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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2003
|_| 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.)
100 Rue Charlemagne
Braselton, Georgia 30517
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code (678) 425-0900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2).
Yes |_| No |X|
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of
September 30, 2002, is approximately $198,000.
On June 30, 2003, the registrant had 2,513,257 shares of its common stock
outstanding.
DOCUMENTS INCORPORATE BY REFERENCE: None
PART I
Item 1. Business
General
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 Georgia"). The Company also owns one hotel that it
manages, owns undeveloped land that it holds for sale and manages a golf resort
and a restaurant.
Effective April 1, 2001, the Company operates in two reportable business
segments: hotel operations and hotel management services. The Company's current
hotel operations segment consists solely of a 271 room hotel it owns (through
its subsidiaries) in Hurstbourne, Kentucky. The hotel is franchised with Holiday
Inn. The Company's hotel management services segment currently consists of four
managed hotels, excluding the operating hotel described above, a golf resort in
California and a restaurant in Georgia. Three of these hotels and the golf
resort are owned by Fountainhead Development Corp., ("Fountainhead") and another
hotel is owned by both the Company's Chairman and its President.
Fountainhead Transactions
Fountainhead is primarily engaged in the business of developing, owning
and operating luxury resort properties, including Chateau Elan Georgia and St.
Andrews Bay ("St. Andrews") located in Scotland. In January 2000, the Company
entered into a management agreement ("Management Agreement") with Fountainhead
to perform management services at Chateau Elan Georgia for five years. Chateau
Elan Georgia is a 301-room luxury resort located in Braselton, Georgia, which
includes an inn, conference center, winery and luxury amenities such as a spa
and golf club. Pursuant to the Management Agreement, the Company is to receive a
base management fee equal to 2% of the gross revenues of the properties being
managed, plus an annual incentive management fee to be determined each year
based on the profitability of the properties being managed during that year.
The Company continues to seek new hotel management opportunities,
including possible opportunities to manage other properties being developed by
Fountainhead. In addition to Chateau Elan Georgia, the Company manages
Fountainhead's Chateau Elan Sebring ("Sebring"), an 81 room hotel located in
Sebring, Florida, St. Andrews, a 209-room luxury resort in Scotland ("St.
Andrews") which opened on June 14, 2001 and Diablo Grande Resort ("Diablo"). The
Company has management agreements for
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managing Chateau Elan Sebring, St. Andrews and Diablo. In October 2002, the
Company amended the terms of the management agreements with Fountainhead for the
management of St. Andrews and Sebring. In exchange for five year agreements, the
Company agreed to pay Fountainhead $575,000.
The commencement dates for the management agreements were March 1, 2000,
June 1, 2001 and August 8, 2002 for Sebring, St. Andrews and Diablo,
respectively. While the Company intends to seek management opportunities with
other Fountainhead properties, 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, including Chateau Elan
Georgia, Sebring, St.Andrews or Diablo, in the future. For the fiscal year ended
March 31, 2003, the combined management and development fees for these
Fountainhead hotels were approximately $1,008,000, representing 90% of the total
Company's management fee revenue for the year ended March 31, 2003.
Management Agreements
In addition to the Fountainhead properties, the Company currently manages
a hotel property pursuant to a management agreement that generally provides the
Company with a fee calculated as a percentage of gross revenues of the hotel
property. The hotel property currently managed by the Company is located in
Kentucky and is a Holiday Inn franchisee. The Company indirectly owns the hotel
as described below and, as a result, the operations of the hotel are
consolidated for financial reporting purposes. Under the terms of the franchise
agreement with respect to this property, the Company is required to comply with
standards established by the franchiser, including property upgrades and
renovations. Under the terms of the management agreement, the owner of the hotel
(which is indirectly owned by the Company) is responsible for all operating
expenses, including property upgrades and renovations.
The Company also manages the Holiday Inn Express at Chateau Elan, (a hotel
located adjacent to Chateau Elan Georgia and owned by the Company's Chairman and
the Company's President), and manages a restaurant in Georgia.
During the twelve months ended March 31, 2003, the Company entered into
one new management agreement. During the same period, property owners terminated
three other management agreements.
Ownership Interests
The Company currently owns one hotel property, a Holiday Inn hotel in the
Louisville, Kentucky area (the "Louisville Hotel"), through its consolidated
subsidiary, RW Louisville Hotel Associates, LLC ("Associates"), a Delaware
limited liability company. As of March 31, 2001, the Company, through its
wholly-owned subsidiaries, was the manager of and had a minority ownership
interest in Associates which was accounted for on the equity method of
accounting. In April 2001, the Company, through its wholly-owned subsidiaries,
acquired 100% of the membership interests in Associates as further described
below. The membership interests are pledged as security for a
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$3,623,690 loan made by Louisville Hotel, LLC (the "LLC"), a related party. The
membership interests are also subject to an option pursuant to which the LLC has
the right to acquire the membership interests for a 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.
In April 2001, Ridgewood Georgia, Inc., a Georgia corporation ("Ridgewood
Georgia") and a wholly-owned subsidiary of the Company, entered into that
certain Assignment and Assumption Agreement (the "Assignment Agreement") with RW
Hotel Investment Associates, L.L.C., a Delaware limited liability company
("Transferee"), pursuant to which Transferee assigned to Ridgewood Georgia
Transferee's 99% membership interest in RW Louisville Hotel Investors, L.L.C., 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
Louisville Hotel. 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.
On September 30, 1999, the Company, which already owned a 10% interest in
the LLC, acquired an additional interest in the LLC for $2,500,000 from
Louisville Hotel, L.P. ("LLP"). As a result of the transaction, the Company
holds an 80% economic interest in the LLC. The $2,500,000 consideration included
$124,000 in cash, the transfer of the Company's 10% ownership interest in a
hotel property in Houston, Texas and promissory notes, due to LLP, in the
original principal amount of $1,333,000 (the "Louisville Notes") secured by the
Company's membership interest in the LLC, a promissory note in the original
principal amount of $300,000 secured by the Company's undeveloped land in
Longwood, Florida (the "Florida Note") and a promissory note in the original
principal amount of $300,000 secured by the Company's undeveloped land in
Phoenix, Arizona (the "Arizona Note" and together with the Louisville Note and
the Florida Notes, the "Notes"). The Louisville Note, Florida Note and Arizona
Note were non-recourse to the Company. The Company also entered into a new
management agreement with the Louisville Hotel pursuant to which the Company
manages the Louisville Hotel in return for a management fee equal to 3% of gross
revenues plus incentive fees for above budget revenues.
The Company has an 80% ownership interest in and is the Managing Member of
the LLC. LLP holds the remaining 20% ownership interest in the LLC. Pursuant to
the LLC's Operating Agreement dated as of May 1998, as amended on September 30,
1999 and as further amended on February 12, 2003 (as amended, the "Operating
Agreement"), the Company has the right at any time to purchase the remaining 20%
interest in the LLC (the "Purchase Option"). The Operating Agreement provides
that the purchase price for LLP's interest is equal to the sum of (a) LLP's
total capital contributions to the LLC ($3,061,000), plus (b) any accrued but
unpaid preferred return on such capital
3
contributions, plus (c) the residual value of the remaining interest (the amount
that would be distributed to LLP if the LLC sold the Louisville 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 (prior
to its February 12, 2003 amendment), the Company was required, no later than
September 30, 2002, to purchase LLP's remaining interest in the LLC for the
Option Price (the "Purchase Obligation").
On February 12, 2003 the Company completed the following transactions with
LLP. 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 (the Company was released from the 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 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 (such
payments are now 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 $300,000 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 from 13% to 10%
and (c) provide the Company with the option to extend the 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 12 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 March 31, 2003, the Louisville Hotel has spent approximately
$510,000 on improvements and
4
has approximately $61,000 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.
In March 2001 and 2000, the Company recognized writedowns of $2,000,000
and $1,200,000, respectively, on its investment in the LLC. The March 2000
writedown was due to the anticipated shortfall of the Company's return of equity
as a result of the decreased operating performance of the Louisville Hotel. In
March 2001, in light of the deterioration of market conditions affecting the
hotel industry during the fourth quarter and due to a further decrease in the
operating performance of the Louisville Hotel, management of the Company
concluded that the Company's economic ownership interest in the LLC had been
totally impaired. The carrying value of the investment in the LLC on the
Company's books is $0 as of March 31, 2003 and 2002.
Competition and Seasonality
The hotel business is highly competitive. The demand for accommodations
and the resulting cash flow vary seasonally. Levels of demand are dependent upon
many factors, including general and local economic conditions and changes in the
number of leisure and business related travelers. The hotels managed by the
Company compete with other hotels on various bases including room prices,
quality, service, location and amenities. An increase in the number of
competitive hotel properties in a particular area could have an adverse effect
on the revenues of a Company-managed hotel located in the same area that would
reduce the fees paid to the Company with respect to such property. The Company
is also competing with a multitude of other hotel management companies to obtain
management contracts.
Undeveloped Land
The Company also owns three parcels of undeveloped land which it holds for
sale, two are located in Florida, and one in Texas. The parcel located in
Longwood, Florida is pledged as security for the Company's obligations under the
Notes and the Operating Agreement. The Company has no plans to develop the
remaining properties. The Company intends to sell the properties at such time as
the Company is able to negotiate sales on terms acceptable to the Company.
During the twelve month period ended March 31, 2003, the Company sold or
transferred three parcels of undeveloped land for a loss of approximately
$18,000. In March 2003, the Company signed a contract for the sale of its
property in Longwood, Florida for $540,000. The closing is to occur no later
than October 31, 2003. The contract is contingent upon the purchaser verifying
and confirming access to the property. There can be no assurance that the
closing will occur based on such factors as the contingency described above or
the ability of the seller to fund the transaction as well as other conditions
typical in real estate transactions. There also can be no assurance that the
Company will be able to sell its other undeveloped land on terms favorable to
the Company.
5
Principal Office/Employees
The Company was incorporated under the laws of the State of Delaware on
October 29, 1985. In January 1997, the Company changed its name from Ridgewood
Properties, Inc. to Ridgewood Hotels, Inc. Prior to December 31, 1985, the
Company operated under the name CMEI, Inc.
The Company's principal office is located at 100 Rue Charlemagne,
Braselton, Georgia 30517 (telephone number (678) 425-0900). As of March 31,
2003, the Company employed approximately 693 persons, of which 558 work at the
hotels owned by Fountainhead and managed by the Company, 120 work at the
Louisville Hotel, 8 work at the Holiday Inn Express, 6 work at the restaurant in
Georgia and two work in the Company's principal office. Payroll costs associated
with employees working at hotels are funded by the owners of such hotels. The
Company considers its relations with employees to be good.
Item 2. Properties
The Company does not own any real property material to conducting the
administrative aspects of its business operations. The Company's administrative
offices are located at Chateau Elan Georgia.
As of March 31, 2003, the Company had ownership interest in one operating
property as follows:
Name of Hotel Location # of Rooms Ownership Interest
------------- -------- ---------- ------------------
Holiday Inn Louisville, KY 271 (a)
(a) As of March 31, 2003, the Company, through its subsidiaries, holds a
100% ownership interest in the Louisville Hotel as the sole member
of Associates, the entity that owns the hotel. The Louisville Hotel
serves as collateral for a $17,164,000 term loan with a commercial
lender. Through its ownership in the LLC, the Company has an 80%
economic interest in the Louisville Hotel. The LLC has an option to
acquire the membership interests in Associates for nominal value.
The Company also owns three undeveloped properties which it holds for
sale, of which two properties are located in Florida, and one property is
located in Texas. The Company does not expect to develop these properties. These
properties are more fully described in Note 2 to the Company's audited
consolidated financial statements set forth on pages F-7 to F-34 of this
Report and in Schedule III, Real Estate and Accumulated Depreciation, set forth
on pages F-35 to F-37 of this Report.
Item 3. Legal Proceedings
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,
6
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 holders of up to approximately 790,457 shares 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.
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.
7
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended March 31, 2003.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
There effectively has been an absence of an established public trading
market for the Company's common stock which is quoted in the "pink sheets".
The following table sets forth, for the respective periods indicated, the
closing prices of the common stock
Quarter Ended High Low
------------- ------ ------
June 30, 2001 $0.843 $0.550
September 30, 2001 $0.740 $0.500
December 31, 2001 $0.600 $0.580
March 31, 2002 $0.700 $0.580
June 30, 2002 $0.250 $0.250
September 30, 2002 $0.250 $0.250
December 31, 2002 $0.010 $0.010
March 31, 2003 $0.050 $0.050
On June 30, 2003, the closing price quoted by broker-dealer firms
effecting transactions in the Company's common stock was $0.05.
On March 31, 2003, there were 2,513,257 shares of the Company's common
stock outstanding held by approximately 190 shareholders of record.
The Company may pay future dividends if and when earnings and cash are
available but has no present intention to do so. The declaration of dividends on
the common stock is within the discretion of the Board of Directors of the
Company (the "Board") and is, therefore, subject to many considerations,
including operating results, business and capital requirements and other
factors.
As of March 31, 2003, the Company was in arrears with respect to
$1,470,000 of dividends with respect to the Company's outstanding shares of the
Company's Series A Convertible Cumulative Preferred Stock. The Company is
prohibited from paying dividends on its shares of common stock at any time that
the Company is in arrears with respect to such preferred stock dividends.
Pursuant to the terms of the Stipulation of Settlement (see discussion under
Item 3- Legal Proceedings above), the Convertible
8
Preferred Stock will be cancelled in return for 1,350,000 shares of the
Company's Common Stock and the dividend arrearages have been cancelled.
The Company made no sales of unregistered securities of the Company in the
twelve months ended March 31, 2003.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the Company's audited financial statements and related notes
thereto, set forth in Item 8 hereof, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," set forth in Item 7 hereof.
The historical results are not necessarily indicative of future results. All
amounts are in thousands, except per share data.
March 31 August 31
Balance Sheet Data as of 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------
Total Assets $ 23,629 $25,592 $5,771 $8,243 $5,910
Long-Term Debt 21,685 20,674 1,933 4,553 2,682
Shareholders' Equity (Deficit) (1,035) 432 1,700 1,740 1,556
Year Ended Seven Months Ended Year ended
Income Statement Data March 31 March 31 March 31 March 31 August 31
for the ---------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Net Revenues $ 9,403 $ 9,339 $ 10,466 $ 3,378 $ 2,769 $ 4,547 $ 5,830
Net Loss (1,467) (1,268) (40) (1,816) (593) (1,283) (622)
Net Loss Applicable
To Common Shareholders (1,827) (1,628) (400) (2,026) (803) (1,643) (982)
Basic and Diluted
Loss Per Share (0.73) (0.65) (0.16) (1.07) (0.53) (1.09) (0.64)
(a) The increase in the assets and liabilities as of March 31, 2002 compared
to March 31, 2001 is due to the consolidation of the Louisville Hotel
effective April 1, 2001.
Item 7. 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 of the Company and its subsidiaries. The discussion should
be read in conjunction with the Company's consolidated financial statements for
the fiscal years ended March 31, 2003, 2002 and 2001, included elsewhere herein.
Certain statements included in this Report are forward-looking, such as
statements relating to estimates of operating and capital expenditure
requirements, future revenue
9
and operating income, and cash flow and liquidity. Such forward-looking
statements are based on the Company's current expectations, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by the Company, and are subject to a number of risks and
uncertainties that could cause actual results in the future to differ
significantly from results expressed or implied in any such forward-looking
statements. These risks and uncertainties include, but are not limited to,
uncertainties relating to economic and business conditions, governmental and
regulatory policies, and the competitive environment in which the Company
operates. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "may," "will," or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. Such statements are not guarantees of future performance and are
subject to the risks and uncertainties referred to above. Therefore, the
Company's actual results could differ materially and adversely from those
expressed in any forward-looking statements as a result of various factors. The
Company undertakes no obligation to revise or update publicly any
forward-looking statements for any reason. The information contained in this
Report 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 SEC.
Significant Accounting Policies -
The Company's significant accounting policies consist of revenue
recognition on management contracts and the impairment of long-lived assets. The
impairment of long-lived assets is significant due to the impact it has on the
value of the hotel described above as it is reported in the consolidated assets
of the Company. The Company reviews the net carrying value of its hotels and
other long-lived assets 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
assets. 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 will be written down
to estimated fair market value. The Company recorded losses of $2,000,000 in the
year ended March 31, 2001 for impairment of the Company's investment in the
hotel in Louisville, Kentucky.
New Accounting Pronouncements-
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections", was issued.
This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that Statement, FASB Statement No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This
Statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets
of Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback
10
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The adoption of SFAS No. 145 had no effect on the
financial position and results of operations of the Company.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", was issued which nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred
in a Restructuring"). The adoption of SFAS No. 146 had no effect on the
financial position and results of operations of the Company.
In December 2002, SFAS 148, Accounting for Stock-Based Compensations -
Transition and Disclosure, was issued which is an amendment of SFAS 123,
Accounting for Stock-Based Compensation. This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. The Company has determined not to adopt SFAS 148 as of March 31,
2003 as the Company has limited stock option activity.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an Interpretation of SFAS No. 5, 57, and
107, and recession of FASB Interpretation No. 34. The interpretation elaborates
on the disclosures to be made by a guarantor in its financial statements. It
also requires a guarantor to recognize a liability for the fair value of the
obligation undertaken in issuing the guarantee at the inception of a guarantee.
Management does not expect the adoption of this interpretation to have a
significant effect on the financial position and results of operations of the
Company.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest annuities. FIN No. 46 clarifies the application of Accounting Research
Bulletin ("ARB") No. 51, Consolidated Financial Statements, to certain entities
in which equity investors do not have characteristics of controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The application of the majority voting interest requirement in ARB 51 to certain
types of entities may not identify the party with a controlling financial
interest because the controlling financial interest may be achieved through
arrangements that do not involve a controlling interest. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003 and to
fiscal years beginning after June 15, 2003 for variable interest entities
acquired before February 1, 2003. Management does not expect the adoption of FIN
No. 46 to have a significant impact on the Company's financial statements.
11
Results of Operations -
Hotel Management Revenue
The Company presently manages four hotel properties (not including the
hotel in Louisville, Kentucky consolidated for financial reporting purposes and
discussed below under Wholly Owned Hotel Operations), a resort property with
golf facilities only and a restaurant for which the Company receives a
management fee calculated as a percentage of gross revenues.
During the fiscal year ended March 31, 2003, the Company managed four
Fountainhead properties consisting of Chateau Elan Georgia, Sebring, St. Andrews
and Diablo. St. Andrews opened in June 2001 and the Company received a
development fee for services provided to St. Andrews prior to its opening. The
Company began receiving management fees from Diablo beginning in August 2002.
The combined management and development fees for these Fountainhead hotels were
approximately $1,008,000, including $644,000 relating to Chateau Elan Georgia,
$62,000 relating to Sebring, $273,000 relating to St. Andrews and $29,000
relating to Diablo. The management and development fees from these Fountainhead
properties represent approximately 90% of the Company's total management fee
revenue for the year ended March 31, 2003. During fiscal year ended March 31,
2002, the combined management and development fees for these Fountainhead hotels
were approximately $858,000, including $645,000 relating to Chateau Elan
Georgia, $70,000 relating to Sebring and $143,000 relating to St. Andrews. The
management and development fees from these Fountainhead properties represent
approximately 64% of the Company's total management fee revenue for the year
ended March 31, 2002. During fiscal year ended March 31, 2001, the combined
management and development fees for these Fountainhead hotels were approximately
$1,123,000, including $973,000 relating to Chateau Elan Georgia, $60,000
relating to Sebring and $90,000 relating to St. Andrews. The management and
development fees from these Fountainhead properties represent approximately 44%
of the Company's total management fee revenue for the year ended March 31, 2001.
The Company also managed the Holiday Inn Express at Chateau Elan receiving
management fees of approximately $24,000, $23,000 and $23,000 for the fiscal
years ended March 31, 2003, 2002 and 2001, respectively.
The Company also manages a restaurant in Georgia for which it received
approximately $6,000 in management revenue during fiscal year ended March 31,
2003.
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 for the year ended March 31, 2003 decreased
$224,000, or 17% compared to the year ended March 31, 2002. Revenues from hotel
12
management for the year ended March 31, 2002 decreased $1,196,000, or 47%
compared to the year ended March 31, 2001. Revenues from hotel management
decreased as a result of both the termination of management contracts during the
years ended March 31, 2003 and 2002 and a decrease in revenues from prior
periods in hotels currently managed by the Company. The management agreements
were terminated for various reasons such as ownership changes at a hotel or
insufficient cash at the managed hotel to pay for management services. In
addition, approximately $225,000 of this decrease was related to the
consolidation of the hotel in Louisville, Kentucky as of April 1, 2001.
The downturn in the economy beginning during 2001 reduced both corporate
travel and meeting events, resulting in lower hospitality revenues throughout
the hotel sector. The sector suffers from the additional construction of limited
and full service hotels in the past three years. With the improvement of the
fairgrounds and the largest hotel in Louisville and the construction of new
hotels, room night demand has declined forcing room rates lower. In particular,
the resort properties managed by the Company incurred significant cancellations
after September 11, 2001 and experienced reduced occupancy throughout fiscal
year ended March 31, 2003. 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. In addition to
the impact on monthly revenue, the reduction in business will 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.
In compliance with Staff Accounting Bulletin ("SAB") No. 101, the Company
does not accrue or realize incentive management fee revenues until earned. The
management agreements identify when incentive fees are earned and how they are
calculated. Some of the Company's management agreements have provisions that
incentives are earned quarterly while others provide for annual incentive fees.
Some of the agreements' incentive fee provisions are based on a calendar year
while others are based on a fiscal year. The Company recorded no incentive fees
related to any of the properties which it managed for the years ended March 31,
2003 and 2002, but did record an incentive fee of $247,000 related to the
performance of Chateau Elan Georgia for the year ended March 31, 2001. This fee
is based on the actual results of the resort.
During the year ended March 31, 2003, the Company entered into one new
management agreement. During the same period, three management agreements were
terminated by property owners. The management agreements were terminated for
various reasons such as ownership changes at a hotel or insufficient cash at the
managed hotel to pay for management services.
During the year ended March 31, 2003, the Company's management agreements
were terminated for the following properties: (i) a 119 room hotel in Athens,
Georgia as of May 2002, (ii) a 60 room Shoney's Inn in Lavonia, Georgia as of
April 2002, (iii) and a 143 room Holiday Inn Express in Atlanta, Georgia as of
March 2003. The Company received approximately $73,000 of management and
accounting fees during the year ended March 31, 2003 related to these hotels.
13
Wholly-Owned Hotel Operations
The Company currently owns, indirectly through its subsidiaries, one
hotel property, the Louisville Hotel, which is directly owned by Associates, the
wholly-owned subsidiary of the Company. The Louisville Hotel is a Holiday Inn
franchise. Under the terms of the franchise agreement with respect to this
property, the Company is required to comply with standards established by the
franchiser, including property upgrades and renovations. The owner of the hotel
is responsible for all operating expenses, including property upgrades and
renovations. Effective April 2001, Associates financial statements are
consolidated with the Company's financial statements. Revenues from wholly-owned
hotel operations for the fiscal year ended March 31, 2003 decreased $8,000
compared to the fiscal year ended March 31, 2002. Revenues from wholly-owned
hotel operations for the fiscal year ended March 31, 2002 increased $5,715,000,
or 319%, compared to the fiscal year ended March 31, 2001. The increase was due
to the consolidation of Associates.
As of February 2001, the Company no longer leases the Ramada Inn in
Lubbock, Texas. The total revenues for this hotel for the year ended March 31,
2001 were $1,432,000. The Company had no revenues relating to the hotel in
Lubbock, Texas in the fiscal year ended March 31, 2002.
In fiscal years ended March 31, 2003 and 2002, the Louisville Hotel was
the Company's only wholly-owned hotel operation. As a consequence of the
September 11, 2001 terrorist attacks and their effect on the travel industry,
the Louisville Hotel experienced numerous cancellations in September 2001 and
experienced lower occupancy during the fiscal years ended March 31, 2003 and
2002. The Louisville Hotels room reservations 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
Louisville Hotel's revenues until such time as the travel industry rebounds.
Real Estate Sales
The Company had a loss from real estate sales of approximately $18,000 for
the fiscal year ended March 31, 2003. The Company had a $92,000 and $2,876,000
gain for the fiscal years ended March 31, 2002 and 2001, respectively. The
Company sold a hotel property in Longwood, Florida in the fiscal year ended
March 31, 2001 which sale resulted in a gain of approximately $2,856,000. Gains
or losses on real estate sales are dependent upon the timing, sales price and
the Company's basis in specific assets sold and will vary considerably from
period to period.
Other Income
In relation to the Company's investment in unconsolidated entities, the
Company recognized equity of $234,000, $251,000 and $251,000 for the years ended
March 31, 2003, 2002 and 2001, respectively, relating to the Company's ownership
interest in LLC.
14
Interest income decreased $21,000, or 70% for the year ended March 31,
2003 compared to the year end March 31, 2002 and $42,000, or 58% for the year
ended March 31, 2002 compared to the year ended March 31, 2001 due to less cash
available for investment purposes and lower interest rates.
There were no other revenues earned during year ended March 31, 2003. The
other revenue of $89,000 and $22,000 received during the years ended March 31,
2002 and 2001, respectively, was primarily from the recognition of an incentive
fee the Company received from a long distance phone carrier to utilize their
long distance service.
Expenses
Expenses of wholly-owned real estate increased $1,000, for the year ended
March 31, 2003 compared to the year ended March 31, 2002. Expenses of
wholly-owned real estate increased $3,113,000, or 143%, for the year ended March
31, 2002 compared to the year ended March 31, 2001. The increase was due to the
consolidation of the Louisville Hotel.
On January 4, 2001, the Company moved its principle executive offices to
Hoschton, Georgia. The lease expense for vacated office of approximately
$107,000 in the year ended March 31, 2001 is related to the lease obligations on
the Company's previous office in Atlanta, Georgia that it vacated in December
2000. The Company paid $13,107 per month through May 2002. In April 2001, the
vacated office was sublet for $8,738 per month. The Company no longer leases
office space, as it utilizes space at Chateau Elan Georgia.
Depreciation and amortization increased $99,000, or 7%, for the year ended
March 31, 2003 compared to the year ended March 31, 2002. The increase was due
to greater depreciation related to the Louisville Hotel as a result of
improvements required by the Improvement Plan. Depreciation and amortization
increased $846,000, or 155%, for the year ended March 31, 2002 compared to the
year ended March 31, 2001. This increase was due to the consolidation of the
Louisville Hotel.
Interest expense increased $14,000, or 1%, for the year ended March 31,
2003 compared to the year ended March 31, 2002. The increase was due to the
mezzanine loan on the Louisville Hotel, which is held by LLC. Interest expense
increased $1,711,000, or 627%, for the year ended March 31, 2002 compared to the
year ended March 31, 2001 due to the consolidation of the Louisville Hotel.
During the fiscal year ended March 31, 2003, the Company downsized its
corporate staff substantially due to the smaller number of properties being
managed by the Company. The Company's only corporate staff employees are the
President and the Regional Director of Operations. The day-to-day financial
management of the Company is contracted with a CPA firm who reports to the
Regional Director of Operations.
15
General, administrative and other expenses decreased $537,000, or 28% for
the year ended March 31, 2003 compared to the year ended March 31, 2002. The
decrease is due to the Company's downsizing described above. General,
administrative and other expenses decreased $311,000, or 14% for the year ended
March 31, 2002 compared to the year ended March 31, 2001. The decrease is 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.
Provision for doubtful accounts increased by approximately $165,000 for
the year ended March 31, 2003 compared to the year ended March 31, 2002. The
increase was due to specific accounts which the Company determined
collectibility was uncertain. Provision for doubtful accounts decreased by
approximately $108,000 for the year ended March 31, 2002 compared to the year
ended March 31, 2001. The decrease was due to the write-off of several accounts
due to uncollectibility.
There were no business development expenses for the years ended March 31,
2003 and 2002. Previously, while the Company was aggressively pursuing the
business of acquiring, developing, operating and selling hotel properties
throughout the country, the Company incurred business development costs.
In March 2001, the Company recognized a writedown of $2,000,000 on its
investment in LLC. The carrying value of the investment in LLC on the Company's
books is $-0- as of March 31, 2003.
The Company's loss of $1,467,000 for the fiscal year ended March 31, 2003
was comprised of the following: (1) approximately a $960,000 loss as a result of
the hotel management operations, administrative, debt service and depreciation
and amortization costs of the Company and (2) approximately a $507,000 operating
loss by the wholly-owned hotel of the Company. The Company's loss of $1,268,000
for the fiscal year ended March 31, 2002 was comprised of the following: (1)
approximately a $683,000 loss as a result of the hotel management operations,
administrative, debt service and depreciation and amortization costs of the
Company and (2) approximately a $585,000 operating loss by the wholly-owned
hotel of the Company. The Company's income before income taxes of $30,000 for
the fiscal year ended March 31, 2001 was comprised of the following: (a) a
$2,856,000 gain on the sale of the hotel in Longwood, Florida (b) a $2,000,000
writedown on the investment in the Louisville Hotel, (c) additional bad debt
reserve of $189,000, and (d) an operating loss of $637,000.
The Company's recurring losses 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
16
Liquidity and Capital Resources -
Land Sales
During the fiscal year ended March 31, 2003, the Company received net
proceeds of $12,000 from the sale of undeveloped land in Athens, Georgia.
Fountainhead Transactions
On August 8, 2002, the Company entered into a management agreement with
Fountainhead to perform management services at Diablo Grande Resort located in
Patterson, California, one of Fountainhead's properties, for a period of five
years beginning on September 1, 2002. In consideration of the management
agreement, the Company paid Fountainhead $250,000. In the management agreement,
Fountainhead agreed to pay the Company a base management fee equal to 2.5% of
the gross revenues of the properties being managed. The management agreement has
a term of five years but is terminable by Fountainhead. If the management
agreement is terminated by Fountainhead, then Fountainhead must refund the
Company certain amounts based on the year of termination. The agreement
automatically extends for six month increments from September 1, 2007 unless
terminated by either party.
In October 2002, the Company amended the terms of the management
agreements between the Company and Fountainhead for the management of St.
Andrews and Sebring. In exchange for five year agreements, the Company agreed to
pay Fountainhead $575,000. If the management agreement is terminated by
Fountainhead, then Fountainhead must refund the Company certain amounts based on
the year of termination. Fountainhead was paid $400,000 in cash and the
remaining sum of $175,000 was deducted from monthly fees due to the Company for
the management of the St. Andrews property. The Company is amortizing the
$575,000 fee over the life of the management agreement.
There can be no assurance that the Company will continue to manage
Fountainhead properties in the future. If the Company's management of the
Fountainhead properties was terminated by Fountainhead, it would have a material
adverse effect on the Company's revenues and financial condition.
Louisville Hotel
The Company owns one hotel property, the Louisville Hotel, through its
subsidiary, 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
17
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. LLP holds 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.
The Operating Agreement provides that distributions to LLC's owners are
made as follows:
Distributable Cash is defined as the net cash realized from operations but
after payment of management fees, principal and interest, capital improvements
and other such retentions as the managing member determines to be necessary.
Pursuant to the Operating Agreement, distributions of distributable cash from
the LLC shall be made as follows:
o First, to the Company in an amount equal to the cumulative interest paid
on the Notes. The Company uses these funds to pay LLP interest on the
Notes.
o Second, a 13% preferred return (which was reduced to 10% as of February
2003) to LLP on its original $3,061,000 investment.
o Third, a 13% preferred return (which was reduced to 10% as of February
2003) to the Company on its capital contribution of $1,207,000.
o Fourth, 80% to the Company and 20% to LLP.
Cash from a sale or refinancing would be distributed as follows:
o First, to the Company in an amount equal to the cumulative interest paid
on the Notes.
o Second, to the Company in an amount equal to the original principal amount
of the Notes.
18
o Third, to LLP until it has received aggregate distributions in an amount
equal to its 13% preferred return (which was reduced to 10% as of February
2003).
o Fourth, to LLP until its net capital contribution is reduced to zero.
o Fifth, to the Company until it has received an amount equal to its 13%
preferred return (which was reduced to 10% as of February 2003).
o Sixth, to the Company until its net capital contribution is reduced to
zero.
o Thereafter, 20% to LLP and 80% to the Company.
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 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 $300,000 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.
In connection with the new management agreement effective September 30,
1999, the Company received management fees totaling approximately $222,000,
$225,000 and $258,000 for the fiscal years ended March 31, 2003, 2002 and 2001,
respectively
The Company has guaranteed Associates' obligations under the Franchise
Agreement between Associates and Holiday Inn. In the event that the Franchise
Agreement is terminated as a result of a breach of the Franchise Agreement by
Associates, Associates would be subject to liquidated damages under the
Franchise Agreement equal to approximately 12 times the monthly franchise fees
payable pursuant
19
to the Franchise Agreement. The current monthly franchise fees are approximately
$32,000.
Under the Improvement Plan, to which the Louisville Hotel is subject, the
Louisville Hotel is required to make approximately $1,200,000 of improvements by
December 31, 2002, with certain interim milestones. As of March 31, 2003 the
Louisville Hotel has spent approximately $510,000 on improvements and has
approximately $61,000 in escrow to spend on improvements. The Company has
received an informal extension to May 1, 2004 for completion of the Property
Improvement Plan and the funding by Associates should be sufficient for it's
completion.
Shareholder Settlement
See Item 3- Legal Proceedings for discussion of the Shareholder Settlement.
Cash on Hand and Long-Term Debt Obligations
The Company has approximately $89,000 of available cash as of March 31,
2003.
The Company's long-term debt obligations as of March 31, 2003 are as
follows:
-----------------------------------------------------------------------
Total Less than 1 year 1-3 years 4-5 years After 5 years
-----------------------------------------------------------------------
$22,052,000 $367,000 $2,053,000 $949,000 $18,683,000
-----------------------------------------------------------------------
Effect of Inflation
Inflation tends to increase the Company's cash flow from income-producing
properties since rental rates generally increase by a greater amount than
associated expenses. Inflation also generally tends to increase the value of the
Company's land portfolio.
Offsetting these beneficial effects of inflation are the increased cost of
the Company's operating expenses and the increased costs and decreased supply of
investment capital for real estate that generally accompany inflation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has no material exposure to the market risks covered by this
Item.
Item 8. Financial Statements
The reports of Arthur Andersen LLP included herein with respect to the
Financial Statement Schedule III, Real Estate and Accumulated Depreciation,
included herein and the financial statements included herein are copies of
reports previously issued by Arthur Andersen LLP relating to the Company's
financial statement schedule and financial statements for the year ended March
31, 2001. Such reports have not been reissued, and
20
the consent of Arthur Andersen LLP has not been obtained with respect to such
reports. As a result, your ability to assert claims against Arthur Andersen LLP
may be limited. Since we have not been able to obtain the written consent of
Arthur Andersen LLP, you will not be able to recover against Arthur Andersen LLP
under Section 11 of the Securities Act for any untrue statements of material
fact contained in the report or financial statements or any omissions to state a
material fact required to be stated in the financial statements.
The audited consolidated financial statements and financial statement
schedules required to be filed with this Report are set forth at the end of this
Report and begin on page F-1 hereof, "Index To Consolidated Financial
Statements."
Supplementary Financial Information
The following table presents unaudited quarterly statements of operations
data for each quarter of the Company's last two completed fiscal years. The
unaudited quarterly financial statements have been prepared on substantially the
same basis as the audited financial statements for the year ended March 31,
2003, included elsewhere in this Report. The results of operations for any
quarter are not necessarily indicative of the results to be expected for any
future period. Amounts set forth below are in thousands, except per share data.
SUPPLEMENTARY FINANCIAL INFORMATION
(Unaudited)
(000's omitted, except per share data)
2003 For Quarter Ended March 31 December 31 September 30 June 30
- -----------------------------------------------------------------------------------------------
Net Revenues $ 2,494 $ 2,103 $ 2,257 $ 2,549
Net Loss (427) (539) (339) (162)
Net Loss Applicable
To Common Shareholders (517) (629) (429) (252)
Basic Loss Per Share $ (0.21) $ (0.25) $ (0.17) $ (0.10)
2002 For Quarter Ended March 31 December 31 September 30 June 30
- -----------------------------------------------------------------------------------------------
Net Revenues $ 2,017 $ 2,341 $ 2,243 $ 2,738
Net Loss (521) (243) (410) (94)
Net Loss Applicable
To Common Shareholders (611) (333) (500) (184)
Basic Loss Per Share $ (0.25) $ (0.13) $ (0.20) $ (0.07)
21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company had a change in its certifying accountants. Deloitte and
Touche resigned as the Company's independent accountants on May 1, 2003. The
resignation of the former accountants were reported by the Company in its
Current Report Form 8-K dated May 8, 2003 and Form 8-K/A dated May 19, 2003. The
Company engaged Moore Stephens Lovelace, P.A. as its new independent accountants
as of May 9, 2003. The change was reported in the Company's Current Report Form
8-K dated May 9, 2003.
PART III
Item 10. Directors and Executive Officers
Set forth below are the names, ages (as of March 31, 2003), positions and
offices held and a brief description of the business experience during the past
five years of the directors and executive officers of the Company.
Stacey D. Stewart (age 40) has served as a director of the Company since
March 2, 2001. Ms. Stewart is currently the President and Chief Executive
Officer of the Fannie Mae Foundation. Prior to her appointment as President and
Chief Executive Officer with the Fannie Mae Foundation, Ms. Stewart served as
Vice President for Housing and Community Development in the Fannie Mae
Foundation's Southeastern Regional Office. She was also a public finance
investment banker for five years in New York and Atlanta. While in Atlanta, she
served as Treasurer and Chair of the Finance Committee for the Fulton-Dekalb
Hospital Authority, and on the Board of Directors of the Atlanta Urban League,
Research Atlanta, and the Herndon Foundation. She currently serves on the Policy
Advisory Board of the Joint Center for Housing Studies at Harvard University,
and is active with Woman's in Street Village, Woman's Policy Inc., the Museum of
African Art and the Washington Ballet.
Henk H. Evers (age 44) has served as President and Chief Operating Officer
of the Company since January 11, 2000 and as a director of the Company since
February 3, 2000. Since January 1999, Mr. Evers has served as the Chief
Executive Officer of Fountainhead. Since being appointed President of the
Company on January 11, 2000, Mr. Evers has devoted a significant portion of his
time to the Company's affairs including the management of Chateau Elan Georgia.
From November 1994 until January 1999, Mr. Evers was the General Manager of the
Chateau Elan Winery and Resort, where he was in charge of developing the Chateau
Elan brand name and properties in Georgia, California, Florida and Scotland.
Prior to that, Mr. Evers was a member of the executive committee for various
Marriott International properties for approximately 13 years.
Donald E. Panoz (age 67) has served as Chief Executive Officer of the
Company since January 11, 2000 and as Chairman of the Board since February 3,
2000. In 1986, Mr. Panoz founded Fountainhead and has served as its Chairman
since inception. Since July 1999, Mr. Panoz has served as the Chairman of Elan
Motor Sports Technologies, Inc., an auto racing design, development and
manufacturing company located in Braselton, Georgia. Since 1997, Mr. Panoz has
served as the Chairman of Panoz Motor
22
Sports, a race car manufacturer and competitor that he founded. Since 1996, Mr.
Panoz has served as the Chairman and Chief Executive Officer of L'Auberge
International Hospitality Company, a hotel and resort management company that he
co-founded with Nancy C. Panoz. From 1969 until 1996, Mr. Panoz served as the
Chairman and Chief Executive Officer of Elan Corporation plc, a leading
worldwide pharmaceutical research and development company located near Dublin,
Ireland that he co-founded with Nancy C. Panoz. Since 1992, Mr. Panoz has been a
director of Warner Chilcott plc, a publicly traded pharmaceutical company
headquartered in Dublin, Ireland, and served as its Chairman from 1995 to 1998.
Since 1981, Mr. Panoz has served as the Chairman and Chief Executive Officer of
Chateau Elan Winery and Resort, a 301-room inn, conference center and winery
located approximately 40 miles northeast of Atlanta, Georgia. Mr. Panoz also
serves on the Board of Directors of the Georgia Chamber of Commerce. Mr. Panoz
is married to Nancy C. Panoz.
Nancy C. Panoz (age 66) has served as Vice Chairman of the Board since
February 3, 2000. Since 1996, Mrs. Panoz has also served as the Vice Chairman of
L'Auberge International Hospitality Company, a company that she co-founded with
Donald E. Panoz. In 1989, Mrs. Panoz became President of the Chateau Elan Winery
and Resort that she founded with Donald E. Panoz in 1981. In 1985, Mrs. Panoz
founded Elan Natural Waters, Inc., a company that owns and operates a mineral
water bottling plant in Blairsville, Georgia, and has served as its President
and Chairman since its inception. In 1985, Mrs. Panoz founded Nanco Holdings,
Inc., an investment and real estate holding company. In 1969, Mrs. Panoz
co-founded Elan Corporation with Donald E. Panoz, and served as its Managing
Director from 1977 to 1983 and its Vice Chairman from 1983 to 1995. Mrs. Panoz
currently serves on the Board of Directors of numerous non-profit organizations,
including the Atlanta Convention and Visitors Bureau, the Georgia Chamber of
Commerce and the Gwinnett Foundation, Inc. Mrs. Panoz is married to Donald E.
Panoz.
Anthony Mastandrea (age 37) has been a director of the Company since
January 2000. Since December 1998, Mr. Mastandrea has been the Chief Financial
Officer and a director of Fountainhead Holdings, Ltd. From May 1994 until
November 1998, Mr. Mastandrea was the Controller for Fountainhead. Prior to
joining Fountainhead, Mr. Mastandrea was a manager with KPMG Peat Marwick in
Atlanta, Georgia and is a Certified Public Accountant.
James J. Papovich (age 41) has been with the Company since 1997. Mr.
Papovich has been Regional Director of Operations since August 2002. Mr.
Papovich is responsible for the oversight and supervision of the Company's
financial functions including the direct supervision of the outside accounting
firm (whose two principals are certified public accountants) retained by the
Company to assist in financial reporting matters and to provide internal
accounting support. Prior to his appointment as the Regional Director of
Operations, Mr. Papovich served as the General Manager of the hotel in
Hurstbourne, Kentucky. From 1994 until 1997, Mr. Papovich served as the Food and
Beverage Director of the Embassy Row Hotel in Washington, D.C. Prior to 1994,
Mr. Papovich served as the Chef at several prestigious restaurants.
Donald E. Panoz and Nancy C. Panoz are married. There are no other family
relationships among any of the executive officers or directors of the Company.
Directors of the Company serve as such until the Next Annual Meeting of
Stockholders of the Company and until their successors have been elected and
qualified, or until their earlier resignation, death or removal. Executive
officers of the Company are elected or
23
appointed by the Board and hold office until their successors are elected or
until their death, resignation or removal.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires the Company's directors, executive officers, and persons who own
beneficially more than 10% of a registered class of the Company's equity
securities to file with the SEC initial reports of ownership and reports of
changes in ownership of such securities of the Company. Directors, executive
officers and greater than 10% stockholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file.
To the Company's knowledge, all Section 16(a) filing requirements
applicable to its directors, executive officers and greater than 10% beneficial
owners were complied with during the fiscal year ended March 31, 2003.
Item 11. Executive Compensation
Compensation of Non-Employee Directors
During fiscal year ended March 31, 2003, Ms. Stewart, who was a
Non-Employee Director of the Company, received a retainer of $13,200 plus $800
for each Board meeting attended. All directors were reimbursed for expenses
incurred in connection with attending Board and committee meetings.
Executive Compensation
The following table sets forth the cash and non-cash compensation awarded
or paid by the Company for services rendered during each of the fiscal years in
the three-year period ended March 31, 2003, to the Company's Chief Executive
Officer and to the Company's most highly compensated executive officers other
than the Chief Executive Officer whose annual compensation exceeds $100,000 (the
"Named Executive Officers").
24
Summary Compensation Table
Annual Compensation
-------------------
Name and Fiscal All Other
Principal Position Year Salary Bonus Compensation
- ------------------ ---- ------ ----- ------------
Henk H. Evers 2003(3) $291,750 $70,000 $0
President 2002(2) 270,770 0 0
2001(1) 264,500 0 0
Donald E. Panoz 2003(3) 0 0 0
Chief Executive Officer 2002(2) 0 0 0
2001(1) 0 0 0
James J. Papovich 2003(3) $109,390 $ 0 $0
Regional Director of 2002 89,683 5,880 0
Operations 2001 84,958 0 0
- ----------
(1) Information shown is for the fiscal year ended March 31, 2001.
Fountainhead paid Mr. Evers' salary, bonus and benefits for the year
ended March 31, 2001 as an advance to the Company. Amounts shown for
the fiscal year ended March 31, 2001 exclude salary of $80,500,
bonus of $75,000 and benefits of $32,000 paid to Mr. Evers by
Fountainhead and allocated to Fountainhead. Of the salary allocated
to the Company, $62,500 was charged to Chateau Elan Georgia in
return for services performed by Mr. Evers for Chateau Elan Georgia
pursuant to the management agreement from September 1, 2001 to March
31, 2001. Mr. Panoz received no compensation for serving as Chief
Executive Officer of the Company during the fiscal year ended March
31, 2001.
(2) Information shown is for the fiscal year ended March 31, 2002.
Fountainhead paid Mr. Evers' salary, bonus and benefits for the year
ended March 31, 2002 as an advance to the Company. Amounts shown for
fiscal year ended March 31, 2002 exclude salary of $82,985, bonus of
$130,000 and benefits of $36,378 paid to Mr. Evers by Fountainhead
and allocated to Fountainhead. Additionally, $125,000 was charged to
Chateau Elan Georgia in return for services performed by Mr. Evers
for Chateau Elan Georgia pursuant to the management agreement from
April 1, 2001 to March 31, 2002. Mr. Panoz received no compensation
for serving as Chief Executive Officer of the Company during the
fiscal year ended March 31, 2002.
(3) Information shown is for the fiscal year ended March 31, 2003.
Fountainhead paid Mr. Evers' salary, bonus and benefits for the year
ended March 31, 2003 as an advance to the Company. Amounts shown for
fiscal year ended March 31, 2003 exclude salary of $50,000 and
benefits of $1,331 paid to Mr. Evers by Fountainhead and allocated
to Fountainhead. Additionally, $125,000 was charged to Chateau Elan
Georgia in return for services performed by Mr. Evers for Chateau
Elan Georgia pursuant to the management agreement from April 1, 2002
to March 31, 2003. Mr. Panoz received no compensation for serving as
Chief Executive Officer of the Company during the fiscal year ended
March 31, 2003. Mr. Papovich began his duties as Regional Director
of Operations in August 2002. Prior to August 2002, he was the
General Manager of the Company's hotel in Louisville, Kentucky.
The Company did not grant any stock options to any of the Named Executive
Officers during the year ended March 31, 2003.
25
Fiscal Year-End Option Values
The following table sets forth information concerning the value of
unexercised options held by each Named Executive Officers as of March 31, 2003.
During fiscal year ended March 31, 2003, no Named Executive Officer exercised
any stock options.
Number of Securities
Underlying Unexercised Unexercised In-
Options at 3/31/03 The- Money
Name Exercisable/Unexercisable Options at 3/31/03
- ---- ------------------------- ------------------
Henk H. Evers 45,000/45,000 0
Donald E. Panoz 0 0
James J. Papovich 0 0
- ----------
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of June 30, 2003, regarding
the beneficial ownership of the capital stock of the Company by (i) each person
who is currently a director of the Company; (ii) each Named Executive Officer;
(iii) each beneficial owner of more than 5% of any class of the Company's voting
securities; and (iv) all directors and executive officers as a group.
26
Class of No. of Shares
Name and Address of Shares Bene- Beneficially Percentage
Beneficial Owner (1) ficially Owned Owned of Class
-------------------- -------------- ----- --------
Fountainhead Holdings, Inc. Common Stock 3,000,000(2) 77.7%
1394 Broadway Avenue Series A
Braselton, GA 30157 Preferred Stock 450,000(3) 100.0%
Fountainhead Holdings, Ltd. Common Stock 3,000,000(2) 77.7%
1394 Broadway Avenue Series A
Braselton, GA 30157 Preferred Stock 450,000(3) 100.0%
Donald E. Panoz + ++ Common Stock 3,000,000(4)(5) 77.7%
Series A
Preferred Stock 450,000(3)(5) 100.0%
Nancy C. Panoz + Common Stock 3,000,000(4)(5) 77.7%
Series A
Preferred Stock 450,000(3)(5) 100.0%
Henk H. Evers + ++ Common Stock 45,000(7) 0.9%
James J. Papovich ++ Common Stock 200 0%
Stacey D. Stewart + Common Stock 0 0%
Anthony J. Mastandrea + Common Stock 0 0%
All executive officers and directors Common Stock 3,045,200(5)(6) 79.8%
as a group (5 persons) Series A
Preferred Stock 450,000(3)(5) 100.0%
- ----------
+ Director of the Company
++ Executive Officer of the Company
(1) Unless otherwise indicated, the mailing address of each beneficial
owner is 100 Rue Charlemagne, Braselton, Georgia 30517. Information
as to the beneficial ownership of common stock has either been
furnished to the Company by or on behalf of the indicated persons or
is taken from reports on file with the SEC.
(2) Includes 1,350,000 shares of common stock issuable upon the
conversion of the Preferred Stock. Fountainhead Holdings, Ltd.
("Holdings") owns all of the voting stock of Fountainhead Holdings,
Inc.. The shares of stock owned by Holdings includes the shares
owned by Fountainhead Holdings, Inc.
(3) Pursuant to the Stipulation of Settlement which became final on June
19, 2003 (see Item 3- Legal Proceedings), all of the shares of the
Company's Series A Convertible Preferred Stock will be cancelled in
exchange for 1,350,000
27
shares of the Company's common stock. Fountainhead Holdings, Inc.
exchanged the shares of Preferred Stock on July 3, 2003.
(4) Includes (i) 1,350,000 shares of common stock issuable upon the
conversion of the Preferred Stock held by Fountainhead Holdings,
Inc. and (ii) 1,650,000 shares of common stock held by Fountainhead
Holdings, Inc..
(5) Mr. and Mrs. Panoz, who are husband and wife, are directors and
officers of and collectively beneficially own all of the voting
stock of Holdings, which in turn owns all of the voting stock of
Fountainhead Holdings, Inc.. Although they may be deemed to meet the
definition of beneficial ownership with respect to the voting stock
of Holdings, they have no economic interest in such voting stock.
Because these shares of the Company are held of record by
Fountainhead Holdings, Inc., each of Mr. and Mrs. Panoz may be
deemed to be a beneficial owner of all such shares.
(6) Includes (i) 1,350,000 shares of common stock issuable upon the
conversion of the Preferred Stock held by Fountainhead Holdings,
Inc.; and (ii) 45,000 shares of common stock underlying options that
are currently exercisable.
(7) Represents 45,000 shares of common stock underlying options that are
currently exercisable.
The following table sets forth information regarding equity compensation
plans under which the Company's equity securities is authorized for issuance as
of March 31, 2003. The Company's shareholders approved the Company's 1993 Stock
Option Plan (the "Plan") on January 12, 1994 and amended the Plan on October 26,
1994. The Plan is the Company's only equity compensation plan approved by the
Company's shareholders.
- --------------------------------------------------------------------------------------------------------------
Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options outstanding options and issuance under equity
and warrants warrants compensation plans
- --------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by 127,000 $2.00 623,000
securities holders
- --------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by 0 0 0
securities holders
- --------------------------------------------------------------------------------------------------------------
TOTAL 127,000 $2.00 623,000
- --------------------------------------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
In the Management Agreement, Fountainhead agreed to pay the Company a base
management fee equal to 2% of the gross revenues of the properties being
managed, plus an annual incentive management fee to be determined each year
based on the profitability of the properties being managed during that year.
28
The Company's Management Agreement is to perform management services at
Chateau Elan Georgia, one of Fountainhead's properties. 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, then Fountainhead shall pay
to the Company a portion of the projected fees owed to the Company under the
Management Agreement, with adjustments based on the term of the Management
Agreement remaining. In such event, Fountainhead may elect to surrender to the
Company shares of common stock in lieu of a cash payment.
The Company also manages Chateau Elan Sebring, St. Andrews and Diablo. All
of these properties are owned by Fountainhead. On August 8, 2002, the Company
entered into a management agreement with Fountainhead to perform management
services at Diablo Grande Resort located in Patterson, California, one of
Fountainhead's properties, for a period of five years beginning on September 1,
2002. In consideration of the management agreement, the Company paid
Fountainhead $250,000. In the management agreement, Fountainhead agreed to pay
the Company a base management fee equal to 2.5% of the gross revenues of the
properties being managed. The management agreement has a term of five years but
is terminable by Fountainhead. If the management agreement is terminated by
Fountainhead, then Fountainhead must refund the Company the $250,000
consideration as follows: within the first year- $250,000; after one year-
$225,000; after two years- $200,000; after three years- $150,000; after four
years- $125,000 and after five years, $100,000. The agreement automatically
extends for six month increments from September 1, 2007 unless terminated by
either party.
In October 2002, the Company amended the terms of the management
agreements between the Company and Fountainhead for the management of St.
Andrews and Sebring. In exchange for five year agreements, the Company agreed to
pay Fountainhead $575,000. Fountainhead was paid $400,000 in cash and the
remaining sum of $175,000 was deducted from monthly fees due to the Company for
the management of the St. Andrews property.
The Company's Chairman and Chief Executive Officer has an 85% ownership
interest and the Company's President has a 15% ownership interest in the Holiday
Inn Express at Chateau Elan. The Company manages the Holiday Inn Express at
Chateau Elan and in return for such management services has received management
fees of approximately $24,000, $23,000 and $23,000 for the fiscal years ended
March 31, 2003, 2002 and March 31, 2001, respectively.
At the request of the Company, since January 11, 2000, Fountainhead has
paid the salary of the Company's President as an advance to the Company. During
the fiscal year ended March 31, 2003, the Company was charged $360,000 by
Fountainhead for the advanced compensation and benefits. There is approximately
$156,000 of accrued liability at March 31, 2003 for the President's compensation
and benefits.
29
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. The Company is reimbursed by Fountainhead for these expenditures.
As of March 31, 2003, Fountainhead owed the Company approximately $188,000 for
unpaid management fees and expenses.
During the fiscal year ended March 31, 2003, the Company had an agreement
with Chateau Elan Georgia pursuant to which Chateau Elan Georgia's Human
Resource Director serves part-time as the Company's Human Resource Director in
return for which the Company is responsible for a portion of the Human Resource
Director's salary. For the year ended March 31, 2003, the Company incurred
charges of approximately $29,000 for his salary. Chateau Elan Georgia deducts
the Company's portion of the salary from the monthly management fees Chateau
Elan Georgia owes to the Company. The Company's director of marketing and former
director of finance also provided services to Chateau Elan Georgia and, as a
result, for the fiscal year 2003, Chateau Elan Georgia reimbursed the Company
approximately $79,000 for such services.
30
ITEM 14. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer and Chief 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-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended,
as of a date within 90 days prior to the filing date of this report (the
"Evaluation Date")). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, 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 Securities
Exchange Act of 1934, as amended.
(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in
the Company's internal controls or in other factors that could significantly
affect such controls.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The reports of Arthur Andersen LLP included herein with respect to the
Financial Statement Schedule III, Real Estate and Accumulated Depreciation,
included herein and the financial statements included herein are copies of
reports previously issued by Arthur Andersen LLP relating to the Company's
financial statement schedule and financial statements for the years ended March
31, 2001. Such reports have not been reissued, and the consent of Arthur
Andersen LLP with respect to such reports has not been obtained. As a result,
your ability to assert claims against Arthur Andersen LLP may be limited. Since
we have not been able to obtain the written consent of Arthur Andersen LLP, you
will not be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act for any untrue statements of material fact contained in the
report or financial statements or any omissions to state a material fact
required to be stated in the financial statements.
(a)(1) The following consolidated financial statements, together with the
applicable previously issued report of independent public accountants, are set
forth beginning on page F-1 hereof.
Reports of Independent Public Accountants.
Copy of Previously Issued Report of Independent Public Accountants.
Consolidated Balance Sheets at March 31, 2003 and 2002.
Consolidated Statements of Operations for the years ended March 31, 2003,
2002 and 2001
31
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended March 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the years ended March 31, 2003,
2002 and 2001.
Notes to Consolidated Financial Statements.
(a)(2) The financial statement schedule listed below is filed as a part of
this Report on pages F-35 and F-37, respectively.
Financial Statement Schedule III - Real Estate and Accumulated
Depreciation -March 31, 2003.
All other schedules have been omitted from this Report because they are not
applicable or because the required information is given in the audited financial
statements or notes thereto set forth elsewhere in this Report.
(a)(3) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on pages E-1 through E-5 hereof.
(b) The Company has not filed any Current Reports on Form 8-K during the
quarter ended March 31, 2003.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: July 15, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ Henk H. Evers /s/ Nancy C. Panoz
- ---------------------------------- ----------------------------------------
Henk H. Evers, President, Chief Nancy C. Panoz, Director
Operating Officer and Director
/s/ Anthony Mastandrea /s/ James J. Papovich
- ---------------------------------- ----------------------------------------
Anthony Mastandrea, Director James J. Papovich, Regional
Director of Operations
/s/ Donald E. Panoz /s/ Stacey D. Stewart
- ---------------------------------- ----------------------------------------
Donald E. Panoz, Director Stacey D. Stewart, Director
Dated: July 15, 2003
33
I, Henk E. Evers, certify that:
1. I have reviewed this annual report on Form 10-K of Ridgewood Hotels.
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: July 15, 2003
/s/ Henk H. Evers
----------------------------------------
Henk H. Evers, President and Chief
Operating Officer
34
I, James J. Papovich, certify that:
1. I have reviewed this annual report on Form 10-K of Ridgewood Hotels,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: July 15, 2003
/s/ James J. Papovich
----------------------------------------
James J. Papovich, Regional Director of
Operations
35
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3(a) Certificate of Incorporation of Registrant.*
3(b) By-Laws of Registrant.*
3(c) Certificate of Amendment to the Certificate of Incorporation
(filed as an Exhibit to Registrant's Form 10-K for the fiscal
year ended August 31, 1987 and incorporated herein by
reference).
3(d) Certificate of Amendment to the Certificate of Incorporation
of the Registrant (filed as an Exhibit to Registrant's Form
10-K for the fiscal year ended August 31, 1989 and
incorporated herein by reference).
3(e) Certificate of Amendment to the Certificate of Incorporation
of Ridgewood Properties, Inc. dated May 23, 1991 (filed as an
Exhibit to Registrant's Form 10-K for the fiscal year ended
August 31, 1991 and incorporated herein by reference).
3(f) Certificate of Amendment to the Certificate of Incorporation
of Ridgewood Properties, Inc. dated March 30, 1993 (filed as
an Exhibit to Registrant's Form 10-Q for the quarter ended
February 28, 1993 and incorporated herein by reference).
3(g) Certificate of Amendment to the Certificate of Incorporation
of Ridgewood Properties, Inc. dated January 26, 1994 (filed as
Exhibit 3 to Registrant's Form 10-Q for the quarter ended
February 28, 1994 and incorporated herein by reference).
3(h) Certificate of Amendment to the Certificate of Incorporation
of Ridgewood Hotels, Inc. (filed as an Exhibit to Registrant's
Form 8-K on February 5, 1997, and incorporated herein by
reference).
4(a) Stock Purchase Agreement between Ridgewood Properties, Inc.
and Triton Group Ltd., dated as of August 15, 1994 (filed as
an Exhibit to Registrant's Form 8-K on August 15, 1994, and
incorporated herein by reference).
E-1
4(b) Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock of the Registrant (filed as an
Exhibit to Registrant's Registration Statement on Form S-8
filed on November 8, 1994 (No. 33-866084) and incorporated
herein by reference).
10(a) Bill of Sale and Assumption of Liabilities between CMEI, Inc.
and Ridgewood Properties, Inc. dated December 9, 1985.*
10(b) Ridgewood Properties, Inc. Supplemental Retirement and Death
Benefit Plan dated January 1, 1987 (filed as an Exhibit to
Registrant's Form 10-K for the fiscal year ended August 31,
1988 and incorporated herein by reference).
10(c) Ridgewood Properties, Inc. Stock Option Plan dated March 30,
1993 and as amended September 14, 1993 (filed as an Exhibit to
Registrant's Form 10-Q for the quarter ended February 28,
1994, and incorporated herein by reference).
10(d) Ridgewood Properties, Inc. 1993 Stock Option Plan, as amended
on October 26, 1994 (filed as an Exhibit to Registrant's
Registration Statement on Form S-8 filed on November 8, 1994
(No. 33-86084) and incorporated herein by reference).
10(e) Amended and Restated Basic Agreement between RW Hotel
Investment Partners, L.P. and Ridgewood Hotels, Inc. dated
August 14, 1995 (filed as an Exhibit to Registrant's Form 10-K
for the fiscal year ended August 31, 1995, and incorporated
herein by reference).
10(f) Amended and Restated Limited Partnership Agreement of RW Hotel
Partners, L.P. dated September 8, 1995 (filed as an Exhibit to
Registrant's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference).
10(g) Management Agreement (Holiday Inn Hurstbourne) between RW
Hotel Partners, L.P. and Ridgewood Properties, Inc. dated
August 16, 1995 (filed as an Exhibit to Registrant's Form 10-K
for the fiscal year ended August 31, 1995, and incorporated
herein by reference).
E-2
10(h) Agreement and Plan of Merger between and among Ridgewood
Properties, Inc., Ridgewood Acquisition Corp., Wesley Hotel
Group, Inc., Wayne McAteer and Samuel King dated December 7,
1995 (filed as an Exhibit to Registrant's Form 10-Q for the
quarter ended November 30, 1995, and incorporated herein by
reference).
10(i) Operating Agreement between RW Hurstbourne Hotel, Inc. and RW
Louisville Hotel Investors, LLC effective May 13, 1998 (filed
as an Exhibit to Registrant's Form 10-Q for the quarter ended
May 31, 1998).
10(j) Operating Agreement between Ridgewood Hotels, Inc. and
Louisville Hotel, L.P. effective June 5, 1998 (filed as an
Exhibit to Registrant's Form 10-Q for the quarter ended May
31, 1998).
10(k) First Amendment to Operating Agreement of Louisville, LLC
dated September 30, 1999 (filed as an Exhibit to Registrant's
Form 10-K for the fiscal year ended August 31, 1999 and
incorporated herein by reference).
10(l) Secured Promissory Note in the amount of $1,333,000 by
Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated
September 30, 1999 (filed as an Exhibit to Registrant's Form
10-K for the fiscal year ended August 31, 1999 and
incorporated herein by reference).
10(m) Secured Promissory Note (Arizona) in the amount of $300,000 by
Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated
September 30, 1999 (filed as an Exhibit to Registrant's Form
10-K for the fiscal year ended August 31, 1999 and
incorporated herein by reference).
10(n) Secured Promissory Note (Florida) in the amount of $300,000 by
Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated
September 30, 1999 (filed as an Exhibit to Registrant's Form
10-K for the fiscal year ended August 31, 1999 and
incorporated herein by reference).
E-3
10(o) Management Agreement between Fountainhead Development Corp.,
Inc., as Owner, and Ridgewood Hotels, Inc., as Manager, dated
January 10, 2000 (filed as an Exhibit to Registrant's Form 8K
on January 11, 2000 and incorporated herein by reference).
10(p) Agreement between Fountainhead Development Corp., Inc. and
Ridgewood Hotels, Inc. dated January 10, 2000 (filed as an
Exhibit to Registrant's Form 8-K on January 11, 2000 and
incorporated herein by reference).
10(q) Assignment and Assumption Agreement dated as of April 2001
between RW Hotel Investment Associates, LLC and Ridgewood
Georgia, Inc. (filed as an Exhibit to Registrant's Form 8K on
July 2, 2001).
10(r) Contract for the Purchase and Sale of Property dated June 1999
between the Company, Ridgewood Orlando, Inc., Fulgent Street
Motel & Hotel, Inc. and Brokers Title, LLC (filed as an
Exhibit to Registrant's Form 8-K on July 2, 2001).
10(s) Reinstatement of and Second Amendment to Contract for the
Purchase and Sale of Property Dated January 24, 2000 (filed as
an Exhibit to Registrant's Form 8-K on July 2, 2001).
10(t) Stipulation of Settlement dated March 19, 2003, by and among
William N. Strassburger, Michael M. Earley, Luther A.
Henderson, John C. Stiska, N. Russel Walden, Triton Group,
Ltd., Ridgewood Hotels, Inc., and Fountainhead Development
Corp (filed as an Exhibit to Registrant's Form 8-K on March
24, 2003 and incorporated herein by reference).
10(u) Second Amendment to the Operating Agreement of Louisville Hotel, LLC
entered into between Ridgewood Hotels, Inc. and Louisville Hotel,
L.P. effective as of February 12, 2003.
10(v) $300,000 Renewed, Amended and Restated Secured Promissory Note
issued by Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated
February 12, 2003.
10(w) $933,000 Renewed, Amended and Restated Secured Promissory Note
issued by Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated
February 12, 2003.
E-4
23(a) Consent of Deloitte & Touche LLP.
99(a) Order and Final Judgment of the Delaware Court of Chancery in
Civil Action No. 14267 (filed as an Exhibit to Registrant's
Form 8-K on May 30, 2003 and incorporated herein by
reference).
99(b) Certification of the Registrants's President and Chief
Operating Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99(c) Certification of the Registrant's Regional Director of
Operations pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
- ----------
* Previously filed as an Exhibit to Registrant's Registration Statement on
Form 10 file on November 19, 1985 (Securities Exchange Act File No.
0-14019), and incorporated herein by reference.
E-5
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements, Financial Statement
Schedule and Previously Issued Independent Accountants' Reports are included
herein on the pages indicated:
Page
----
Reports of Independent Accountants ...................................... F-2
Previously Issued Reports of Independent Accountants .................... F-3
Consolidated Balance Sheets as of March 31, 2003 and 2002 ............... F-7
Consolidated Statements of Operations for the years ended March 31,
2003, 2002 and 2001 ..................................................... F-9
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended March 31, 2003, 2002 and 2001 ............................... F-10
Consolidated Statements of Cash Flows for the years ended March 31,
2003, 2002 and 2001 ..................................................... F-11
Notes to Consolidated Financial Statements .............................. F-13
Schedule III -Real Estate and Accumulated Depreciation .................. F-35
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
Ridgewood Hotels, Inc. and Subsidiaries
Braselton, Georgia
We have audited the accompanying consolidated balance sheet of Ridgewood Hotels,
Inc. and Subsidiaries (the "Company") as of March 31, 2003, and the related
consolidated statement of operations, shareholders' equity (deficit) and cash
flows for the year ended March 31, 2003. Our audit also included the financial
statement schedule listed in the accompanying index. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ridgewood Hotels,
Inc. and Subsidiaries as of March 31, 2003, and the results of their operations
and their cash flows for the year ended March 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
The accompanying consolidated financial statements have been prepared assuming
Ridgewood Hotels, Inc. and Subsidiaries will continue as a going concern. As
discussed in Note 13 of the notes to the financial statements, the Company has
incurred recurring losses and has a working capital deficiency. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plan in regard to these matters are also described in Note
13. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
MOORE STEPHENS LOVELACE, P.A.
Certified Public Accountants
Orlando, Florida
July 2, 2003
F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Ridgewood Hotels, Inc.
Hoschton, Georgia
We have audited the accompanying consolidated balance sheet of Ridgewood Hotels,
Inc. and Subsidiaries (the "Company") as of March 31, 2002, and the related
statements of income, shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at March 31, 2002, and
the results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's recurring
losses, negative operating cash flows, and its obligation to purchase the
remaining interest in Louisville Hotel, LLC by September 30, 2002, as discussed
in Note 13 to the consolidated financial statements, raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 13. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 13, 2002
F-3
Not Used
F-4
To Ridgewood Hotels, Inc.
We have audited the accompanying consolidated balance sheet of RIDGEWOOD HOTELS,
INC. (a Delaware Corporation) AND SUBSIDIARIES as of March 31, 2001 and 2000 and
the related consolidated statements of operations, shareholders' investment and
cash flows for the year ended March 31, 2001 and the seven months ended March
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ridgewood Hotels,
Inc. and Subsidiaries as of March 31, 2001 and 2000 and the results of their
operations and their cash flows for the year ended March 31, 2001 and the seven
months ended March 31, 2000 in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 10, 2001
The reports of Arthur Andersen LLP included herein with respect to the
Financial Statement Schedule III, Real Estate and Accumulated
Depreciation, included herein and the financial statements included herein
are copies of reports previously issued by Arthur Andersen LLP relating to
the Company's financial statement schedule and financial statements for
the years ended March 31, 2001. Such reports have not been reissued, and
the consent of Arthur Andersen LLP with respect to such reports has not
been obtained. Certain limitations or recovery by investors may exist as a
result of the lack of consent.
F-5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Ridgewood Hotels, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States the consolidated financial statements as of March 31, 2001 and
included in RIDGEWOOD HOTELS, INC.'s annual report to shareholders incorporated
by reference in this Form 10-K, and have issued our report thereon dated July
10, 2001. Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The financial statement schedule listed in Item
14(a) of this Form 10-K is the responsibility of the Company's management, is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Atlanta, Georgia
July 10, 2001
F-6
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
($000's omitted, except share and per share data)
March 31, March 31,
2003 2002
-----------------------
Assets:
Current assets:
Cash $ 89 $ 1,150
Receivables from affiliates 188 156
Other operating receivables, net of allowance for
doubtful accounts of $216 and $154, respectively 374 553
Other current assets 560 829
----------------------
Total current assets 1,211 2,688
Real estate properties and equipment:
Real estate property and equipment
Operating property and equipment, net of accumulated
depreciation of $1,749 and $820, respectively 19,846 20,058
Land held for sale, net of allowance for possible
losses of $2,984 and $3,155, respectively 836 1,365
----------------------
Total real estate investments, net 20,682 21,423
Management contracts, net of accumulated amortization
of $1,298 and $807, respectively 1,526 1,192
Other assets, net of accumulated depreciation of $141 and
$130, respectively 210 289
----------------------
$23,629 $25,592
======================
(continued)
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
($000's omitted, except share and per share data)
March 31, March 31,
2003 2002
--------------------------
Liabilities:
Current liabilities:
Current maturities of long-term debt $ 367 $ 2,257
Accounts payable 650 330
Payables to affiliates 323 25
Accrued salaries, bonuses and other compensation 172 251
Accrued legal and audit expense 129 160
Lease commitment for vacated office -- 26
Accrued liabilities 493 592
-------------------------
Total current liabilities 2,134 3,641
Accrued pension liability 845 845
Long-term debt 21,685 20,674
-------------------------
Total liabilities 24,664 25,160
-------------------------
Commitments and contingencies:
Shareholders' Equity (Deficit):
Series A convertible cumulative preferred
stock, $1 par value, 1,000,000 shares authorized,
450,000 shares issued and outstanding in 2003 and
2002 (liquidation preference of $4,710,000 and
$4,350,000 in 2003 and 2002, respectively) 450 450
Common stock, $0.01 par value, 5,000,000 shares
authorized, 2,513,257 shares issued and outstanding
in 2003 and 2002 25 25
Paid-in surplus 17,671 17,671
Accumulated deficit (19,181) (17,714)
-------------------------
Total shareholders' equity (deficit) (1,035) 432
-------------------------
$ 23,629 $ 25,592
=========================
(concluded)
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED MARCH 31, 2003, 2002 AND 2001
($000's omitted, except share and per share data)
For the Fiscal Year Ended
March 31, March 31, March 31,
2003 2002 2001
-------------------------------------------
Revenues:
Revenues from wholly-
owned hotel operations $ 7,496 $ 7,504 $ 1,789
Revenues from hotel management-
Related party 1,032 881 1,146
Other 82 457 1,388
Sales of real estate properties 550 127 5,798
Equity in net income
of unconsolidated entities 234 251 251
Interest income 9 30 72
Other -- 89 22
------------------------------------------
9,403 9,339 10,466
Costs and expenses:
Expenses of wholly-
owned hotel operations 5,294 5,293 2,180
Costs of real estate sold 568 35 2,922
Lease expense for
vacated office -- 13 107
Depreciation and amortization 1,491 1,392 546
Interest expense 1,998 1,984 273
General, administrative
and other 1,354 1,891 2,202
Provision for doubtful accounts 165 (1) 189
Business development -- -- 17
Writedown on hotel investment -- -- 2,000
------------------------------------------
10,870 10,607 10,436
------------------------------------------
Income (loss) before taxes (1,467) (1,268) 30
Income taxes -- -- (70)
------------------------------------------
Net loss (1,467) (1,268) (40)
Unaccrued preferred dividends (360) (360) (360)
------------------------------------------
Net loss applicable to
common shareholders $ (1,827) $ (1,628) $ (400)
------------------------------------------
Basic and diluted loss per
common share $ (0.73) $ (0.65) $ (0.16)
==========================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(000's omitted, except share data)
Preferred Common Total
Stock Stock Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Surplus Deficit Equity (Deficit)
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 450,000 $450 2,513,257 $25 $17,671 $(16,406) $ 1,740
Net loss -- -- -- -- -- (40) (40)
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 450,000 450 2,513,257 25 17,671 (16,446) 1,700
Net loss -- -- -- -- -- (1,268) (1,268)
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 450,000 450 2,513,257 25 17,671 (17,714) 432
Net loss -- -- -- -- -- (1,467) (1,467)
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 450,000 $450 2,513,257 $25 $17,671 $(19,181) $(1,035)
=======================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED MARCH 31, 2003, 2002 AND 2001
($000's omitted)
For the Fiscal Year Ended
March 31, March 31, March 31,
2003 2002 2001
------- ------- -------
Cash flows from in operating activities:
Net loss $(1,467) $(1,268) $ (40)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,491 1,392 546
Provision for doubtful accounts 165 (108) 189
Decrease (increase) in note receivable -- 250 (250)
Writedown on hotel investment -- -- 2,000
Loss (gain) from sale of real estate properties 18 (92) (2,876)
Decrease (increase) in receivables from affiliates (32) 246 (340)
(Decrease) increase in payables to affiliates 298 (181) 131
Decrease (increase) in other operating receivables 14 290 (264)
Decrease in other assets 286 15 316
(Decrease) increase in accounts payable
and accrued liabilities 85 (535) 94
-----------------------------------
Total adjustments 2,325 1,277 (454)
-----------------------------------
Net cash provided by (used in) operating activities 858 9 (494)
-----------------------------------
Cash flows from investing activities:
Consolidation of hotel, net of cash acquired -- 128 --
Proceeds from sale of real estate, net 12 127 4,371
Additions to real estate properties (726) (211) --
Additions to management contracts (825) -- --
-----------------------------------
Net cash provided by (used in) investing activities (1,539) 44 4,371
-----------------------------------
Cash flows from financing activities:
Repayments of debt (539) (381) (2,657)
Increase in mezzanine loan 159 -- --
-----------------------------------
Net cash used in financing activities (380) (381) (2,657)
-----------------------------------
Net (decrease) increase in cash (1,061) (328) 1,220
Cash at beginning of period 1,150 1,478 258
-----------------------------------
Cash at end of period $ 89 $ 1,150 $ 1,478
===================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED MARCH 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION AND NON-CASH INVESTING AND FINANCING ACTIVITY:
For the Fiscal Year Ended
March 31, March 31, March 31,
2003 2002 2001
----------------------------------------------
Consolidation of hotel assets-
Land $ -- $ 2,400,000 $ --
Buildings -- 17,158,000 --
FF&E -- 1,205,000 --
Interest paid $1,806,000 $ 2,005,000 $257,000
Income taxes paid $ -- $ -- $ 35,000
Reduction of notes payable due to
transfer of land $ 500,000 $ -- $ --
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
Ridgewood Hotels, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2003, 2002 and 2001
1. Description of Business and Significant Accounting Policies
Description of the Business
Ridgewood Hotels, Inc. (the "Company"or "Ridgewood") is a Delaware
corporation primarily engaged in the hotel management business. The Company also
owns one hotel that it manages and owns undeveloped land that it holds for sale.
Summary of Significant Accounting Policies
The consolidated financial statements of the Company include the accounts
of all of its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Per Share Data -
Basic earnings per share is based on the weighted average effect of all
common shares issued and outstanding, and is calculated by dividing net loss
available to common shareholders by the weighted average shares outstanding
during the period. Diluted earnings per share is calculated by dividing net loss
available to common shareholders, adjusted for the effect, if any, from assumed
conversion of all potentially dilutive common shares outstanding, by the
weighted average number of common shares used in the basic earning per share
calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive common shares outstanding. At March 31,
2003, stock options and convertible securities totaling 1,477,000 shares,
represented the only securities that could potentially dilute earnings per
common share in future periods (see Note 6).
Management Contracts-
Management contracts were recorded at their estimated fair value at the
date of acquisition and are being amortized over the life of the contract.
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. Accordingly, the
Company does not consolidate the financial statements of unaffiliated hotels
under a management agreement. Accounting fees are set monthly fees charged to
hotels, which utilize centralized accounting services provided by the Company.
F-13
Investments in Unconsolidated Entities-
The Company's investments in unconsolidated entities are accounted for
using the equity method of accounting. The investments were originally recorded
at cost and have been adjusted to recognize the Company's share of
contributions, distributions, and earnings or losses. The amount of the
adjustment for unconsolidated entities earnings or losses is included in the
determination of the Company's net income (see Note 9).
Capitalization Policies -
Repairs and maintenance costs are expensed in the period incurred. Major
improvements to existing properties that increase the usefulness or useful life
of the property are capitalized.
Depreciation and Amortization Policies -
The Company depreciates operating properties and any related improvements
by using the straight-line method over the estimated useful lives of such
assets, which are generally 30 years for building and land improvements and 5
years for furniture, fixtures and equipment. Depreciation expense for the fiscal
years ended March 31, 2003, 2002, and 2001 was approximately $951,000, $844,000
and $41,000, respectively.
The Company amortizes certain intangible assets over the useful life of
those assets. Management contracts for which consideration is given are
amortized over the life of the contract. Amortization expense for the fiscal
years ended March 31, 2003, 2002 and 2001 was approximately $540,000, $548,000
and $505,000, respectively.
Impairment of Long Lived Assets-
The Company reviews the net carrying value of its hotel and other
long-lived assets 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 assets. 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 will be written down to
estimated fair market value. The Company recorded a loss of $2,000,000 in the
year ended March 31, 2001 for impairment of the Company's equity investment in
Louisville Hotel, LLC (see Notes 3 and 9).
Stock-Based Compensation -
The Company accounts for stock options using the intrinsic value method
and issues stock options only to employees and directors at exercise prices that
are equal to or more than the fair value of the underlying shares on the date of
each grant. Accordingly, no compensation expense is recorded in the accompanying
statements of operations with respect to the grant of stock options.
F-14
Cash-
For the purpose of the consolidated statements of cash flows, cash and
cash equivalents include all highly liquid investments with original maturities
of three months or less when purchased.
Fair Value of Financial Instruments -
The recorded values of financial instruments including cash, accounts
receivable, notes receivable, accounts payable and accrued liabilities reflected
in the financial statements are representative of their fair value due to the
short-term nature of the instruments. The estimated fair value of long-term debt
is disclosed in Note 4.
Deferred Loan Costs-
Costs associated with obtaining debt financing are included within
prepaids and other assets. The costs are capitalized and are amortized over the
life of the related debt instrument.
Revenue Recognition -
Revenue related to management contracts is recognized in the month that
the services are provided. Hotel revenue and incentive revenue is recognized
when earned. Reserves are established for estimated unrecoverable amounts. Gains
on sales of real estate assets are recognized at the time title to the asset is
transferred to the buyer.
Derivative Financial Instruments -
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" ("SFAS No. 138"), which
amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 138 addresses a limited number of issues
related to the implementation of SFAS No. 133. On January 1, 2001, the Company
adopted SFAS No. 133, as amended. The adoption did not have a material effect on
the Company's financial position or results of operations.
Segment and Related Information Reporting -
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), the Company reports
financial and descriptive information about its reportable operating segments.
The Company currently has two operating segments, which consist of hotel
operations and hotel management services (see Note 12).
F-15
Use of Estimates -
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts of assets and liabilities at
the date of the financial statements and contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could significantly differ
from those estimates.
2. Real Estate Property and Equipment
The Company's operating real estate property and equipment by type at
March 31, 2003 and 2002 were as follows ($000's omitted):
March 31,
2003 2002
-------- --------
Land $ 2,400 $ 2,400
Building and improvements 17,166 17,166
Furniture, fixtures and equipment 2,029 1,312
-------- --------
Operating properties, cost 21,595 20,878
-------- --------
Less: accumulated depreciation (1,749) (820)
-------- --------
Operating properties, net $ 19,846 $ 20,058
======== ========
The Company's operating real estate property and equipment at March 31,
2003 and 2002 include the consolidated assets of RW Louisville Hotel Associates
LLC ("Associates"), as described in Note 3.
The Company also owns three parcels of undeveloped land, which it holds
for sale, two of which are located in Florida, and one located in Texas. The
total cost of these land parcels is approximately $3,820,000 and $4,520,000,
excluding a reserve against the properties of approximately $2,984,000 and
$3,155,000, at March 31, 2003 and 2002, respectively. The parcel located in
Longwood, Florida is pledged as security for certain Company obligations (see
Notes 3 and 9). The Company has no plans to develop the remaining properties.
The Company intends to sell the properties at such time as the Company is able
to negotiate sales on terms acceptable to the Company.
3. Commitments and Contingencies
Litigation-
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
F-16
"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:
(j) 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, 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.
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.
F-17
Louisville Hotel- (See also Note 9)
On May 13, 1998, RW Louisville Hotel Associates LLC ("Associates") was
organized as a limited liability company under the laws of the State of
Delaware. Associates was organized to own and manage the Holiday Inn ("the
Hotel") located in the Louisville, Kentucky area. The Company invested $362,000
into Louisville Hotel, LLC, a Delaware limited liability company (the "LLC"),
which represented a 10% interest in the LLC. The LLC loaned $3,620,000 to
Associates in return for all cash flows generated from the Hotel. On September
30, 1999, the Company purchased additional equity in the LLC. The Company
increased its ownership in the LLC 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 were cross-defaulted, bore interest at 13% and matured on September
30, 2002. Holding an 80% ownership interest in the LLC, the Company is now the
Managing Member of the LLC. Louisville Hotel, L.P. ("LLP"), an unrelated company
holds the remaining 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 and as further amended on February 12, 2003 (as amended, the
"Operating Agreement"), the Company has the right at any time to purchase LLP's
remaining interest in the LLC (the "Purchase Option"). The Operating Agreement
provides that the purchase price for LLP's interest is equal to the sum of (a)
LLP's total capital contributions to the LLC ($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
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 was required, no later than September 30, 2002
(which date was extended to February 12, 2006), to purchase LLP's remaining
interest in the LLC for the Option Price (the "Purchase Obligation").
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 (see Note 4) 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.
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 (such
payments are now 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
F-18
all remaining outstanding principal and interest or (2) convey title to the land
in Longwood to LLP as payment in full of the $300,000 Florida Note. Fourth, the
Company and LLP amended the Operating Agreement to (a) extend the Purchase
Obligation until February 12, 2006, (b) reduce the rate of preferred return from
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
would be subject to liquidated damages under the Franchise Agreement equal to
approximately 12 times the monthly franchise fees payable pursuant to the
Franchise Agreement. The current monthly franchise fees are approximately
$32,000.
In conjunction with the Franchise Agreement, Associates is subject to a
Property Improvement Plan ("the Plan"). Under the Plan, Associates was required
to make approximately $1,200,000 of improvements to the Hotel by December 31,
2002, as well as meet certain interim milestones. As of March 31, 2003,
Associates has spent approximately $510,000 on improvements and has
approximately $61,000 in escrow to spend on improvements. The Company has
received a verbal extension for the completion of the Plan and management
believes the funding by Associates should be sufficient for it's completion. If
the verbal extension is withdrawn, the Company would be in non-compliance with
the Franchise Agreement.
Lease Obligation-
In March 2001, the Company signed a sublease agreement ("Sublease") on the
space previously used for its executive offices. The Sublease was for a term of
thirteen months and commenced on May 1, 2001. Pursuant to the Sublease the
Company received $8,738 per month for thirteen months. The Company paid $13,107
per month for the existing lease, which expired in May 2002. The Company has no
remaining lease commitment liabilities as of March 31, 2003.
4. Long-Term Debt
On September 30, 1999, the Company entered into three promissory Notes in
order to purchase additional equity in the LLC (see Note 3). 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 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 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
F-19
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 $300,000 Florida Note. As a
result of these transactions, the remaining principal amount due on the Notes is
$1,233,000 as of March 31, 2003.
Interest expense was $234,000, $251,000 and $251,000, respectively, for
the fiscal years ended March 31, 2003, 2002 and 2001.
The combined approximate average amount of borrowings on the Notes during
the year ended March 31, 2003 was $1,846,000. The combined maximum amount of
borrowings outstanding under the Notes was $1,933,000, and the balance of the
notes at March 31, 2003 was $1,233,000. The carrying value of the Notes
approximate their fair value at March 31, 2003.
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. The repairs and maintenance funds are also being
used to fund the Plan described in Note 3. As of March 31, 2003 and 2002, the
balance of the loan was approximately $17,164,000 and $17,501,000, respectively.
The balance of the escrow funds was approximately $344,000 and $552,000 at March
31, 2003 and 2002, respectively, and is recorded in other current assets.
Interest expense for the fiscal years ended March 31, 2003, 2002 and 2001 was
approximately $1,318,000, $1,296,000 and $ -0-, respectively.
The approximate average amount of borrowings on the Hotel loan during the
fiscal year ended March 31, 2003 was $17,321,000. The maximum amount of
borrowings outstanding under this loan during that period was $17,501,000. The
fair value of the loan was approximately $17,164,000 at March 31, 2003.
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
F-20
Loan is for a term of ten years at a fixed rate of 13% (the rate changed to 10%
effective February 12, 2003- see discussion above). Principal and interest
payments are payable in monthly installments equal to the monthly net revenue of
Associates for each month. As of March 31, 2003 and 2002, the balance of the
promissory note was approximately $3,655,000 and $3,496,000, respectively.
Interest expense for the fiscal year ended March 31, 2003, 2002 and 2001 was
approximately $446,000, $437,000 and $406,000, respectively.
The approximate average amount of borrowings on the LLC Loan during the
year ended March 31, 2003 was $3,480,000. The maximum amount of borrowings
outstanding under this note was $3,655,000. The carrying value of the note
approximates its fair value at March 31, 2003.
Maturities of long-term debt as of March 31, 2003 during the Company's
next five fiscal years are as follows:
For the Fiscal Year Ended March 31,
2004 $ 367,000
2005 395,000
2006 1,658,000
2007 457,000
2008 492,000
Thereafter 18,683,000
-----------
Total $22,052,000
===========
5. Income Taxes
The provision for income taxes are summarized as follows:
For the Fiscal Year Ended
---------------------------------
March 31, March 31, March 31,
2003 2002 2001
---------------------------------
Current:
Federal $-- $-- $70
State -- -- --
---------------------------------
Total current -- -- 70
Deferred:
Federal -- -- --
State -- -- --
---------------------------------
Total deferred -- -- --
---------------------------------
Total $-- $-- $70
=================================
F-21
The following is a reconciliation of the federal statutory rate to the Company's
effective rate:
(000's omitted)
For the Fiscal
Year Ended
-----------------------------------------
March 31, March 31, March 31,
2003 2002 2001
-----------------------------------------
Tax at statutory rate $(499) $(329) $ 10
State taxes, net of
federal benefit (53) (31) 1
Permanent items -- (124) 2
Valuation reserve/other 552 503 (13)
Other -- (19) 70
-------------------------------------
$ -- $ -- $ 70
=====================================
The tax effects of deferred tax assets and liabilities are as follows:
(000's omitted)
March 31, 2003 March 31, 2002
-------------- --------------
Allowance for Possible
Losses - Impairments $ 2,327 $ 2,165
Excess of Book over Tax
Depreciation 168 229
Pension Expenses 318 318
Other 223 181
Excess of Book over Tax
Basis, Income from LLC 458 311
Tax Loss Carryforwards 5,986 6,643
-----------------------------------
Gross Deferred Tax
Assets 9,480 9,847
-----------------------------------
Excess of Book over Tax
Basis, Income from LLC (215) (127)
Loan Amortization -- (38)
Other -- (60)
-----------------------------------
Gross Deferred Tax
Liabilities (215) (225)
-----------------------------------
Deferred Tax Assets
Valuation Allowance (9,265) (9,622)
-----------------------------------
$ 0 $ 0
===================================
F-22
For financial reporting purposes, a valuation allowance has been
recognized at March 31, 2003 and 2002 to reduce the net deferred income tax
assets to zero. The net change in the valuation allowance for deferred tax
assets in the fiscal years ended March 31, 2003 and 2002 was a decrease of
$357,000 and an increase of $1,496,000, respectively. These changes resulted
primarily from changes in the Company's deferred tax assets relating to the
federal and state net operating loss carryforwards.
On March 31, 2003, the Company has federal net operating loss
carryforwards for income tax purposes of approximately $14,092,000, that will
begin to expire in tax year 2005. In January 2000, the Company had an ownership
change as defined in Section 382 of the Internal Revenue Code. As such, the net
operating loss available to offset future income is limited. The amount of net
operating loss available in any year may increase if certain assets are sold.
6. Shareholders' Equity (Deficit)
Common and Preferred Stock -
There are currently 5,000,000 shares of common stock authorized, of which
2,513,257 are outstanding, of which approximately 66% is owned by Fountainhead.
In addition, Fountainhead owns 450,000 shares of convertible preferred stock
such that Fountainhead has beneficial ownership of approximately 78% of the
Company.
There are currently 1,000,000 authorized shares of the Company's Series A
Convertible Preferred Stock and 450,000 shares issued and outstanding. The
preferred stock is redeemable by the Company at $8.00 per share and accrues
dividends at a rate of $0.40 per share annually for the first two years and at a
rate of $0.80 per share annually thereafter. Dividends are payable quarterly
commencing on November 1, 1994. Each share of the preferred stock is convertible
into three shares of the Company's common stock effective August 16, 1996 and is
subject to certain anti-dilution adjustments. As of March 31, 2003, no shares
have been converted. In the event of any liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, the holders of the shares of
preferred stock shall be entitled to receive $8.00 per share of preferred stock
plus all dividends not previously declared and unpaid thereon. As of March 31,
2003 and 2002, there are $1,470,000 and $1,110,000, respectively, of dividends
in arrears owed to Fountainhead.
Pursuant to the terms of the Stipulation of Settlement (See Note 3), upon
the settlement becoming final, the Convertible Preferred Stock will be cancelled
in return for 1,350,000 shares of the Company's Common Stock and the dividend
arrearages will be cancelled.
F-23
Loss Per Share -
The following table sets forth the computation of basic and diluted loss per
share:
For the Fiscal Year Ended
March 31, March 31, March 31,
2003 2002 2001
--------------------------------------------------
Net loss (1,467,000) (1,268,000) (40,000)
Less undeclared preferred dividends (360,000) (360,000) (360,000)
--------------------------------------------------
Net loss applicable to
common shareholders $(1,827,000) $(1,628,000) $ (400,000)
Weighted average shares outstanding
-basic and diluted $ 2,513,000 $ 2,513,000 $ 2,513,000
==================================================
Basic and diluted loss per
common share $ (0.73) $ (0.65) $ (0.16)
==================================================
The effect of the Company's stock options and convertible securities was
excluded from the computations for the twelve months ended March 31, 2003, 2002
and 2001, as they are antidilutive. Accordingly, for the periods presented,
diluted net loss per share is the same as basic net loss per share.
1993 Stock 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. As of March 31,
2003, the 25,000 options were cancelled due to the director's termination of
employment.
On July 1, 2000, 258,500 additional grants were issued to key employees at
a price of $2.00 per share, which was no less than the fair market value at the
date of the grant. Certain employees' options vest over a four-year period in
25% increments while certain others vest over a four-year period with 10% the
first year, 25% the second year, 50% the third year and 100% the fourth year.
All options granted on July 1, 2000 expire ten years from the date of grant,
unless earlier by reason of death, disability, termination of employment, or for
other reasons outlined in the Option Plan. As of March 31, 2003, 127,000 options
are outstanding with the remaining 131,500 options being cancelled as a result
of the holder's termination of employment with the Company.
The Company's 1993 Stock Option Plan expired on March 30, 2003. The
Company anticipates amending the plan to extend the expiration date of the plan.
Had the Company recorded compensation expense for its stock option plans
instead of following the intrinsic value method, the Company's net loss for the
fiscal years ended March 31, 2003, 2002 and 2001 would have increased to the pro
forma amounts indicated below:
F-24
2003 2002 2001
------- ------- -------
Net loss:
As reported $(1,467) $(1,268) $ (40)
Pro forma (1,513) (1,352) (158)
Basic and diluted
loss per common
share:
As reported $ (0.73) $ (0.65) $ (0.16)
Pro forma (0.75) (0.68) (0.21)
The weighted average fair value of options granted estimated on the date of
grant using the Black-Scholes model was $1.48 for options granted in 2000. The
fair value of the options granted was based on the following assumptions:
volatility of 139 percent, dividend yield of 0 percent, risk free interest rate
of 6.09 percent for options granted on July 1, 2000 and 6.49 percent for options
granted on June 13, 2000, and a forfeiture rate of 0 percent. No options were
granted during the years ended March 31, 2003 and 2002.
7. Related Party Transactions-
As of March 31, 2003, the Company has management agreements with Chateau
Elan Georgia, Chateau Elan Sebring, St. Andrews, Scotland and Diablo Grande
Resort ("Diablo"). Each of these properties is owned by Fountainhead. In October
2002, the Company amended the terms of the management agreements between the
Company and Fountainhead for the management of St. Andrews and Sebring. In
exchange for five year agreements, the Company agreed to pay Fountainhead
$575,000. Fountainhead was paid $400,000 in cash and the remaining sum of
$175,000 was deducted from monthly fees due to the Company for the management of
the St. Andrews property. The Company is amortizing the $575,000 fee over the
life of the management agreement.
For the year ended March 31, 2003, the combined management and accounting
fees for these Fountainhead hotels were approximately $1,008,000, including
$644,000 relating to Chateau Elan Georgia, $62,000 relating to Sebring, $273,000
relating to St. Andrews and $29,000 relating to Diablo. The management and
development fees from these Fountainhead properties represent approximately 90%
of the Company's total management fee revenue for the year ended March 31, 2003.
For the year ended March 31, 2002, the combined management and development fees
for these Fountainhead hotels were approximately $858,000, including $645,000
relating to Chateau Elan Georgia, $70,000 relating to Sebring and $143,000
relating to St. Andrews. The management and development fees from these
Fountainhead properties represent approximately 55% of the Company's total
management fee revenue for the year ended March 31, 2002. For the year ended
March 31, 2001, the Company earned management fees of approximately $973,000 and
$60,000 for Chateau Elan Georgia and Sebring, respectively. The combined
management and development fees for these Fountainhead hotels were approximately
$1,123,000 and represented 44% of the total management fee revenue for the
fiscal year ended March 31, 2001. The Company also manages the Lodge at Chateau
Elan, a hotel owned jointly by the Company's Chairman and the Company's
President. The Company received management fees of approximately $24,000,
$23,000 and $23,000 from the Lodge at Chateau Elan for the fiscal years ended
March 31, 2003, 2002 and 2001, respectively.
F-25
The Company President's compensation is paid by Fountainhead and
reimbursed by the Company through monthly deductions in management fees earned.
As of March 31, 2003, approximately $156,000 of accrued compensation was
recorded and is included in payables to affiliates.
In the normal course of its business of managing hotels, the Company may
incur various expenses on behalf of Fountainhead or its subsidiaries that the
Company pays and is reimbursed by Fountainhead for these expenditures. As of
March 31, 2003, Fountainhead owed the Company approximately $188,000 of unpaid
management fees and $156,000 for unreimbursed expenses, which represents 33% and
25% of the Company's total receivables, respectively. In addition, Fountainhead
incurs various expenses on behalf of the Company. As of March 31, 2003, the
Company owed Fountainhead $105,000 for such expenses.
For the year ended March 31, 2003, 2002 and 2001, the Company was charged
approximately $29,000, $42,000 and $40,000, respectively, for salary related to
the Human Resources Director of Chateau Elan Georgia. The Company does not have
a full-time Human Resources Director and utilizes Chateau Elan Georgia's
part-time. Chateau Elan Georgia deducts a portion of the Human Resources
Director's salary from the monthly management fees owed to the Company. The
Company's former Director of Marketing and former Director of Accounting and
Finance also provided services to Chateau Elan Georgia and, as a result, for the
fiscal years ended March 31, 2003 and 2002, Chateau Elan Georgia reimbursed the
Company $48,000 and $56,000 for such services, respectively.
Until September 2002, the Company leased its office space for $3,984 per
month from Nanco Co., which is owned by one of the Company's directors. A
portion of the office space was used by Chateau Elan Marketing in return for a
payment of $1,992 per month to the Company. The Company no longer leases this
space.
8. Supplemental Retirement and Death Benefit Plan
The Company implemented a non-qualified Supplemental Retirement and Death
Benefit Plan with an effective date of January 1, 1987 (the "Retirement Plan").
The Retirement Plan supplements other retirement plans and also provided
pre-retirement death benefits to participants' beneficiaries.
On January 11, 2000, the Retirement Plan's only participant waived all of
his rights under or benefits accrued pursuant to the Retirement Plan, except
that he shall have the right to receive $55,000 per year for 15 years beginning
at the age of 65. The gain from the decreased benefit obligation is
approximately $374,000 and is being amortized over the remaining period of this
obligation. The Company has recorded a total pension liability of approximately
$845,000 as of March 31, 2003, including the curtailment gain.
F-26
9. Investments in Unconsolidated Hotel Entities
Ridgewood Georgia, Inc.
In April 2001, Ridgewood Georgia, Inc., a Georgia corporation ("Ridgewood
Georgia") and a wholly-owned subsidiary of the Company, entered into that
certain Assignment and Assumption Agreement (the "Assignment Agreement") with RW
Hotel Investment Associates, L.L.C., a Delaware limited liability company
("Transferor"), pursuant to which Transferor assigned to Ridgewood Georgia
Transferor's 99% membership interest in RW Louisville Hotel Investors, L.L.C., 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
Louisville Hotel. 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.
During the year ended March 31, 2001, the Partnership received management
fees of approximately $202,000 from properties the Partnership had previously
owned. These management agreements were terminated in September 2001. As of
March 31, 2003, the Company's recorded value of its investment in the
Partnership was $0. The Partnership conducts no business.
Houston Hotel, LLC
On December 9, 1997, Houston Hotel, LLC ("Houston Hotel") was organized as
a limited liability company under the laws of the State of Delaware. The Houston
Hotel was organized solely for the purpose of owning and managing the Hampton
Inn Galleria in Houston, Texas. The Company contributed approximately $316,000
into Houston Hotel representing a 10% interest, and the other 90% interest was
owned by Houston Hotel, Inc., a Nevada corporation. On September 30, 1999 the
Company transferred its 10% ownership in Houston Hotel, LLC for additional
equity in the LLC (see Note 3).
A Property Management Agreement existed between the Houston Hotel and the
Company as property manager for the purpose of managing the hotel. In connection
with the management agreement, the Company received management fees totaling
approximately $87,000 for the year ended March 31, 2001. The Company's Property
Management Agreement with the Houston Hotel was terminated during the fiscal
year ended March 31, 2001.
Louisville Hotel Associates LLC
As described in Note 3, the Company consolidates the assets and
liabilities of Associates, which includes the Hotel, a Holiday Inn located in
the Louisville, Kentucky area. In April 2001, the Company, through its
wholly-owned subsidiaries, acquired 100% of the membership interests in
Associates and began to consolidate the Hotel's operations into the Company's
consolidated financial statements. The membership interests are pledged as
security for a $3,623,690 loan made by the LLC. The
F-27
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 are required to be paid to the LLC until principal and interest on
the loan are paid in full. All income or loss allocated by the LLC to the
Company is based upon the formula for Distributed Cash.
Distributable Cash is defined as the net cash realized from operations but
after payment of management fees, principal and interest, capital improvements
and other such retentions as the managing member determines to be necessary.
Pursuant to the Operating Agreement, distributions of distributable cash from
the LLC shall be made as follows:
o First, to the Company in an amount equal to the cumulative interest paid
on the Notes. The Company uses these funds to pay LLP interest on the
Notes.
o Second, a 13% preferred return (which was reduced to 10% as of February
2003 - see Note 3) to LLP on their original $3,061,000 investment.
o Third, a 13% preferred return (which was reduced to 10% as of February
2003 - see Note 3) to the Company on its capital contribution of
$1,207,000.
o Fourth, 80% to the Company and 20% to LLP.
Cash from a sale or refinancing would be distributed as follows:
o First, to the Company in an amount equal to the cumulative interest paid
on the Notes.
o Second, to the Company in an amount equal to the original principal amount
of the Notes.
o Third, to LLP until it has received aggregate distributions in an amount
equal to its 13% preferred return (which was reduced to 10% as of February
2003- see Note 3)
o Fourth, to LLP until its net capital contribution is reduced to zero.
o Fifth, to the Company until it has received an amount equal to its 13%
preferred return (which was reduced to 10% as of February 2003 - see Note
3).
o Sixth, to the Company until its net capital contribution is reduced to
zero.
o Thereafter, 20% to LLP and 80% to the Company.
As a result, the LLC has all of the economic interest in the Hotel. In
accordance with EITF 96-16 "Investor's accounting for an investee when the
investor has a majority of the voting interest but the minority shareholder or
shareholders have certain approval or veto rights", the LLC is not consolidated
in the accompanying financial statements as the minority member has kept
substantial participation rights in this entity.
F-28
In March 2001, in light of the deterioration of market conditions
affecting the hotel industry and due to a further decrease in the operating
performance of the Hotel, management of the Company concluded that their
economic ownership interest in the LLC had been totally impaired and the
carrying value of the investment was reduced to zero.
The Company maintains a management agreement with the Hotel and received
management fees totaling approximately $222,000, $225,000 and $258,000 for the
years ended March 31, 2003, 2002 and 2001, respectively. Management fees earned
in fiscal year 2003 and 2002 were eliminated as the Hotel was consolidated into
the Company's financial statement effective April 1, 2001.
F-29
The unaudited combined balance sheet and statement of operations of the
unconsolidated entities are as follows:
COMBINED UNCONSOLIDATED ENTITY
CONDENSED BALANCE SHEET
UNAUDITED
(000's omitted)
March 31, March 31, March 31,
2003 2002 2001
-----------------------------------------
Current assets $ 4,742 $ 4,217 $ 1,423
Property and equipment, net -- -- 20,067
Intangible assets, net -- -- 209
----------------------------------------
Total Assets $ 4,742 $ 4,217 $ 21,699
========================================
Current Liabilities 551 274 594
Long-term debt -- -- 21,415
----------------------------------------
Total Liabilities 551 274 22,009
Capital (deficit), net 4,191 3,943 (310)
----------------------------------------
Total Liabilities and Capital $ 4,742 $ 4,217 $ 21,699
========================================
COMBINED UNCONSOLIDATED ENTITIES
CONDENSED STATEMENT OF OPERATIONS
UNAUDITED
(000's omitted)
For the Fiscal Year Ended
March 31, March 31, March 31,
2003 2002 2001
-----------------------------------------
OPERATIONS:
Revenues $ 760 $ 677 $ 8,598
Operating expenses -- -- 6,074
----------------------------------------
Income from operations 760 677 2,524
----------------------------------------
Interest expense -- -- 1,690
Depreciation/amortization -- -- 972
NET INCOME (LOSS) $ 760 $ 677 $ (138)
========================================
F-30
10. Employee Savings Plan
The Ridgewood Hotels Employee Savings Plan ("Savings Plan") is a savings
and salary deferral plan that is qualified under Sections 401(a) and 401(k) of
the Internal Revenue Code of 1986. The Savings Plan includes all employees of
the Company who have completed one year of service and have attained age
twenty-one.
Each participant in the Savings Plan may elect to reduce his or her
compensation by any percentage, not to exceed 15% of compensation when combined
with any employer contributions made on behalf of the participant, and have such
amount contributed to his or her account under the Savings Plan. Employer
contributions are made prior to the withholding of income taxes on such amounts.
Effective January 1, 2000, the Savings Plan was amended to provide for an
employer matching contribution in an amount equal to 100% of the first 3% of pay
that an employee contributes to the Plan and an amount equal to 50% of the next
2% of pay that an employee contributes to the Plan. In no event shall such
employer matching contributions exceed 4% of the participant's compensation. In
addition, the Board of Directors of the Company is authorized to make
discretionary contributions to the Savings Plan out of the Company's current or
accumulated profits. Discretionary Contributions are allocated among those
participants who complete at least 1,000 hours of service during the plan year
and are employed by the Company on the last day of the plan year. Employees are
subject to a seven-year graduated vesting schedule with respect to all employer
contributions.
Distributions from the Savings Plan will generally be available upon or
shortly following a participant's termination of employment with the Company,
with additional rights with respect to Voluntary Contributions.
Expenses for the Savings Plan were approximately $18,000, $19,000 and
$21,000 for the fiscal years ended March 31, 2003, 2002 and 2001, respectively.
11. Sale of Operating Property
On May 31, 2000, the Company sold its hotel in Longwood, Florida for
$5,350,000. Approximately $3,500,000 of the sales proceeds were used to settle
the mortgage and defeasance penalty on the hotel. The Company recognized
approximately $2,856,000 in profit on the sale before tax. In conjunction with
the transaction, the Company received a $250,000 note from the purchaser. The
note was paid in full in June 2001.
12. Segment and Related Information
The Company operates in two reportable business segments: hotel operations
and hotel management services. The Company's current hotel operations segment
consists solely of a 271 room hotel it owns in Louisville, Kentucky. The
Company's hotel management services segment currently consists of four managed
hotels, excluding the operating hotel described above. Three of these hotels are
owned by Fountainhead, and
F-31
another is owned jointly by the Company's Chairman and President. The remaining
hotel is managed for an independent third party.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
The Company evaluates the performance of its operating segments based upon
net operating income, which is defined as income before income taxes,
nonrecurring items, interest income, interest expense, gains on sales of
property and other non-operating income.
Summarized financial information concerning the Company's reportable segments is
shown in the following table ($000's omitted):
Hotel
Hotel Management
Operations Services
---------- ----------
Fiscal Year ended March 31, 2003
Revenues from operating hotel $ 7,496 $ --
Hotel management revenue -- 1,114
Depreciation and amortization 978 513
Net operating income (loss) 1,224 (919)
Total assets $ 20,922 $ 2,707
The following table provides a reconciliation of total segment net operating
income to the Company's reported loss ($000's omitted):
Fiscal Year ended March 31, 2003
Total segment net operating income $ 305
Loss on sales of land (18)
Interest expense (1,998)
Other non-operating income 244
--------
Net loss $ (1,467)
========
F-32
Hotel
Hotel Management
Operations Services
---------- ----------
Fiscal Year ended March 31, 2002
Revenues from operating hotel $ 7,504 $ --
Hotel management revenue -- 1,563
Depreciation and amortization 874 518
Net operating income (loss) 1,148 (895)
Total assets $ 21,204 $ 4,389
The following table provides a reconciliation of total segment net operating
income to the Company's reported loss ($000's omitted):
Fiscal Year ended March 31, 2002
Total segment net operating income $ 253
Gains on sales of land 92
Interest expense (1,984)
Other non-operating income 371
--------
Net loss $ (1,268)
========
Fountainhead accounts for 90% of the total hotel management services revenue for
the year ended March 31, 2003.
13. 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 profitability, it
may be unable to satisfy its obligations and will consider all available
alternatives including the possibility of selling the Company assets.
F-33
14. Subsequent Events
As of July 3, 2003, the Settlement discussed in Note 3 was completed. The
Company has received the $1,770,000 of settlement proceeds, the shares of Series
A Convertible Preferred Stock have been submitted to the Company in exchange for
1,350,000 shares of the Company's common stock, the dividend arrearages with
respect to the Series A Convertible Preferred Stock have been cancelled and Mr.
Walden has transferred 32,000 shares of the Company's common stock to the
Company.
F-34
SCHEDULE III
Page 1 of 3
RIDGEWOOD HOTELS, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
MARCH 31, 2003
(000's Omitted)
Cost Capitalized Gross Amount at Which
Initial Cost Subsequent to Carried at March 31, 2003
to Company Acquisition (A)(B)(D)
------- ------------------ ------------------- -------------------------------------------
Building Building Accumu-
Encum- and and lated Date of
brances Improve- Improve- Carrying Improve- Deprecia- Construc- Date
Description (E) Land ments ments Costs Land ments Total tion (C) tion Acquired
- ----------- ------- ------- -------- -------- -------- ------- -------- ------- --------- --------- --------
Land-
Texas -- 5,338 -- 2 -- 3,582 2 3,584 -- -- Dec-85
Florida 1,233 516 -- 10 -- 225 10 235 -- -- Oct-85
Florida -- -- -- -- -- -- -- -- -- -- Jul-88
------- ------- ------- ------- ----- ------- ------- ------- -------
Subtotal $ 1,233 $ 5,854 $ -- $ 12 $ -- $ 3,807 $ 12 $ 3,819 $ --
======= ======= ======= ======= ===== ======= ======= ======= =======
Hotel-
Kentucky $17,501 $ 2,400 $18,469 $ 726 $ -- $ 2,400 $19,195 $21,595 $ 1,749 -- Apr-01
------- ------- ------- ------- ----- ------- ------- ------- -------
Total $18,734 $ 8,254 $18,469 $ 738 $ -- $ 6,207 $19,207 $25,414 $ 1,749
======= ======= ======= ======= ===== ======= ======= ======= =======
F-35
SCHEDULE III
Page 2 of 2
(A) As discussed in Note 1 to the "Notes to Consolidated Financial
Statements," real estate held for investment is carried at cost and
real estate held for sale is carried at the lower of cost or fair
value less costs to sell. At March 31, 2003, the amount of the
allowance for possible losses was approximately $2,984,000, which
related to land held for sale.
(B) Reconciliation of real estate properties (000's omitted):
For the Year
For the Year For the Year Ended
Ended 3/31/03 Ended 3/31/02 3/31/01
------------- ------------- ------------
Balance,
Beginning $25,398 $ 4,555 $ 8,086
of period
Additions
During the
Period: 726
Acquisitions 20,878
Capitalized
Costs
Deductions
during
the
period:
Real estate
sold or
assets
retired
(on which
financing
was pro-
vided by
the
Company
in
certain
cases) 710 35 3,531
======= ======= =======
Balance,
end of
period $25,414 $25,398 $ 4,555
======= ======= =======
F-36
(C) Operating properties and any related improvements are being
depreciated by the "straight line" method over the estimated useful
lives of such assets, which are generally 30 years for buildings and
5 years for furniture and fixtures.
Reconciliation of accumulated depreciation (000's omitted):
For the Year
For the Year For the Year Ended
Ended 3/31/03 Ended 3/31/02 3/31/01
------------- ------------- ------------
Balance,
Beginning $ 820 $ 0 $ 1,855
of period
Additions
during the 929 820 --
period
Depreciation
associated
with assets
sold or 1,855
retired
------------------------------------------------
Balance, end
of period $ 1,749 $ 820 $ 0
================================================
(D) The aggregate cost for federal income tax purposes is approximately
$26,345,000 at March 31, 2003.
(E) This parcel of land cross-collateralizes two notes totaling
$1,233,000 that the Company is obligated to pay by February 2006 in
conjunction with the Company's ownership of a hotel in Louisville,
Kentucky.
F-37