UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003
OR
|_| TRANSITION REPORT UNDER 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 Small Business Issuer as specified in its Charter)
Delaware 58-1656330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Rue Charlemagne
Braselton, Georgia 30517
(Address of principal executive offices)
(678) 425-0900
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Common stock, par value $.01 per share - 2,513,257 shares outstanding at June
30, 2003.
Transitional Small Business Disclosure Format (check one:)
Yes |_| No |X|
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
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.
1
RIDGEWOOD HOTELS, INC.
Index to Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 2003
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page
Consolidated Balance Sheet as of June 30, 2003................ 3
Consolidated Statements of Operations for the Three
Months Ended June 30, 2003 and 2002........................... 5
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2003 and 2002........................... 6
Notes to Consolidated Financial Statements.................... 7
Item 2 Managements' Discussion and Analysis or Plan of Operation..... 12
Item 3 Controls and Procedures....................................... 16
PART II - OTHER INFORMATION
Item 1 Legal Proceedings............................................. 17
Item 2 Changes in Securities and Use of Proceeds..................... 18
Item 6 Exhibits and Reports on Form 8-K.............................. 18
Signatures............................................................ 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2003
($000's omitted, except share and per share data)
(Unaudited)
Assets:
Current assets:
Cash $ 1,188
Receivables from affiliates 204
Other operating receivables, net of allowance for
doubtful accounts of $216 385
Other current assets 1,274
-------
Total current assets 3,051
Real estate properties and equipment:
Real estate property and equipment
Operating property and equipment, net of accumulated
depreciation of $1,993 19,641
Land held for sale, net of allowance for possible
losses of $2,984 836
-------
Total real estate investments, net 20,477
Management contracts, net of accumulated amortization
of $1,440 1,385
Other assets, net
200
-------
$25,113
=======
The accompanying notes are an integral part of the consolidated financial
statements.
3
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2003
($000's omitted, except share and per share data)
(Unaudited)
Liabilities:
Current liabilities:
Current maturities of long-term debt $ 406
Accounts payable 638
Payables to affiliates 287
Accrued salaries, bonuses and other compensation 213
Accrued legal and audit expense 89
Accrued liabilities 2,003
--------
Total current liabilities 3,636
Accrued pension liability 840
Long-term debt 21,621
--------
Total liabilities 26,097
--------
Commitments and contingencies:
Shareholders' Deficit:
Series A convertible cumulative preferred
stock, $1 par value, 1,000,000 shares authorized,
450,000 shares issued and outstanding (liquidation)
preference of $4,800,000 and $4,710,000, respectively 450
Common stock, $0.01 par value, 5,000,000 shares
authorized, 2,513,257 shares issued and outstanding 25
Paid-in surplus 17,796
Accumulated deficit (19,255)
--------
Total shareholders' deficit (984)
--------
$ 25,113
========
The accompanying notes are an integral part of the consolidated financial
statements.
4
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
($000's omitted, except share and per share data)
(Unaudited)
For the Three Months Ended
June 30, June 30,
2003 2002
-------------------------
Revenues:
Revenues from wholly-
owned hotel operations $ 1,924 $ 2,114
Revenues from hotel management-
Related party 317 285
Other 6 32
Sales of real estate properties -- 50
Equity in net income
of unconsolidated entities 31 63
Interest income -- 5
-----------------------
2,278 2,549
Costs and expenses:
Expenses of wholly-
owned hotel operations 1,285 1,433
Depreciation and amortization 396 388
Interest expense 442 507
General, administrative
and other 229 316
Impairment loss of land held for sale -- 67
-----------------------
2,352 2,711
-----------------------
Loss before taxes (74) (162)
Income taxes -- --
-----------------------
Net loss (74) (162)
Unaccrued preferred dividends -- (90)
-----------------------
Net loss applicable to
common shareholders $ (74) $ (252)
-----------------------
Basic and diluted loss per
common share $ (0.03) $ (0.10)
=======================
The accompanying notes are an integral part of the consolidated financial
statements.
5
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
($000's omitted)
(Unaudited)
For the Three Months Ended
June 30, June 30,
2003 2002
--------------------------
Cash flows from operating activities:
Net loss $ (74) $ (162)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 396 388
Provision for doubtful accounts -- 41
Gain from sale of real estate properties -- (50)
Increase in receivables from affiliates (16) (152)
(Decrease) increase in payables to affiliates (36) 40
(Increase) decrease in other operating receivables (11) 27
(Increase) decrease in other assets 56 166
Decrease (increase) in accounts payable and accrued liabilities (151) 47
--------------------------
Total adjustments 238 507
--------------------------
Net cash provided by operating activities 164 345
--------------------------
Cash flows from investing activities:
Proceeds from sale of real estate -- 50
Additions to real estate properties (40) (259)
--------------------------
Net cash used in investing activities (40) (209)
--------------------------
Cash flows from financing activities:
Repayments of debt (86) (85)
Proceeds from shareholder settlement 1,000 --
Increase in mezzanine loan 61 --
--------------------------
Net cash provided by (used in) financing activities 975 (85)
--------------------------
Net increase in cash 1,099 51
Cash at beginning of period 89 1,150
--------------------------
Cash at end of period $ 1,188 $ 1,201
==========================
The accompanying notes are an integral part of the consolidated financial
statements.
6
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(Unaudited)
1. BASIS OF PRESENTATION:
The accompanying consolidated financial statements are unaudited and
should be read in conjunction with the Ridgewood Hotel, Inc.'s (the "Company")
Annual Report on Form 10K for the fiscal year ended March 31, 2003. The
consolidated financial statements include the accounts of the Company, the
Holiday Inn located in Louisville, Kentucky (the "Louisville Hotel"), which is
owned through the Company's wholly-owned subsidiary, RW Louisville Hotel
Associates, LLC ("Associates"), and Louisville Hotel, LLC ("LLC"). 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. The results of operations
for the interim periods presented are not necessarily indicative of the results
to be expected for the fiscal year ending March 31, 2004.
2. LAND HELD FOR SALE:
The Company determined that the undeveloped land in Dallas, Texas and
Longwood, Florida, met the criteria of a qualifying disposition in accordance
with SFAS No. 144. The Company has recorded the carrying amount of the land as
land held for sale in the accompanying balance sheet. The land is expected to be
sold during the fiscal year ending March 31, 2004.
7
3. RELATED PARTY TRANSACTIONS:
The Company is party to management agreements with Fountainhead
Development Corporation ("Fountainhead"), to provide management services at the
following Fountainhead properties: Chateau Elan Georgia ("Chateau Elan"),
Chateau Elan Sebring ("Sebring") St. Andrews Bay Scotland ("St. Andrews") and
Diablo Grande Resort ("Diablo"). Fountainhead Holdings, Inc., which is under
common control with Fountainhead, owns approximately 78% of the outstanding
capital stock of the Company. For the three months ended June 30, 2003, the
Company earned management fees of approximately $163,000, $17,000, $110,000 and
$19,000 for Chateau Elan, Sebring, St. Andrews and Diablo, respectively. For the
three months ended June 30, 2002, the Company earned management fees of
approximately $195,000, $17,000, $66,000 and $-0- for Chateau Elan, Sebring, St.
Andrews and Diablo, respectively. Management fees earned from Fountainhead
represent 96% and 88% of the total management fee revenue for the three months
ended June 30, 2003 and 2002.
The Company also manages the Holiday Inn Express at Chateau Elan ("Holiday
Inn Express"), a hotel located adjacent to Chateau Elan and owned by the
Company's Chairman and the Company's President. The Company received management
fees of approximately $8,000 and $7,000 from the Holiday Inn Express for the
three months ended June 30, 2003 and 2002, 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. As of June 30, 2003 and 2002,
Fountainhead owed the Company approximately $204,000 and $308,000, respectively,
for unpaid management fees and expenses, which represents 35% and 41%,
respectively, of the Company's total receivables as of June 30, 2003 and 2002.
The Company utilized Chateau Elan's Human Resource Director ("HR
Director") on a part-time basis during fiscal years 2003. In connection with the
services provided by the HR Director, the Company was charged approximately
$18,000 for the three months ended June 30, 2002.
The Company's former Director of Marketing and former Director of
Accounting and Finance provided services to Chateau Elan during fiscal years
2003. For the three months ended June 30, 2002, Chateau Elan reimbursed the
Company approximately $27,000 for such services.
4. LONG TERM DEBT:
On September 30, 1999, the Company entered into three promissory notes
(the "Notes") in order to purchase additional equity in the LLC. A note in the
original principal amount of $1,333,000 collateralized by the Company's
ownership interest in the LLC and two other notes in the original principal
amount of $300,000 each, with one collateralized by the Company's Phoenix,
Arizona land and the other collateralized by the Company's
8
Longwood, Florida land. On February 12, 2003 the Company amended the terms of
the Notes as follows: First, the Company made a $700,000 principal payment on
the Notes by (a) paying $200,000 in cash; (b) conveying to an affiliate of
Louisville Hotel, LLP ("LLP")(an unrelated company) title to the Company's
undeveloped land in Ohio in return for a $200,000 reduction in the principal of
the Notes and (c) conveying to an affiliate of LLP title to the Company's
undeveloped land in Arizona in return for a $300,000 reduction in the principal
of the Notes (the Company was released from the portion of the Notes
collateralized by the Arizona land.) Second, the Company and LLP amended the
terms of the Notes (other than the portion of the Notes collateralized by the
land in Longwood, Florida (the "Florida Note")) by reducing the interest rate
from 13% to 10% and extending the maturity date until February 2006. Third, the
Company and LLP amended the Florida Note by: (a) reducing the interest rate from
13% to 10%; (b) extending the maturity date such that principal is due and
payable in quarterly installments of $50,000 with the first installment due on
July 1, 2004; (c) providing that interest only shall be payable in monthly
installments until the date on which the final principal payment is paid and (d)
providing that if the Company establishes legal access to its Florida land at
any time prior to July 1, 2004, then the Company shall, at its option, either
(1) pay an amount equal to all remaining outstanding principal and interest or
(2) convey title to the land in Longwood to LLP as payment in full of the
$300,00 Florida Note. As a result of these transactions, the remaining principal
amount due on the Notes is $1,233,000 as of June 30, 2003. Interest expense was
approximately $31,000 and $63,000, respectively, for the three months ended June
30, 2003 and 2002.
On May 21, 1998, Associates entered into a loan with a commercial lender
to purchase the Hotel (the "Hotel Loan"). 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
approximately $55,000 per month and is subject to adjustment annually. The
escrow funds are used for property tax assessments, insurance and repairs and
maintenance as the need arises. As of June 30, 2003, the balance of the loan was
approximately $17,078,000. Interest expense for the three months ended June 30,
2003 and 2002 was approximately $320,000 and $332,000, 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 collateralized by the ownership interest in Associates
(the "LLC Loan"). The LLC Loan was 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 June 30, 2003,
the balance of the promissory note was approximately $3,716,000. Interest
expense for the three months ended June 30, 2003 and 2002 was approximately
$91,000 and $63,000, respectively.
9
5. SHAREHOLDERS' INVESTMENT:
For the Three Months Ended
June 30, 2003 June 30, 2002
(Unaudited) (Unaudited)
-----------------------------
Net loss (74,000) (162,000)
Less undeclared preferred dividends -- (90,000)
-----------------------------
Net loss applicable to common
shareholders $ (74,000) $ (252,000)
Weighted average shares outstanding-
basic $ 2,513,000 $ 2,513,000
=============================
Basic and diluted loss per common share $ (0.03) $ (0.10)
=============================
Pursuant to the terms of the Stipulation of Settlement (See Note 6 below),
when the settlement became final on June 19, 2003, the Series A Convertible
Preferred Stock was agreed to be cancelled in return for 1,350,000 shares of the
Company's Common Stock and the dividend arrearages was cancelled (See Note 6
below).
Stock Based Compensation
At June 30, 2003, the Company has one-stock based employee compensation plan.
The Company accounts for the plan under the recognition and measusrement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees
("APB25"), and related Interpretations. In accordance with APB25, stock-based
employee compensation costs are recorded for the excess of fair market value
over the exercise price at the date of grant. For the three months ended June,
2003 the Company did not record any stock-based employee compensation costs as
no options were issued during the periods.
The following table illustrates the effects on net loss and loss per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, for all options outstanding.
Three Months Ended June 30
--------------------------
2003 2002
-------- --------
Net Loss, as reported $ (74) $ (162)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (14) (11)
-------- --------
$ (88) $ (173)
======== ========
Loss per share:
Basic and Diluted - as reported $ (0.03) $ (0.10)
======== ========
Basic and Diluted - pro forma $ (0.04) $ (0.10)
======== ========
6. COMMITMENTS AND CONTINGENCIES:
On May 2, 1995, an action was filed in the Court of Chancery of the State
of Delaware (New Castle County) entitled William N. Strassburger v. Michael M.
Earley, Luther A. Henderson, John C. Stiska, N. Russell Walden, and Triton
Group, Ltd., defendants, and Ridgewood Hotels, Inc., nominal defendant, C.A. No.
14267 (the "Chancery Court Action"). The plaintiff challenged the actions of the
Company and its directors in consummating the Company's August 1994 repurchases
of its common stock held by Triton Group, Ltd. and Hesperus Partners Ltd.
In March 2003, the parties to the Chancery Court Action entered into a
Stipulation of Settlement (the "Settlement") pursuant to which the parties have
agreed to settle the Chancery Court Action. On March 24, 2003, the Settlement
was submitted to the Court for approval and the Settlement was approved by the
Court on May 20, 2003 and became final on June 19, 2003. The principal terms of
the Settlement provide that:
(i) Certain of the defendants will pay to Ridgewood the aggregate
amount of $1,770,000. Ridgewood has agreed to use $1,645,000
of such funds to make an offer to acquire the shares of
Ridgewood's common stock held by its Minority Stockholders (as
such term is defined in the Settlement). The defendants in the
Chancery Court Action and Ridgewood's majority stockholder,
Fountainhead Development, LLC, have agreed that the shares of
Ridgewood's common stock held by them will not participate in
the offer. As a result, it is estimated that the holder of up
to approximately
10
790,457 share of Ridgewood's common stock may be eligible to
participate in the offer, which would result in an offer of
approximately $2.08 per share for such shares.
(ii) All of the shares of Ridgewood' Series A Convertible Preferred
Stock will be cancelled in exchange for 1,350,000 shares of
Ridgewood's common stock (which will not be eligible to
participate in the offer described above) and Ridgewood's
obligation to pay any accrued but unpaid dividends with
respect to such preferred stock will be eliminated.
(iii) Defendant Walden will transfer his 32,000 shares of
Ridgewood's common stock to Ridgewood.
(iv) The Action will be dismissed and the defendants will be
released from any claims relating hereto.
In addition, certain of the defendants have agreed to pay the
attorney's fees and expenses of the plaintiff's counsel up to
$1,825,000, if such fees and expenses are approved by the Court.
Under the term of the Settlement, Ridgewood is not obligated to pay
any of the plaintiff's attorney's fees or expenses.
In June 2003, the Company received $1,000,000 of the settlement
proceeds. Subsequent to June 30, 2003, (i) the Company received the
remaining $770,000 of settlement proceeds and has commenced an offer to
purchase up to 790,457 shares of its Common Stock at $2.08 per share, (ii)
the Company's outstanding Preferred Stock was exchanged for 1,350,000
shares of Common Stock and (iii) the 32,000 shares of common stock held by
Mr. Walden were cancelled.
As of June 30, 2003, $1,000,000 of the settlement proceeds are
recorded as cash because such funds were received prior to June 30, 2003
and the remaining $770,000 are recorded as a receivable under the heading
in other current assets because such funds were not received until July 3,
2004. The Company has recorded an accrued liability of $1,645,000 to
reflect the Company's contractual obligation to make the tender offer with
such funds and the remaining $125,000 has been recorded as
paid-in-surplus.
7. GOING CONCERN CONSIDERATIONS:
The Company's recurring losses, negative working capital, and negative
operating cash flows raise substantial doubt about the Company's ability to
continue as a going concern. The Company is continuing its efforts to return to
profitability by continuing (i) to seek new opportunities to manage resort
properties, (ii) to take steps to reduce costs (including administrative costs)
and (iii) its efforts to increase the revenue at existing properties managed by
the Company. In the event the Company is unable to return to
11
profitability, it may be unable to satisfy its obligations and will consider all
available alternatives including the possibility of selling the Company assets.
8. SUBSEQUENT EVENT:
As discussed in Note 6, as of July 3, 2003, the Company has received the
$1,770,000 of settlement proceeds, the shares of Preferred Stock have been
submitted to the Company in exchange for 1,350,000 shares of Common Stock, the
dividend arrearages with respect to the Preferred Stock have been cancelled and
Mr. Walden has transferred 32,000 shares of Common Stock to the Company. On
August 5, 2003, the Company commenced the tender offer to all eligible
shareholders.
ITEM 2. MANAGEMENT'S DISCUSSION OR PLAN OF OPERATION
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
months ending June 30, 2003.
OVERVIEW
Ridgewood Hotels, Inc., a Delaware corporation (the "Company"), is primarily
engaged in the hotel management business. The Company currently manages four mid
to luxury hotels containing 671 rooms located in two states and Scotland,
including the Chateau Elan Winery & Resort located in Braselton, Georgia
("Chateau Elan"). The Company also owns one hotel that it manages, owns
undeveloped land that it holds for sale and manages a golf resort and
restaurant.
CRITICAL ACCOUNTING POLICIES
Some of our critical accounting policies require the use of judgment in their
application or require estimates of inherently uncertain matters. Although our
accounting policies are in compliance with accounting principles generally
accepted in the United States of America, a change in the facts and
circumstances of the underlying transactions could significantly change the
application of the accounting policies and the resulting financial statement
impact. Listed below are those policies that we believe are critical and require
the use of complex judgment in their application.
Management Contracts
Management Contracts are recorded at their estimated fair value at the date of
acquisition and are amortized over the life of the contract. Fair value is
determined based upon an analysis of discounted expected future cash flows from
the management contract.
12
Impairment of Long Lived Assets
The carrying value of the Company's hotels and other long-lived assets are
reviewed for impairment if any facts and circumstances suggest their
recoverability may have been impaired. Impairment is determined by calculating
the sum of the estimated undiscounted future cash flows, including the projected
undiscounted future net proceeds from the sale of the hotel or other long-lived
asset. In the event such sum is less than the depreciated cost of the hotel or
other long-lived asset, the hotel or other long-lived asset is written down to
its estimated fair market value.
Asset Held for Sale
Long-lived assets that meet the criteria of a qualifying disposition in
accordance with Statement of Financial Accounting Standard No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, are classified separately
in the Company's balance sheet and are carried at fair value less costs to sell.
The Company currently holds undeveloped land that is expected to be sold during
fiscal 2004, as described in Note 2 to the condensed consolidated financial
statements.
RESULTS OF OPERATIONS --
Comparison of the three months ended June 30, 2003 to the three months ended
June 30, 2002.
Revenues
Revenues from wholly owned hotel operations decreased approximately
$190,000, or 9% for the three months ended June 30, 2003 compared to the three
months ended June 30, 2002. The decrease for the three months ended June 30,
2003 compared to June 30, 2002 was due to lower occupancy and a lower average
daily room rate at the hotel in Louisville, Kentucky. Occupancy and room rates
have decreased due to a very competitive market in the area.
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 increased approximately
$6,000, or 2% for the three months ended June 30, 2003 compared to the three
months ended June 30, 2002. Revenues from hotel management increased as a result
of slightly increased revenues at the managed properties.
13
For the three months ended June 30, 2003, the Company earned management
fees of approximately $163,000, $15,000, $110,000 and $19,000 for Chateau Elan,
Sebring, St. Andrews and Diablo, respectively. Management fees for the three
months ended June 30, 2002, were approximately $195,000, $17,000, $66,000 and
$-0-, for Chateau Elan, Sebring, St. Andrews and Diablo, respectively.
Management fees earned from Fountainhead represent 96% and 88% of the total
management fee revenue for the three months ended June 30, 2003 and 2002.
The Company also manages the Holiday Inn Express, a hotel owned by the
Company's Chairman and the Company's President. The Company received management
fees of approximately $8,000 and $7,000 from the Holiday Inn Express for the
three months ended June 30, 2003 and 2002, respectively.
Equity in net income of unconsolidated entities of $31,000 and $63,000 for
the three months ended June 30, 2003 and 2002, respectively, 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
Expenses of wholly-owned real estate decreased approximately $148,000, or
10%, for the three months ended June 30, 2003 compared to the three months ended
June 30, 2002. The decreases were due to normal fluctuations in operating
expenses as a result of decreased revenues at the hotel in Louisville, Kentucky.
Depreciation and amortization expense increased approximately $8,000, or
2%, for the three months ended June 30, 2003 compared to the three months ended
June 30, 2002. The increase was due to the addition of depreciable assets at the
hotel in Louisville, Kentucky.
Interest expense decreased approximately $65,000, or 13% for the three
months ended June 30, 2003 compared to the three months ended June 30, 2002. The
decrease was due to the lower interest rate on certain Company promissory notes
and principal balance on the loan for the hotel in Louisville, Kentucky.
General, administration and other expenses decreased approximately
$87,000, or 28% for the three months ended June 30, 2003 compared to the three
months ended June 30, 2002. The decrease was due to the Company's continuing
overall efforts to manage overhead costs closely. The Company has also
eliminated several staff positions and decreased or eliminated various other
costs in conjunction with managing fewer hotels.
LIQUIDITY AND CAPITAL RESOURCES -
Approximately $1,000,000 of the Company's cash on hand and accounts receivable
of approximately $600,000 at June 30, 2003 is intended to be used to repurchase
shares of
14
common stock in accordance with the Stipulation of Settlement. The net amount of
approximately $1,600,000 has also been recorded at June 30, 2003 in accrued
liabilities.
Louisville Hotel
The Company owns one hotel property located in Louisville, Kentucky (the
"Louisville Hotel"), through its subsidiary, RW Louisville Hotel Associates, LLC
("Associates"). As of March 31, 2001, the Company, through its wholly-owned
subsidiaries, was the manager of and had a minority ownership interest in
Associates. In April 2001, the Company, through its wholly-owned subsidiaries,
acquired 100% of the membership interests in Associates. The membership
interests are pledged as security for a $3,623,690 loan made by the LLC. The
membership interests are also subject to an option pursuant to which the LLC has
the right to acquire the membership interests for nominal value. Pursuant to the
terms of the loan, all revenues (including proceeds from sale or refinancing) of
Associates (after payment of expenses including a management fee to the Company)
are required to be paid to the LLC until principal and interest on the loan are
paid in full. As a result, the LLC has all of the economic interests in the
Louisville Hotel. On September 30, 1999, the Company, which already owned a 10%
interest in LLC, acquired an additional interest in the LLC from LLP for
$2,500,000. As a result of the transaction, the Company holds an 80% economic
interest in the LLC.
The Company has an 80% ownership interest in and is the Managing Member of
the LLC. Louisville Hotel, LLPholds the remaining 20% ownership in LLC. Pursuant
to the LLC's Operating Agreement, the Company has the right at any time to
exercise the Purchase Option whereby the Company may purchase the remaining
interest in the LLC. The Operating Agreement provides that the Option Price for
LLP's interest is equal to the sum of (a) LLP's total capital contributions to
LLC (approximately $3,100,000), 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 LLP if LLC sold the Louisville
Hotel for its fair market value and distributed the proceeds to the members
pursuant to the Operating Agreement). Under the terms of the Operating
Agreement, the Company is subject to the Purchase Obligation whereby it is
required, no later than February 12, 2006, to purchase LLP's remaining interest
in the LLC for the Option Price. The Company's obligation to purchase the
remaining interest in the LLC is secured by the Company's interest in the LLC
and the Longwood, Florida property.
On February 12, 2003 the Company entered into new agreements with the LLP
to refinance the Notes and extend the terms. First, the Company made a $700,000
principal payment on the Notes by (a) paying $200,000 in cash; (b) conveying to
an affiliate of LLP title to the Company's undeveloped land in Ohio in return
for a $200,000 reduction in the principal of the Notes and (c) conveying to an
affiliate of LLP title to the Company's undeveloped land in Arizona in return
for a $300,000 reduction in the principal of the Notes and a release from
portion of the Notes secured by the Arizona land. Second, the Company and LLP
amended the terms of the Notes (other than the portion of the Notes secured by
the land in Longwood, Florida (the "Florida Note")) by reducing the interest
rate from 13% to 10% and extending the maturity date until
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February 2006. Third, the Company and LLP amended the Florida Note by: (a)
reducing the interest rate from 13% to 10%; (b) extending the maturity date such
that principal is due and payable in quarterly installments of $50,000 with the
first installment due on July 1, 2004 (which payment is recourse to the
Company); (c) providing that interest only shall be payable in monthly
installments until the date on which the final principal payment is paid and (d)
providing that if the Company establishes legal access to its Florida land at
any time prior to July 1, 2004, then the Company shall, at its option, either
(1) pay an amount equal to all remaining outstanding principal and interest or
(2) convey title to the land in Longwood to LLP as payment in full of the
$300,00 Florida Note. Fourth, the Company and LLP amended the LLC Operating
Agreement to (a) extend the Purchase Obligation until February 12, 2006, (b)
reduce the rate of preferred return to 13% to 10% and (c) provide the Company
with the option to extend to Purchase Obligation until February 12, 2007 if the
Company has made a partial payment of no less than $1,000,000 towards the
Purchase Obligation before February 12, 2006. As a result of these transactions,
the remaining principal amount due on the Notes is $1,233,000.
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 9 times the monthly franchise fees payable pursuant to the
Franchise Agreement.
In conjunction with the Franchise Agreement, Associates is subject to a
Property Improvement Plan (the "Improvement Plan"). Pursuant to the Improvement
Plan, Associates was required to make certain improvements to the Louisville
Hotel by December 31, 2002, as well as meet certain interim milestones. The
Company estimates that the total required improvements will cost approximately
$1,200,000. As of June 30, 2003 the Louisville Hotel has spent approximately
$510,000 on improvements and has approximately $58,000 in escrow to spend on
improvements. The Company has received a verbal extension for the completion of
the Improvement Plan. Funding by Associates should be sufficient for it's
completion by using the escrowed funds described above and excess cash flows
generated by the Louisville Hotel. If the verbal extension is withdrawn, the
Company would be in noncompliance with the Franchise Agreement.
Shareholder Settlement
See Part 11, Item 1 of the Quarterly Report on Form 10-QSB
ITEM 3. CONTROLS AND PROCEDURES
The Company's principal executive officer and principal financial officer,
or persons performing similar functions, have evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period covered by this report, as
required by paragraph (b) of Rules 13(a)-15 or 15(d)-15 of the Exchange Act.
Based on such evaluation, such officers have
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concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures are effective in alerting them on a
timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2003, the Company entered into a Stipulation of Settlement (the
"Settlement") in the action that was pending in the Court of Chancery of the
State of Delaware (New Castle County) entitled William N. Strassburger v.
Michael M. Earley, Luther A. Henderson, John C. Stiska, N. Russell Walden, and
Triton Group, Ltd., defendants, and Ridgewood Hotels, Inc., nominal defendant,
C.A. No. 14267 (the "Chancery Court Action"), pursuant to which the parties
agreed to settle the Chancery , Court Action. On March 24, 2003, the Settlement
was submitted to the Court for approval. On May 20, 2003 the Court entered an
Order and Final Judgment approving the terms of the Settlement and dismissing
the Chancery Court Action. The Order and Final Judgment became final on June 19,
2003. The principal terms of the Settlement provide that:
(i) Certain of the defendants will pay to Ridgewood the aggregate
amount of $1,770,000. Ridgewood has agreed to use $1,645,000
of such funds to make an offer to acquire the shares of
Ridgewood's common stock held by its Minority Stockholders (as
such term is defined in the Settlement). The defendants in the
Chancery Court Action and Ridgewood's majority stockholder,
Fountainhead Development, LLC, have agreed that the shares of
Ridgewood's common stock held by them will not participate in
the offer. As a result, it is estimated that the holders of up
to approximately 790,457 shares of Ridgewood's common stock
may be eligible to participate in the offer, resulting in an
offer of approximately $2.08 per share for such shares.
(ii) All of the shares of Ridgewood's Series A Convertible
Preferred Stock will be cancelled in exchange for 1,350,000
shares of Ridgewood's common stock (which will not be eligible
to participate in the offer described above) and Ridgewood's
obligation to pay any accrued but unpaid dividends with
respect to such preferred stock will be eliminated.
(iii) Defendant Walden will transfer his 32,000 shares of
Ridgewood's common stock to Ridgewood.
(iv) The Action will be dismissed and the defendants will be
released from any claims relating hereto.
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In addition, certain of the defendants have agreed to pay the
attorney's fees and expenses of the plaintiff's counsel up to
$1,825,000. Under the term of the Settlement, Ridgewood is not
obligated to pay any of the plaintiff's attorney's fees or expenses.
In June 2003, the Company received $1,000,000 of the
settlement proceeds. Subsequent to June 30, 2003, (i) the Company
received the remaining $770,000 of settlement proceeds and has
commenced an offer to purchase up to 790,457 shares of its Common
Stock at $2.08 per share, (ii) the Company's outstanding Preferred
Stock was exchanged for 1,350,000 shares of Common Stock and (iii)
the 32,000 shares of Common Stock held by Mr. Walden were cancelled
ITEM 2. Changes in Securities and Use of Proceeds
Pursuant to the terms of the Stipulation of Settlement in the Chancery
Court Action described in Item 1 above, the Company's Series A Convertible
Preferred Stock has been cancelled and the 450,000 shares of Series A
Convertible Preferred Stock outstanding on June 30, 2003 have been exchanged for
1,350,000 shares of the Company's Common Stock. The accrued and unpaid dividends
with respect to the Series A Convertible Preferred Stock have been eliminated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
31.1 Certification of Henk H. Evers
31.2 Certification of Jim Papovich
32.1 Section 1350 Certification by Henk H. Evers
32.2 Section 1350 Certification by Jim Papovich
B. Reports on Form 8-K:
During the quarter ended June 30, 2003, the Company filed with the
Securities and Exchange Commission the following Current Reports on Form 8-K.
(i) On May 8, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 4 a change in the Company's certifying
accountant. The Company reported that the auditor-client
relationship with Deloitte and Touche LLP had ceased.
(ii) On May 16, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 4 a change in the Company's certifying
accountant. The Company reported that they had engaged Moore
Stephens Lovelace, P.A. as its new independent auditor.
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(iii) On May 19, 2003, the Company filed a Current Report on Form 8-K/A
amending and restating in its entirety Item 4 of the Current Report
on Form 8-K filed by the Company on May 8, 2003. Additionally, this
Current Report on Form 8-K/A provides disclosure under Item 7
exhibits.
(iv) On May 23, 2003, the Company filed a Current Report on Form 8-K
reporting under Item 5 other events and required FD disclosure. The
Company reported that the Delaware Court of Chancery entered an
Order and Final Judgement approving the Stipulation of Settlement.
Additionally, this Current Report on Form 8-K provides disclosure
under Item 7 exhibits.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has 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/ Jim Papovich
-------------------------------
Jim Papovich
Regional Director of Operations
Date: August 14, 2003
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