SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-14019
Ridgewood Hotels, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 58-1656330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1106 Highway 124
Hoschton, Georgia 30548
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code (770) 867-9830
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 |_| No |X|
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|
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant on August 31, 2002 is $206,000. On August 31,
2002, the Registrant had 2,513,480 shares of its common stock outstanding.
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 six mid to luxury hotels containing 1086 rooms located in three 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 and owns undeveloped land that it holds for sale.
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 in
Louisville, Kentucky. The hotel is franchised with Holiday Inn. The Company's
hotel management services segment currently consists of five managed hotels,
excluding the operating hotel described above. Three of these hotels are owned
by Fountainhead Development Corp., ("Fountainhead") and another is owned by both
the Company's Chairman and President. The remaining hotel is managed for an
independent third party.
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 Scotland") 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. In consideration for the Management Agreement, the
Company issued to Fountainhead 1,000,000 shares of its common stock, which
represented 66% of the common issued and outstanding stock. The determined
market value of the management contract was $2,000,000 at the time of the
transaction based upon an analysis of the discounted expected future cash flows
from the management contract and significant stock transactions with a third
party. 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.
Also in January 2000, Fountainhead purchased 650,000 shares of common
stock from N. Russell Walden (a principal shareholder and then President of the
Company). Fountainhead also purchased 450,000 shares of the Company's
convertible preferred stock from ADT Security Services, Inc. ("ADT"). After
these transactions, Fountainhead has beneficial ownership of approximately 78%
of the Company.
1
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 ("Chateau Elan Sebring"), an 81 room hotel
located in Sebring, Florida, and St. Andrews Scotland, a 209-room luxury resort
which opened on June 14, 2001. The Company has management agreements for
managing Chateau Elan Sebring and St. Andrews Scotland. The agreements were for
an initial six month term and automatically renew for additional six month
increments from the commencement date of the agreements unless terminated by
either party. The commencement dates were March 1, 2000 and June 1, 2001 for
Chateau Elan Sebring and St. Andrews Scotland, 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, Chateau Elan Sebring or
St. Andrews Scotland, in the future. For the fiscal year ended March 31, 2002,
the combined management and development fees for these Fountainhead hotels were
approximately $858,000, representing 55% of the total management fee revenue for
the year ended March 31, 2002. The Company's management may, under appropriate
circumstances, seek to acquire ownership interests in hotels to be managed by
the Company.
Management Agreements
In addition to the Fountainhead properties, the Company currently manages
3 other hotel properties pursuant to management agreements that generally
provide the Company with a fee calculated as a percentage of gross revenues of
the hotel property. The hotel properties currently managed by the Company are
located in Georgia and Kentucky and are Holiday Inn franchisees. The Company has
an ownership interest in the Kentucky hotel as described below. Under the terms
of franchise agreements with respect to these properties, the Company is
required to comply with standards established by the franchisers, including
property upgrades and renovations. Under the terms of the management agreements,
the owners of the hotels are responsible for all operating expenses, including
property upgrades and renovations.
The Company also manages the Lodge at Chateau Elan, a hotel located
adjacent to Chateau Elan Georgia and owned by the Chief Executive Officer and
the President of the Company.
During the twelve months ended March 31, 2002, the Company entered into
three new management agreements of which two have subsequently been terminated.
During the same period, property owners terminated eight other management
agreements. These management agreements were terminated for various reasons such
as ownership changes at the hotel or insufficient cash at the hotel to pay for
management services.
Ownership Interests
In May 2000, the Company sold its ownership interest in a Ramada Hotel
located in Longwood, Florida for $5,350,000, from which the Company received net
proceeds of approximately $1,310,000 and a note receivable in principal amount
2
of $250,000, which note was paid in full in 2001.
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 $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. ("Louisville LP"). 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 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 are
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
3
Louisville Hotel in return for a management fee equal to 3% of gross revenues
plus incentive fees for above budget revenues.
Holding an 80% ownership interest in the LLC, the Company is the Managing
Member of the LLC. Louisville LP 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 (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 Louisville LP's interest is equal to the sum of (a) Louisville LP's
total capital contributions to the LLC ($3,061,000), plus (b) any accrued but
unpaid preferred return on such capital contributions, plus (c) the residual
value of the remaining interest (the amount that would be distributed to
Louisville LP if the LLC sold the Louisville Hotel for its fair market value and
distributed the proceeds to the members pursuant to the Operating Agreement)
(the "Option Price"). Under the terms of the Operating Agreement, the Company is
required, no later than September 30, 2002, to purchase Louisville LP's
remaining interest in the LLC for the Option Price (the "Purchase Obligation").
The Company has reached an agreement with Louisville LP pursuant to which,
(i) the Company will make a $200,000 principal payment on the Louisville Notes;
(ii) the Company will convey to Louisville LP (or its designees) title to two of
the Company's parcels of undeveloped real estate located in Florida and Arizona
subject to the Arizona Note and Florida Note; (iii) the Company will convey
title to its undeveloped parcel of real estate located in Ohio in return for an
additional $200,000 reduction in the principal outstanding with respect to the
Louisville Notes; and (iv) the maturity date of the Louisville Notes will be
extended 3 years to September 30, 2005 and the interest will be reduced from 13%
to 10%. As a result, the Louisville Notes will have an outstanding remaining
principal balance of $933,000. In addition, the Operating Agreement will be
amended to (i) reduce the preferred return for Louisville LP and the Company
from 13% to 10% on a going forward basis; (ii) extend the Purchase Obligation
from September 30, 2002 to September 30, 2005; (iii) provide the Company with an
option to further extend the Purchase Obligation until September 30, 2006 if the
Company makes a partial payment of $1,000,000 by September 30, 2005; and (iv)
provide Louisville LP with certain rights to receive financial information
regarding the LLC. The parties have agreed that the closing date for the
transaction will be on or before October 31, 2002. However, the Company's
agreement with Louisville LP is conditioned upon the parties' mutual agreement
to the terms of definite agreements and there can be no assurance that the
closing will occur.
The Company's recurring losses, negative operating cash flows, and the
Company's obligation to acquire Louisville LP's interest in the LLC raise
substantial doubt about the Company's ability to continue as a going concern. In
the event that the Company is unable to close on the transaction with Louisville
LP, the Company intends to continue its efforts to restructure its obligations
with Louisville LP. If an agreement cannot be reached with Louisville LP, the
Company intends to consider all available alternatives including the possibility
of selling Company assets. However, if the Company does not complete a
restructuring with Louisville LP, the Company will be in default of its
obligations with Louisville LP.
4
In addition to restructuring its obligations with Louisville LP, 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
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 24 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 is 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, 2002, the Louisville Hotel has spent approximately
$692,000 on improvements and has approximately $340,000 in escrow to spend on
improvements. The Company has received an extension to May 1, 2004 for
completion of the Property 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.
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, 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.
5
Undeveloped Land
The Company also owns six parcels of undeveloped land which it holds for
sale, two of which are located in Florida, and one each located in Georgia,
Texas, Ohio and Arizona. The parcels located in Phoenix, Arizona and Longwood,
Florida are pledged as security for the Company's obligations under the
Louisville Notes and the Operating Agreement. Under the Company's agreement with
Louisville LP, the Company will transfer the two pledged properties as well as
the Ohio property to Louisville LP (or its designees). The Company has no plans
to develop the remaining properties. The Company intends to sell the other
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, 2002,
the Company sold one parcel of undeveloped land for a gain of approximately
$92,000. There can be no assurance that the Company will be able to sell its
undeveloped land on terms favorable to the Company.
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 1106 Highway 124, Hoschton,
Georgia 30548 (telephone number (770) 867-9830). As of March 31, 2002, the
Company employed approximately 270 persons, of which 134 work at the hotels
owned by third parties and managed by the Company, 130 work at the Louisville
Hotel and 6 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 leases
approximately 2,400 square feet of office space in Hoschton, Georgia pursuant to
a month-to-month lease. The space is leased at market rates and is owned by one
of the Company's directors.
As of March 31, 2002, 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, 2002, 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 $17,501,000 term loan with a commercial lender. Through
6
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 six undeveloped properties which it holds for sale,
of which two properties are located in Florida, and one property in each of
Georgia, Texas, Ohio and Arizona. The Company has entered into an agreement to
transfer its property in Longwood, Florida and its Arizona and Ohio properties
to Louisville LP or its designees. 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-12 of this
Report and in Schedule III, Real Estate and Accumulated Depreciation, set forth
on pages F-41 to F-43 of this Report.
Item 3. Legal Proceedings
On May 2, 1995, a complaint was filed in the Court of Chancery of the
State of Delaware (New Castle County) entitled William N. Strassburger v.
Michael M. 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 "Complaint"). The plaintiff is an individual shareholder of
the Company who purports to file the Complaint individually, representatively on
behalf of all similarly situated shareholders, and derivatively on behalf of the
Company. The Complaint challenges the actions of the Company and its directors
in consummating the Company's August 1994 repurchases of its common stock held
by Triton Group, Ltd. and Hesperus Partners Ltd. in five counts, denominated
Waste of Corporate Assets, Breach of Duty of Loyalty to Ridgewood, Breach of
Duty of Good Faith, Intentional Misconduct, and Breach of Duty of Loyalty and
Good Faith to Class. On July 5, 1995, the Company filed a timely answer
generally denying the material allegations of the complaint and asserting
several affirmative defenses. On March 19, 1998, the Court dismissed all class
claims, with only the derivative claims remaining for trial. The case was tried
by Vice Chancellor Jacobs during the period February 1 through February 3, 1999.
On January 24, 2000, the Court rendered its Opinion. The Court found in
favor of the plaintiff and against three of the four individual
director-defendants (Messrs. Walden, Stiska and Earley). The Court held that the
repurchase transactions being challenged were unlawful under Delaware law, for
two primary reasons: (1) the transactions were entered into for the improper
purpose of entrenching Mr. Walden in his then-current position of President and
director, and thus constituted an unlawful self-dealing transaction; and (2) the
use of the Company's assets to repurchase its common stock held by Triton Group,
Ltd. and Hesperus Partners Ltd. was not demonstrated to the Court's satisfaction
to be "entirely fair" to the minority shareholders under the entire fairness
doctrine as enunciated under Delaware law. Having found that the challenged
transactions were unlawful, the Court determined that further proceedings would
be necessary to identify the precise form that the final decree in this case
should take.
On May 15, 2000, the plaintiff filed a Memorandum in Support of Judgment
After Trial requesting that the Court enter an order rescinding the Company's
issuance of preferred stock in connection with repurchase transactions and
7
requesting that the Court enter a judgment for damages against Messrs. Stiska,
Earley and Walden. The Company and the defendants filed written responses to
plaintiff's memorandum in August 2000.
In November 2000, the Court entered an Order Partially Implementing
Decisions and Scheduling Proceedings on Rescissory Damages (the "November 2000
Order"). The November 2000 Order, among other things, orders the rescission of
the Company's outstanding preferred stock and the issuance of 1,350,000 shares
of the Company's common stock in return therefor, but the rescission of the
preferred stock is stayed subject to the Court's entry of a final order on the
remaining issues. The November 2000 Order also provides that the Court must
determine (i) if defendant Triton will be required to return to the Company
$1,162,000 in dividends previously paid on the preferred stock and whether
interest will be required to be paid on such dividends and (ii) the amount of
rescissory damages, if any, that Messrs. Walden, Stiska and Earley should be
required to pay to the Company and whether such damages are subject to
pre-judgment interest from September 1, 1994. The parties conducted additional
discovery with respect to the remedy issues. In January 2002, the Court held an
evidentiary hearing with respect to the remaining damages issues. Subsequently,
the parties submitted additional briefs and presented oral argument to the Court
with respect to such issues. The Court has not issued a ruling.
As a derivative action, the Company does not believe that the ultimate
outcome of the litigation will result in a material adverse effect on its
financial condition. However, the Company may be required to pay plaintiff's
attorneys' fees. In addition, Mr. Walden has asserted that he has the right to
the continued advancement of his legal fees and expenses under the Company's
Certificate of Incorporation (as amended), subject to an undertaking to pay such
advances back if required under Delaware law. In January 2002, the Company
entered into an agreement with Mr. Walden (without acknowledging Mr. Walden's
right to such advancement) pursuant to which the Company agreed to advance to
Mr. Walden fees and expenses incurred by Mr. Walden through the date of such
agreement and to continue to advance reasonable fees and expenses until such
time as the Company terminates such agreement. Mr. Walden agreed to reimburse
the Company for all fees and expenses advanced or to be advanced to him if it
shall ultimately be determined by the Court that he is not entitled to
indemnification with respect to the action. Mr. Walden also pledged as security
for his undertaking one-half (1/2) of the annual payments to be made to Mr.
Walden pursuant to the consulting agreement between him and the Company dated
January 11, 2000. Mr. Walden no longer has any management involvement with the
Company.
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, 2002.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
8
The Company's common stock, $0.01 par value per share, is quoted on the
over-the-counter bulletin board service ("OTCBB") of the National Association of
Securities Dealers ("NASDAQ") under the symbol "RWHT". There effectively has
been an absence of an established public trading market for the Company's common
stock.
The following table sets forth, for the respective periods indicated, the
closing prices of the common stock in the over-the-counter market, as reported
and summarized by the OTCBB.
Quarter Ended High Low
------------- ---- ---
June 30, 2000 3.125 1.750
September 30, 2000 1.875 0.625
December 31, 2000 1.500 0.531
March 31, 2001 0.843 0.531
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
On June 30, 2002, the high and low bid price quoted by broker-dealer firms
effecting transactions in the Company's common stock was $.25.
On March 31, 2002, there were 2,513,480 shares of the Company's common
stock outstanding held by approximately 190 shareholders of record.
The Company paid its first and only cash dividend on its common stock
during fiscal year 1990. The dividend paid was approximately $0.06 per share of
common stock and totaled approximately $397,000. The Company may pay future
dividends if and when earnings and cash are available but has no present
intention to do so. The declaration of dividends on the common stock is within
the discretion of the Board of Directors of the Company (the "Board") and is,
therefore, subject to many considerations, including operating results, business
and capital requirements and other factors.
The Company is currently in arrears with respect to $1,110,000 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.
The Company made no sales of unregistered securities of the Company in the
twelve months ended March 31, 2002.
9
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 2002 2001 2000 1999 1998 1997
- ---------------------------------------------------- -------------------------
Total Assets (a) $25,592 $5,771 $8,243 $5,910 $7,280 $8,266
Long-Term Debt (a) 20,674 1,933 4,553 2,682 2,744 2,804
Shareholders' Investment 432 1,700 1,740 1,556 2,944 4,038
Year Ended Seven Months Ended
March 31 March 31 March 31 Years Ended August 31
Income Statement Data --------------------------------------------------------------------------------------
for the 2002 2001 2000 1999 1999 1998 1997
--------------------------------------------------------------------------------------
Net Revenues $ 9,339 $ 10,466 $ 3,378 $ 2,769 $ 4,547 $ 5,830 $ 8,209
Net Loss (1,268) (40) (1,816) (593) (1,283) (622) (463)
Net Loss Applicable
To Common Shareholders (1,628) (400) (2,026) (803) (1,643) (982) (823)
Basic and Diluted
Loss Per Share (0.65) (0.16) (1.07) (0.53) (1.09) (0.64) (0.58)
(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 year ended March 31, 2002 and 2001 and the seven months ended March
31, 2000, 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 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,
10
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 and
$1,200,000 in the year ended March 31, 2001 and seven months ended March 31,
2000, respectively, for impairment of the Company's investment in the hotel in
Louisville, Kentucky.
New Accounting Pronouncements-
In June 2001, SFAS No. 141, "Business Combinations," was issued. This
statement eliminates pooling of interests accounting and requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. The Company adopted this standard on July 1, 2001 and adoption
of this standard did not have a significant effect on the Company's financial
statements.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was
issued establishing accounting and reporting standards that address how goodwill
and intangible assets should be accounted for within the financial statements.
The statement requires companies to not amortize goodwill and intangible assets
with infinite lives, but to test such assets for impairment on a regular basis.
An intangible asset that has a finite life should be amortized over its useful
11
life and evaluated for impairment on a regular basis. This statement is
effective for fiscal years beginning after December 15, 2001. The Company
adopted this standard on April 1, 2002 and adoption of this standard did not
have a significant effect on the Company's financial statements.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," was issued establishing new rules and clarifying
implementation issues with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, "by allowing a
probability-weighted cash flow estimation approach to measure the impairment
loss of a long-lived asset. The statement also established new standards for
accounting for discontinued operations. Transactions that qualify for reporting
in discontinued operations include the disposal of a component of an entity's
operations that comprises operations and cash flow that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest
of the entity. The statement is effective for fiscal years beginning after
December 15, 2001. The Company adopted this standard on April 1, 2002 and
adoption of this standard did not have a significant effect on the Company's
financial statements.
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 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.
Results of Operations -
Hotel Management Revenue
The Company presently manages six hotel properties for which the Company
receives a management fee calculated as a percentage of gross revenues of the
hotel property.
12
During the fiscal year ended March 31, 2002, the Company managed three
Fountainhead properties consisting of Chateau Elan Georgia, Chateau Elan Sebring
and St. Andrews Scotland. St. Andrews Scotland opened in June 2001. The Company
received a development fee for services provided to St. Andrews Scotland prior
to its opening. 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 Chateau Elan Sebring and $143,000
relating to St. Andrews Scotland. 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. The Company also
managed the Lodge at Chateau Elan receiving management fees of $23,121 and
$23,354 for the fiscal year ended March 31, 2002 and 2001, respectively.
Two other hotel properties currently managed by the Company are located in
Georgia and Kentucky and are Holiday Inn franchisees. Under the terms of
franchise agreements with respect to these properties, the Company is required
to comply with standards established by the franchisers, including property
upgrades and renovations. Under the terms of the management agreements, the
owners of the hotels are responsible for all operating expenses, including
property upgrades and renovations.
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, 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 eight
management contracts during the year ended March 31, 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. Revenues from hotel management for the year ended March 31,
2001 compared to August 31, 1999 increased $1,321,000, or 109%, the increase was
due primarily to the management and development fees from hotel properties owned
by Fountainhead.
The downturn in the economy during 2001 and the first quarter of 2002
reduced both corporate travel and meeting events, resulting in lower hospitality
revenues throughout the hotel sector. In addition to this general downturn, the
terrorist attacks of September 11th caused significant cancellations at the
hotels managed by the Company in the month of September and continued to effect
revenues through the fiscal year ended March 31, 2002. In particular, the resort
properties managed by the Company incurred significant cancellations after
September 11, 2001 and experienced reduced occupancy throughout the remainder of
the fiscal year ended March 31, 2002. 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
13
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 year ended March 31,
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, 2002, the Company entered into two new
management agreements, which have subsequently been terminated. During the same
period, eight 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, 2002, the Company's management agreements
were terminated for the following properties: (i) a 355 room Ramada Inn in
Atlanta, Georgia as of June 2001, (ii) a 224 room Ramada Inn in Spartanburg,
South Carolina as of June 2001, (iii) a 199 room Howard Johnson's as of June
2001, (iv) a 124 room hotel in Lakeland, Florida as of June 2001, (v) a 96 room
Holiday Inn Express in Commerce, Georgia as of September 2001, (vi) a 120 room
Holiday Inn in Atlanta, Georgia as of September 2001, (vii) a 131 room Holiday
Inn in Gainesville, Georgia as of September 2001, (viii) and a 247 room Ramada
Inn in Atlanta, Georgia as of October 2001. The Company received approximately
$264,000 of management and accounting fees during the year ended March 31, 2002
related to these hotels.
Wholly-Owned Hotel Operations
The Company currently owns, indirectly through its subsidiaries, one hotel
property, the Louisville Hotel, which is directly owned by Associates. 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, 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. Revenues from wholly-owned hotel operations for the fiscal year
ended March 31, 2001 decreased $914,000, or 34%, compared to the year ended
August 31, 1999. The decrease was due to the sale of the Company's hotel in
Longwood, Florida in May 2000. Revenues from wholly-owned hotel operations for
the seven months ended March 31, 2000 increased $47,000, or 3%, compared to the
seven months ended March 31, 1999. The net increase was the result of an
additional $262,000 of revenues from a hotel leased by the Company
14
in Lubbock, Texas and a $215,000 decrease in revenue from the hotel in Longwood,
Florida.
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
Longwood, Florida or Lubbock, Texas in the fiscal year ended March 31, 2002.
In fiscal year ended March 31, 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 year ended March 31, 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 gain from real estate sales of approximately $92,000 and
$2,876,000 for the fiscal years ended March 31, 2002 and 2001, respectively, and
$335,000 for the seven months ended March 31, 2000. These changes result
primarily from the sale of the Company's 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 $251,000 for the years ended March 31, 2002 and
2001 relating to the Company's ownership interest in the LLC and $133,000 and
$85,000, respectively, for the seven months ended March 31, 2000 and 1999.
During fiscal year ended August 31, 1999, the Company recognized equity in the
income of the LLC of approximately $156,000.
Interest income decreased $42,000, or 58% for the year ended March 31,
2002 compared to the year end March 31, 2001 due to less cash available for
investment purposes and lower interest rates. Interest income increased $57,000,
or 380% for the year ended March 31, 2001 compared to the year ended August 31,
1999, due to a larger amount of cash on hand primarily from the sale of the
hotel in Longwood, Florida. Interest income decreased $9,000, or 90% for the
seven months ended March 31, 2000 compared to the seven months ended March 31,
1999 due to less cash available for investment.
15
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. The other revenue of $23,000 received during the
seven months ended March 31, 2000 was primarily from a favorable adjustment
received for workers' compensation claims.
Expenses
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. Expenses of
wholly-owned real estate decreased $185,000, or 8%, for the year ended March 31,
2001 compared to the year ended August 31, 1999. The decrease was due to the
sale of the Company's hotel in Longwood, Florida. Expenses of wholly-owned real
estate increased $167,000, or 12%, for the seven months ended March 31, 2000
compared to the seven months ended March 31, 1999. The increase was primarily
due to the hotel leased by the Company in Lubbock, Texas.
As of January 1, 2001, the Company has implemented an organizational
restructuring that relocated corporate regional directors of operations
positions into area general manager positions that are physically located at
individual properties. The salaries of the area general managers are funded by
the individual properties. Therefore, the Company has realized reduced payroll
costs and does not expect to incur any additional costs in connection with this
organizational restructuring. The Company also de-centralized accounting
services it provides for several of the managed properties. With this plan the
Company reduced its payroll costs associated with centralized accounting of
these properties, and these managed properties no longer provide an accounting
fee to the Company.
On January 4, 2001, the Company moved its principle executive offices to
Hoschton, Georgia. The lease expense for vacated office of approximately
$107,000 in the year ended March 31, 2001 is related to the lease obligations on
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 lease has now terminated.
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. Depreciation and
amortization increased $87,000, or 19%, for the year ended March 31, 2001
compared to the year ended August 31, 1999. These increases were due to greater
amortization of the Company's hotel management agreements.
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. Interest expense decreased $69,000, or 20%, for the year
ended March 31, 2001 compared to the year ended August 31, 1999 due to the sale
of the hotel in Longwood, Florida. The debt on Longwood hotel was repaid when it
16
was sold in May 2000. Interest expense increased $150,000, or 76%, for the seven
months ended March 31, 2000 compared to the seven months ended March 31, 1999.
The increase was due to the additional debt incurred by the Company for its
acquisition of an interest in the Louisville Hotel.
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. General, administrative and other expenses increased $65,000, or 3% for
the year ended March 31, 2001 compared to the year ended August 31, 1999. The
increase was due to various expenses. General, administrative and other expenses
increased $328,000, or 28%, for the seven months ended March 31, 2000 compared
to the seven months ended March 31, 1999. The increase was due to several
reasons. Payroll and benefits increased due to additional staff required to
manage a larger number of hotels. Additionally, consulting fees increased due
primarily to a consulting agreement with the Company's former President, and
legal expense increased due to an ongoing lawsuit. See further discussion below
and see note 3 in the Notes to Consolidated Financial Statements.
The majority of the increase in legal expenses relates to the shareholder
derivative action pending in the Delaware Court of Chancery that is described
more fully in Item 3 hereof. In addition to the Company's legal expenses, one of
the Company's former directors has asserted that he has the right to require the
Company to continue to advance his legal fees and expenses, subject to his
undertaking to repay the advances if required under Delaware law. In January
2002, the Company entered into an agreement with such former director pursuant
to which the Company agreed to advance his legal fees and expenses through the
date of such agreement and to continue to advance reasonable fees and expenses
until such time as the Company terminates the agreement. The Company advanced
fees and expenses of approximately $108,000 pursuant to such agreement for the
fiscal year ended March 31, 2002. The director is obligated to repay such
advances if the Delaware Chancery Court ultimately determines that the director
is not entitled to indemnification. The Company has expensed these costs since
the Company does not know whether the director will have the financial ability
to repay such advances if he becomes obligated to do so. The director has
pledged one-half of payments to be paid to him pursuant to a consulting
agreement commencing in April 2003 as security for his undertaking.
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.
Provision for doubtful accounts increased by approximately $189,000 for the year
ended March 31, 2001 compared to the year ended August 31, 1999 due to the loss
of several management contracts in which the Company was still owed management
fees and other expenses normally reimbursed by the hotels under management.
17
There were no business development expenses for the year ended March 31,
2002. Business development expenses decreased $131,000, or 89%, for the year
ended March 31, 2001 compared to the year ended August 31, 1999. Business
development expenses decreased $28,000, or 32%, for the seven months ended March
31, 2000 compared to the seven months ended March 31, 1999. The decreases were
primarily due to the termination of a consultant used by the Company. During
fiscal year 1999, while the Company was aggressively pursuing the business of
acquiring, developing, operating and selling hotel properties throughout the
country, the Company incurred business development costs of $148,000.
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 subsequent to year-end and due to a
further decrease in the operating performance of the Louisville Hotel,
management of the Company concluded that their economic ownership interest had
been totally impaired. The carrying value of the investment in the LLC on the
Company's books is $-0- as of March 31, 2002 and 2001.
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.
Liquidity and Capital Resources -
Land Sales
During the fiscal year ended March 31, 2002, the Company received net
proceeds of approximately $127,000 from the sale of undeveloped land in Athens,
Georgia. The proceeds were used to provide additional working capital to the
Company.
Fountainhead Transactions
In consideration of the Management Agreement with Fountainhead, the
Company issued to Fountainhead 1,000,000 shares of common stock at a fair value
of $2.00 per share in January 2000. Pursuant to 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.
18
The Management Agreement has a term of five years but is terminable upon
the transfer by Fountainhead of all or a material portion of the properties
covered by the Management Agreement. If the Management Agreement is terminated
upon such a transfer or upon the occurrence of an event of default by
Fountainhead, Fountainhead shall pay to the Company a portion of the projected
fees owed to the Company under the agreement, with adjustments based on the term
of the Management Agreement remaining. In such event, Fountainhead may elect to
surrender to the Company shares of common stock in lieu of a cash payment. See
also Note 6 to the consolidated financial statements. The Company has management
agreements for managing Chateau Elan Sebring and St. Andrews Scotland. Unless
terminated, the agreements automatically extend for six month increments from
the commencement date of the agreements. The commencement dates were March 1,
2000 and June 1, 2001 for Chateau Elan Sebring and St. Andrews Scotland,
respectively.
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.
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
wholly owned or consolidated 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 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.
19
On September 30, 1999, the Company, which already owned a 10% interest in
the LLC, acquired an additional interest in the LLC from Louisville LP for
$2,500,000. As a result of the transaction, the Company holds an 80% economic
interest in the LLC. The $2,500,000 consideration included the following:
Transfer of 10% ownership interest in Houston Hotel, LLC $443,000
Cash payment (1) 124,000
Promissory note to Louisville LP secured by the
Company's ownership interest in the LLC (2) 1,333,000
Promissory note to Louisville LP secured by the
Company's Phoenix, Arizona land (2) 300,000
Promissory note to Louisville LP secured by one parcel
of the Company's Longwood, Florida land (2) 300,000
----------
Total additional equity in the LLC $2,500,000
==========
(1) The cash to make this payment was obtained from the LLC in
connection with a modification of the management contract of the
Louisville Hotel. This amount represents the unamortized portion of
the original $200,000 participation fee paid to the LLC to acquire
the management contract of the Louisville Hotel.
(2) The three promissory notes constitute the Louisville Notes which are
cross-defaulted and are non-recourse to the Company.
Holding an 80% ownership interest in the LLC, the Company is the Managing
Member of the LLC. LP holds the remaining 20% ownership in the 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 Louisville
LP's interest is equal to the sum of (a) Louisville LP's total capital
contributions to the 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
Louisville LP if the 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 September 30, 2002, to
purchase Louisville LP'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, the Longwood, Florida property and the
Phoenix, Arizona property.
20
The Operating Agreement provides that distributions to the LLC's owners
are made as follows:
Distributable cash is defined as the net cash realized from operations but
after payment of management fees, principal and interest, capital improvements
and other such retentions as the Managing Member determines to be necessary.
Distributions of distributable cash from the LLC is made as follows:
o First, to the Company in an amount equal to the cumulative interest
paid on the Louisville Notes. The Company then uses these funds to
make the interest payments to Louisville LP.
o Second, a 13% preferred return to Louisville LP on its original
capital contribution of $3,061,000.
o Third, a 13% preferred return to the Company on its capital
contribution of $1,207,000.
o Fourth, 80% to the Company and 20% to Louisville LP.
Cash from a sale or refinancing would be distributed as follows:
o First, to the Company in an amount equal to the cumulative interest
paid on the Louisville Notes. The Company would then use these funds
to make any unpaid interest payments to Louisville LP.
o Second, to the Company in an amount equal to the Louisville Notes of
$1,333,000, $300,000 and $300,000.
o Third, to Louisville LP until it has received aggregate
distributions in an amount equal to its 13% preferred return on its
capital contribution.
o Fourth, to Louisville LP until its net capital contribution is
reduced to zero.
o Fifth, to the Company until it has received an amount equal to its
13% preferred return.
o Sixth, to the Company until its net capital contribution is reduced
to zero.
o Thereafter, 20% to Louisville LP and 80% to the Company.
Effective September 30, 1999, a new management agreement was entered into
between the Company and Associates. In connection with the new management
agreement effective September 30, 1999, the Company received management fees
totaling approximately $153,000 for the seven months ended March 31, 2000 and
$224,000 and $258,000 for the fiscal years ended March 31, 2002 and 2001,
respectively.
21
Unless current market conditions change or the Company is able to obtain
an additional source of funds (whether through operations, financing or
otherwise) the Company currently does not have sufficient liquidity to acquire
Louisville LP's interest in the LLC for the Option Price and to pay off the
Louisville Note, Florida Note and Arizona Note by September 30, 2002. Under the
terms of the Operating Agreement and the Notes, the failure of the Company to
acquire Louisville LP's interest by September 30, 2002 and pay off the Notes
could result in the Company forfeiting its interest in the LLC, the Longwood,
Florida property and the Phoenix, Arizona property.
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 24 times the monthly franchise fees
payable pursuant 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, 2002 and
June 30, 2002, the Louisville Hotel has spent approximately $692,000 and
$951,000, respectively, on improvements and has approximately $340,000 and
$120,000, respectively, in escrow to spend on improvements. The Company has
received an extension to May 1, 2004 for completion of the Property Improvement
Plan and the funding by Associates should be sufficient for its completion.
The Company's recurring losses and the Company's obligation to acquire the
Louisville, LP interest (as described above) raise substantial doubt about the
Company's ability to continue as a going concern.
With respect to the purchase obligation, the Company has reached an
agreement with Louisville LP pursuant to which, (i) the Company will make a
$200,000 principal payment on the Louisville Notes; (ii) the Company will convey
to Louisville LP (or its designees) title to two of the Company's parcels of
undeveloped real estate located in Florida and Arizona subject to the Florida
Note and Arizona Note; (iii) the Company will convey its undeveloped parcel of
real estate located in Ohio in return for a further $200,000 reduction in the
outstanding principal balance of the Louisville Notes; and (iv) the maturity
date of the Louisville Notes will be extended 3 years to September 30, 2005 and
the interest will be reduced from 13% to 10%. As a result, the Louisville Notes
will have an outstanding remaining principal balance of $933,000. In addition,
the Operating Agreement will be amended to (i) reduce the preferred return for
Louisville LP and the Company from 13% to 10% on a going forward basis; (ii)
extend the Purchase Obligation from September 30, 2002 to September 30, 2005;
(iii) provide the Company with an option to further extend the Purchase
Obligation until September 30, 2006 if the Company makes a partial payment of
$1,000,000 by September 30, 2005; and (iv) provide Louisville LP with certain
rights to receive financial information regarding the LLC. The Company and
Louisville LP have agreed that the closing of this transaction will occur on or
22
before October 31, 2002. However, the Company's agreement with Louisville LP is
conditioned upon the parties agreeing to the terms of definite agreements and
there can be no assurance that the closing will occur.
In the event that the Company is unable to close on the transaction with
Louisville LP, the Company intends to continue its efforts to restructure its
obligations with Louisville LP. If an agreement cannot be reached with
Louisville LP, the Company intends to consider all available alternatives
including the possibility of selling Company assets. However, if the Company
does not complete a restructuring with Louisville LP, Louisville may pursue its
available remedies which would likely have a material adverse effect on the
Company.
In addition to restructuring its obligations with Louisville LP, the
Company is continuing its efforts to return to profitability by (i) continuing
to seek new opportunities to manage resort properties, (ii) continuing to take
steps to reduce costs (including administrative costs) and (iii) continuing its
efforts to increase the revenue at existing properties managed by the Company.
Cash on Hand and Long-Term Debt Obligations
The Company has approximately $1,150,000 of available cash as of March 31,
2002.
The Company's long-term debt obligations as of March 31, 2002 are as
follows:
Total Less than 1 year 1-3 years 4-5 years After 5 years
----- ---------------- --------- --------- -------------
$22,931,000 $2,257,000 $720,000 $842,000 $19,112,000
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
23
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 and the seven months ended 2000. Such reports have not been reissued,
and 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 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,
2002, 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.
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)
2001 For Quarter Ended March 31 December 31 September 30 June 30
- ------------------------------------------------------------------------------------------
Net Revenues $ 1,225 $ 1,039 $ 1,169 $ 7,033
Net (Loss) Income (1,723) (577) (210) 2,470
Net (Loss) Income Applicable
To Common Shareholders (1,813) (667) (300) 2,380
Basic (Loss) Earnings Per Share $ (0.72) $ (0.27) $ (0.12) $ 0.95
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
All information required to be reported under Item 9 hereof has been
previously reported. The Company had a change in its certifying accountants. The
Company engaged Deloitte & Touche, LLP as its new independent accountants as of
June 12, 2002. The change was reported in Form 8-K dated June 18, 2002.
24
PART III
Item 10. Directors and Executive Officers
Set forth below are the names, ages (as of March 31, 2002), 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 H. Davis (age 39) has served as a director of the Company since
March 2, 2001. Ms. Davis 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. Davis 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 43) 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 66) 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 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
25
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 65) 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 36) is a director of the Company. 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.
With the exception that Donald E. Panoz and Nancy C. Panoz are married,
there are no family relationships among any of the executive officers or
directors of the Company. Executive officers of the Company are elected or
appointed by the Board and hold office until their successors are elected or
until their death, resignation or removal.
Sheldon E. Misher was a director of the Company from January 11, 2000
until his resignation on September 19, 2002. Mr. Misher did not resign because
of any disagreement with the Company on any matter relating to the Company's
operations, policies or practices or otherwise.
Luther A. Henderson was a director of the Company from its formation in
1985 until his death in September 2002.
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.
26
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, 2002.
Item 11. Executive Compensation
Compensation of Non-Employee Directors
During fiscal year ended March 31, 2002, Ms. Davis, Mr. Henderson, and Mr.
Misher, who were Non-Employee Directors 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.
On June 13, 2000, the Company issued non-qualified stock options to
purchase up to 25,000 shares of common stock at an exercise price of $2.25 per
share to Mr. Misher in connection with his serving as a director and Secretary
of the Company.
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, 2002, 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").
Summary Compensation Table
Annual Compensation
-------------------
Name and Fiscal All Other
Principal Position Year Salary Bonus Compensation
- ------------------ ---- ------ ----- ------------
Henk H. Evers 2002(3) $270,770 $0 $0
President 2001(2) 264,500 0 0
2000(1) 75,000 0 0
Donald E. Panoz 2002(3) 0 0 0
Chief Executive Officer 2001(2) 0 0 0
2000(1) 0 0 0
- ---------------
(1) Information shown is for the seven month period ended March 31,
2000. Mr. Evers was appointed as President and Chief Operating
Officer effective January 11, 2000. At the Company's request,
Fountainhead paid Mr. Evers' salary for the period ended March 31,
2000 as an advance to the Company. The Company accrued $75,000 in
expenses relating to the advanced compensation for the period ended
March 31, 2000. Mr. Panoz was appointed Chief Executive Officer of
27
the Company on January 11, 2000. Mr. Panoz received no compensation
for serving as Chief Executive Officer of the Company during the
period ended March 31, 2000.
(2) 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, 2000 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.
(3) 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. Of the salary allocated to the
Company, $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.
The Company did not grant any stock options to any of the Named Executive
Officers during the year ended March 31, 2002. On July 1, 2000, the
Company granted stock options to purchase up to 90,000 shares of common
stock at an exercise price of $2.00 per share to Mr. Evers in connection
with his serving as President of the Company. The options vest over a four
year period at the rate of 25% per year.
Aggregated Stock Option Exercises in Fiscal Year 2002 and Fiscal Year-End Option
Values
28
The following table sets forth information concerning the value of
unexercised options held by each Named Executive Officers as of March 31, 2002.
Number of Securities Value of Options
Shares Underlying Unexercised Exercisable/
Acquired on Value Options at 3/31/02 Unexercisable at
Name Exercise (#) Realized ($) Exercisable/Unexercisable 3/31/02
- ---- ------------ ------------ ------------------------- -------
Henk H. Evers 0 0 22,500/67,500 0
Donald E. Panoz 0 0 0 0
- ----------------
Supplemental Retirement and Death Benefit Plan
The Ridgewood Hotels, Inc. Supplemental Retirement and Death Benefit Plan
(the "SERP") was adopted, effective January 1, 1987, to provide supplemental
retirement benefits for selected employees of the Company. As of March 31, 2002,
no employees of the Company were participating in the SERP.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of June 30, 2002, 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.
29
Class of No. of Shares
Name and Address of Shares Bene- Beneficially Percentage
Beneficial Owner (1) ficially Owned Owned of Class
-------------------- -------------- ----- --------
Fountainhead Development Corp., Inc. 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 3,065,000 (4)(5) 77.7%
Series A
Preferred Stock 450,000 (3)(5) 100.0%
Nancy C. Panoz + Common Stock 3,065,000 (4)(5) 77.7%
Series A
Preferred Stock 450,000 (3)(5) 100.0%
Sheldon E. Misher +* Common Stock 25,000 (6) 1%
Henk H. Evers + ++ Common Stock 22,500 (9) 0.9%
Stacey H. Davis + Common Stock 0 0%
Anthony Mestandrea + Common Stock 0 0%
Luther A. Henderson +* Common Stock 58,800 (7) 2.3%
5608 Malvey Avenue, Suite 104-A
Ft. Worth, TX 76107
All executive officers and directors Common Stock 3,106,300 (5)(8) 79.8%
as a group (7 persons) Series A
Preferred Stock 450,000 (3)(5) 100.0%
- ---------------
+ Director of the Company
++ Executive Officer of the Company
* Former Director of the Company
(1) Unless otherwise indicated, the mailing address of each beneficial
owner is 1106 Highway 124, Hoschton, Georgia 30548. 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 that may be received upon
the conversion of the preferred shares.
(3) Fountainhead acquired the preferred stock from ADT. Under the terms
of the stock purchase agreement with respect to the shares,
Fountainhead may be
30
required to return the shares to ADT in the event that ADT is
required by court order, in litigation pending in the Court of
Chancery in Delaware involving ADT (see "Legal Proceedings"), to
return the preferred stock to the Company. If, as a result of the
return of the preferred stock, ADT receives common stock, then
Fountainhead has agreed to acquire such shares from ADT.
(4) Includes (i) 1,350,000 shares of common stock that may be received
upon the conversion of the preferred shares held by Fountainhead,
(ii) 1,650,000 shares of common stock held by Fountainhead, and
(iii) 65,000 shares of common stock underlying an option granted to
Fountainhead by Mr. Walden that is immediately exercisable.
(5) Mr. and Mrs. Panoz, who are husband and wife, are directors and
collectively may be deemed to beneficially own all of the voting
stock of Fountainhead Holdings, Ltd. ("Holdings"), which in turn
owns all of the voting stock of Fountainhead. 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, each of Mr. and Mrs. Panoz may be deemed to
be a beneficial owner of all such shares.
(6) Represents 25,000 shares of common stock underlying options that are
currently exercisable.
(7) Includes 18,000 shares of common stock underlying options that are
currently exercisable.
(8) Includes (i) 1,350,000 shares of common stock that may be received
upon the conversion of the preferred shares held by Fountainhead;
and (ii) 130,500 shares of common stock underlying options that are
currently exercisable.
(9) Represents 22,500 shares of common stock underlying options that are
currently exercisable.
The following table sets forth information regarding compensation plans
under which the Company's common stock is authorized for issuance as of March
31, 2002. 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.
31
- -----------------------------------------------------------------------------------------------------------
Number of securities to Number of securities
be issued upon exercise Weighted-average remaining available for
of outstanding options exercise price of issuance under equity
and warrants outstanding options and compensation plans
warrants
- -----------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by securities 304,500 $2.01 445,500
holders
- -----------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by securities 0 0 0
holders
- -----------------------------------------------------------------------------------------------------------
TOTAL 304,500 $2.01 445,500
- -----------------------------------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
On January 10, 2000, the Company entered into the Management Agreement
with Fountainhead, pursuant to which Fountainhead retained the Company to
perform management services at Chateau Elan Georgia, one of Fountainhead's
properties, for a period of five years. In consideration of Fountainhead's
agreement to enter into the Management Agreement and a payment of $10,000 by
Fountainhead to the Company, the Company issued to Fountainhead 1,000,000 shares
of common stock which represented 66% of common issued shares outstanding. The
determined market value of the management contract was $2,000,000 at the time of
the transaction based upon an analysis of the discounted expected future cash
flows from the management contract and significant stock transactions with a
third party. In the Management Agreement, Fountainhead agreed to pay the Company
a base management fee equal to 2% of the gross revenues of the properties being
managed, plus an annual incentive management fee to be determined each year
based on the profitability of the properties being managed during that year.
The Management Agreement has a term of five years, but is terminable upon
the transfer by Fountainhead of all or a material portion of the properties
covered by the Management Agreement. If the Management Agreement is terminated
upon such a transfer or upon the occurrence of an event of default by
Fountainhead, 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 and Fountainhead's resort in
St. Andrews Scotland, which opened on June 14, 2001. Both of these properties
are owned by Fountainhead. The Company has management agreements for managing
Chateau Elan Sebring and St. Andrews Scotland. The agreements were for an
initial six month term and automatically renew for additional six month terms
unless terminated by either party prior to such extension. The commencement
dates were March 1, 2000 and June 1, 2001 for Chateau Elan Sebring and St.
Andrews Scotland, respectively.
32
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 Lodge
at Chateau Elan. The Company manages the Lodge at Chateau Elan and in return for
such management services has received management fees of $23,121 and $23,354 for
the fiscal years ended March 31, 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. From
January 11, 2000 through March 31, 2002, the Company has incurred $640,000 in
expenses relating to the advanced compensation and benefits representing the
portion of the Company's President salary and benefits relating to his services
to the Company. In March 2001, the Company reduced the advanced compensation
liability for the Company's President by $90,000 by netting accrued pre-opening
fees owed to the Company by Fountainhead for managing St. Andrews Scotland
against this liability. During the fiscal year ended March 31, 2002, the Company
paid Fountainhead $525,000 for the advanced compensation and benefits. After
reducing the advanced compensation by $90,000 and $525,000, there is
approximately $25,000 of accrued liability remaining at March 31, 2002.
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, 2002, Fountainhead owed the Company approximately $156,000 for
unpaid management fees and expenses.
During the fiscal year ended March 31, 2002, 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, 2002, the Company incurred
charges of approximately $42,000 representing approximately 30% of 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 director of finance also provide services to Chateau
Elan Georgia and, as a result, for the fiscal year 2002, Chateau Elan Georgia
reimbursed the Company for $56,000 for such services.
The Company leases its office space for $3,984 per month from Nanco Co.,
which is owned by one of the Company's directors. The Company charges Chateau
Elan Marketing $1,992 per month for their share of the use of office space. The
lease terms are month-to-month and at market rates for comparable space.
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
33
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.
34
PART IV
Item 14. 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 and the seven months ended March 31, 2000. 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.
Report of Independent Public Accountants.
Copy of Previously Issued Report of Independent Public Accountants.
Consolidated Balance Sheets at March 31, 2002 and 2001.
Consolidated Statements of Operations for the years ended March 31, 2002
and 2001, for the seven months ended March 31, 2000 and 1999 and for the
year ended August 31, 1999.
Consolidated Statements of Shareholders' Investment for the years ended
March 31, 2002 and 2001, for the seven months ended March 31, 2000 and for
the year ended August 31, 1999.
Consolidated Statements of Cash Flows for the years ended March 31, 2002
and 2001, for the seven months ended March 31, 2000 and 1999 and for the
year ended August 31, 1999.
Notes to Consolidated Financial Statements.
(a)(2) The financial statement schedule listed below is filed as a part of
this Report on pages F-3 and F-5, respectively.
Report of Independent Public Accountants on Financial Statement Schedule.
Previously Issued Report of Independent Public Accountants on Financial
Statement Schedule.
35
Financial Statement Schedule III - Real Estate and Accumulated
Depreciation -March 31, 2002.
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-10 hereof.
The Company did not file any Current Reports on Form 8-K during the
quarter ended March 31, 2002.
36
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-4
Consolidated Balance Sheets as of March 31, 2002 and 2001 ..................... F-7
Consolidated Statements of Operations for the years ended March 31, 2002 and
2001, for the seven months ended March 31, 2000 and 1999 and for the year ended
August 31, 1999 ............................................................... F-9
Consolidated Statements of Shareholders' Investment for the years ended March
31, 2002 and 2001, for the seven months ended March 31, 2000 and for the year
ended August 31, 1999 ......................................................... F-10
Consolidated Statements of Cash Flows for the years ended March 31, 2002 and
2001, for the seven months ended March 31, 2000 and 1999 and for the year ended
August 31, 1999 ............................................................... F-11
Notes to Consolidated Financial Statements .................................... F-13
Schedule III -Real Estate and Accumulated Depreciation ........................ F-41
F-1
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-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Ridgewood Hotels, Inc.
Hoschton, Georgia
We have audited the consolidated financial statements of Ridgewood Hotels, Inc.
and subsidiaries (the "Company") as of March 31, 2002 and for the year then
ended, and have issued our report thereon dated August 13, 2002, which report
includes an explanatory paragraph as to the substantial doubt about the
Company's ability to continue as a going concern; such consolidated financial
statements and report are included elsewhere in this Form 10-K. Our audit also
included the financial statement schedule of the Company, Schedule III of this
Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 13, 2002
F-3
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 and 2000. 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.
F-4
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
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 and the seven months ended March 31, 2000.
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