SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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
December 31, 2001.
1
RIDGEWOOD HOTELS, INC.
Index to Quarterly Report on Form 10-Q
For the Quarter Ended December 31, 2001
PART I - FINACIAL INFORMATION
Page
----
Item 1 Financial Statements
Consolidated Balance Sheets as of December 31, 2001
and March 31, 2001.............................................. 3
Consolidated Statements of Operations for the Three
and Nine Months Ended December 31, 2001 and 2000................ 5
Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2001 and 2000......................... 6
Notes to Consolidated Financial Statements...................... 7
Item 2 Managements' Discussion and Analysis of Financial
Condition and Results of Operations............................. 18
Item 3 Quantitative and Qualitative Disclosures About Market Risk......
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K................................ 24
Signatures ................................................................ 25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND MARCH 31, 2001
ASSETS
($000's omitted, except share and per share data)
December 31, March 31,
2001 2001
------------ ---------
(Unaudited) (Audited)
Assets:
Current assets:
Cash and cash equivalents $ 1,677 $1,478
Receivables from affiliates (note 6) 218 402
Other operating receivables, net of allowance for doubtful accounts
of $158 and $262, respectively 354 407
Note receivable -- 250
Other current assets 892 109
------- ------
Total current assets 3,141 2,646
Real estate investments :
Real estate properties
Operating properties, net of accumulated
depreciation of $513 and $-0-, respectively 20,361 --
Land held for sale, net of allowance for possible losses of $3,155 1,366 1,400
Investment in unconsolidated hotel entity, net of writedown
of $3,200 (note 5) -- --
------- ------
Total real estate investments, net 21,727 1,400
Management contracts, net of accumulated amortization of $708 and
$728, respectively (note 6) 1,292 1,688
Other assets, net of accumulated depreciation of $256 and $95,
respectively 304 37
------- ------
$26,464 $5,771
======= ======
The accompanying notes are an integral part of these consolidated balance
sheets.
3
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND MARCH 31, 2001
LIABILITIES AND SHAREHOLDERS' INVESTMENT
($000's omitted, except share and per share data)
December 31, March 31,
2001 2001
------------ ---------
(Unaudited) (Audited)
Liabilities:
Current liabilities:
Current maturities of long-term debt $ 2,598 $ --
Accounts payable 721 296
Payables to affiliates (note 6) 253 206
Accrued salaries, bonuses and other compensation 90 101
Accrued legal and audit expense 148 207
Lease commitment for vacated office 59 94
Accrued interest and other liabilities 552 310
-------- --------
Total current liabilities 4,421 1,214
Accrued pension liability, including deferred curtailment gain 894 894
Other long-term liabilities -- 30
Long-term debt (note 7) 20,196 1,933
-------- --------
Total liabilities 25,511 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 (17,193) (16,446)
-------- --------
Total shareholders' investment 953 1,700
-------- --------
$ 26,464 $ 5,771
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
4
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
DECEMBER 31, 2001 AND 2000
($000's omitted, except share and per share data)
For the Three For the Nine
Months Ended Months Ended
------------------------- --------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2001 2000 2000 2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Revenues:
Revenues from wholly-
owned hotel operations $1,805 $ 414 $ 5,966 $ 1,599
Revenues from
hotel management 325 530 1,004 1,867
Sales of real estate properties 127 -- 127 5,525
Equity in net income
of unconsolidated entities 63 63 188 189
Interest income 16 22 25 46
Other 5 10 12 16
------ ------ ------- ---------
2,341 1,039 7,322 9,242
Costs and expenses:
Expenses of wholly-
owned real estate properties 1,337 485 4,100 1,797
Costs of real estate sold 35 8 35 2,887
Lease commitment for vacated
office, net -- 106 -- 106
Depreciation and amortization 291 131 960 415
Interest expense 505 63 1,506 210
General, administrative
and other 416 823 1,468 2,142
------ ------ ------- ---------
2,584 1,616 8,069 7,557
------ ------ ------- ---------
Net (loss) income (243) (577) (747) 1,685
Preferred dividends (90) (90) (270) (270)
------ ------ ------- ---------
Net (loss) income applicable to
common shareholders $ (333) $ (667) $(1,017) $ 1,415
------ ------ ------- ---------
(Loss) earnings per common share:
Basic $(0.13) $(0.27) $ (0.40) $ 0.56
Diluted $(0.13) (0.27) $ (0.40) 0.37
The accompanying notes are an integral part of these consolidated statements.
5
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001 AND 2000
($000's omitted)
For the Nine
Months Ended
-------------------------
Dec. 31, Dec. 31,
2001 2000
----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net (loss) income $ (747) $ 1,685
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization 960 415
Increase in allowance for doubtful account -- 148
Gain from sale of real estate properties (92) (2,638)
Decrease (increase) in receivables from affiliates 180 (107)
Increase in payables to affiliates 47 270
Decrease (increase) in other assets 255 (218)
(Decrease) increase in accounts payable
and accrued liabilities (482) 308
------ -------
Total adjustments 868 (1,822)
------ -------
Net cash provided by (used in) operating activities 121 (137)
------ -------
Cash flows from investing activities:
Acquisition of business, net of cash acquired 128 --
Proceeds from sale of real estate 377 4,384
Additions to real estate properties (117) --
------ -------
Net cash provided by investing activities 388 4,384
------ -------
Cash flows from financing activities:
Repayments of debt (310) (2,657)
------ -------
Net increase in cash and cash equivalents 199 1,590
Cash and cash equivalents at beginning of period 1,478 258
------ -------
Cash and cash equivalents at end of period $1,677 $ 1,848
====== =======
Supplemental disclosure of cash flow information
and non-cash activity:
Interest paid $1,442 $ 210
Income taxes paid -- 35
The accompanying notes are an integral part of these consolidated statements
6
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
(Unaudited)
1. GENERAL:
Ridgewood Hotels, Inc., a Delaware corporation (the "Company"), is
primarily engaged in the hotel management business. The Company currently
manages eight 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 the St. Andrews Bay Golf Resort & Spa in St.
Andrews, Scotland ("St. Andrews"). The Company also has an ownership interest in
one hotel and owns undeveloped land that it holds for sale.
The Company's common stock, par value $.01 per share, is quoted on the
over-the-counter bulletin board service maintained by the National Association
of Securities Dealers under the symbol "RWHT."
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
7
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 on Form 10K for the fiscal year
ended March 31, 2001. The results of operations for the three and nine months
ended December 31, 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 nine months ended December 31, 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
8
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 No. 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 SFAS No. 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. 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 nine months ended December 31,
2001 and 2000 is as follows:
9
For the Nine
Months Ended
---------------------
Dec. 31, Dec. 31,
2001 2000
-------- --------
Income Tax Provision $-- $ 894
Utilization of Net Operating Loss
Carry-forwards -- (894)
--- -----
Regular Income Tax Provision -- --
Alternative Minimum Income Tax
Provision -- 70
Deferred Income Tax Benefit
From AMT Tax Credit -- (70)
--- -----
Net Income Tax Provision $-- $ --
=== =====
A taxable gain resulted from the Company's sale of its hotel in Longwood,
Florida in May of 2000. Net operating losses generated in prior years were
sufficient to offset this gain for regular Federal and state tax purposes.
However, for fiscal year ending March 31, 2001, the Company was subject to
Federal alternative minimum tax resulting from this sale.
10
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 Nine
Months Ended Months Ended
------------------------ -------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2001 2000 2001 2000
---------- ---------- ----------- ----------
Net (loss) income $ (243,000) $ (577,000) $ (747,000) $1,685,000
Less undeclared preferred dividends (90,000) (90,000) (270,000) (270,000)
---------- ---------- ----------- ----------
Net (loss) income applicable to
common shareholders $ (333,000) $ (667,000) $(1,017,000) $1,415,000
========== ========== =========== ==========
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 3,863,480
Net (loss) earnings per share
Basic $ (0.13) $ (0.27) $ (0.40) $ 0.56
Diluted $ (0.13) $ (0.27) $ (0.40) $ 0.37
The effect of the Company's stock options and convertible securities was
excluded from the computations for the three and nine months ended December 31,
2001 as it is antidilutive.
As of December 31, 2001 there are $1,020,000 of preferred stock dividends
in arrears and due to Fountainhead. The Company last declared preferred
dividends on preferred stock in February 1999, when dividends were declared out
of paid-in surplus and recorded against that account in accordance with
applicable Delaware law.
11
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 December 31, 2001.
On July 1, 2000, options to purchase 258,500 shares of common stock 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 terminated 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 December 31, 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
12
"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 December 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'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
$40,000.
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 December 31, 2001, the Hotel has spent approximately $142,000
on improvements and has approximately $403,000 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
13
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 the Company's 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 December 31, 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 Louisville, 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 nine months ended December 31, 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.
14
CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
UNAUDITED
(000's omitted)
For the For the
Three Months Nine Months
Ended Ended
December 31, December 31,
2001 2000 2001 2000
------ ------ ------- -------
Revenues .......................... $2,341 $2,989 $ 7,322 $15,775
Operating Expenses ................ 1,788 2,898 5,603 11,377
------ ------ ------- -------
Income From Operations ...... 553 91 1,719 4,398
------ ------ ------- -------
Interest Expense .................. 505 513 1,506 1,572
Depreciation/Amortization ......... 291 345 960 1,051
------ ------ ------- -------
Net (Loss) Income ................. $ (243) $ (767) $ (747) $ 1,775
Preferred Dividends ............... (90) (90) (270) (270)
------ ------ ------- -------
Net (Loss) Income Applicable to
Common Shareholders ............ (333) (857) (1,017) 1,505
====== ====== ======= =======
(Loss) Earnings Per Common Share
Basic .................... $(0.13) $(0.34) $ (0.40) $ 0.60
Diluted .................. $(0.13) $(0.34) $ (0.40) $ 0.39
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.
15
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 therefor, 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
$253,000 in expenses relating to the advanced compensation for the nine months
ended December 31, 2001 (after taking into account the portions assumed by
Chateau Elan Georgia and Fountainhead).
As of December 31, 2001 the Company manages Chateau Elan Georgia and
Chateau Elan Sebring ("Sebring") and St. Andrews. Each of these hotels are
Fountainhead's properties. Fountainhead opened St. Andrews, Scotland ("St.
Andrews") on June 14, 2001. Prior to that time, 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 December 31, 2001 the Company
earned management fees of approximately $170,000, $15,000 and $43,000, for
Chateau Elan Georgia, Sebring and St. Andrews, respectively. For the nine months
ended December 31, 2001 the Company earned management fees of approximately
$493,000, $45,000 and $96,000, for Chateau Elan Georgia, Sebring and St.
Andrews, respectively. The combined management and development fees for these
Fountainhead hotels were approximately $228,000 and $634,000, respectively, and
represented 70% and 63% of the total management fee revenue for the three and
nine months ended December 31, 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
December 31, 2001, Fountainhead owed the Company approximately $218,000 for
unpaid management fees and expenses, which represents 39% of the Company's total
receivables as of December 31, 2001.
16
For the three and nine months ended December 31, 2001, the Company was
charged approximately $10,000 and $30,000, respectively, of salary in connection
with payments made 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 December 31, 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 December 31,
2001, the balance of the loan was $17,556,000. Interest expense for the three
and nine months ended December 31, 2001 was approximately $315,000 and $974,000
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 December 31, 2001, the balance of the
promissory note was approximately $3,305,000. Interest expense for the three and
nine months ended December 31, 2001 was approximately $127,000 and $343,000,
respectively.
17
ITEM 2. 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 three
and nine months ending December 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 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 $1,391,000, or 336%
and $4,367,000, or 273% for the three and nine months ended December 31, 2001
compared to the three and nine months ended December 31, 2000, respectively.
This increase was due to the consolidation of RW Louisville Hotel Associates,
LLC ("Associates") for the three and nine months ended December 31, 2001.
Associates owns a hotel in the Louisville, Kentucky area (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 in February 2001. As a result, the Hotel was the Company's only
wholly-owned hotel operation as of December 31, 2001 and during the nine month
period then ended. As a consequence of the September 11, 2001 terrorist attacks
and their effect on the travel industry, the Hotel experienced numerous
cancellations in September 2001 and experienced lower occupancy during the three
months ended December 31, 2001. The Hotel
18
has negotiated agreements for additional airline contract rooms to help offset
lower occupancy rates as a result of the current economic conditions in the
travel industry. 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 until such time as the travel
industry rebounds.
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 $205,000 or 39% and
$863,000 or 46% for the three and nine months ended December 31, 2001 compared
to the three and nine months ended December 31, 2000, respectively. Revenues
from hotel management decreased as a result of both the termination of several
management contracts since June 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
continued to effect revenues through the three months ended December 31, 2001.
In particular, the resort properties managed by the Company incurred significant
cancellations after September 11th and experienced reduced occupancy throughout
the three month period ended December 31, 2001. The Company anticipates that
while the downturn in business may begin to recover, the general economic
slowdown will continue to have a negative impact on the Company's management fee
revenues resulting in lower management fee revenues this fiscal 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 and other properties
with similar arrangements. To partially offset this downturn, the Company
implemented cost containment at its managed properties and its corporate office.
As of December 31, 2001 the Company manages Chateau Elan Georgia, Chateau
Elan Sebring ("Sebring") and St. Andrews Bay Golf Resort & Spa ("St. Andrews").
Each of these hotels are Fountainhead Development Corporation's ("Fountainhead")
properties. Fountainhead opened a hotel in St. Andrews on June 14, 2001. Prior
to that time, 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 is
in the process of negotiating the terms of a management contract with
Fountainhead with respect to St. Andrews. For the three months ended December
31, 2001 the Company earned management fees of approximately $170,000, $15,000
and $43,000, for Chateau
19
Elan Georgia, Sebring and St. Andrews, respectively. For the nine months ended
December 31, 2001 the Company earned management fees of approximately $493,000,
$45,000 and $96,000, for Chateau Elan Georgia, Sebring and St. Andrews,
respectively. The combined management and development fees for these
Fountainhead hotels were approximately $228,000 and $634,000, respectively, and
represented 70% and 63% of the total management fee revenue for the three and
nine months ended December 31, 2001, respectively.
In addition to commencement of managing St. Andrews, the Company entered
into one new management agreement during the nine months ended December 31, 2001
to manage a 60 room Shoney's Inn in Lavonia, Georgia.
The Company's management agreements with respect to eight properties which
the Company derived approximately $187,000 of base management revenues during
the nine months ending December 31, 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 (vii) a 96
room Holiday Inn Express in Commerce, Georgia and (viii) a 247 room Ramada Inn
in Atlanta, Georgia. Since October 2001, the Company has been entitled to
receive $11,000 per month through March 2002 as a termination fee from the owner
of the three Holiday Inn properties listed above. To date, none of these
payments has been made.
Equity in net income of unconsolidated entities for the three and nine
months ended December 31, 2001 was received from Louisville Hotel, LLC ("LLC").
This equity is offset, on a dollar for dollar basis, by interest accrued on
notes outstanding with Louisville Hotel, LP, and is recorded as interest
expense.
Expenses of wholly-owned real estate properties increased $852,000, or 176%
and $2,303,000, or 128% for the three and nine months ended December 31, 2001
compared to the three and nine months ended December 31, 2000, respectively. The
increase was due to the consolidation of the Hotel.
During the nine months ending December 31, 2001 the Company had gains from
real estate sales of approximately $92,000. This gain was due to the sale of the
Company's remaining parcel of land in Athens, Georgia. During the nine months
ending December 31, 2000 the Company had gains from real estate sales of
approximately $2,638,000. Approximately $2,626,000 of the gain was due to the
sale of the 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.
Depreciation and amortization expense increased approximately $160,000, or
122% and $545,000, or 131% for the three and nine months ended December 31, 2001
20
compared to the three and nine months ended December 31, 2000, respectively. The
increases were due to the consolidation of the Hotel.
Interest expense increased approximately $442,000, or 702% and $1,296,000
or 617% for the three and nine months ended December 31, 2001 compared to the
three and nine months ended December 31, 2000, respectively. The increase was
due to the consolidation of the Hotel.
General, administration and other expenses decreased approximately
$399,000, or 48% and $674,000, or 31% for the three and nine months ended
December 31, 2001 compared to the three and nine months ended December 31, 2000,
respectively. The decrease is due to the Company's continuing overall efforts to
decrease overhead. Additionally, the three months ended December 31, 2000 had
several large non-recurring expenses.
LIQUIDITY AND CAPITAL RESOURCES -
Fountainhead Transactions-
For a description of the Company's transactions with Fountainhead, see Note
6 of the Notes to Consolidated Financial Statements included herein, which is
incorporated herein by reference.
The Company's management continues to seek new hotel management
opportunities, including possible opportunities to manage other properties being
developed by Fountainhead. 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 $253,000 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 nine months ended December 31, 2001. Balances receivable
from affiliates as of December 31, 2001 are approximately $218,000, representing
amounts owed by Fountainhead with respect to unpaid management fees relating
to Chateau Elan Georgia, Sebring and St. Andrews.
Louisville Hotel-
The Company has an ownership interest in a Holiday Inn hotel in the
Louisville, Kentucky area. 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
21
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 December 31, 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
$40,000.
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 December 31, 2001, the Hotel has spent approximately $142,000
on improvements and has approximately $403,000 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
22
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 currently manages four hotels which are not owned by
Fountainhead or related entities. 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 $158,000, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While the Company is exposed to various market risks, including changes in
interest rates, the Company does not believe that it has any material exposure
to the market risks covered by this Item. As of December 31, 2001, the Company
primarily carries interest rates which are fixed and, therefore, does not expect
to have material exposure to interest rate changes in the short term. The
Company does not enter into derivatives or other financial instruments for
trading purposes and has not entered into financial instruments to manage and
reduce the impact of changes in interest rates.
23
PART II. OTHER INFORMATION
ITEM 3. Default Upon Senior Securites
(b) For a discussion of arrearages in the payment of dividends with
respect to the Company's preferred stock, see Note 4 of the Notes
to Consolidated Financial Statements included herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
None
B. Reports on Form 8-K:
During the quarter ended December 31, 2001, the Company filed a
Current Report on Form 8-K/A with the SEC on October 18, 2001, setting
forth (i) the audited financial statements of Associates for the years
ended December 31, 2000 and 1999, and (ii) the unaudited pro forma
consolidated financial statements of the Company as of and for the
year ended March 31, 2001, which report amended Item 7 of the
Company's Current Report on Form 8-K filed with the SEC on July 2,
2001, with respect to the Company's acquisition of 100% of the
membership interests in Associates.
24
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: February 14, 2002
25