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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-14019
Ridgewood Hotels, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 58-1656330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
100 Rue Charlemagne
Braselton, Georgia 30517
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code (678) 425-0900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2).
Yes |_| No |X|
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of
September 30, 2002, is approximately $198,000.
On June 30, 2003, the registrant had 2,513,257 shares of its common stock
outstanding.
DOCUMENTS INCORPORATE BY REFERENCE: None
PART I
Item 1. Business
General
Ridgewood Hotels, Inc., a Delaware corporation (the "Company"), is
primarily engaged in the hotel management business. The Company currently
manages four mid to luxury hotels containing 671 rooms located in two states and
Scotland, including the Chateau Elan Winery & Resort located in Braselton,
Georgia ("Chateau Elan Georgia"). The Company also owns one hotel that it
manages, owns undeveloped land that it holds for sale and manages a golf resort
and a restaurant.
Effective April 1, 2001, the Company operates in two reportable business
segments: hotel operations and hotel management services. The Company's current
hotel operations segment consists solely of a 271 room hotel it owns (through
its subsidiaries) in Hurstbourne, Kentucky. The hotel is franchised with Holiday
Inn. The Company's hotel management services segment currently consists of four
managed hotels, excluding the operating hotel described above, a golf resort in
California and a restaurant in Georgia. Three of these hotels and the golf
resort are owned by Fountainhead Development Corp., ("Fountainhead") and another
hotel is owned by both the Company's Chairman and its President.
Fountainhead Transactions
Fountainhead is primarily engaged in the business of developing, owning
and operating luxury resort properties, including Chateau Elan Georgia and St.
Andrews Bay ("St. Andrews") located in Scotland. In January 2000, the Company
entered into a management agreement ("Management Agreement") with Fountainhead
to perform management services at Chateau Elan Georgia for five years. Chateau
Elan Georgia is a 301-room luxury resort located in Braselton, Georgia, which
includes an inn, conference center, winery and luxury amenities such as a spa
and golf club. Pursuant to the Management Agreement, the Company is to receive a
base management fee equal to 2% of the gross revenues of the properties being
managed, plus an annual incentive management fee to be determined each year
based on the profitability of the properties being managed during that year.
The Company continues to seek new hotel management opportunities,
including possible opportunities to manage other properties being developed by
Fountainhead. In addition to Chateau Elan Georgia, the Company manages
Fountainhead's Chateau Elan Sebring ("Sebring"), an 81 room hotel located in
Sebring, Florida, St. Andrews, a 209-room luxury resort in Scotland ("St.
Andrews") which opened on June 14, 2001 and Diablo Grande Resort ("Diablo"). The
Company has management agreements for
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managing Chateau Elan Sebring, St. Andrews and Diablo. In October 2002, the
Company amended the terms of the management agreements with Fountainhead for the
management of St. Andrews and Sebring. In exchange for five year agreements, the
Company agreed to pay Fountainhead $575,000.
The commencement dates for the management agreements were March 1, 2000,
June 1, 2001 and August 8, 2002 for Sebring, St. Andrews and Diablo,
respectively. While the Company intends to seek management opportunities with
other Fountainhead properties, Fountainhead has no obligation to enter into
further management relationships with the Company, and there can be no assurance
that the Company will manage any Fountainhead properties, including Chateau Elan
Georgia, Sebring, St.Andrews or Diablo, in the future. For the fiscal year ended
March 31, 2003, the combined management and development fees for these
Fountainhead hotels were approximately $1,008,000, representing 90% of the total
Company's management fee revenue for the year ended March 31, 2003.
Management Agreements
In addition to the Fountainhead properties, the Company currently manages
a hotel property pursuant to a management agreement that generally provides the
Company with a fee calculated as a percentage of gross revenues of the hotel
property. The hotel property currently managed by the Company is located in
Kentucky and is a Holiday Inn franchisee. The Company indirectly owns the hotel
as described below and, as a result, the operations of the hotel are
consolidated for financial reporting purposes. Under the terms of the franchise
agreement with respect to this property, the Company is required to comply with
standards established by the franchiser, including property upgrades and
renovations. Under the terms of the management agreement, the owner of the hotel
(which is indirectly owned by the Company) is responsible for all operating
expenses, including property upgrades and renovations.
The Company also manages the Holiday Inn Express at Chateau Elan, (a hotel
located adjacent to Chateau Elan Georgia and owned by the Company's Chairman and
the Company's President), and manages a restaurant in Georgia.
During the twelve months ended March 31, 2003, the Company entered into
one new management agreement. During the same period, property owners terminated
three other management agreements.
Ownership Interests
The Company currently owns one hotel property, a Holiday Inn hotel in the
Louisville, Kentucky area (the "Louisville Hotel"), through its consolidated
subsidiary, RW Louisville Hotel Associates, LLC ("Associates"), a Delaware
limited liability company. As of March 31, 2001, the Company, through its
wholly-owned subsidiaries, was the manager of and had a minority ownership
interest in Associates which was accounted for on the equity method of
accounting. In April 2001, the Company, through its wholly-owned subsidiaries,
acquired 100% of the membership interests in Associates as further described
below. The membership interests are pledged as security for a
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$3,623,690 loan made by Louisville Hotel, LLC (the "LLC"), a related party. The
membership interests are also subject to an option pursuant to which the LLC has
the right to acquire the membership interests for a nominal value. Pursuant to
the terms of the loan, all revenues (including proceeds from sale or
refinancing) of Associates (after payment of expenses including a management fee
to the Company) are required to be paid to the LLC until principal and interest
on the loan are paid in full.
In April 2001, Ridgewood Georgia, Inc., a Georgia corporation ("Ridgewood
Georgia") and a wholly-owned subsidiary of the Company, entered into that
certain Assignment and Assumption Agreement (the "Assignment Agreement") with RW
Hotel Investment Associates, L.L.C., a Delaware limited liability company
("Transferee"), pursuant to which Transferee assigned to Ridgewood Georgia
Transferee's 99% membership interest in RW Louisville Hotel Investors, L.L.C., a
Delaware limited liability company ("RW Hotel Investors"). As a result,
Ridgewood Georgia, which previously owned the remaining 1% membership interest
in RW Hotel Investors, owns 100% of the membership interests in RW Hotel
Investors (the "Membership Interests").
RW Hotel Investors, in turn, owns 99% of Associates, which owns the
Louisville Hotel. The remaining 1% interest in Associates is owned by RW
Hurstbourne Hotel, Inc., a Delaware corporation and a wholly-owned subsidiary of
the Company. Therefore, as a result of the Assignment Agreement, the Company
became the indirect owner of 100% of the membership interests of Associates.
On September 30, 1999, the Company, which already owned a 10% interest in
the LLC, acquired an additional interest in the LLC for $2,500,000 from
Louisville Hotel, L.P. ("LLP"). As a result of the transaction, the Company
holds an 80% economic interest in the LLC. The $2,500,000 consideration included
$124,000 in cash, the transfer of the Company's 10% ownership interest in a
hotel property in Houston, Texas and promissory notes, due to LLP, in the
original principal amount of $1,333,000 (the "Louisville Notes") secured by the
Company's membership interest in the LLC, a promissory note in the original
principal amount of $300,000 secured by the Company's undeveloped land in
Longwood, Florida (the "Florida Note") and a promissory note in the original
principal amount of $300,000 secured by the Company's undeveloped land in
Phoenix, Arizona (the "Arizona Note" and together with the Louisville Note and
the Florida Notes, the "Notes"). The Louisville Note, Florida Note and Arizona
Note were non-recourse to the Company. The Company also entered into a new
management agreement with the Louisville Hotel pursuant to which the Company
manages the Louisville Hotel in return for a management fee equal to 3% of gross
revenues plus incentive fees for above budget revenues.
The Company has an 80% ownership interest in and is the Managing Member of
the LLC. LLP holds the remaining 20% ownership interest in the LLC. Pursuant to
the LLC's Operating Agreement dated as of May 1998, as amended on September 30,
1999 and as further amended on February 12, 2003 (as amended, the "Operating
Agreement"), the Company has the right at any time to purchase the remaining 20%
interest in the LLC (the "Purchase Option"). The Operating Agreement provides
that the purchase price for LLP's interest is equal to the sum of (a) LLP's
total capital contributions to the LLC ($3,061,000), plus (b) any accrued but
unpaid preferred return on such capital
3
contributions, plus (c) the residual value of the remaining interest (the amount
that would be distributed to LLP if the LLC sold the Louisville Hotel for its
fair market value and distributed the proceeds to the members pursuant to the
Operating Agreement) (the "Option Price"). However, the Purchase Option is only
exercisable in connection with concurrent payment in full of all remaining
amounts due under the Notes. Under the terms of the Operating Agreement (prior
to its February 12, 2003 amendment), the Company was required, no later than
September 30, 2002, to purchase LLP's remaining interest in the LLC for the
Option Price (the "Purchase Obligation").
On February 12, 2003 the Company completed the following transactions with
LLP. First, the Company made a $700,000 principal payment on the Notes by (a)
paying $200,000 in cash; (b) conveying to an affiliate of LLP title to the
Company's undeveloped land in Ohio in return for a $200,000 reduction in the
principal of the Notes and (c) conveying to an affiliate of LLP title to the
Company's undeveloped land in Arizona in return for a $300,000 reduction in the
principal of the Notes (the Company was released from the portion of the Notes
secured by the Arizona land.) Second, the Company and LLP amended the terms of
the Notes (other than the portion of the Notes secured by the land in Longwood,
Florida (the "Florida Note")) by reducing the interest rate from 13% to 10% and
extending the maturity date until February 2006. Third, the Company and LLP
amended the Florida Note by: (a) reducing the interest rate from 13% to 10%; (b)
extending the maturity date such that principal is due and payable in quarterly
installments of $50,000 with the first installment due on July 1, 2004 (such
payments are now recourse to the Company); (c) providing that interest only
shall be payable in monthly installments until the date on which the final
principal payment is paid and (d) providing that if the Company establishes
legal access to its Florida land at any time prior to July 1, 2004, then the
Company shall, at its option, either (1) pay an amount equal to all remaining
outstanding principal and interest or (2) convey title to the land in Longwood
to LLP as payment in full of the $300,000 Florida Note. Fourth, the Company and
LLP amended the LLC Operating Agreement to (a) extend the Purchase Obligation
until February 12, 2006, (b) reduce the rate of preferred return from 13% to 10%
and (c) provide the Company with the option to extend the Purchase Obligation
until February 12, 2007 if the Company has made a partial payment of no less
than $1,000,000 towards the Purchase Obligation before February 12, 2006. As a
result of these transactions, the remaining principal amount due on the Notes is
$1,233,000.
Associates is a licensee under a franchise agreement with Holiday Inn (the
"Franchise Agreement"). The Company has guaranteed Associates obligations under
the Franchise Agreement. In the event that the Franchise Agreement is terminated
as a result of a breach of the Franchise Agreement by Associates, Associates may
be subject to liquidated damages under the Franchise Agreement equal to
approximately 12 times the monthly franchise fees payable pursuant to the
Franchise Agreement.
In conjunction with the Franchise Agreement, Associates is subject to a
Property Improvement Plan ("the Improvement Plan"). Pursuant to the Improvement
Plan, Associates was required to make certain improvements to the Louisville
Hotel by December 31, 2002, as well as meet certain interim milestones. The
Company estimates that the total required improvements will cost approximately
$1,200,000. As of March 31, 2003, the Louisville Hotel has spent approximately
$510,000 on improvements and
4
has approximately $61,000 in escrow to spend on improvements. The Company has
received a verbal extension for the completion of the Improvement Plan. Funding
by Associates should be sufficient for it's completion by using the escrowed
funds described above and excess cash flows generated by the Louisville Hotel.
If the verbal extension is withdrawn, the Company would be in noncompliance with
the Franchise Agreement.
In March 2001 and 2000, the Company recognized writedowns of $2,000,000
and $1,200,000, respectively, on its investment in the LLC. The March 2000
writedown was due to the anticipated shortfall of the Company's return of equity
as a result of the decreased operating performance of the Louisville Hotel. In
March 2001, in light of the deterioration of market conditions affecting the
hotel industry during the fourth quarter and due to a further decrease in the
operating performance of the Louisville Hotel, management of the Company
concluded that the Company's economic ownership interest in the LLC had been
totally impaired. The carrying value of the investment in the LLC on the
Company's books is $0 as of March 31, 2003 and 2002.
Competition and Seasonality
The hotel business is highly competitive. The demand for accommodations
and the resulting cash flow vary seasonally. Levels of demand are dependent upon
many factors, including general and local economic conditions and changes in the
number of leisure and business related travelers. The hotels managed by the
Company compete with other hotels on various bases including room prices,
quality, service, location and amenities. An increase in the number of
competitive hotel properties in a particular area could have an adverse effect
on the revenues of a Company-managed hotel located in the same area that would
reduce the fees paid to the Company with respect to such property. The Company
is also competing with a multitude of other hotel management companies to obtain
management contracts.
Undeveloped Land
The Company also owns three parcels of undeveloped land which it holds for
sale, two are located in Florida, and one in Texas. The parcel located in
Longwood, Florida is pledged as security for the Company's obligations under the
Notes and the Operating Agreement. The Company has no plans to develop the
remaining properties. The Company intends to sell the properties at such time as
the Company is able to negotiate sales on terms acceptable to the Company.
During the twelve month period ended March 31, 2003, the Company sold or
transferred three parcels of undeveloped land for a loss of approximately
$18,000. In March 2003, the Company signed a contract for the sale of its
property in Longwood, Florida for $540,000. The closing is to occur no later
than October 31, 2003. The contract is contingent upon the purchaser verifying
and confirming access to the property. There can be no assurance that the
closing will occur based on such factors as the contingency described above or
the ability of the seller to fund the transaction as well as other conditions
typical in real estate transactions. There also can be no assurance that the
Company will be able to sell its other undeveloped land on terms favorable to
the Company.
5
Principal Office/Employees
The Company was incorporated under the laws of the State of Delaware on
October 29, 1985. In January 1997, the Company changed its name from Ridgewood
Properties, Inc. to Ridgewood Hotels, Inc. Prior to December 31, 1985, the
Company operated under the name CMEI, Inc.
The Company's principal office is located at 100 Rue Charlemagne,
Braselton, Georgia 30517 (telephone number (678) 425-0900). As of March 31,
2003, the Company employed approximately 693 persons, of which 558 work at the
hotels owned by Fountainhead and managed by the Company, 120 work at the
Louisville Hotel, 8 work at the Holiday Inn Express, 6 work at the restaurant in
Georgia and two work in the Company's principal office. Payroll costs associated
with employees working at hotels are funded by the owners of such hotels. The
Company considers its relations with employees to be good.
Item 2. Properties
The Company does not own any real property material to conducting the
administrative aspects of its business operations. The Company's administrative
offices are located at Chateau Elan Georgia.
As of March 31, 2003, the Company had ownership interest in one operating
property as follows:
Name of Hotel Location # of Rooms Ownership Interest
------------- -------- ---------- ------------------
Holiday Inn Louisville, KY 271 (a)
(a) As of March 31, 2003, the Company, through its subsidiaries, holds a
100% ownership interest in the Louisville Hotel as the sole member
of Associates, the entity that owns the hotel. The Louisville Hotel
serves as collateral for a $17,164,000 term loan with a commercial
lender. Through its ownership in the LLC, the Company has an 80%
economic interest in the Louisville Hotel. The LLC has an option to
acquire the membership interests in Associates for nominal value.
The Company also owns three undeveloped properties which it holds for
sale, of which two properties are located in Florida, and one property is
located in Texas. The Company does not expect to develop these properties. These
properties are more fully described in Note 2 to the Company's audited
consolidated financial statements set forth on pages F-7 to F-34 of this
Report and in Schedule III, Real Estate and Accumulated Depreciation, set forth
on pages F-35 to F-37 of this Report.
Item 3. Legal Proceedings
On May 2, 1995, an action was filed in the Court of Chancery of the State
of Delaware (New Castle County) entitled William N. Strassburger v. Michael M.
Earley,
6
Luther A. Henderson, John C. Stiska, N. Russell Walden, and Triton Group, Ltd.,
defendants, and Ridgewood Hotels, Inc., nominal defendant, C.A. No. 14267 (the
"Chancery Court Action"). The plaintiff challenged the actions of the Company
and its directors in consummating the Company's August 1994 repurchases of its
common stock held by Triton Group, Ltd. and Hesperus Partners Ltd.
In March 2003, the parties to the Chancery Court Action entered into a
Stipulation of Settlement (the "Settlement") pursuant to which the parties have
agreed to settle the Chancery Court Action. On March 24, 2003, the Settlement
was submitted to the Court for approval and the Settlement was approved by the
Court on May 20, 2003 and became final on June 19, 2003. The principal terms of
the Settlement provide that:
(i) Certain of the defendants will pay to Ridgewood the aggregate amount
of $1,770,000. Ridgewood has agreed to use $1,645,000 of such funds
to make an offer to acquire the shares of Ridgewood's common stock
held by its Minority Stockholders (as such term is defined in the
Settlement). The defendants in the Chancery Court Action and
Ridgewood's majority stockholder, Fountainhead Development, LLC,
have agreed that the shares of Ridgewood's common stock held by them
will not participate in the offer. As a result, it is estimated that
the holders of up to approximately 790,457 shares of Ridgewood's
common stock may be eligible to participate in the offer, which
would result in an offer of approximately $2.08 per share for such
shares.
(ii) All of the shares of Ridgewood' Series A Convertible Preferred Stock
will be cancelled in exchange for 1,350,000 shares of Ridgewood's
common stock (which will not be eligible to participate in the offer
described above) and Ridgewood's obligation to pay any accrued but
unpaid dividends with respect to such preferred stock will be
eliminated.
(iii) Defendant Walden will transfer his 32,000 shares of Ridgewood's
common stock to Ridgewood.
(iv) The Action will be dismissed and the defendants will be released
from any claims relating hereto.
In addition, certain of the defendants have agreed to pay the
attorney's fees and expenses of the plaintiff's counsel up to $1,825,000,
if such fees and expenses are approved by the Court. Under the term of the
Settlement, Ridgewood is not obligated to pay any of the plaintiff's
attorney's fees or expenses.
As of July 3, 2003, the Company has received the $1,770,000 of
settlement proceeds, the shares of Preferred Stock have been submitted to
the Company in exchange for 1,350,000 shares of Common Stock, the dividend
arrearages with respect to the Preferred Stock have been cancelled and Mr.
Walden has transferred 32,000 shares of Common Stock to the Company.
7
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended March 31, 2003.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
There effectively has been an absence of an established public trading
market for the Company's common stock which is quoted in the "pink sheets".
The following table sets forth, for the respective periods indicated, the
closing prices of the common stock
Quarter Ended High Low
------------- ------ ------
June 30, 2001 $0.843 $0.550
September 30, 2001 $0.740 $0.500
December 31, 2001 $0.600 $0.580
March 31, 2002 $0.700 $0.580
June 30, 2002 $0.250 $0.250
September 30, 2002 $0.250 $0.250
December 31, 2002 $0.010 $0.010
March 31, 2003 $0.050 $0.050
On June 30, 2003, the closing price quoted by broker-dealer firms
effecting transactions in the Company's common stock was $0.05.
On March 31, 2003, there were 2,513,257 shares of the Company's common
stock outstanding held by approximately 190 shareholders of record.
The Company may pay future dividends if and when earnings and cash are
available but has no present intention to do so. The declaration of dividends on
the common stock is within the discretion of the Board of Directors of the
Company (the "Board") and is, therefore, subject to many considerations,
including operating results, business and capital requirements and other
factors.
As of March 31, 2003, the Company was in arrears with respect to
$1,470,000 of dividends with respect to the Company's outstanding shares of the
Company's Series A Convertible Cumulative Preferred Stock. The Company is
prohibited from paying dividends on its shares of common stock at any time that
the Company is in arrears with respect to such preferred stock dividends.
Pursuant to the terms of the Stipulation of Settlement (see discussion under
Item 3- Legal Proceedings above), the Convertible
8
Preferred Stock will be cancelled in return for 1,350,000 shares of the
Company's Common Stock and the dividend arrearages have been cancelled.
The Company made no sales of unregistered securities of the Company in the
twelve months ended March 31, 2003.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the Company's audited financial statements and related notes
thereto, set forth in Item 8 hereof, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," set forth in Item 7 hereof.
The historical results are not necessarily indicative of future results. All
amounts are in thousands, except per share data.
March 31 August 31
Balance Sheet Data as of 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------
Total Assets $ 23,629 $25,592 $5,771 $8,243 $5,910
Long-Term Debt 21,685 20,674 1,933 4,553 2,682
Shareholders' Equity (Deficit) (1,035) 432 1,700 1,740 1,556
Year Ended Seven Months Ended Year ended
Income Statement Data March 31 March 31 March 31 March 31 August 31
for the ---------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Net Revenues $ 9,403 $ 9,339 $ 10,466 $ 3,378 $ 2,769 $ 4,547 $ 5,830
Net Loss (1,467) (1,268) (40) (1,816) (593) (1,283) (622)
Net Loss Applicable
To Common Shareholders (1,827) (1,628) (400) (2,026) (803) (1,643) (982)
Basic and Diluted
Loss Per Share (0.73) (0.65) (0.16) (1.07) (0.53) (1.09) (0.64)
(a) The increase in the assets and liabilities as of March 31, 2002 compared
to March 31, 2001 is due to the consolidation of the Louisville Hotel
effective April 1, 2001.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations of the Company and its subsidiaries. The discussion should
be read in conjunction with the Company's consolidated financial statements for
the fiscal years ended March 31, 2003, 2002 and 2001, included elsewhere herein.
Certain statements included in this Report are forward-looking, such as
statements relating to estimates of operating and capital expenditure
requirements, future revenue
9
and operating income, and cash flow and liquidity. Such forward-looking
statements are based on the Company's current expectations, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by the Company, and are subject to a number of risks and
uncertainties that could cause actual results in the future to differ
significantly from results expressed or implied in any such forward-looking
statements. These risks and uncertainties include, but are not limited to,
uncertainties relating to economic and business conditions, governmental and
regulatory policies, and the competitive environment in which the Company
operates. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "may," "will," or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. Such statements are not guarantees of future performance and are
subject to the risks and uncertainties referred to above. Therefore, the
Company's actual results could differ materially and adversely from those
expressed in any forward-looking statements as a result of various factors. The
Company undertakes no obligation to revise or update publicly any
forward-looking statements for any reason. The information contained in this
Report is not a complete description of the Company's business or the risks
associated with an investment in the Company's common stock. The Company urges
you to carefully review and consider the various disclosures made in this Report
and in the Company's other reports filed with the SEC.
Significant Accounting Policies -
The Company's significant accounting policies consist of revenue
recognition on management contracts and the impairment of long-lived assets. The
impairment of long-lived assets is significant due to the impact it has on the
value of the hotel described above as it is reported in the consolidated assets
of the Company. The Company reviews the net carrying value of its hotels and
other long-lived assets if any facts and circumstances suggest their
recoverability may have been impaired. Impairment is determined by calculating
the sum of the estimated undiscounted future cash flows, including the projected
undiscounted future net proceeds from the sale of the hotel or other long-lived
assets. In the event such sum is less than the depreciated cost of the hotel or
other long-lived asset, the hotel or other long-lived asset will be written down
to estimated fair market value. The Company recorded losses of $2,000,000 in the
year ended March 31, 2001 for impairment of the Company's investment in the
hotel in Louisville, Kentucky.
New Accounting Pronouncements-
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections", was issued.
This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that Statement, FASB Statement No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This
Statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets
of Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback
10
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The adoption of SFAS No. 145 had no effect on the
financial position and results of operations of the Company.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", was issued which nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred
in a Restructuring"). The adoption of SFAS No. 146 had no effect on the
financial position and results of operations of the Company.
In December 2002, SFAS 148, Accounting for Stock-Based Compensations -
Transition and Disclosure, was issued which is an amendment of SFAS 123,
Accounting for Stock-Based Compensation. This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. The Company has determined not to adopt SFAS 148 as of March 31,
2003 as the Company has limited stock option activity.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an Interpretation of SFAS No. 5, 57, and
107, and recession of FASB Interpretation No. 34. The interpretation elaborates
on the disclosures to be made by a guarantor in its financial statements. It
also requires a guarantor to recognize a liability for the fair value of the
obligation undertaken in issuing the guarantee at the inception of a guarantee.
Management does not expect the adoption of this interpretation to have a
significant effect on the financial position and results of operations of the
Company.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest annuities. FIN No. 46 clarifies the application of Accounting Research
Bulletin ("ARB") No. 51, Consolidated Financial Statements, to certain entities
in which equity investors do not have characteristics of controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The application of the majority voting interest requirement in ARB 51 to certain
types of entities may not identify the party with a controlling financial
interest because the controlling financial interest may be achieved through
arrangements that do not involve a controlling interest. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003 and to
fiscal years beginning after June 15, 2003 for variable interest entities
acquired before February 1, 2003. Management does not expect the adoption of FIN
No. 46 to have a significant impact on the Company's financial statements.
11
Results of Operations -
Hotel Management Revenue
The Company presently manages four hotel properties (not including the
hotel in Louisville, Kentucky consolidated for financial reporting purposes and
discussed below under Wholly Owned Hotel Operations), a resort property with
golf facilities only and a restaurant for which the Company receives a
management fee calculated as a percentage of gross revenues.
During the fiscal year ended March 31, 2003, the Company managed four
Fountainhead properties consisting of Chateau Elan Georgia, Sebring, St. Andrews
and Diablo. St. Andrews opened in June 2001 and the Company received a
development fee for services provided to St. Andrews prior to its opening. The
Company began receiving management fees from Diablo beginning in August 2002.
The combined management and development fees for these Fountainhead hotels were
approximately $1,008,000, including $644,000 relating to Chateau Elan Georgia,
$62,000 relating to Sebring, $273,000 relating to St. Andrews and $29,000
relating to Diablo. The management and development fees from these Fountainhead
properties represent approximately 90% of the Company's total management fee
revenue for the year ended March 31, 2003. During fiscal year ended March 31,
2002, the combined management and development fees for these Fountainhead hotels
were approximately $858,000, including $645,000 relating to Chateau Elan
Georgia, $70,000 relating to Sebring and $143,000 relating to St. Andrews. The
management and development fees from these Fountainhead properties represent
approximately 64% of the Company's total management fee revenue for the year
ended March 31, 2002. During fiscal year ended March 31, 2001, the combined
management and development fees for these Fountainhead hotels were approximately
$1,123,000, including $973,000 relating to Chateau Elan Georgia, $60,000
relating to Sebring and $90,000 relating to St. Andrews. The management and
development fees from these Fountainhead properties represent approximately 44%
of the Company's total management fee revenue for the year ended March 31, 2001.
The Company also managed the Holiday Inn Express at Chateau Elan receiving
management fees of approximately $24,000, $23,000 and $23,000 for the fiscal
years ended March 31, 2003, 2002 and 2001, respectively.
The Company also manages a restaurant in Georgia for which it received
approximately $6,000 in management revenue during fiscal year ended March 31,
2003.
Revenues from hotel management are generally based on agreements, which
provide monthly base management fees, accounting fees, and periodic incentive
fees. The base management fees are typically a percentage of total revenue for a
managed property, while incentive fees are typically based on net income and/or
ownership returns on investment for the managed property. Accounting fees are
set monthly fees charged to hotels, which utilize centralized accounting
services provided by the Company.
Revenues from hotel management for the year ended March 31, 2003 decreased
$224,000, or 17% compared to the year ended March 31, 2002. Revenues from hotel
12
management for the year ended March 31, 2002 decreased $1,196,000, or 47%
compared to the year ended March 31, 2001. Revenues from hotel management
decreased as a result of both the termination of management contracts during the
years ended March 31, 2003 and 2002 and a decrease in revenues from prior
periods in hotels currently managed by the Company. The management agreements
were terminated for various reasons such as ownership changes at a hotel or
insufficient cash at the managed hotel to pay for management services. In
addition, approximately $225,000 of this decrease was related to the
consolidation of the hotel in Louisville, Kentucky as of April 1, 2001.
The downturn in the economy beginning during 2001 reduced both corporate
travel and meeting events, resulting in lower hospitality revenues throughout
the hotel sector. The sector suffers from the additional construction of limited
and full service hotels in the past three years. With the improvement of the
fairgrounds and the largest hotel in Louisville and the construction of new
hotels, room night demand has declined forcing room rates lower. In particular,
the resort properties managed by the Company incurred significant cancellations
after September 11, 2001 and experienced reduced occupancy throughout fiscal
year ended March 31, 2003. The Company anticipates that while the downturn in
business may begin to recover, the general economic slowdown will continue to
have a negative impact on the Company's management fee revenues. In addition to
the impact on monthly revenue, the reduction in business will have an impact on
management incentive fees that are based on the annual performance of the
Chateau Elan Georgia property and other properties with similar arrangements. To
partially offset this downturn, the Company implemented cost containment at its
managed properties and its corporate office.
In compliance with Staff Accounting Bulletin ("SAB") No. 101, the Company
does not accrue or realize incentive management fee revenues until earned. The
management agreements identify when incentive fees are earned and how they are
calculated. Some of the Company's management agreements have provisions that
incentives are earned quarterly while others provide for annual incentive fees.
Some of the agreements' incentive fee provisions are based on a calendar year
while others are based on a fiscal year. The Company recorded no incentive fees
related to any of the properties which it managed for the years ended March 31,
2003 and 2002, but did record an incentive fee of $247,000 related to the
performance of Chateau Elan Georgia for the year ended March 31, 2001. This fee
is based on the actual results of the resort.
During the year ended March 31, 2003, the Company entered into one new
management agreement. During the same period, three management agreements were
terminated by property owners. The management agreements were terminated for
various reasons such as ownership changes at a hotel or insufficient cash at the
managed hotel to pay for management services.
During the year ended March 31, 2003, the Company's management agreements
were terminated for the following properties: (i) a 119 room hotel in Athens,
Georgia as of May 2002, (ii) a 60 room Shoney's Inn in Lavonia, Georgia as of
April 2002, (iii) and a 143 room Holiday Inn Express in Atlanta, Georgia as of
March 2003. The Company received approximately $73,000 of management and
accounting fees during the year ended March 31, 2003 related to these hotels.
13
Wholly-Owned Hotel Operations
The Company currently owns, indirectly through its subsidiaries, one
hotel property, the Louisville Hotel, which is directly owned by Associates, the
wholly-owned subsidiary of the Company. The Louisville Hotel is a Holiday Inn
franchise. Under the terms of the franchise agreement with respect to this
property, the Company is required to comply with standards established by the
franchiser, including property upgrades and renovations. The owner of the hotel
is responsible for all operating expenses, including property upgrades and
renovations. Effective April 2001, Associates financial statements are
consolidated with the Company's financial statements. Revenues from wholly-owned
hotel operations for the fiscal year ended March 31, 2003 decreased $8,000
compared to the fiscal year ended March 31, 2002. Revenues from wholly-owned
hotel operations for the fiscal year ended March 31, 2002 increased $5,715,000,
or 319%, compared to the fiscal year ended March 31, 2001. The increase was due
to the consolidation of Associates.
As of February 2001, the Company no longer leases the Ramada Inn in
Lubbock, Texas. The total revenues for this hotel for the year ended March 31,
2001 were $1,432,000. The Company had no revenues relating to the hotel in
Lubbock, Texas in the fiscal year ended March 31, 2002.
In fiscal years ended March 31, 2003 and 2002, the Louisville Hotel was
the Company's only wholly-owned hotel operation. As a consequence of the
September 11, 2001 terrorist attacks and their effect on the travel industry,
the Louisville Hotel experienced numerous cancellations in September 2001 and
experienced lower occupancy during the fiscal years ended March 31, 2003 and
2002. The Louisville Hotels room reservations has negotiated agreements for
additional airline contract rooms to help offset lower occupancy rates as a
result of the current economic conditions in the travel industry. The Company
anticipates that the downturn in business as a result of these events and their
effect on the travel industry will continue to have a negative impact on the
Louisville Hotel's revenues until such time as the travel industry rebounds.
Real Estate Sales
The Company had a loss from real estate sales of approximately $18,000 for
the fiscal year ended March 31, 2003. The Company had a $92,000 and $2,876,000
gain for the fiscal years ended March 31, 2002 and 2001, respectively. The
Company sold a hotel property in Longwood, Florida in the fiscal year ended
March 31, 2001 which sale resulted in a gain of approximately $2,856,000. Gains
or losses on real estate sales are dependent upon the timing, sales price and
the Company's basis in specific assets sold and will vary considerably from
period to period.
Other Income
In relation to the Company's investment in unconsolidated entities, the
Company recognized equity of $234,000, $251,000 and $251,000 for the years ended
March 31, 2003, 2002 and 2001, respectively, relating to the Company's ownership
interest in LLC.
14
Interest income decreased $21,000, or 70% for the year ended March 31,
2003 compared to the year end March 31, 2002 and $42,000, or 58% for the year
ended March 31, 2002 compared to the year ended March 31, 2001 due to less cash
available for investment purposes and lower interest rates.
There were no other revenues earned during year ended March 31, 2003. The
other revenue of $89,000 and $22,000 received during the years ended March 31,
2002 and 2001, respectively, was primarily from the recognition of an incentive
fee the Company received from a long distance phone carrier to utilize their
long distance service.
Expenses
Expenses of wholly-owned real estate increased $1,000, for the year ended
March 31, 2003 compared to the year ended March 31, 2002. Expenses of
wholly-owned real estate increased $3,113,000, or 143%, for the year ended March
31, 2002 compared to the year ended March 31, 2001. The increase was due to the
consolidation of the Louisville Hotel.
On January 4, 2001, the Company moved its principle executive offices to
Hoschton, Georgia. The lease expense for vacated office of approximately
$107,000 in the year ended March 31, 2001 is related to the lease obligations on
the Company's previous office in Atlanta, Georgia that it vacated in December
2000. The Company paid $13,107 per month through May 2002. In April 2001, the
vacated office was sublet for $8,738 per month. The Company no longer leases
office space, as it utilizes space at Chateau Elan Georgia.
Depreciation and amortization increased $99,000, or 7%, for the year ended
March 31, 2003 compared to the year ended March 31, 2002. The increase was due
to greater depreciation related to the Louisville Hotel as a result of
improvements required by the Improvement Plan. Depreciation and amortization
increased $846,000, or 155%, for the year ended March 31, 2002 compared to the
year ended March 31, 2001. This increase was due to the consolidation of the
Louisville Hotel.
Interest expense increased $14,000, or 1%, for the year ended March 31,
2003 compared to the year ended March 31, 2002. The increase was due to the
mezzanine loan on the Louisville Hotel, which is held by LLC. Interest expense
increased $1,711,000, or 627%, for the year ended March 31, 2002 compared to the
year ended March 31, 2001 due to the consolidation of the Louisville Hotel.
During the fiscal year ended March 31, 2003, the Company downsized its
corporate staff substantially due to the smaller number of properties being
managed by the Company. The Company's only corporate staff employees are the
President and the Regional Director of Operations. The day-to-day financial
management of the Company is contracted with a CPA firm who reports to the
Regional Director of Operations.
15
General, administrative and other expenses decreased $537,000, or 28% for
the year ended March 31, 2003 compared to the year ended March 31, 2002. The
decrease is due to the Company's downsizing described above. General,
administrative and other expenses decreased $311,000, or 14% for the year ended
March 31, 2002 compared to the year ended March 31, 2001. The decrease is due to
the Company's continuing overall efforts to manage overhead costs closely. The
Company has also eliminated several staff positions and decreased or eliminated
various other costs in conjunction with managing fewer hotels.
Provision for doubtful accounts increased by approximately $165,000 for
the year ended March 31, 2003 compared to the year ended March 31, 2002. The
increase was due to specific accounts which the Company determined
collectibility was uncertain. Provision for doubtful accounts decreased by
approximately $108,000 for the year ended March 31, 2002 compared to the year
ended March 31, 2001. The decrease was due to the write-off of several accounts
due to uncollectibility.
There were no business development expenses for the years ended March 31,
2003 and 2002. Previously, while the Company was aggressively pursuing the
business of acquiring, developing, operating and selling hotel properties
throughout the country, the Company incurred business development costs.
In March 2001, the Company recognized a writedown of $2,000,000 on its
investment in LLC. The carrying value of the investment in LLC on the Company's
books is $-0- as of March 31, 2003.
The Company's loss of $1,467,000 for the fiscal year ended March 31, 2003
was comprised of the following: (1) approximately a $960,000 loss as a result of
the hotel management operations, administrative, debt service and depreciation
and amortization costs of the Company and (2) approximately a $507,000 operating
loss by the wholly-owned hotel of the Company. The Company's loss of $1,268,000
for the fiscal year ended March 31, 2002 was comprised of the following: (1)
approximately a $683,000 loss as a result of the hotel management operations,
administrative, debt service and depreciation and amortization costs of the
Company and (2) approximately a $585,000 operating loss by the wholly-owned
hotel of the Company. The Company's income before income taxes of $30,000 for
the fiscal year ended March 31, 2001 was comprised of the following: (a) a
$2,856,000 gain on the sale of the hotel in Longwood, Florida (b) a $2,000,000
writedown on the investment in the Louisville Hotel, (c) additional bad debt
reserve of $189,000, and (d) an operating loss of $637,000.
The Company's recurring losses and negative operating cash flows raise
substantial doubt about the Company's ability to continue as a going concern.
The Company is continuing its efforts to return to profitability by continuing
(i) to seek new opportunities to manage resort properties , (ii) to take steps
to reduce costs (including administrative costs) and (iii) its efforts to
increase the revenue at existing properties managed by the Company
16
Liquidity and Capital Resources -
Land Sales
During the fiscal year ended March 31, 2003, the Company received net
proceeds of $12,000 from the sale of undeveloped land in Athens, Georgia.
Fountainhead Transactions
On August 8, 2002, the Company entered into a management agreement with
Fountainhead to perform management services at Diablo Grande Resort located in
Patterson, California, one of Fountainhead's properties, for a period of five
years beginning on September 1, 2002. In consideration of the management
agreement, the Company paid Fountainhead $250,000. In the management agreement,
Fountainhead agreed to pay the Company a base management fee equal to 2.5% of
the gross revenues of the properties being managed. The management agreement has
a term of five years but is terminable by Fountainhead. If the management
agreement is terminated by Fountainhead, then Fountainhead must refund the
Company certain amounts based on the year of termination. The agreement
automatically extends for six month increments from September 1, 2007 unless
terminated by either party.
In October 2002, the Company amended the terms of the management
agreements between the Company and Fountainhead for the management of St.
Andrews and Sebring. In exchange for five year agreements, the Company agreed to
pay Fountainhead $575,000. If the management agreement is terminated by
Fountainhead, then Fountainhead must refund the Company certain amounts based on
the year of termination. Fountainhead was paid $400,000 in cash and the
remaining sum of $175,000 was deducted from monthly fees due to the Company for
the management of the St. Andrews property. The Company is amortizing the
$575,000 fee over the life of the management agreement.
There can be no assurance that the Company will continue to manage
Fountainhead properties in the future. If the Company's management of the
Fountainhead properties was terminated by Fountainhead, it would have a material
adverse effect on the Company's revenues and financial condition.
Louisville Hotel
The Company owns one hotel property, the Louisville Hotel, through its
subsidiary, Associates. As of March 31, 2001, the Company, through its
wholly-owned subsidiaries, was the manager of and had a minority ownership
interest in Associates. In April 2001, the Company, through its wholly-owned
subsidiaries, acquired 100% of the membership interests in Associates. The
membership interests are pledged as security for a $3,623,690 loan made by the
LLC. The membership interests are also subject to an option pursuant to which
the LLC has the right to acquire the membership interests for nominal value.
Pursuant to the terms of the loan, all revenues (including proceeds from sale or
refinancing) of Associates (after payment of expenses including a management fee
17
to the Company) are required to be paid to the LLC until principal and interest
on the loan are paid in full. As a result, the LLC has all of the economic
interests in the Louisville Hotel. On September 30, 1999, the Company, which
already owned a 10% interest in LLC, acquired an additional interest in the LLC
from LLP for $2,500,000. As a result of the transaction, the Company holds an
80% economic interest in the LLC.
The Company has an 80% ownership interest in and is the Managing Member of
the LLC. LLP holds the remaining 20% ownership in LLC. Pursuant to the LLC's
Operating Agreement, the Company has the right at any time to exercise the
Purchase Option whereby the Company may purchase the remaining interest in the
LLC. The Operating Agreement provides that the Option Price for LLP's interest
is equal to the sum of (a) LLP's total capital contributions to LLC
(approximately $3,100,000), plus (b) any accrued but unpaid preferred return on
such capital contributions, plus (c) the residual value of the remaining
interest (the amount that would be distributed to LLP if LLC sold the Louisville
Hotel for its fair market value and distributed the proceeds to the members
pursuant to the Operating Agreement). Under the terms of the Operating
Agreement, the Company is subject to the Purchase Obligation whereby it is
required, no later than February 12, 2006, to purchase LLP's remaining interest
in the LLC for the Option Price. The Company's obligation to purchase the
remaining interest in the LLC is secured by the Company's interest in the LLC
and the Longwood, Florida property.
The Operating Agreement provides that distributions to LLC's owners are
made as follows:
Distributable Cash is defined as the net cash realized from operations but
after payment of management fees, principal and interest, capital improvements
and other such retentions as the managing member determines to be necessary.
Pursuant to the Operating Agreement, distributions of distributable cash from
the LLC shall be made as follows:
o First, to the Company in an amount equal to the cumulative interest paid
on the Notes. The Company uses these funds to pay LLP interest on the
Notes.
o Second, a 13% preferred return (which was reduced to 10% as of February
2003) to LLP on its original $3,061,000 investment.
o Third, a 13% preferred return (which was reduced to 10% as of February
2003) to the Company on its capital contribution of $1,207,000.
o Fourth, 80% to the Company and 20% to LLP.
Cash from a sale or refinancing would be distributed as follows:
o First, to the Company in an amount equal to the cumulative interest paid
on the Notes.
o Second, to the Company in an amount equal to the original principal amount
of the Notes.
18
o Third, to LLP until it has received aggregate distributions in an amount
equal to its 13% preferred return (which was reduced to 10% as of February
2003).
o Fourth, to LLP until its net capital contribution is reduced to zero.
o Fifth, to the Company until it has received an amount equal to its 13%
preferred return (which was reduced to 10% as of February 2003).
o Sixth, to the Company until its net capital contribution is reduced to
zero.
o Thereafter, 20% to LLP and 80% to the Company.
On February 12, 2003 the Company entered into new agreements with the LLP
to refinance the Notes and extend the terms. First, the Company made a $700,000
principal payment on the Notes by (a) paying $200,000 in cash; (b) conveying to
an affiliate of LLP title to the Company's undeveloped land in Ohio in return
for a $200,000 reduction in the principal of the Notes and (c) conveying to an
affiliate of LLP title to the Company's undeveloped land in Arizona in return
for a $300,000 reduction in the principal of the Notes and a release from
portion of the Notes secured by the Arizona land. Second, the Company and LLP
amended the terms of the Notes (other than the portion of the Notes secured by
the land in Longwood, Florida (the "Florida Note")) by reducing the interest
rate from 13% to 10% and extending the maturity date until February 2006. Third,
the Company and LLP amended the Florida Note by: (a) reducing the interest rate
from 13% to 10%; (b) extending the maturity date such that principal is due and
payable in quarterly installments of $50,000 with the first installment due on
July 1, 2004 (which payment is recourse to the Company); (c) providing that
interest only shall be payable in monthly installments until the date on which
the final principal payment is paid and (d) providing that if the Company
establishes legal access to its Florida land at any time prior to July 1, 2004,
then the Company shall, at its option, either (1) pay an amount equal to all
remaining outstanding principal and interest or (2) convey title to the land in
Longwood to LLP as payment in full of the $300,000 Florida Note. Fourth, the
Company and LLP amended the LLC Operating Agreement to (a) extend the Purchase
Obligation until February 12, 2006, (b) reduce the rate of preferred return to
13% to 10% and (c) provide the Company with the option to extend to Purchase
Obligation until February 12, 2007 if the Company has made a partial payment of
no less than $1,000,000 towards the Purchase Obligation before February 12,
2006. As a result of these transactions, the remaining principal amount due on
the Notes is $1,233,000.
In connection with the new management agreement effective September 30,
1999, the Company received management fees totaling approximately $222,000,
$225,000 and $258,000 for the fiscal years ended March 31, 2003, 2002 and 2001,
respectively
The Company has guaranteed Associates' obligations under the Franchise
Agreement between Associates and Holiday Inn. In the event that the Franchise
Agreement is terminated as a result of a breach of the Franchise Agreement by
Associates, Associates would be subject to liquidated damages under the
Franchise Agreement equal to approximately 12 times the monthly franchise fees
payable pursuant
19
to the Franchise Agreement. The current monthly franchise fees are approximately
$32,000.
Under the Improvement Plan, to which the Louisville Hotel is subject, the
Louisville Hotel is required to make approximately $1,200,000 of improvements by
December 31, 2002, with certain interim milestones. As of March 31, 2003 the
Louisville Hotel has spent approximately $510,000 on improvements and has
approximately $61,000 in escrow to spend on improvements. The Company has
received an informal extension to May 1, 2004 for completion of the Property
Improvement Plan and the funding by Associates should be sufficient for it's
completion.
Shareholder Settlement
See Item 3- Legal Proceedings for discussion of the Shareholder Settlement.
Cash on Hand and Long-Term Debt Obligations
The Company has approximately $89,000 of available cash as of March 31,
2003.
The Company's long-term debt obligations as of March 31, 2003 are as
follows:
-----------------------------------------------------------------------
Total Less than 1 year 1-3 years 4-5 years After 5 years
-----------------------------------------------------------------------
$22,052,000 $367,000 $2,053,000 $949,000 $18,683,000
-----------------------------------------------------------------------
Effect of Inflation
Inflation tends to increase the Company's cash flow from income-producing
properties since rental rates generally increase by a greater amount than
associated expenses. Inflation also generally tends to increase the value of the
Company's land portfolio.
Offsetting these beneficial effects of inflation are the increased cost of
the Company's operating expenses and the increased costs and decreased supply of
investment capital for real estate that generally accompany inflation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has no material exposure to the market risks covered by this
Item.
Item 8. Financial Statements
The reports of Arthur Andersen LLP included herein with respect to the
Financial Statement Schedule III, Real Estate and Accumulated Depreciation,
included herein and the financial statements included herein are copies of
reports previously issued by Arthur Andersen LLP relating to the Company's
financial statement schedule and financial statements for the year ended March
31, 2001. Such reports have not been reissued, and
20
the consent of Arthur Andersen LLP has not been obtained with respect to such
reports. As a result, your ability to assert claims against Arthur Andersen LLP
may be limited. Since we have not been able to obtain the written consent of
Arthur Andersen LLP, you will not be able to recover against Arthur Andersen LLP
under Section 11 of the Securities Act for any untrue statements of material
fact contained in the report or financial statements or any omissions to state a
material fact required to be stated in the financial statements.
The audited consolidated financial statements and financial statement
schedules required to be filed with this Report are set forth at the end of this
Report and begin on page F-1 hereof, "Index To Consolidated Financial
Statements."
Supplementary Financial Information
The following table presents unaudited quarterly statements of operations
data for each quarter of the Company's last two completed fiscal years. The
unaudited quarterly financial statements have been prepared on substantially the
same basis as the audited financial statements for the year ended March 31,
2003, included elsewhere in this Report. The results of operations for any
quarter are not necessarily indicative of the results to be expected for any
future period. Amounts set forth below are in thousands, except per share data.
SUPPLEMENTARY FINANCIAL INFORMATION
(Unaudited)
(000's omitted, except per share data)
2003 For Quarter Ended March 31 December 31 September 30 June 30
- -----------------------------------------------------------------------------------------------
Net Revenues $ 2,494 $ 2,103 $ 2,257 $ 2,549
Net Loss (427) (539) (339) (162)
Net Loss Applicable
To Common Shareholders (517) (629) (429) (252)
Basic Loss Per Share $ (0.21) $ (0.25) $ (0.17) $ (0.10)
2002 For Quarter Ended March 31 December 31 September 30 June 30
- -----------------------------------------------------------------------------------------------
Net Revenues $ 2,017 $ 2,341 $ 2,243 $ 2,738
Net Loss (521) (243) (410) (94)
Net Loss Applicable
To Common Shareholders (611) (333) (500) (184)
Basic Loss Per Share $ (0.25) $ (0.13) $ (0.20) $ (0.07)
21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company had a change in its certifying accountants. Deloitte and
Touche resigned as the Company's independent accountants on May 1, 2003. The
resignation of the former accountants were reported by the Company in its
Current Report Form 8-K dated May 8, 2003 and Form 8-K/A dated May 19, 2003. The
Company engaged Moore Stephens Lovelace, P.A. as its new independent accountants
as of May 9, 2003. The change was reported in the Company's Current Report Form
8-K dated May 9, 2003.
PART III
Item 10. Directors and Executive Officers
Set forth below are the names, ages (as of March 31, 2003), positions and
offices held and a brief description of the business experience during the past
five years of the directors and executive officers of the Company.
Stacey D. Stewart (age 40) has served as a director of the Company since
March 2, 2001. Ms. Stewart is currently the President and Chief Executive
Officer of the Fannie Mae Foundation. Prior to her appointment as President and
Chief Executive Officer with the Fannie Mae Foundation, Ms. Stewart served as
Vice President for Housing and Community Development in the Fannie Mae
Foundation's Southeastern Regional Office. She was also a public finance
investment banker for five years in New York and Atlanta. While in Atlanta, she
served as Treasurer and Chair of the Finance Committee for the Fulton-Dekalb
Hospital Authority, and on the Board of Directors of the Atlanta Urban League,
Research Atlanta, and the Herndon Foundation. She currently serves on the Policy
Advisory Board of the Joint Center for Housing Studies at Harvard University,
and is active with Woman's in Street Village, Woman's Policy Inc., the Museum of
African Art and the Washington Ballet.
Henk H. Evers (age 44) has served as President and Chief Operating Officer
of the Company since January 11, 2000 and as a director of the Company since
February 3, 2000. Since January 1999, Mr. Evers has served as the Chief
Executive Officer of Fountainhead. Since being appointed President of the
Company on January 11, 2000, Mr. Evers has devoted a significant portion of his
time to the Company's affairs including the management of Chateau Elan Georgia.
From November 1994 until January 1999, Mr. Evers was the General Manager of the
Chateau Elan Winery and Resort, where he was in charge of developing the Chateau
Elan brand name and properties in Georgia, California, Florida and Scotland.
Prior to that, Mr. Evers was a member of the executive committee for various
Marriott International properties for approximately 13 years.
Donald E. Panoz (age 67) has served as Chief Executive Officer of the
Company since January 11, 2000 and as Chairman of the Board since February 3,
2000. In 1986, Mr. Panoz founded Fountainhead and has served as its Chairman
since inception. Since July 1999, Mr. Panoz has served as the Chairman of Elan
Motor Sports Technologies, Inc., an auto racing design, development and
manufacturing company located in Braselton, Georgia. Since 1997, Mr. Panoz has
served as the Chairman of Panoz Motor
22
Sports, a race car manufacturer and competitor that he founded. Since 1996, Mr.
Panoz has served as the Chairman and Chief Executive Officer of L'Auberge
International Hospitality Company, a hotel and resort management company that he
co-founded with Nancy C. Panoz. From 1969 until 1996, Mr. Panoz served as the
Chairman and Chief Executive Officer of Elan Corporation plc, a leading
worldwide pharmaceutical research and development company located near Dublin,
Ireland that he co-founded with Nancy C. Panoz. Since 1992, Mr. Panoz has been a
director of Warner Chilcott plc, a publicly traded pharmaceutical company
headquartered in Dublin, Ireland, and served as its Chairman from 1995 to 1998.
Since 1981, Mr. Panoz has served as the Chairman and Chief Executive Officer of
Chateau Elan Winery and Resort, a 301-room inn, conference center and winery
located approximately 40 miles northeast of Atlanta, Georgia. Mr. Panoz also
serves on the Board of Directors of the Georgia Chamber of Commerce. Mr. Panoz
is married to Nancy C. Panoz.
Nancy C. Panoz (age 66) has served as Vice Chairman of the Board since
February 3, 2000. Since 1996, Mrs. Panoz has also served as the Vice Chairman of
L'Auberge International Hospitality Company, a company that she co-founded with
Donald E. Panoz. In 1989, Mrs. Panoz became President of the Chateau Elan Winery
and Resort that she founded with Donald E. Panoz in 1981. In 1985, Mrs. Panoz
founded Elan Natural Waters, Inc., a company that owns and operates a mineral
water bottling plant in Blairsville, Georgia, and has served as its President
and Chairman since its inception. In 1985, Mrs. Panoz founded Nanco Holdings,
Inc., an investment and real estate holding company. In 1969, Mrs. Panoz
co-founded Elan Corporation with Donald E. Panoz, and served as its Managing
Director from 1977 to 1983 and its Vice Chairman from 1983 to 1995. Mrs. Panoz
currently serves on the Board of Directors of numerous non-profit organizations,
including the Atlanta Convention and Visitors Bureau, the Georgia Chamber of
Commerce and the Gwinnett Foundation, Inc. Mrs. Panoz is married to Donald E.
Panoz.
Anthony Mastandrea (age 37) has been a director of the Company since
January 2000. Since December 1998, Mr. Mastandrea has been the Chief Financial
Officer and a director of Fountainhead Holdings, Ltd. From May 1994 until
November 1998, Mr. Mastandrea was the Controller for Fountainhead. Prior to
joining Fountainhead, Mr. Mastandrea was a manager with KPMG Peat Marwick in
Atlanta, Georgia and is a Certified Public Accountant.
James J. Papovich (age 41) has been with the Company since 1997. Mr.
Papovich has been Regional Director of Operations since August 2002. Mr.
Papovich is responsible for the oversight and supervision of the Company's
financial functions including the direct supervision of the outside accounting
firm (whose two principals are certified public accountants) retained by the
Company to assist in financial reporting matters and to provide internal
accounting support. Prior to his appointment as the Regional Director of
Operations, Mr. Papovich served as the General Manager of the hotel in
Hurstbourne, Kentucky. From 1994 until 1997, Mr. Papovich served as the Food and
Beverage Director of the Embassy Row Hotel in Washington, D.C. Prior to 1994,
Mr. Papovich served as the Chef at several prestigious restaurants.
Donald E. Panoz and Nancy C. Panoz are married. There are no other family
relationships among any of the executive officers or directors of the Company.
Directors of the Company serve as such until the Next Annual Meeting of
Stockholders of the Company and until their successors have been elected and
qualified, or until their earlier resignation, death or removal. Executive
officers of the Company are elected or
23
appointed by the Board and hold office until their successors are elected or
until their death, resignation or removal.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires the Company's directors, executive officers, and persons who own
beneficially more than 10% of a registered class of the Company's equity
securities to file with the SEC initial reports of ownership and reports of
changes in ownership of such securities of the Company. Directors, executive
officers and greater than 10% stockholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file.
To the Company's knowledge, all Section 16(a) filing requirements
applicable to its directors, executive officers and greater than 10% beneficial
owners were complied with during the fiscal year ended March 31, 2003.
Item 11. Executive Compensation
Compensation of Non-Employee Directors
During fiscal year ended March 31, 2003, Ms. Stewart, who was a
Non-Employee Director of the Company, received a retainer of $13,200 plus $800
for each Board meeting attended. All directors were reimbursed for expenses
incurred in connection with attending Board and committee meetings.
Executive Compensation
The following table sets forth the cash and non-cash compensation awarded
or paid by the Company for services rendered during each of the fiscal years in
the three-year period ended March 31, 2003, to the Company's Chief Executive
Officer and to the Company's most highly compensated executive officers other
than the Chief Executive Officer whose annual compensation exceeds $100,000 (the
"Named Executive Officers").
24
Summary Compensation Table
Annual Compensation
-------------------
Name and Fiscal All Other
Principal Position Year Salary Bonus Compensation
- ------------------ ---- ------ ----- ------------
Henk H. Evers 2003(3) $291,750 $70,000 $0
President 2002(2) 270,770 0 0
2001(1) 264,500 0 0
Donald E. Panoz 2003(3) 0 0 0
Chief Executive Officer 2002(2) 0 0 0
2001(1) 0 0 0
James J. Papovich 2003(3) $109,390 $ 0 $0
Regional Director of 2002 89,683 5,880 0
Operations 2001 84,958 0 0
- ----------
(1) Information shown is for the fiscal year ended March 31, 2001.
Fountainhead paid Mr. Evers' salary, bonus and benefits for the year
ended March 31, 2001 as an advance to the Company. Amounts shown for
the fiscal year ended March 31, 2001 exclude salary of $80,500,
bonus of $75,000 and benefits of $32,000 paid to Mr. Evers by
Fountainhead and allocated to Fountainhead. Of the salary allocated
to the Company, $62,500 was charged to Chateau Elan Georgia in
return for services performed by Mr. Evers for Chateau Elan Georgia
pursuant to the management agreement from September 1, 2001 to March
31, 2001. Mr. Panoz received no compensation for serving as Chief
Executive Officer of the Company during the fiscal year ended March
31, 2001.
(2) Information shown is for the fiscal year ended March 31, 2002.
Fountainhead paid Mr. Evers' salary, bonus and benefits for the year
ended March 31, 2002 as an advance to the Company. Amounts shown for
fiscal year ended March 31, 2002 exclude salary of $82,985, bonus of
$130,000 and benefits of $36,378 paid to Mr. Evers by Fountainhead
and allocated to Fountainhead. Additionally, $125,000 was charged to
Chateau Elan Georgia in return for services performed by Mr. Evers
for Chateau Elan Georgia pursuant to the management agreement from
April 1, 2001 to March 31, 2002. Mr. Panoz received no compensation
for serving as Chief Executive Officer of the Company during the
fiscal year ended March 31, 2002.
(3) Information shown is for the fiscal year ended March 31, 2003.
Fountainhead paid Mr. Evers' salary, bonus and benefits for the year
ended March 31, 2003 as an advance to the Company. Amounts shown for
fiscal year ended March 31, 2003 exclude salary of $50,000 and
benefits of $1,331 paid to Mr. Evers by Fountainhead and allocated
to Fountainhead. Additionally, $125,000 was charged to Chateau Elan
Georgia in return for services performed by Mr. Evers for Chateau
Elan Georgia pursuant to the management agreement from April 1, 2002
to March 31, 2003. Mr. Panoz received no compensation for serving as
Chief Executive Officer of the Company during the fiscal year ended
March 31, 2003. Mr. Papovich began his duties as Regional Director
of Operations in August 2002. Prior to August 2002, he was the
General Manager of the Company's hotel in Louisville, Kentucky.
The Company did not grant any stock options to any of the Named Executive
Officers during the year ended March 31, 2003.
25
Fiscal Year-End Option Values
The following table sets forth information concerning the value of
unexercised options held by each Named Executive Officers as of March 31, 2003.
During fiscal year ended March 31, 2003, no Named Executive Officer exercised
any stock options.
Number of Securities
Underlying Unexercised Unexercised In-
Options at 3/31/03 The- Money
Name Exercisable/Unexercisable Options at 3/31/03
- ---- ------------------------- ------------------
Henk H. Evers 45,000/45,000 0
Donald E. Panoz 0 0
James J. Papovich 0 0
- ----------
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of June 30, 2003, regarding
the beneficial ownership of the capital stock of the Company by (i) each person
who is currently a director of the Company; (ii) each Named Executive Officer;
(iii) each beneficial owner of more than 5% of any class of the Company's voting
securities; and (iv) all directors and executive officers as a group.
26
Class of No. of Shares
Name and Address of Shares Bene- Beneficially Percentage
Beneficial Owner (1) ficially Owned Owned of Class
-------------------- -------------- ----- --------
Fountainhead Holdings, Inc. Common Stock 3,000,000(2) 77.7%
1394 Broadway Avenue Series A
Braselton, GA 30157 Preferred Stock 450,000(3) 100.0%
Fountainhead Holdings, Ltd. Common Stock 3,000,000(2) 77.7%
1394 Broadway Avenue Series A
Braselton, GA 30157 Preferred Stock 450,000(3) 100.0%
Donald E. Panoz + ++ Common Stock 3,000,000(4)(5) 77.7%
Series A
Preferred Stock 450,000(3)(5) 100.0%
Nancy C. Panoz + Common Stock 3,000,000(4)(5) 77.7%
Series A
Preferred Stock 450,000(3)(5) 100.0%
Henk H. Evers + ++ Common Stock 45,000(7) 0.9%
James J. Papovich ++ Common Stock 200 0%
Stacey D. Stewart + Common Stock 0 0%
Anthony J. Mastandrea + Common Stock 0 0%
All executive officers and directors Common Stock 3,045,200(5)(6) 79.8%
as a group (5 persons) Series A
Preferred Stock 450,000(3)(5) 100.0%
- ----------
+ Director of the Company
++ Executive Officer of the Company
(1) Unless otherwise indicated, the mailing address of each beneficial
owner is 100 Rue Charlemagne, Braselton, Georgia 30517. Information
as to the beneficial ownership of common stock has either been
furnished to the Company by or on behalf of the indicated persons or
is taken from reports on file with the SEC.
(2) Includes 1,350,000 shares of common stock issuable upon the
conversion of the Preferred Stock. Fountainhead Holdings, Ltd.
("Holdings") owns all of the voting stock of Fountainhead Holdings,
Inc.. The shares of stock owned by Holdings includes the shares
owned by Fountainhead Holdings, Inc.
(3) Pursuant to the Stipulation of Settlement which became final on June
19, 2003 (see Item 3- Legal Proceedings), all of the shares of the
Company's Series A Convertible Preferred Stock will be cancelled in
exchange for 1,350,000
27
shares of the Company's common stock. Fountainhead Holdings, Inc.
exchanged the shares of Preferred Stock on July 3, 2003.
(4) Includes (i) 1,350,000 shares of common stock issuable upon the
conversion of the Preferred Stock held by Fountainhead Holdings,
Inc. and (ii) 1,650,000 shares of common stock held by Fountainhead
Holdings, Inc..
(5) Mr. and Mrs. Panoz, who are husband and wife, are directors and
officers of and collectively beneficially own all of the voting
stock of Holdings, which in turn owns all of the voting stock of
Fountainhead Holdings, Inc.. Although they may be deemed to meet the
definition of beneficial ownership with respect to the voting stock
of Holdings, they have no economic interest in such voting stock.
Because these shares of the Company are held of record by
Fountainhead Holdings, Inc., each of Mr. and Mrs. Panoz may be
deemed to be a beneficial owner of all such shares.
(6) Includes (i) 1,350,000 shares of common stock issuable upon the
conversion of the Preferred Stock held by Fountainhead Holdings,
Inc.; and (ii) 45,000 shares of common stock underlying options that
are currently exercisable.
(7) Represents 45,000 shares of common stock underlying options that are
currently exercisable.
The following table sets forth information regarding equity compensation
plans under which the Company's equity securities is authorized for issuance as
of March 31, 2003. The Company's shareholders approved the Company's 1993 Stock
Option Plan (the "Plan") on January 12, 1994 and amended the Plan on October 26,
1994. The Plan is the Company's only equity compensation plan approved by the
Company's shareholders.
- --------------------------------------------------------------------------------------------------------------
Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options outstanding options and issuance under equity
and warrants warrants compensation plans
- --------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by 127,000 $2.00 623,000
securities holders
- --------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by 0 0 0
securities holders
- --------------------------------------------------------------------------------------------------------------
TOTAL 127,000 $2.00 623,000
- --------------------------------------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
In the Management Agreement, Fountainhead agreed to pay the Company a base
management fee equal to 2% of the gross revenues of the properties being
managed, plus an annual incentive management fee to be determined each year
based on the profitability of the properties being managed during that year.
28
The Company's Management Agreement is to perform management services at
Chateau Elan Georgia, one of Fountainhead's properties. The Management Agreement
has a term of five years, but is terminable upon the transfer by Fountainhead of
all or a material portion of the properties covered by the Management Agreement.
If the Management Agreement is terminated upon such a transfer or upon the
occurrence of an event of default by Fountainhead, then Fountainhead shall pay
to the Company a portion of the projected fees owed to the Company under the
Management Agreement, with adjustments based on the term of the Management
Agreement remaining. In such event, Fountainhead may elect to surrender to the
Company shares of common stock in lieu of a cash payment.
The Company also manages Chateau Elan Sebring, St. Andrews and Diablo. All
of these properties are owned by Fountainhead. On August 8, 2002, the Company
entered into a management agreement with Fountainhead to perform management
services at Diablo Grande Resort located in Patterson, California, one of
Fountainhead's properties, for a period of five years beginning on September 1,
2002. In consideration of the management agreement, the Company paid
Fountainhead $250,000. In the management agreement, Fountainhead agreed to pay
the Company a base management fee equal to 2.5% of the gross revenues of the
properties being managed. The management agreement has a term of five years but
is terminable by Fountainhead. If the management agreement is terminated by
Fountainhead, then Fountainhead must refund the Company the $250,000
consideration as follows: within the first year- $250,000; after one year-
$225,000; after two years- $200,000; after three years- $150,000; after four
years- $125,000 and after five years, $100,000. The agreement automatically
extends for six month increments from September 1, 2007 unless terminated by
either party.
In October 2002, the Company amended the terms of the management
agreements between the Company and Fountainhead for the management of St.
Andrews and Sebring. In exchange for five year agreements, the Company agreed to
pay Fountainhead $575,000. Fountainhead was paid $400,000 in cash and the
remaining sum of $175,000 was deducted from monthly fees due to the Company for
the management of the St. Andrews property.
The Company's Chairman and Chief Executive Officer has an 85% ownership
interest and the Company's President has a 15% ownership interest in the Holiday
Inn Express at Chateau Elan. The Company manages the Holiday Inn Express at
Chateau Elan and in return for such management services has received management
fees of approximately $24,000, $23,000 and $23,000 for the fiscal years ended
March 31, 2003, 2002 and March 31, 2001, respectively.
At the request of the Company, since January 11, 2000, Fountainhead has
paid the salary of the Company's President as an advance to the Company. During
the fiscal year ended March 31, 2003, the Company was charged $360,000 by
Fountainhead for the advanced compensation and benefits. There is approximately
$156,000 of accrued liability at March 31, 2003 for the President's compensation
and benefits.
29
In the normal course of its business of managing hotels, the Company may
incur various expenses on behalf of Fountainhead or its subsidiaries that the
Company pays. The Company is reimbursed by Fountainhead for these expenditures.
As of March 31, 2003, Fountainhead owed the Company approximately $188,000 for
unpaid management fees and expenses.
During the fiscal year ended March 31, 2003, the Company had an agreement
with Chateau Elan Georgia pursuant to which Chateau Elan Georgia's Human
Resource Director serves part-time as the Company's Human Resource Director in
return for which the Company is responsible for a portion of the Human Resource
Director's salary. For the year ended March 31, 2003, the Company incurred
charges of approximately $29,000 for his salary. Chateau Elan Georgia deducts
the Company's portion of the salary from the monthly management fees Chateau
Elan Georgia owes to the Company. The Company's director of marketing and former
director of finance also provided services to Chateau Elan Georgia and, as a
result, for the fiscal year 2003, Chateau Elan Georgia reimbursed the Company
approximately $79,000 for such services.
30
ITEM 14. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer, or
persons performing similar functions, have evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended,
as of a date within 90 days prior to the filing date of this report (the
"Evaluation Date")). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, the Company's disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic filings under the Securities
Exchange Act of 1934, as amended.
(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in
the Company's internal controls or in other factors that could significantly
affect such controls.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The reports of Arthur Andersen LLP included herein with respect to the
Financial Statement Schedule III, Real Estate and Accumulated Depreciation,
included herein and the financial statements included herein are copies of
reports previously issued by Arthur Andersen LLP relating to the Company's
financial statement schedule and financial statements for the years ended March
31, 2001. Such reports have not been reissued, and the consent of Arthur
Andersen LLP with respect to such reports has not been obtained. As a result,
your ability to assert claims against Arthur Andersen LLP may be limited. Since
we have not been able to obtain the written consent of Arthur Andersen LLP, you
will not be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act for any untrue statements of material fact contained in the
report or financial statements or any omissions to state a material fact
required to be stated in the financial statements.
(a)(1) The following consolidated financial statements, together with the
applicable previously issued report of independent public accountants, are set
forth beginning on page F-1 hereof.
Reports of Independent Public Accountants.
Copy of Previously Issued Report of Independent Public Accountants.
Consolidated Balance Sheets at March 31, 2003 and 2002.
Consolidated Statements of Operations for the years ended March 31, 2003,
2002 and 2001
31
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended March 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the years ended March 31, 2003,
2002 and 2001.
Notes to Consolidated Financial Statements.
(a)(2) The financial statement schedule listed below is filed as a part of
this Report on pages F-35 and F-37, respectively.
Financial Statement Schedule III - Real Estate and Accumulated
Depreciation -March 31, 2003.
All other schedules have been omitted from this Report because they are not
applicable or because the required information is given in the audited financial
statements or notes thereto set forth elsewhere in this Report.
(a)(3) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on pages E-1 through E-5 hereof.
(b) The Company has not filed any Current Reports on Form 8-K during the
quarter ended March 31, 2003.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RIDGEWOOD HOTELS, INC.
By: /s/ Henk H. Evers
----------------------------
Henk H. Evers,
President
Dated: July 15, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ Henk H. Evers /s/ Nancy C. Panoz
- ---------------------------------- ----------------------------------------
Henk H. Evers, President, Chief Nancy C. Panoz, Director
Operating Officer and Director
/s/ Anthony Mastandrea /s/ James J. Papovich
- ---------------------------------- ----------------------------------------
Anthony Mastandrea, Director James J. Papovich, Regional
Director of Operations
/s/ Donald E. Panoz /s/ Stacey D. Stewart
- ---------------------------------- ----------------------------------------
Donald E. Panoz, Director Stacey D. Stewart, Director
Dated: July 15, 2003
33
I, Henk E. Evers, certify that:
1. I have reviewed this annual report on Form 10-K of Ridgewood Hotels.
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: July 15, 2003
/s/ Henk H. Evers
----------------------------------------
Henk H. Evers, President and Chief
Operating Officer
34
I, James J. Papovich, certify that:
1. I have reviewed this annual report on Form 10-K of Ridgewood Hotels,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: July 15, 2003
/s/ James J. Papovich
----------------------------------------
James J. Papovich, Regional Director of
Operations
35
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3(a) Certificate of Incorporation of Registrant.*
3(b) By-Laws of Registrant.*
3(c) Certificate of Amendment to the Certificate of Incorporation
(filed as an Exhibit to Registrant's Form 10-K for the fiscal
year ended August 31, 1987 and incorporated herein by
reference).
3(d) Certificate of Amendment to the Certificate of Incorporation
of the Registrant (filed as an Exhibit to Registrant's Form
10-K for the fiscal year ended August 31, 1989 and
incorporated herein by reference).
3(e) Certificate of Amendment to the Certificate of Incorporation
of Ridgewood Properties, Inc. dated May 23, 1991 (filed as an
Exhibit to Registrant's Form 10-K for the fiscal year ended
August 31, 1991 and incorporated herein by reference).
3(f) Certificate of Amendment to the Certificate of Incorporation
of Ridgewood Properties, Inc. dated March 30, 1993 (filed as
an Exhibit to Registrant's Form 10-Q for the quarter ended
February 28, 1993 and incorporated herein by reference).
3(g) Certificate of Amendment to the Certificate of Incorporation
of Ridgewood Properties, Inc. dated January 26, 1994 (filed as
Exhibit 3 to Registrant's Form 10-Q for the quarter ended
February 28, 1994 and incorporated herein by reference).
3(h) Certificate of Amendment to the Certificate of Incorporation
of Ridgewood Hotels, Inc. (filed as an Exhibit to Registrant's
Form 8-K on February 5, 1997, and incorporated herein by
reference).
4(a) Stock Purchase Agreement between Ridgewood Properties, Inc.
and Triton Group Ltd., dated as of August 15, 1994 (filed as
an Exhibit to Registrant's Form 8-K on August 15, 1994, and
incorporated herein by reference).
E-1
4(b) Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock of the Registrant (filed as an
Exhibit to Registrant's Registration Statement on Form S-8
filed on November 8, 1994 (No. 33-866084) and incorporated
herein by reference).
10(a) Bill of Sale and Assumption of Liabilities between CMEI, Inc.
and Ridgewood Properties, Inc. dated December 9, 1985.*
10(b) Ridgewood Properties, Inc. Supplemental Retirement and Death
Benefit Plan dated January 1, 1987 (filed as an Exhibit to
Registrant's Form 10-K for the fiscal year ended August 31,
1988 and incorporated herein by reference).
10(c) Ridgewood Properties, Inc. Stock Option Plan dated March 30,
1993 and as amended September 14, 1993 (filed as an Exhibit to
Registrant's Form 10-Q for the quarter ended February 28,
1994, and incorporated herein by reference).
10(d) Ridgewood Properties, Inc. 1993 Stock Option Plan, as amended
on October 26, 1994 (filed as an Exhibit to Registrant's
Registration Statement on Form S-8 filed on November 8, 1994
(No. 33-86084) and incorporated herein by reference).
10(e) Amended and Restated Basic Agreement between RW Hotel
Investment Partners, L.P. and Ridgewood Hotels, Inc. dated
August 14, 1995 (filed as an Exhibit to Registrant's Form 10-K
for the fiscal year ended August 31, 1995, and incorporated
herein by reference).
10(f) Amended and Restated Limited Partnership Agreement of RW Hotel
Partners, L.P. dated September 8, 1995 (filed as an Exhibit to
Registrant's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference).
10(g) Management Agreement (Holiday Inn Hurstbourne) between RW
Hotel Partners, L.P. and Ridgewood Properties, Inc. dated
August 16, 1995 (filed as an Exhibit to Registrant's Form 10-K
for the fiscal year ended August 31, 1995, and incorporated
herein by reference).
E-2
10(h) Agreement and Plan of Merger between and among Ridgewood
Properties, Inc., Ridgewood Acquisition Corp., Wesley Hotel
Group, Inc., Wayne McAteer and Samuel King dated December 7,
1995 (filed as an Exhibit to Registrant's Form 10-Q for the
quarter ended November 30, 1995, and incorporated herein by
reference).
10(i) Operating Agreement between RW Hurstbourne Hotel, Inc. and RW
Louisville Hotel Investors, LLC effective May 13, 1998 (filed
as an Exhibit to Registrant's Form 10-Q for the quarter ended
May 31, 1998).
10(j) Operating Agreement between Ridgewood Hotels, Inc. and
Louisville Hotel, L.P. effective June 5, 1998 (filed as an
Exhibit to Registrant's Form 10-Q for the quarter ended May
31, 1998).
10(k) First Amendment to Operating Agreement of Louisville, LLC
dated September 30, 1999 (filed as an Exhibit to Registrant's
Form 10-K for the fiscal year ended August 31, 1999 and
incorporated herein by reference).
10(l) Secured Promissory Note in the amount of $1,333,000 by
Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated
September 30, 1999 (filed as an Exhibit to Registrant's Form
10-K for the fiscal year ended August 31, 1999 and
incorporated herein by reference).
10(m) Secured Promissory Note (Arizona) in the amount of $300,000 by
Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated
September 30, 1999 (filed as an Exhibit to Registrant's Form
10-K for the fiscal year ended August 31, 1999 and
incorporated herein by reference).
10(n) Secured Promissory Note (Florida) in the amount of $300,000 by
Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated
September 30, 1999 (filed as an Exhibit to Registrant's Form
10-K for the fiscal year ended August 31, 1999 and
incorporated herein by reference).
E-3
10(o) Management Agreement between Fountainhead Development Corp.,
Inc., as Owner, and Ridgewood Hotels, Inc., as Manager, dated
January 10, 2000 (filed as an Exhibit to Registrant's Form 8K
on January 11, 2000 and incorporated herein by reference).
10(p) Agreement between Fountainhead Development Corp., Inc. and
Ridgewood Hotels, Inc. dated January 10, 2000 (filed as an
Exhibit to Registrant's Form 8-K on January 11, 2000 and
incorporated herein by reference).
10(q) Assignment and Assumption Agreement dated as of April 2001
between RW Hotel Investment Associates, LLC and Ridgewood
Georgia, Inc. (filed as an Exhibit to Registrant's Form 8K on
July 2, 2001).
10(r) Contract for the Purchase and Sale of Property dated June 1999
between the Company, Ridgewood Orlando, Inc., Fulgent Street
Motel & Hotel, Inc. and Brokers Title, LLC (filed as an
Exhibit to Registrant's Form 8-K on July 2, 2001).
10(s) Reinstatement of and Second Amendment to Contract for the
Purchase and Sale of Property Dated January 24, 2000 (filed as
an Exhibit to Registrant's Form 8-K on July 2, 2001).
10(t) Stipulation of Settlement dated March 19, 2003, by and among
William N. Strassburger, Michael M. Earley, Luther A.
Henderson, John C. Stiska, N. Russel Walden, Triton Group,
Ltd., Ridgewood Hotels, Inc., and Fountainhead Development
Corp (filed as an Exhibit to Registrant's Form 8-K on March
24, 2003 and incorporated herein by reference).
10(u) Second Amendment to the Operating Agreement of Louisville Hotel, LLC
entered into between Ridgewood Hotels, Inc. and Louisville Hotel,
L.P. effective as of February 12, 2003.
10(v) $300,000 Renewed, Amended and Restated Secured Promissory Note
issued by Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated
February 12, 2003.
10(w) $933,000 Renewed, Amended and Restated Secured Promissory Note
issued by Ridgewood Hotels, Inc. to Louisville Hotel, L.P. dated
February 12, 2003.
E-4
23(a) Consent of Deloitte & Touche LLP.
99(a) Order and Final Judgment of the Delaware Court of Chancery in
Civil Action No. 14267 (filed as an Exhibit to Registrant's
Form 8-K on May 30, 2003 and incorporated herein by
reference).
99(b) Certification of the Registrants's President and Chief
Operating Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99(c) Certification of the Registrant's Regional Director of
Operations pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
- ----------
* Previously filed as an Exhibit to Registrant's Registration Statement on
Form 10 file on November 19, 1985 (Securities Exchange Act File No.
0-14019), and incorporated herein by reference.
E-5
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements, Financial Statement
Schedule and Previously Issued Independent Accountants' Reports are included
herein on the pages indicated:
Page
----
Reports of Independent Accountants ...................................... F-2
Previously Issued Reports of Independent Accountants .................... F-3
Consolidated Balance Sheets as of March 31, 2003 and 2002 ............... F-7
Consolidated Statements of Operations for the years ended March 31,
2003, 2002 and 2001 ..................................................... F-9
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended March 31, 2003, 2002 and 2001 ............................... F-10
Consolidated Statements of Cash Flows for the years ended March 31,
2003, 2002 and 2001 ..................................................... F-11
Notes to Consolidated Financial Statements .............................. F-13
Schedule III -Real Estate and Accumulated Depreciation .................. F-35
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
Ridgewood Hotels, Inc. and Subsidiaries
Braselton, Georgia
We have audited the accompanying consolidated balance sheet of Ridgewood Hotels,
Inc. and Subsidiaries (the "Company") as of March 31, 2003, and the related
consolidated statement of operations, shareholders' equity (deficit) and cash
flows for the year ended March 31, 2003. Our audit also included the financial
statement schedule listed in the accompanying index. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of mater