SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-14019
Ridgewood Hotels, Inc.
(Exact name of registrant as specified in its charter)
Delaware 58-1656330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1106 Highway 124
Hoschton, Georgia 30548
(Address of principal executive offices) (Zip Code)
(770) 867-9497
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Common stock, par value $.01 per share - 2,513,480 shares outstanding at
September 30, 2001.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND MARCH 31, 2001
ASSETS
($000's omitted, except share and per share data)
September 30, March 31,
2001 2001
------------------ ------------------
Assets: (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 1,566 $1,478
Receivables from affiliates (note 6) 201 402
Other operating receivables, net of allowance for doubtful
accounts of $166 and $262, respectively 360 407
Note receivable -- 250
Other current assets 1,027 109
------- ------
Total current assets 3,154 2,646
Real estate investments :
Real estate properties
Operating properties, net of accumulated
depreciation of $344 and $-0-, respectively 20,490 --
Land held for sale, net of allowance for possible losses of $3,155 1,400 1,400
Investment in unconsolidated hotel entity, net of writedown
of $3,200 (note 5) -- --
------- ------
Total real estate investments, net 21,890 1,400
Management contracts, net of accumulated amortization of $1,024 and
$728, respectively (note 6) 1,392 1,688
Other assets, net of accumulated depreciation of $241 and $95,
respectively 320 37
------- ------
$26,756 $5,771
======= ======
The accompanying notes are an integral part of these consolidated balance
sheets.
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND MARCH 31, 2001
LIABILITIES AND SHAREHOLDERS' INVESTMENT
($000's omitted, except share and per share data)
Liabilities: September 30, March 31,
2001 2001
------------------ ------------------
(Unaudited) (Audited)
Current liabilities:
Current maturities of long-term debt $ 2,247 $--
Accounts payable 708 296
Payables to affiliates (note 6) 163 206
Accrued salaries, bonuses and other compensation 141 101
Accrued legal and audit expense 148 207
Lease commitment for vacated office 73 94
Accrued interest and other liabilities 558 310
-------- --------
Total current liabilities 4,038 1,214
Accrued pension liability, including deferred curtailment gain 894 894
Other long-term liabilities -- 30
Long-term debt (note 7) 20,628 1,933
-------- --------
Total liabilities 25,560 4,071
-------- --------
Commitments and contingencies: (note 5)
Shareholders' investment: (note 4)
Series A convertible cumulative preferred
stock, $1 par value, 1,000,000 shares authorized, 450,000 shares
issued and outstanding
450 450
Common stock, $0.01 par value, 5,000,000 shares authorized,
2,513,480 shares issued and outstanding
25 25
Paid-in surplus
17,671 17,671
Accumulated deficit (16,950) (16,446)
-------- --------
Total shareholders' investment
1,196 1,700
-------- --------
$ 26,756 $ 5,771
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000
($000's omitted, except share and per share data)
For the Three For the Six
Months Ended Months Ended
------------------------------- --------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------------------------------------------------------------
Revenues:
Revenues from wholly-
owned hotel operations $ 1,883 $ 414 $ 4,162 $ 1,185
Revenues from
hotel management 293 666 679 1,337
Sales of real estate properties -- -- -- 5,525
Equity in net income
of unconsolidated entities 63 63 126 126
Interest income 2 23 8 24
Other 2 3 6 6
------------------------------- --------------------------------
2,243 1,169 4,981 8,203
Costs and expenses:
Expenses of wholly-
owned real estate properties 1,331 490 2,763 1,312
Costs of real estate sold -- -- -- 2,879
Depreciation and amortization 320 131 669 284
Interest expense 511 64 1,001 147
General, administrative
and other 491 694 1,052 1,319
------------------------------- --------------------------------
2,653 1,379 5,485 5,941
------------------------------- --------------------------------
Net (loss) income (410) (210) (504) 2,262
Preferred dividends (90) (90) (180) (180)
------------------------------- --------------------------------
Net (loss) income applicable to
common shareholders $ (500) $ (300) $ (684) $ 2,082
------------------------------- --------------------------------
(Loss) earnings per common share:
Basic $ (0.20) $ (0.12) $ (0.27) $ 0.83
Diluted $ (0.20) (0.12) $ (0.27) 0.54
The accompanying notes are an integral part of these consolidated statements.
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
($000's omitted)
For the Six
Months Ended
-------------------------------
Sept. 30, Sept. 30,
2001 2000
-------------------------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net (loss) profit $ (504) $ 2,262
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization 669 284
Increase in allowance for doubtful account -- 28
Gain from sale of real estate properties -- (2,646)
Decrease (Increase) in receivables from affiliates 201 (126)
(Decrease) increase in payables to affiliates (43) 180
Decrease (Increase) in other assets 197 (335)
(Decrease) increase in accounts payable and accrued liabilities (475) 142
-------------------------------
Total adjustments 549 (2,473)
-------------------------------
Net cash used in operating activities 45 (211)
-------------------------------
Cash flows from investing activities:
Acquisiton of business, net of cash acquired 128 --
Proceeds from sale of real estate 250 4,392
Additions to real estate properties (105) --
-------------------------------
Net cash provided by investing activities 273 4,392
-------------------------------
Cash flows from financing activities:
Repayments of debt (230) (2,657)
-------------------------------
Net (decrease) increase in cash and cash equivalents 88 1,524
Cash and cash equivalents at beginning of period 1,478 258
-------------------------------
Cash and cash equivalents at end of period $ 1,566 $ 1,782
===============================
Supplemental disclosure of cash flow information and non-cash activity:
Interest paid $ 1,023 $ 147
Income taxes paid -- 18
The accompanying notes are an integral part of these consolidated statements
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
(Unaudited)
1. GENERAL:
Ridgewood Hotels, Inc. (the "Company") is primarily engaged in the hotel
management business. The Company currently manages seven mid to luxury hotels
containing 997 rooms located in three states and Scotland, including the Chateau
Elan Winery & Resort in Braselton, Georgia ("Chateau Elan Georgia") and St.
Andrews, Scotland. The Company also has an ownership interest in one hotel and
owns undeveloped land that it holds for sale.
The Company's common stock is listed in the National Association of
Securities Dealers (NASDAQ) over-the-counter bulletin board service. On January
10, 2000, the Company entered into a management agreement ("Management
Agreement") with Fountainhead Development Corp., a Georgia corporation
("Fountainhead"), to perform management services at Chateau Elan 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"). The
determined market value of the management contract was $2,000,000 at the time of
the transaction. In connection with the issuance of the Fountainhead Shares, the
number of directors constituting the full Board of Directors of the Company was
increased from three to seven members, effective on February 3, 2000. See also
note 6.
On January 11, 2000, one of the principal stockholders and President of the
Company, N. Russell Walden ("Walden"), sold 650,000 shares of the common stock
to Fountainhead and a new President of the Company was elected. Another
principal shareholder, ADT Security Services, Inc. ("ADT"), sold 450,000 shares
of preferred stock of the Company to Fountainhead. Through the issuance of the
common stock pursuant to the Management Agreement and the acquisitions of the
Walden common stock and ADT preferred stock, Fountainhead obtained beneficial
ownership of approximately 79% of the common stock. Fountainhead is engaged
principally in the business of owning and operating hotel, resort, and other
real estate properties. See also note 6.
2. BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and
Exchange Commission. In the opinion of management, the consolidated financial
statements reflect all adjustments, consisting of normal recurring adjustments,
which are necessary to present fairly the financial position, results of
operations and changes in cash flows for the interim periods covered by this
report. Although certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to such rules and regulations, management believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's annual report for the
fiscal year ended March 31, 2001. The results of operations for the three and
six months ended September 30, 2001 are not necessarily indicative of the
results to be expected for the fiscal year ending March 31, 2002.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after the elimination of all inter-company
amounts. The Company has an ownership interest in a hotel being operated as a
Holiday Inn located in Louisville, 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. For the three and six months ended September 30, 2001, Associates is
consolidated for financial reporting purposes. See also Note 5.
The accompanying consolidated financial statements of the Company present
the historical cost basis amount of assets, liabilities and shareholders'
investment of the real estate business for the periods presented.
The 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 debtor to pay.
For the purpose of the Statement of Cash Flows, cash includes cash
equivalents which are highly liquid investments with maturity of three months or
less.
On March 28, 2000, the Company changed its fiscal year from August 31 to
March 31.
Recent Accounting Developments-
In June 2001, the Financial Accounting Standards Board approved Statements
of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141")
and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are
effective July 1, 2001 and January 1, 2002, respectively. SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Under
SFAS 142, amortization of goodwill, including goodwill recorded in past business
combinations, will discontinue upon adoption of this standard. All goodwill and
intangible assets will be tested for impairment in accordance with the
provisions of the Statement. SFAS 141 did not have a material impact on the
Company's financial statements when adopted. The Company is currently reviewing
the provisions of and SFAS 142 and assessing the impact of adoption, but does
not believe it will be material.
In August 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations"
(effective June 15, 2002) and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (effective December 15, 2001) were issued. SFAS
No. 143 requires that entities recognize the fair value of a liability for an
asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. The statement supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and among other factors, establishes criteria beyond that
previously specified in Statement 121 to determine when a long-lived asset is to
be considered as held for sale. The Company believes that the adoption of SFAS
No's 143 will not have a significant impact on the Company's financial
statements and the Company is currently evaluating the impact of SFAS 144.
3. INCOME TAXES:
The Company has net operating loss carry-forwards for both book and tax
purposes which may be used to offset future taxable income. However, due to the
change of control of the Company discussed in Note 1 above, there are
limitations on the amount of net operating loss carry-forwards that may be
utilized each year to offset taxable income.
The Company's income tax provision for the six months ended September 30,
2001 and 2000 is as follows:
For the Six
Months Ended
--------------------------
Sept. 30, Sept. 30,
2001 2000
--------------------------
Income Tax Provision $ -- $ 894,000
Utilization of Net Operating Loss
Carry-forwards -- (894,000)
----- ---------
Regular Income Tax Provision -- --
Alternative Minimum Income Tax
Provision -- 70
Deferred Income Tax Benefit
From AMT Tax Credit -- (70)
----- ---------
Net Income Tax Provision $ -- $ --
===== =========
4. SHAREHOLDERS' INVESTMENT
Earnings Per Share-
The following table sets forth the computation of basic and diluted
(loss) earnings per share:
For the Three For the Six
Months Ended Months Ended
--------------------------------- ---------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
--------------------------------- ---------------------------------
Net (loss) income $ (410,000) $ (210,000) $ (504,000) $ 2,262,000
Less undeclared preferred dividends (90,000) (90,000) (180,000) (180,000)
-------------------------- ---------------------------
Net (loss) income applicable to
common shareholders $ (500,000) $ (300,000) $ (684,000) $ 2,082,000
========================== ===========================
Weighted average shares outstanding
Basic 2,513,480 2,513,480 2,513,480 2,513,480
Diluted 2,513,480 2,513,480 2,513,480 3,863,000
Net (loss) earnings per share
Basic $ (0.20) $ (0.12) $ (0.27) $ 0.83
Diluted (0.20) (0.12) (0.27) 0.54
The effect of the Company's stock options and convertible securities was
excluded from the computations for the three and six months ended September 30,
2001 as it is antidilutive.
As of September 30, 2001 there are $930,000 of preferred stock dividends in
arrears and due to Fountainhead. The Company last declared preferred dividends
in February 1999, when dividends were declared out of paid-in surplus and
recorded against that account in accordance with applicable Delaware law.
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
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.
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 September 30, 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 September 30, 2001.
5. INVESTMENT IN LOUISVILLE HOTEL:
On May 13, 1998, Associates was organized as a limited liability company
under the laws of the State of Delaware. Associates was organized to own and
manage 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 $3,623,690 to
the Hotel (see Note 7) and also has an option to purchase Associates for a
nominal consideration. 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. ("Louisville") 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 September 30, 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's
interest in the LLC for the Option Price and to pay off the Notes on September
30, 2002. Under the terms of the Operating Agreement, the failure of the Company
to acquire Louisville'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 estimates that the cost of these improvements is approximately
$1,858,000. As of September 30, 2001, the Hotel has spent approximately $115,000
on improvements and has approximately $391,000 in escrow to spend on
improvements. The Company has not determined whether Associates will be able to
fund the remainder of the Plan. If Associates is unable to fund the remainder of
the Plan, the Company may be required to complete the Plan pursuant to the
Company's guaranty of the Franchise Agreement.
In March 2001 and 2000, the Company recognized writedowns of $2,000,000 and
$1,200,000, respectively, on its investment in the LLC. The March 2000 writedown
was due to the anticipated shortfall of the Company's return of equity as a
result of the decreased operating performance of the hotel. In March 2001, in
light of the deterioration of market conditions affecting the hotel industry
during the fourth quarter and subsequent to year-end and due to a further
decrease in the operating performance of the Hotel, management of the Company
concluded that their economic ownership interest had been totally impaired. The
carrying value of the investment in the LLC on the Company's books is $0 as of
September 30, 2001.
Ridgewood Georgia, Inc., a Georgia corporation ("Ridgewood Georgia") and a
wholly-owned subsidiary of the Company, entered into a certain 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 of 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 Company began consolidating Associates effective April 1, 2001. The
acquisition of Associates was accounted for as a purchase in accordance with APB
No. 16, and accordingly, the purchase price has been preliminarily allocated to
the net tangible and identifiable intangible assets acquired based on their
estimated fair values as of the acquisition date.
The following unaudited data summarize the pro forma results of operations
for the three and six months ended September 30, 2001 as if the acquisition had
occurred on the first fiscal day of such period. The unaudited pro forma
information has been prepared for comparative purposes only and does not purport
to represent what the results of operations would actually have been had the
transaction actually occurred on the date indicated or what the results of
operations may be in the future.
RW LOUISVILLE HOTEL ASSOCIATES, LLC
STATEMENT OF OPERATIONS
UNAUDITED
(000's omitted)
For the For the
Three Months Six Months
Ended Ended
September 30, September 30,
2001 2000 2001 2000
----------------------------------------------------
Revenues $ 2,243 $ 3,384 $ 4,981 $ 12,786
Operating Expenses 1,822 2,667 3,815 8,479
---------------------------------------------
Income From Operations 421 717 1,166 4,307
---------------------------------------------
Interest Expense 511 517 1,001 1,059
Depreciation/Amortization 320 343 669 706
---------------------------------------------
Net (Loss) Income $ (410) $ (143) $ (504) $ 2,542
Preferred Dividends (90) (90) (180) (180)
---------------------------------------------
Net (Loss) Income Applicable to
Common Shareholders (500) (233) (684) 2,362
=============================================
(Loss) Earnings Per Common Share
Basic $ (0.20) $ (0.09) $ (0.27) $ 0.94
Diluted (0.20) (0.09) (0.27) 0.61
6. FOUNTAINHEAD TRANSACTIONS:
On January 10, 2000, the Company entered into the Management Agreement with
Fountainhead (see note 1), pursuant to which Fountainhead retained the Company
to perform management services at Chateau Elan Georgia, one of Fountainhead's
properties, for a period of five years beginning on March 24, 2000. In
consideration of Fountainhead's agreement to enter into the Management Agreement
and a payment of $10,000 by Fountainhead to the Company, the Company issued to
Fountainhead 1,000,000 shares of common stock at a fair market value of $2.00
per share. In the Management Agreement, Fountainhead agreed to pay the Company a
base management fee equal to 2% of the gross revenues of the properties being
managed, plus an annual incentive management fee to be determined each year at
the end of Chateau Elan
Georgia's fiscal year, March 31. The annual incentive fee is based on the
profitability of the properties being managed during that year.
The Management Agreement has a term of five years but is terminable upon
the transfer by Fountainhead of all or a material portion of the properties
covered by the Management Agreement. If the Management Agreement is terminated
upon such a transfer or upon the occurrence of an event of default by
Fountainhead, Fountainhead 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 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
a portion of Mr. Evers' annual salary. 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 a portion of Mr. Evers annual salary while he
continues to perform such services. The Company has incurred and accrued
approximately $163,000 in expenses relating to the advanced compensation for the
six months ended September 30, 2001 (after taking into account the portions
assumed by Chateau Elan Georgia and Fountainhead).
As of September 30, 2001, the Company manages Chateau Elan Georgia and
Chateau Elan Sebring ("Sebring"). Both of these hotels are Fountainhead's
properties. Fountainhead opened a hotel in St. Andrews, Scotland ("St. Andrews")
on June 14, 2001. The Company received $6,000 per month from Fountainhead since
January 2000 through May 2001 as a development fee while St. Andrews was under
construction. The Company has been managing St. Andrews since its opening and
has been negotiating the terms of the contract with Fountainhead. For the three
months ended September 30, 2001 the Company earned management fees of
approximately $140,000, $21,000 and $36,000, for Chateau Elan Georgia, Sebring
and St. Andrews, respectively. For the six months ended September 30, 2001 the
Company earned management fees of approximately $323,000, $36,000 and $53,000,
for Chateau Elan Georgia, Sebring and St. Andrews, respectively. The combined
management and development fees for these Fountainhead hotels were approximately
$197,000 and $412,000, and represented 67% and 61% of the total management fee
revenue for the three and six months ended September 30, 2001, respectively.
In the normal course of its business of managing hotels, the Company may
incur various expenses on behalf of Fountainhead or its subsidiaries that the
Company pays and is reimbursed by Fountainhead for these expenditures. As of
September 30, 2001, Fountainhead owed the Company approximately $201,000 for
unpaid management fees
and expenses, which represents 36% of the Company's total receivables as of
September 30, 2001.
For the three and six months ended September 30, 2001, the Company was
charged approximately $10,000 and $20,000 of salary related to the Human
Resources Director of Chateau Elan Georgia, respectively. The Company does not
have a full-time Human Resources Director and utilizes Chateau Elan Georgia's
Human Resource Director part-time. Chateau Elan Georgia deducts this charge from
the monthly management fees owed to the Company.
7. LONG-TERM DEBT:
On September 30, 1999, the Company entered into three promissory notes in
order to purchase additional equity in the LLC. 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 September 30, 2001. The three promissory 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.
On May 21, 1998, Associates entered into a loan with a commercial lender to
purchase the Hotel in Louisville, Kentucky. The loan proceeds were $18,500,000,
and the Hotel serves as collateral for the loan. The loan is for a term of 25
years at a fixed rate of 7.39%. Principal and interest payments are
approximately $135,000 per month beginning July 1, 1998. Per the loan agreement,
principal and interest payments may increase after July 1, 2008 based on certain
terms per the agreement. In addition, Associates is required to make insurance,
taxes and repair escrow payments each month. The total amount for these items is
a payment of approximately $45,000 per month and could be adjusted annually. The
escrow funds are used as tax, insurance and repair needs arise. The repair funds
are also being used to fund the Plan described in Note 5. As of September 30,
2001, the balance of the loan was $17,637,000. Interest expense for the three
and six months ended September 30, 2001 was approximately $339,000 and $666,000,
respectively.
On June 2, 1998, Associates, in conjunction with the purchase of the Hotel,
entered into a promissory note with LLC in the amount of $3,623,690 and the
promissory note is secured by the ownership interest in Associates. The loan is
for a term of ten years at a fixed rate of 13%. Principal and interest payments
are payable in monthly installments equal to the monthly net revenue of
Associates for each month. As of September 30, 2001, the balance of the
promissory note was approximately $3,305,000. Interest expense for the three and
six months ended September 30, 2001 was approximately $107,000 and $216,000,
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000
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 three
and six months ending September 30, 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 number of risks and
uncertainties that could cause actual results in the future to differ
significantly from results expressed or implied in any such forward-looking
statements. These risks and uncertainties include, but are not limited to,
uncertainties relating to economic and business conditions, governmental and
regulatory policies, and the competitive environment in which the Company
operates. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "may," "will," or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future
events or circumstances, including any underlying assumptions, are
forward-looking statements. Such statements are not guarantees of future
performance and are subject to the risks and uncertainties referred to above.
Therefore, the Company's actual results could differ materially and adversely
from those expressed in any forward-looking statements as a result of various
factors. The Company undertakes no obligation to revise or update publicly any
forward-looking statements for any reason. The information contained in this
document is not a complete description of the Company's business or the risks
associated with an investment in the Company's common stock. The Company urges
you to carefully review and consider the various disclosures made in this report
and in the Company's other reports filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS --
Revenues from hotel operations increased approximately $1,469,000, or 355%
and $2,977,000, or 251% for the three and six months ended September 30, 2001
compared to the three and six months ended September 30, 2000, respectively.
This increase was due to the consolidation of RW Louisville Hotel Associates,
LLC ("Associates") for the three and six months ended September 30, 2001.
Associates owns a hotel in Louisville, Kentucky (the "Hotel"). The Company has
no other wholly-owned hotel operations since it sold its hotel in Longwood,
Florida in May 2000 and discontinued its lease of a hotel in Lubbock, Texas. As
a result, the Hotel was the Company's only wholly-owned hotel operation as of
September 30, 2001 and during the six month period then ended. As a consequence
of the September 11, 2001 terrorist attacks, the Hotel experienced numerous
cancellations in September 2001, which resulted in a shortfall in revenue for
that month. Also, more than 10% of the Hotel's room reservations traditionally
come from airline companies. The Company is currently negotiating with the
airlines but anticipates that revenues from these clients will decrease
significantly in the foreseeable future. The Company anticipates that the
downturn in business as a result of these events and their effect on the travel
industry will continue to have a negative impact on the Hotel's revenues going
forward.
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.
Revenues from hotel management decreased approximately $373,000 or 56% and
$658,000 or 49% for the three and six months ended September 30,2001 compared to
the three and six months ended September 30, 2000, respectively. Revenues from
hotel management decreased as a result of both the termination of several
management contracts since September 30, 2000 and a decrease in revenues from
prior periods in hotels presently managed by the Company. The downturn in the
economy during 2001 reduced both corporate travel and meeting events, resulting
in lower hospitality revenues throughout the hotel sector. In addition to this
general downturn, the terrorist attacks of September 11th caused significant
cancellations at the hotels managed by the Company
in the month of September and continue to effect revenues thereafter. In
particular, the resort properties managed by the Company incurred significant
cancellations post-September 11th. The Company estimates that cancellations
alone resulted in a loss of $35,000 in management fee revenue for September,
2001. The Company anticipates that while the downturn in business may begin to
recover, the general economic slowdown coupled with the events of September 11th
will continue to have a negative impact on the Company's management fee revenues
resulting in lower management fee revenues this year as compared to last year.
In addition to the impact on monthly revenue, the reduction in business could
have an impact on management incentive fees that are based on the annual
performance of the Chateau Elan Georgia property. During this uncertain period,
the Company is focused on cost containment at its managed properties and its
corporate office.
As of September 30, 2001 the Company manages Chateau Elan Georgia and
Chateau Elan Sebring ("Sebring"). Both of these hotels are Fountainhead
Development Corporation's ("Fountainhead") properties. Fountainhead opened a
hotel in St. Andrews, Scotland ("St. Andrews") on June 14, 2001. The Company
received $6,000 per month from Fountainhead from January 2000 through May 2001
as a development fee while St. Andrews was under construction. The Company has
been managing St. Andrews since its opening and has been negotiating the terms
of the contract with Fountainhead. For the three months ended September 30, 2001
the Company earned management fees of approximately $140,000, $21,000 and
$36,000, for Chateau Elan Georgia, Sebring and St. Andrews, respectively. For
the six months ended September 30, 2001 the Company earned management fees of
approximately $323,000, $36,000 and $53,000, for Chateau Elan Georgia, Sebring
and St. Andrews, respectively. The combined management and development fees for
these Fountainhead hotels were approximately $197,000 and $412,000, and
represented 67% and 61% of the total management fee revenue for the three and
six months ended September 30, 2001, respectively.
In addition to commencement of managing St. Andrews, the Company entered
into one new management agreement during the six months ended September 30, 2001
to manage a 60 room Shoney's Inn in Lavonia, Georgia.
The Company's management agreements with respect to seven properties which
the Company derived approximately $120,000 of base management revenues during
the six months ending September 30, 2001 have been terminated as follows: (i) a
120 room hotel in Lakeland, Florida, (ii) a 400 room Ramada Inn in Atlanta,
Georgia, (iii) a 221 room Ramada Inn in Spartenburg, South Carolina and (iv) a
197 room Howard Johnson's in Atlanta, Georgia, (v) a 120 room Holiday Inn in
Atlanta, Georgia, (vi) a 132 room Holiday Inn in Gainesville, Georgia and (vii)
a 96 room Holiday Inn Express in Commerce, Georgia. Beginning in October 2001,
the Company will receive $11,000 per month through March 2002 as a termination
fee from the owner of the three Holiday Inn properties terminated above.
Equity in net income of unconsolidated entities for the three and six
months ended September 30, 2001 was received from Louisville Hotel, LLC ("LLC").
This equity is
offset, on a dollar for dollar basis, by interest payments on notes outstanding
with Louisville Hotel, LP, and is recorded as interest expense.
Expenses of wholly-owned real estate properties increased $841,000, or 172%
and $1,451,000, or 111% for the three and six months ended September 30, 2001
compared to the three and six months ended September 30, 2000, respectively. The
increase was due to the consolidation of the Hotel.
During the six months ending September 30, 2000 the Company had gains from
real estate sales of approximately $2,646,000. Approximately $2,634,000 of the
gain was due to the sale of the hotel in Longwood and $12,000 was due to the
sale of a parcel of land in Phoenix, Arizona. Gains or losses on sales are
dependent upon the specific assets sold in a particular period and the terms of
each sale. The Company had no gains from real estate sales during the six months
ended September 30, 2001.
Depreciation and amortization expense increased approximately $189,000, or
144% and $385,000, or 136% for the three and six months ended September 30, 2001
compared to the three and six months ended September 30, 2000, respectively. The
increases were due to the consolidation of the Hotel.
Interest expense increased approximately $447,000, or 698% and $854,000, or
581% for the three and six months ended September 30, 2001 compared to the three
and six months ended September 30, 2000, respectively. The increase was due to
the consolidation of the Hotel.
General, administration and other expenses decreased approximately
$204,000, or 29% and $267,000, or 20% for the three and six months ended
September 30, 2001 compared to the three and six months ended September 30,
2000, respectively. The decrease is due to the Company's continuing overall
efforts to decrease overhead.
LIQUIDITY AND CAPITAL RESOURCES -
Fountainhead Transactions-
On January 10, 2000, the Company entered into a management agreement (the
"Management Agreement") with Fountainhead, pursuant to which Fountainhead
retained the Company to perform management services at Chateau Elan Winery and
Resort, one of Fountainhead's properties, for a period of five years. In
consideration of Fountainhead's agreement to enter into the Management Agreement
and a payment of $10,000 by Fountainhead to the Company, the Company issued to
Fountainhead 1,000,000 shares of common stock at a fair market value of $2.00
per share. In the Management Agreement, Fountainhead agreed to pay the Company a
base management fee equal to 2% of the gross revenues of the properties being
managed, plus an annual incentive management fee to be determined each year
based on the profitability of the properties being managed during that year.
The Management Agreement has a term of five years but is terminable upon
the transfer by Fountainhead of all or a material portion of the properties
covered by the Management Agreement. If the Management Agreement is terminated
upon such a transfer or upon the occurrence of an event of default by
Fountainhead, Fountainhead shall pay to the Company a portion of the projected
fees owed to the Company under the agreement, with adjustments based on the term
of the Management Agreement remaining. In such event, Fountainhead may elect to
surrender to the Company shares of common stock in lieu of a cash payment. The
Company's new management continues to seek new hotel management opportunities,
including possible opportunities to manage other properties being developed by
Fountainhead. In addition to Chateau Elan Georgia, the Company manages Sebring
and St. Andrews. The Company intends to seek management opportunities with other
Fountainhead properties; however, Fountainhead has no obligation to enter into
further management relationships with the Company, and there can be no assurance
that the Company will manage any Fountainhead properties in the future.
The Company has recorded a total of approximately $163,000 payable to
affiliates for the salary of Mr. Henk Evers, President and Chief Operating
Officer, which continues to be advanced by Fountainhead. All of this payable was
incurred during the six months ended September 30, 2001. Balances receivable
from affiliates are approximately $201,000 for Fountainhead's Chateau Elan
properties in Georgia, Florida, and St. Andrews, Scotland and represent unpaid
management fees.
Louisville Hotel-
The Company has an ownership interest in a Holiday Inn hotel in
Hurstbourne, Kentucky. The Hotel is owned by 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 Louisville Hotel, LLC (the "LLC"). The membership
interests are also subject to an option pursuant to which 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 the LLC
(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. 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. As a
result of the transaction, the Company has an 80% economic interest in the LLC.
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 LP'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 September 30,
2001, the estimated Option Price is approximately $3,061,000. The Company's
obligation to purchase the remaining interest in the LLC is secured by the
Company's interest in the LLC, the Longwood, Florida property and the Phoenix,
Arizona property.
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 estimates that the cost of these improvements is approximately
$1,858,000. As of September 30, 2001, the Hotel has spent approximately $115,000
on improvements and has approximately $391,000 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.
Based on the Company's assessment of market conditions effecting the hotel
industry and the operating performance of the Hotel, the Company has written off
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, 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 Hotel, including its potential sale prior to September 30,
2002.
Other -
The Company has approximately $1,500,000 of available cash as of November
10, 2001.
In October 2001, the Company sold its remaining land in Athens, Georgia for
approximately $127,000. The Company will recognize a gain on the sale of the
property of approximately $92,000. During the same month, the Company was
terminated from managing a 247 room Ramada Inn in Atlanta, Georgia. The Company
had received approximately $47,000 of management fees from the hotel during the
six months ended September 30, 2001.
The Company currently manages four hotels which are not owned by
Fountainhead. Under the terms of franchise agreements, the Company is required
to comply with standards established by franchisers, including property
renovations and upgrades. The success of the Company's operations continues to
be dependent upon such unpredictable factors as the general and local economic
conditions to which the real estate and hotel industry is particularly
sensitive: labor, environmental issues, weather conditions, consumer spending or
general business conditions and the availability of satisfactory financing.
The Company has reserved an allowance for doubtful accounts of
approximately $166,000, which relates to several doubtful accounts related to
the loss of several management contracts in which the Company was still owed
management fees and other expenses normally reimbursed by the hotels under
management. While the Company believes these accounts will not be collected,
collection efforts are still being made.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
None
B. Reports on Form 8-K:
During the quarter ended September 30, 2001, the Company filed with the
Securities and Exchange Commission the following Current Report on Form 8-K or
Form 8-K/A.
(i) On July 2, 2001, the Company filed a Current Report on Form 8-K reporting
under Item 2 of such report the Company's acquisition of Membership
interests in RW Louisville Hotel Associates, L.L.C. and additional
information concerning the Company's previous sale of its hotel property in
Longwood, Florida (the "July 2001 8-K"); and
(ii) On October 18, 2001, the Company filed a Current Report on Form 8-K
amending Item 7 of the July 2001 8-K to set forth the (i) audited financial
statements of RW Louisville Hotel Associates, L.L.C. for the years ended
December 31, 2000 and 1999, together with notes thereto; and (ii) unaudited
pro forma consolidated financial statements of the Company as of March 31,
2000, together with the notes thereto,
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIDGEWOOD HOTELS, INC.
By: /s/ Henk H. Evers
Henk H. Evers
President
By: /s/ Peter M. Conboy
Peter M. Conboy
Director of Finance &
Accounting
Date: November 14, 2001