligation. The Company has
recorded a total pension liability of approximately $894,000 as of March 31,
2001.
Concurrent with the implementation of the Supplemental Retirement and Death
Benefit Plan, the Company purchased key person life insurance contracts on the
life of the Plan participant. The policies are owned by and payable to the
Company and are "increasing whole life" insurance. The Company pays level annual
premiums, may borrow against cash values earned, and pays interest annually on
any loans that may be cumulatively outstanding. Since the Plan's benefits were
waived as described above, the Company chose to cancel the policies and received
approximately $7,000 during the seven months ended March 31, 2000.
41
8. Investments in Unconsolidated Hotel Entities
RW Hotel Partners, L.P.
On August 16, 1995, RW Hotel Partners, L.P. was organized as a limited
partnership (the "Partnership") under the laws of the State of Delaware.
Concurrently, the Company formed Ridgewood Georgia, Inc., a Georgia corporation
("Ridgewood Georgia") that became the sole general partner in the Partnership
with RW Hotel Investments Associates, L.L.C. ("Investor") as the limited
partner. Ridgewood Georgia has a 1% base distribution percentage versus 99% for
the Investor. However, distribution percentages do vary depending on certain
defined preferences and priorities pursuant to the Partnership Agreement
("Agreement"), which are discussed below. The Partnership was originally formed
to acquire a hotel property in Louisville, Kentucky, but subsequently purchased
five additional hotels. The Partnership purchased the hotel in Louisville,
Kentucky for approximately $16,000,000. In December 1995 and January 1996, the
Partnership purchased four hotel properties in Georgia for approximately
$15,000,000 and a hotel in South Carolina for $4,000,000, respectively. Three of
the Georgia hotels were sold at a loss in March 1998, and the hotel in
Louisville was transferred to a new entity in June 1998 in conjunction with
refinancing that hotel (see "Louisville Hotel Associates LLC" below). The hotel
in Orangeburg, South Carolina was sold at a loss in November 1998. In November
1999, the remaining hotel in Thomasville, Georgia was sold at a loss. The
Partnership will be dissolved, and the Company will neither receive cash nor be
required to pay out cash related to the Partnership.
Total management fees related to these hotels for the seven months ended
March 31, 2000 were $10,000 and for the years ended August 31, 1999 and 1998
were approximately $68,000 and $233,000, respectively.
In connection with the sale of three of its six hotels in March 1998, the
Company signed a management agreement with the new owner of the three hotels
wherein it will receive a management fee equal to 3% of revenues plus 15% of the
net operating income plus 5% of any profit realized upon the sale of the hotels.
In connection with the management agreement, the Company received management
fees totaling approximately $202,000 for the year ended March 31, 2001, $107,000
for the seven months ended March 31, 2000 and $191,000 and $114,000 for the
years ended August 31, 1999 and 1998, respectively.
Houston Hotel, LLC
On December 9, 1997, Houston Hotel, LLC ("Houston Hotel") was organized as
a limited liability company under the laws of the State of Delaware. The purpose
that Houston Hotel was organized is limited solely to owning and managing the
Hampton Inn Galleria in Houston, Texas. The Company contributed approximately
$316,000 into Houston Hotel that represents a 10% interest, and the other 90%
interest is owned by Houston Hotel, Inc. (the "Manager"), a Nevada corporation.
42
Income or loss allocated to the Company and the Managing Member is based
upon the formula for distributing cash.
Distributable cash is defined as the cash from operations and capital
contributions determined by the Manager to be available for distribution. Cash
from operations is defined as the net cash realized from the operations of
Houston Hotel after payment of all cash expenditures of Houston Hotel including,
but not limited to, operating expenses, fees, payments of principal and interest
on indebtedness, capital improvements and replacements, and such reserves and
retentions as the Manager reasonably determines to be necessary.
Distributions of distributable cash shall be made as follows:
o First, 100% to the Manager until it has been distributed an amount
equal to its accrued but unpaid 13% preferred return.
o Second, 100% to the Company until the Company has been distributed an
amount equal to its accrued but unpaid 13% preferred return.
o Third, 80% to the Manager and 20% to the Company.
A Property Management Agreement exists between Houston Hotel, LLC and the
Company as property manager ("Property Manager") for the purpose of managing the
hotel. The Property Manager shall be entitled to the following property
management fees:
(1) 1.5% of the gross revenues from the hotel property.
(2) 1.5% of the gross revenues from the hotel property as an incentive fee
if 85% of the budgeted net operating income is met.
In connection with the management agreement, the Company received
management fees totaling approximately $78,000 for the year ended March 31,
2001, $56,000 for the seven months ended March 31, 2000 and $98,000 and $83,000
for the fiscal years ended August 31, 1999 and 1998, respectively.
On September 30, 1999 the Company transferred its 10% ownership in Houston
Hotel, LLC for additional equity in Louisville Hotel, LLC. See further
discussion below under "Louisville Hotel Associates, LLC."
Effective September 30, 1999 a new management agreement exists between the
Company and Houston Hotel, LLC. The Company ("Manager") shall be entitled to the
following property management fees:
(1) A Base Management Fee equal to 3% of gross revenues from the hotel
property.
43
(2) An Incentive Management Fee in an amount up to 1% of gross revenue per
period calculated as follows:
(a) 0.5% of gross revenue per year in which the actual net operating
income ("NOI") reaches 105% of the budgeted NOI for that period,
and
(b) an additional 0.5% of gross revenue per year in which the actual
NOI reaches 110% of the budgeted NOI for that period.
(c) The Incentive Management Fee will be accrued monthly and
disbursed quarterly. The quarterly disbursements for the
Incentive Management Fee will be reconciled quarterly and
annually.
In August 2000 the Company's management agreement was terminated.
Louisville Hotel (see also Note 3)
The Company has an ownership interest in a Holiday Inn hotel in Louisville,
Kentucky (the "Hotel"). The Hotel is owned by Associates. As of March 31, 2001,
the Company, through its wholly-owned subsidiaries, was the manager of and had a
minority ownership interest in Associates. In April, 2001, the Company, through
its wholly-owned subsidiaries, acquired 100% of the membership interests in
Associates. The membership interests are pledged as security for a $3,623,690
loan made by the LLC . The membership interests are also subject to an option
pursuant to which the LLC has the right to acquire the membership interests for
nominal value. Pursuant to the terms of the loan, all revenues (including
proceeds from sale or refinancing) of Associates (after payment of expenses
including a management fee to the Company) are required to be paid to the LLC
until principal and interest on the loan are paid in full. As a result, the LLC
has all of the economic interests in the Hotel.
On September 30, 1999, the Company purchased additional equity in the LLC.
The Company increased its ownership from 10% to 80%. The consideration issued to
acquire the increased ownership was $2,500,000, composed of the following:
Transfer of 10% ownership interest in Houston Hotel, LLC $443,000
Cash payment (1) 124,000
Promissory note to Louisville LP secured by the Company's
ownership interest in the LLC (2) 1,333,000
Promissory note to Louisville LP secured by the Company's
Phoenix, Arizona land (2) 300,000
Promissory note to Louisville LP secured by one parcel of
the Company's Longwood, Florida land (2) 300,000
-------------
Total additional equity in the LLC $2,500,000
=============
44
(1) The cash to make this payment was obtained from the LLC in connection
with a modification of the management contract of the Hotel. This
amount represents the unamortized portion of the original $200,000
participation fee paid to the LLC to acquire the management contract
of the Hotel.
(2) The Notes are cross-defaulted. The Notes bear interest at 13% and
mature on September 30, 2002. See Notes 3 and 4.
In accordance with EITF Issue M:96-16 "Investor's accounting for an
investor when the investor has a majority of the voting interest but the
minority shareholder or shareholders have certain approval or veto rights", the
LLC is not consolidated in the accompanying financial statements as the minority
member has kept substantial participation rights in this entity.
Income or loss allocated by the LLC to the Company is based upon the
formula for distributing cash.
Distributable cash is defined as the net cash realized from operations but
after payment of management fees, principal and interest, capital improvements
and other such retentions as the managing member determines to be necessary.
Distributions of distributable cash from the LLC shall be made as follows:
o First, to the Company in an amount equal to the cumulative interest
paid on the acquisition loans of $1,333,000, $300,000 and $300,000.
The Company has been using these funds to pay Louisville LP.
o Second, a 13% preferred return to Louisville LP on their original
$3,061,000 investment.
o Third, a 13% preferred return to the Company on its capital
contribution of $1,207,000.
o Fourth, 80% to the Company and 20% to Louisville LP.
Cash from a sale or refinancing would be distributed as follows:
o First, to the Company in an amount equal to the cumulative interest
paid on the acquisition loans of $1,333,000, $300,000 and $300,000.
45
o Second, to the Company in an amount equal to the acquisition loans of
$1,333,000, $300,000 and $300,000.
o Third, to Louisville LP until it has received aggregate distributions
in an amount equal to its 13% preferred return.
o Fourth, to Louisville LP until its net capital contribution is reduced
to zero.
o Fifth, to the Company until it has received an amount equal to its 13%
preferred return.
o Sixth, to the Company until its net capital contribution is reduced to
zero.
o Thereafter, 10% to Louisville LP and 90% to the Company. If a sale or
refinancing occurs after September 30, 2000 but before September 30,
2001, then the distribution would change to 15% and 85%, respectively.
In March 2001 and 2000, the Company recognized writedowns of $2,000,000 and
$1,200,000, respectively, on its investment in the LLC. The March 2000 writedown
was due to the anticipated shortfall of the Company's return of equity as a
result of the decreased operating performance of the Hotel. In March 2001, in
light of the deterioration of market conditions affecting the hotel industry
during the fourth quarter and subsequent to year-end and due to a further
decrease in the operating performance of the Hotel, management of the Company
concluded that their economic ownership interest had been totally impaired. The
carrying value of the investment in the LLC on the Company's books is $0 as of
March 31, 2001.
In 1998, the Company paid an additional $200,000 to the LLC as a fee to
acquire the management contract for the Hotel. This amount was included in other
assets. The Company was amortizing the fee $70,000 per year for the first two
years and $20,000 per year for the next three years.
With respect to the sum of $100,000, in the event that the management
contract is terminated by the LLC with or without cause and not pursuant to a
third party sale prior to June 5, 2000, the LLC will pay to the Company the sum
of $4,166.67 times the number of months prior to June 5, 2000 that the
management contract is terminated.
With respect to the second sum of $100,000, in the event that the
management contract is terminated by the LLC prior to June 5, 2003, the LLC will
pay to the Company the sum of $1,666.67 times the number of months prior to June
5, 2003 that the management contract is terminated.
In connection with the management agreement, the Company received
management fees totaling approximately $258,000 for the year ended March 31,
2001, $153,000 for the seven months ended
46
March 31, 2000, $_______ for the seven months ended March 31, 1999 (unaudited)
and $285,000 and $57,000 for the years ended August 31, 1999 and 1998,
respectively.
A summary of the investment in unconsolidated entities is as follows:
For the Year For the Seven For the Year For the Year
Ended Months Ended Ended Ended
March 31, 2001 March 31, 2000 Aug. 31, 1999 Aug. 31, 1998
-------------- -------------- ------------- -------------
Beginning net balance of
investment in unconsoli-
dated entities $ 2,000 $ 1,016 $ 832 $ 338
Capital contributions (1) -- 2,184 184 678
Writedown (2) ($2,000) (1,200) -- --
Equity in loss -- -- -- (98)
Distributions -- -- -- (86)
------- ------- ------- -------
Ending net balance of
investment in uncon-
solidated entities $ 0 $ 2,000 $ 1,016 $ 832
======= ======= ======= =======
(1) The capital contribution shown here of $2,184,000 plus the original
investment in Houston Hotel, LLC of $316,000 equals the total
additional investment in the LLC of $2,500,000.
(2) In March 2001 and 2000, the Company recognized writedowns of
$2,000,000 and $1,200,000, respectively, on its investment in the LLC.
This writedowns are due to the anticipated shortfall of the Company's
return of equity as a result of the decreased operating performance of
the Hotel.
The unaudited combined balance sheet and statement of operations of the
unconsolidated entities are as follows:
47
COMBINED UNCONSOLIDATED ENTITIES
CONDENSED BALANCE SHEET
UNAUDITED
(000's omitted)
March 31, March 31,
2001 2000
--------------------------
Current Assets $ 1,423 $ 732
Property and Equipment, net 20,067 20,811
Intangible Assets, net 209 577
-------------------------
Total Assets $ 21,699 $ 22,120
=========================
Current Liabilities 594 608
Long-Term Debt 21,415 21,684
-------------------------
Total Liabilities 22,009 22,292
Deficit, net (310) (172)
-------------------------
Total Liabilities and Deficit $ 21,699 $ 22,120
=========================
COMBINED UNCONSOLIDATED ENTITIES
CONDENSED STATEMENT OF OPERATIONS
UNAUDITED
(000's omitted)
For the
Fiscal Year For the Seven For the Fiscal
Ended Months Ended Year Ended
-----------------------------------------------------------------------
March 31, March 31, March 31, August 31, August 31,
2001 2000 1999 1999 1998
-----------------------------------------------------------------------
HOTEL OPERATIONS:
Revenues $ 8,598 $ 5,224 $ 8,120 $ 11,681 $ 17,057
Operating Expenses 6,074 3,777 5,498 10,146 12,781
-----------------------------------------------------------------------
Income from Hotel
Operations 2,524 1,447 2,622 1,535 4,276
-----------------------------------------------------------------------
Interest Expense 1,690 1,096 1,552 2,632 2,059
Depreciation/Amortization 972 819 838 1,562 1,943
Loss due to change to
liquidation basis of
accounting for RW
Hotel Partners, L.P. -- -- -- -- 2,828
-----------------------------------------------------------------------
NET LOSS $ (138) $ (468) $ 232 $ (2,659) $ (2,554)
=======================================================================
48
9. Employee Savings Plan
The Ridgewood Hotels Employee Savings Plan ("Savings Plan") is a savings
and salary deferral plan that is qualified under Sections 401(a) and 401(k) of
the Internal Revenue Code of 1986. The Savings Plan includes all employees of
the Company who have completed one year of service and have attained age
twenty-one.
Each participant in the Savings Plan may elect to reduce his or her
compensation by any percentage, not to exceed 15% of compensation when combined
with any Matching Basic or Discretionary Employer Contributions (below) made on
behalf of the participant, and have such amount contributed to his or her
account under the Savings Plan. Elective Employer Contributions are made prior
to the withholding of income taxes on such amounts.
Prior to January 1, 2000, the Savings Plan provided for an employer
matching contribution in an amount equal to 50% of the elective employer
contributions, provided that in no event shall such employer matching
contributions exceed 3% of the participant's compensation. In addition, the
Board of Directors of the Company was authorized to make discretionary
contributions to the Savings Plan out of the Company's current or accumulated
profits ("Discretionary Contributions"). Discretionary Contributions were
allocated among those participants who completed at least 1,000 hours of service
during the plan year and were employed by the Company on the last day of the
plan year.
Beginning on January 1, 2000, the Savings Plan now provides for an employer
matching contribution in an amount equal to 100% of the first 3% of pay that an
employee contributes to the Plan and an amount equal to 50% of the next 2% of
pay that an employee contributes to the Plan. In no event shall such employer
matching contributions exceed 4% of the participant's compensation. In addition,
the Board of Directors of the Company is authorized to make discretionary
contributions to the Savings Plan out of the Company's current or accumulated
profits. Discretionary Contributions are allocated among those participants who
complete at least 1,000 hours of service during the plan year and are employed
by the Company on the last day of the plan year.
Employees are subject to a seven-year graduated vesting schedule with
respect to Basic Employer Contributions, Matching Employer Contributions and
Discretionary Contributions.
Distributions from the Savings Plan will generally be available upon or
shortly following a participant's termination of employment with the Company,
with additional rights with respect to Voluntary Contributions.
Expense for the Employee Savings Plan was approximately $21,000 for the
fiscal year ended March 31, 2001 and $17,000, respectively, for the seven months
ended March 31, 2000 and March 31, 1999 (unaudited). For the fiscal years ending
August
49
31, 1999 and 1998, expense for the Employee Savings Plan was approximately
$18,000 each year.
10. Sale of Operating Property
On May 31, 2000, the Company sold its hotel in Longwood, Florida for
$5,350,000. Approximately $3,500,000 of the sales proceeds were used to settle
the mortgage and defeasance penalty on the hotel. The Company recognized
approximately $2,856,000 in profit on the sale before tax. In conjunction with
the transaction, the Company received a $250,000 note from the purchaser. The
note was paid in full in June 2001.
During the fiscal year ended March 31, 2001, the Company sold a parcel of
land in Phoenix, Arizona for net proceeds of approximately $381,000 and
recognized approximately a $12,000 gain on the sale. The Company also sold a
parcel of land in Fairfield, Ohio for approximately $23,000 and recognized
approximately an $8,000 gain on the sale.
11. Subsequent Event
Ridgewood Georgia has entered into an Assignment and Assumption Agreement
(the "Assignment Agreement") dated as of April, 2001 with RW Hotel Investment
Associates, LLC, ("Transferee") pursuant to which Transferee assigned to
Ridgewood Georgia, Transferee's 99% membership interest in RW Louisville Hotel
Investors, LLC, a Delaware limited liability company ("RW Hotel Investors"). As
a result, Ridgewood Georgia, which previously owned the remaining 1% membership
interest in RW Hotel Investors, owns 100% of the membership interests in RW
Hotel Investors (the "Membership Interests").
RW Hotel Investors, in turn, owns 99% of Associates, which owns the Hotel
in Hurstbourne, Kentucky. The remaining 1% interest in Associates is owned by RW
Hurstbourne Hotel, Inc., a Delaware corporation and a wholly-owned subsidiary of
the Company. Therefore, as a result of the Assignment Agreement, the Company
became the indirect owner of 100% of the Membership Interests in Associates.
The Assignment Agreement was entered into to provide the Company with
ownership of Associates in connection with Associates' application for a new
franchise agreement for its Holiday Inn franchise. The Assignment Agreement is
being reported herein because, as a result of the acquisition by RW Louisville
Hotel Associates, the Hotel will be included in the Company's consolidated
financial statements on a going forward basis.
50
Report of Independent Public Accountants
To Ridgewood Hotels, Inc.
We have audited the accompanying consolidated balance sheets of RIDGEWOOD
HOTELS, INC. (a Delaware corporation) AND SUBSIDIARIES as of March 31, 2001 and
2000 and the related consolidated statements of operations, shareholders'
investment and cash flows for the year ended March 31, 2001 and the seven months
ended March 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ridgewood Hotels,
Inc. and Subsidiaries as of March 31, 2001 and 2000 and the results of their
operations and their cash flows for the year ended March 31, 2001 and the seven
months ended March 31, 2000 in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 10, 2001
51
Report of Independent Accountants
To the Board of Directors and
Shareholders of Ridgewood Hotels, Inc.
In our opinion, the accompanying consolidated statements of operations and
cash flows present fairly, in all material respects, the results of operations
and of cash flows for each of the two years in the period ended August 31, 1999
of Ridgewood Hotels, Inc. and its subsidiaries (the "Company"), in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLC
PRICEWATERHOUSECOOPERS LLC
Atlanta, Georgia
November 17, 1999
52
Market Information
The Company's common stock is listed in the National Association of
Securities Dealers (NASDAQ) over-the-counter bulletin board service.
Transfer Agent
Computershare Investor Services, Dallas, Texas is the Company's stock
transfer agent. Computershare maintains the Company's shareholder records. To
change name, address or ownership of stock, to report lost certificates, or to
consolidate accounts, contact:
Computershare Investor Services
1601 Elm Street
Thanksgiving Tower, Suite 4340
Dallas, Texas 75201
General Counsel
Rogers & Hardin
2700 International Tower
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Independent Public Accountants
Arthur Andersen LLP
Suite 2500
133 Peachtree Street, N.E.
Atlanta, Georgia 30303-1816
53
Shareholder and General Inquiries
The Company is required to file an Annual Report on Form 10-K for its
fiscal year ended March 31, 2001 with the Securities and Exchange Commission.
Copies of this annual report may be obtained without charge upon written request
to:
Ridgewood Hotels, Inc.
Shareholder Relations
1106 Highway 124
Hoschton, Georgia 30548
(770) 867-9830
54