<PAGE> 1
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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 2
TO
ANNUAL REPORT
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended November 30, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________________ to _____________________
Commission File Number: 0-17442
THOMAS EDISON INNS, INC.
(Name of Small Business Issuer in its Charter)
MICHIGAN 38-2730460
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
40 PEARL STREET, N.W., SUITE 900
GRAND RAPIDS, MICHIGAN 49503
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, including Area Code: (616) 776-2600
Securities Registered under Section 12(b) of the Exchange Act: NONE
Securities Registered under Section 12(g) of the Exchange Act: COMMON SHARES,
PAR VALUE $0.01 PER SHARE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $14,244,904.
The aggregate market value of the voting shares held by non-affiliates as of
March 20, 1996 was $3,189,334 computed based upon the price ($6.13) at which
voting shares sold on March 20, 1996 in the last transaction known to
the Company before the date of this report. For the purpose of this
calculation, officers, directors and greater than 5% shareholders are assumed
to be affiliated.
As of March 20, 1996, there were outstanding 3,020,150 Common Shares.
Transitional Small Business Disclosure Format (check one): YES NO X
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<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
- -------
Thomas Edison Inns, Inc. (the "Company") is a Michigan corporation that was
incorporated on August 8, 1986. The Company is engaged in the hospitality
business, including the operation of hotels, restaurants and other
hospitality-related entities. In its business, the Company owns and operates,
through its wholly owned subsidiaries, three full service hotels: the 149-room
Thomas Edison Inn located on the St. Clair River in Port Huron, Michigan; the
96-room St. Clair Inn located on the St. Clair River in St. Clair, Michigan;
and the 121-room Spring Lake Holiday Inn located on the Grand River in Spring
Lake, Michigan (referred to individually as a "Hotel", and collectively as the
"Hotels"). Each Hotel has a waterfront location and seeks primarily business
travelers and tourists who desire full service accommodations such as guest
rooms, restaurants and meeting rooms.
The Company's principal executive office is located at 40 Pearl Street,
N.W., Suite 900, Grand Rapids, Michigan 49503, its telephone number is (616)
776 - 2600 and its facsimile number is (616) 776 - 2776. Unless otherwise
specified, or unless the context otherwise requires, all references to the
Company include Thomas Edison Inns, Inc. and its subsidiaries.
REPLACEMENT AND RESTRUCTURING OF MANAGEMENT
- -------------------------------------------
From its inception in 1986 until January 1996, Donald W. Reynolds served as
Chairman of the Board, President, Chief Executive Officer, Treasurer and
Secretary of the Company, and the Company engaged Innkeepers Management
Company, a Michigan corporation wholly owned by Mr. Reynolds ("Innkeepers"), to
manage the Company's business, including the Hotels, pursuant to a Management
Agreement. In fiscal 1994 and 1995, the Company paid fees to Innkeepers of
$456,750 and $402,786.
As previously reported in the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission ("SEC") on February 3, 1996, Mr.
Reynolds was removed as a director and officer of the Company by the St. Clair
County (Michigan) Circuit Court on January 8, 1996. The court appointed Frank
O. Staiger as acting President and director. On January 25, 1996, Meritage
Capital Corp., formerly known as Meritage Hospitality Group Incorporated, the
Company's majority shareholder ("Meritage"), amended the Company's Bylaws to
classify the Board of Directors into two classes, expanded the Board of
Directors to 10 directors and appointed five new directors: Christopher B.
Hewett, David S. Lundeen, Joseph L. Maggini, Robert E. Schermer, Jr. and
Robert E. Schermer, Sr. On January 25, 1996, the Company's newly expanded
Board of Directors removed David C. Distad, son-in-law of Mr. Reynolds, as
Vice President and Chief Financial Officer of the Company and terminated the
Management Agreement with Innkeepers. As a result, the Company no longer
employs a third party management company; instead, the Company has installed
new management to operate its business directly in an effort to more
effectively utilize the Company's resources and employees.
The Company's new executive officers are Mr. Hewett, President and Chief
Executive Officer, Mr. Schermer, Jr., Executive Vice President, Chief Financial
Officer and Treasurer, Gerard Belisle, Jr., Senior Vice President - Operations,
and James R. Saalfeld, Vice President, General Counsel and Secretary. In
addition, the Company has hired nine new management level employees who have an
active role in, and substantial responsibilities with regard to, the
operational management of the Hotels.
The Company and its subsidiaries employ approximately 142 persons full time
and approximately 315 persons part time in the operation of the Hotels. None
of the employees are part of a collective bargaining unit. The Company
believes that its relations with its employees are favorable.
<PAGE> 3
THOMAS EDISON INN
- -----------------
The Thomas Edison Inn, which opened in 1987, is located on approximately
9.6 acres bordering the St. Clair River in Port Huron, Michigan. The Hotel has
149 rooms, a 250 seat restaurant that overlooks the St. Clair River and Lake
Huron, a 150 seat cocktail lounge and a variety of meeting facilities
accommodating up to 500 people. Other facilities include an indoor swimming
pool, a poolside whirlpool, and a health club and retail shops leased to third
party vendors. The Company is proceeding on a multi-year capital expenditure
program which will include upgrading and refurbishing the Hotel. See "Capital
Expenditure Program" below.
The Hotel's room revenue is derived from small groups, individual corporate
travelers and leisure travelers. Telemarketing and billboard advertising have
been the primary methods of promoting the Hotel.
The Hotel's food and beverage facilities are heavily patronized by local
clientele which results in food and beverage revenues significantly higher than
industry norms for similar size hotels.
ST. CLAIR INN
- -------------
The St. Clair Inn, which opened in 1926, is located on approximately 3.6
acres bordering the St. Clair River in St. Clair, Michigan. The Hotel has 96
rooms, a 240 seat restaurant that overlooks the St. Clair River, a 60 seat
cocktail lounge, and a variety of meeting facilities accommodating up to 250
people. Other facilities include an indoor swimming pool and approximately
1,000 feet of frontage along the St. Clair River with a boardwalk running most
of that distance. The Company is proceeding on a multi-year capital
expenditure program which will include upgrading and refurbishing the Hotel.
See "Capital Expenditure Program" below.
The Hotel's market mix is similar to that of the Thomas Edison Inn and the
Hotel also derives substantial food and beverage revenue from local clientele.
SPRING LAKE HOLIDAY INN
- -----------------------
The Spring Lake Holiday Inn, which opened in 1969, is located on
approximately 4.0 acres bordering the Grand River in Spring Lake, Michigan.
The Hotel has 121 rooms, a 185 seat restaurant that overlooks the Grand River,
a 125 seat cocktail lounge, and a variety of meeting facilities accommodating
up to 300 people. Other facilities include an outdoor and an indoor swimming
pool. The Company is proceeding on a multi-year capital expenditure program
which will include upgrading and refurbishing the Hotel. See "Capital
Expenditure Program" below.
The Hotel is operated under a license agreement (the "License Agreement")
with Holiday Inns, Inc. Under the License Agreement, the Hotel is entitled to
use the service marks "Holiday Inn" and "Holidex" and certain other service
marks and trademarks, and a computerized reservation network operating under
the name "Holidex." In addition, the Hotel participates in advertising, public
relations, marketing, and training programs sponsored by Holiday Inns, Inc.
Under the License Agreement, the Hotel is required to pay a variety of fees and
assessments to Holiday Inns, Inc.; is required to maintain its appearance and
conduct its operations in accordance with standard specifications and policies
as set forth by Holiday Inns, Inc.; and is subject to certain inspections and
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<PAGE> 4
auditing by Holiday Inns, Inc. The License Agreement permits the Hotel to
acquire certain products and services from various subsidiaries of Holiday
Inns, Inc.
On May 18, 1995, the term of the License Agreement was extended until
August 2009 and the Company was permitted to retain 1% of the monthly royalty
payment of 5% of gross room revenues as an advertising assistance allowance
until August 1999.
Holiday Inns, Inc. may terminate the license if the Hotel fails to meet
its obligations under the License Agreement to the satisfaction of Holiday
Inns, Inc. Any termination would result in the loss of the benefits of the
Holiday Inns, Inc.'s advertising program, the loss of the use of the "Holiday
Inn" name and related name recognition, and the loss of access to the Holidex
reservation system. The Company believes the termination of the License
Agreement could have a materially adverse effect on its operations. The
Company believes that the Hotel is currently in compliance with the terms of
the License Agreement and does not expect Holiday Inns, Inc. to terminate the
License Agreement before its expiration date.
The Hotel's market mix is similar to that of the Thomas Edison Inn and the
Hotel also derives substantial food and beverage revenue from local clientele.
NON-CORE ASSETS
- ---------------
The Company has a number of assets which do not directly relate to its
hospitality business. These assets include (i) approximately 4.6 acres of
residential property and undeveloped land adjacent to the Thomas Edison Inn,
(ii) commercial property adjacent to the St. Clair Inn, (iii) a marina
facility, including fifty-two boat slips, adjacent to the Spring Lake Holiday
Inn, and (iv) approximately $5.1 million in life insurance policies on the life
of Mr. Reynolds (together, the "Non-core Assets"). The Company may sell or
otherwise dispose of some or all of the Non-core Assets to raise additional
funds which may be used for its Capital Expenditure Program (see below) or for
other corporate purposes.
CAPITAL EXPENDITURE PROGRAM
- ---------------------------
The Company is in the process of developing and implementing a multi-year
capital expenditure program to upgrade and refurbish the Company's Hotels.
During fiscal 1996, the Company intends to spend approximately $1 million
of currently available funds to upgrade and refurbish the Company's Hotels.
The Company may finance additional expenditures through (i) the sale of some or
all of the Non-core Assets, (ii) funds generated from operations, or (iii)
refinancing the First Mortgage Loan (see Item 2 "Financing and Encumbrances"
for a description of the First Mortgage Loan).
COMPETITION AND INDUSTRY CONDITIONS
- -----------------------------------
The hospitality industry is highly competitive. On the national level,
occupancy has been improving along with the average daily rate over the last
several years. A significant factor in the improvement of profitability has
been the refinancing of fixed interest rate loans bearing higher rates of
interest. Industry sources forecast modest increases in occupancy, average
daily rates and profits for 1996. The hospitality industry remains sensitive
to local and national economic trends and may be adversely affected by economic
downturns. No assurance can be given that a change in the
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<PAGE> 5
general economic conditions would not adversely affect the operations and
profitability of the Company.
The following table illustrates the average daily room rates for the Hotels
during 1994 and 1995 as compared to a national average:
AVERAGE DAILY ROOM RATES
<TABLE>
<CAPTION>
Thomas Spring Lake National
Fiscal Year Edison Inn St. Clair Inn Holiday Inn Average
----------- ---------- ------------- ----------- --------
<S> <C> <C> <C> <C>
1994 $80.14 $75.18 $64.87 $63.37
1995 $81.48 $71.41 $67.50 $67.34
</TABLE>
The following table illustrates the percentages of occupancy for 1994
and 1995 as compared to the national occupancy rate:
OCCUPANCY RATES
<TABLE>
<CAPTION>
Thomas Spring Lake National
Fiscal Year Edison Inn St. Clair Inn Holiday Inn Average
----------- ---------- ------------- ----------- -------
<S> <C> <C> <C> <C>
1994 63% 58% 62% 65%
1995 60% 60% 62% 66%
</TABLE>
The Hotels are in vigorous competition with a wide range of facilities
offering various types of hospitality related services to the public. The
competition includes several national and regional hotel chains offering a
variety of accommodations, and independent hotels in each market segment.
The areas of differentiation include the level of service and amenities
customarily offered to the traveling public, as well as room rates. In
addition, the hospitality industry has been developing new hotel products
directed at specialized segments of the hospitality industry, such as all-suite
properties, extended-stay properties and limited service properties. The
continued modernization, refurbishment and maintenance of hotel properties are
important factors to prevent competitive obsolescence. The demand for each
Hotel's accommodations vary seasonally. Historically, the demand has been
greatest during the summer, holiday periods and on weekends, resulting in
higher revenues during the Company's second and third fiscal quarter. Other
factors affecting each Hotel's operations include, among others, general
economic conditions, changes in travel patterns, highway conditions and
relocation, local business conditions, and competition from other lodging
facilities.
The Company's Hotels continue to be the dominant full service
properties in their respective markets. To maintain its market share, the
Company is in the process of implementing an expanded sales and marketing
program for each Hotel. The Company is also implementing a Capital Expenditure
Program (See "Capital Expenditure Program" above). In recent years, all newly
constructed hotel properties in the Company's markets have been limited service
properties. The Company anticipates there will be increased competition in its
respective markets in the future.
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<PAGE> 6
GOVERNMENTAL REGULATIONS
- ------------------------
The hotel, restaurant, lounge and marina operations of the Company's
facilities are subject to governmental regulation and licensing requirements,
including, but not limited to, zoning, public health inspections, liquor
licenses and marina operating permits.
The Hotels are required to maintain liquor licenses from the State of
Michigan and food certificates from their respective counties. If a Hotel lost
its liquor license or its food certificate, its operations would be adversely
affected. The Company knows of no reason why the liquor licenses or the food
certificates would be terminated or not renewed upon their respective
expiration dates.
In connection with the marina facility adjacent to the Spring Lake
Holiday Inn, the Company is required to maintain a marina operation permit with
the Michigan Department of Environmental Quality. If the Company lost its
marina license, its operations would be adversely affected. The Company knows
of no reason why the marina license would be terminated or not renewed upon its
expiration date.
ITEM 2. DESCRIPTION OF PROPERTY
For a description of each Hotel that is owned and operated by the
Company and its subsidiaries, see Item 1 "Description of Business." Each Hotel
is held in fee, subject to the encumbrances that are described in "Financing
and Encumbrances" below. The Company owns certain property described in Item 1
"Non-core Assets" which is subject to the encumbrances listed in "Financing and
Encumbrances" below. Management believes that the Company's properties are
adequately covered by insurance.
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The following table illustrates the most recent appraised values of
the Company's Hotels and certain Non-core Assets:
APPRAISED VALUE
---------------
<TABLE>
<CAPTION>
Property Appraised Value Appraisal Date
-------- --------------- --------------
<S> <C> <C>
Thomas Edison Inn and
2.59 acres of adjacent
undeveloped land $13,815,000 March 28, 1995
2.04 acres of residential
property and undeveloped land
adjacent to the Thomas Edison Inn 185,000 March 6, 1996
St. Clair Inn 6,550,000 March 28, 1995
Commercial Property
adjacent to St. Clair Inn 375,000 March 6, 1996
Spring Lake Holiday Inn
and marina facility 5,000,000 March 30, 1995
---------
TOTAL APPRAISED VALUE $25,925,000
===========
</TABLE>
FINANCING AND ENCUMBRANCES
- --------------------------
On February 26, 1996, the Company entered into an agreement with Great
American Life Insurance Company ("GALIC"), an affiliate of American Financial
Group, Inc., to refinance all of its mortgage debt. The Company executed two
promissory notes in favor of GALIC in the principal amount of $12,000,000 (the
"First Mortgage Loan") and $3,000,000 (the "Second Mortgage Loan"),
respectively. The interest rate on the First Mortgage Loan is equal to the
Prime Rate of the Provident Bank (Cincinnati, Ohio) plus 1%, fully floating.
The interest rate on the Second Mortgage Loan is equal to the Prime Rate of the
Provident Bank plus 8%, fully floating. The First Mortgage Loan has a maturity
date of March 1, 2012, with monthly payments of interest only during the first
year and 180 equal monthly payments of principal plus accrued interest
thereafter. The Second Mortgage Loan has a maturity date of March 1, 2002,
with monthly payments of interest only during the first year and 60 equal
monthly payments of principal and accrued interest thereafter. The First
Mortgage Loan may be prepaid in whole or in part at any time without penalty
upon payment of all accrued interest. The Second Mortgage Loan may be prepaid
in whole or in increments of $100,000 upon payment of all accrued interest plus
a prepayment premium of 10% of the principal balance so prepaid, except that no
prepayment premium shall be payable if GALIC requires such prepayment from the
proceeds resulting from the disposition of certain collateral securing the
Second Mortgage Loan. The First Mortgage Loan is secured by, among other
things, a first priority mortgage lien on the Hotels. The Second Mortgage Loan
is secured by a second priority mortgage lien on the Hotels, by a first
priority mortgage lien on the residential property and undeveloped land
adjacent to the Thomas Edison Inn, the commercial property adjacent to the St.
Clair Inn, and the marina facility
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<PAGE> 8
adjacent to the Spring Lake Holiday Inn, by a collateral assignment of all life
insurance policies owned by the Company on the life of Mr. Reynolds and by an
assignment of a Secured Promissory Note in the principal amount of $10,500,000
payable by Meritage to the Company (the "Meritage Note"). Both the First
Mortgage Loan and the Second Mortgage Loan contain cross-default provisions.
The Company is seeking to refinance the First Mortgage Loan in an
amount up to $14 million. The Company intends to use any additional funds
raised either to pay down the Second Mortgage Loan or for capital expenditures.
See "Capital Expenditure Program" above.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved, as both plaintiff and defendant, in certain
legal proceedings. Except as described below, all of these proceedings arose
in the ordinary course of the Company's business and, in the opinion of the
Company, any potential liability of the Company with respect to these legal
actions will not, in the aggregate, be material to the Company's financial
condition.
DERIVATIVE PROCEEDING
- ---------------------
As previously reported on the Company's Amendment to the Annual Report
on Form 10-KSB filed with the SEC on March 15, 1995, the Company and its
sitting directors as of January 10, 1995, including Mr. Reynolds, were named in
a derivative lawsuit (the "Derivative Proceeding") filed by 13 of the Company's
shareholders (including Meritage, now the majority shareholder) (Case No.
95-0103-CZ, Kent County (Michigan) Circuit Court, Leiber, J.)
On January 25, 1996, the Company's newly expanded Board of Directors
delegated to the Stock Purchase Agreement Committee, consisting of William F.
Ehinger, Mr. Maggini, Raymond A. Weigel, III and Mr. Staiger, the duty of
evaluating, among other things, the Company's rights and obligations with
respect to the claims asserted against Mr. Reynolds in the Derivative
Proceeding. The Stock Purchase Agreement Committee will make recommendations to
the Company's Board as to how the Company should proceed. In any event, the
Company believes that all defendants other than Mr. Reynolds will be dismissed
from the Derivative Proceeding in the near future.
Because the suit is a derivative action, all monetary relief would be
in favor of the Company. As a result, the Company does not anticipate that
the Company will be liable for a money judgment with respect to the Derivative
Proceeding.
TAI SUIT
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The Company has also been named, along with Meritage, Rebecca L.
Awtrey, Mr. Ehinger, Joseph P. Michael and Mr. Weigel, in a proceeding (the
"TAI Suit") filed by TEI Acquisition, Inc. ("TAI") (Case No. 95-00-33-88-CZ,
St. Clair County (Michigan) Circuit Court, Deegan, J.). TAI seeks a
declaratory judgment that the 870,248 shares TAI is reported to have acquired
from Mr. Reynolds, his family and Innkeepers on November 7, 1995, have full
voting rights. The Company believes that the 870,248 shares held by TAI (the
"TAI Shares") were the subject of at least one control share acquisition as
that term is defined by Chapter 7B of the Michigan Business Corporation Act
("MBCA") and, as a result, only have such voting rights as might be conferred
on them at a
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meeting of shareholders held pursuant to Section 798 of the MBCA. As a result,
the Company believes the TAI Shares are presently non-voting shares.
As previously reported in the Company's Current Report on Form 8-K
filed with the SEC on February 3, 1996, the court ordered (i) the appointment of
Mr. Staiger as President and as a director of the Company and (ii) that Meritage
and the Company may proceed towards closing the Stock Purchase and Sale
Agreement among the Company, Meritage, Mr. Reynolds and Innkeepers (the "Stock
Purchase Agreement" which is described in the Company's Current Report on Form
8-K filed with the SEC on October 3, 1995). In an order entered on February 12,
1996, the Court (i) confirmed the resignation of Mr. Staiger and the appointment
of Mr. Hewett as President of the Company and (ii) approved the closing of the
Stock Purchase Agreement as between the Company and Meritage.
The Company has filed a counter-claim against TAI in the TAI Suit.
The counter-claim maintains that TAI has interfered in the Company's management
and control of its corporate and business affairs and otherwise injured the
Company by, among other things, attempting to usurp the corporate identity and
tangible and intangible assets of the Company. The counter-claim seeks (i) a
declaration that the TAI Shares in the Company were not transferred to TAI, or,
in the alternative, a declaration that if transferred, the shares are
non-voting pursuant to Chapter 7B of the MBCA; (ii) compensation for damages
sustained due to TAI's wrongful behavior; and (iii) treble damages and
attorneys' fees pursuant to TAI's violation of the federal Racketeering
Influenced and Corrupt Organizations Act.
MERITAGE SUIT
- -------------
The Company has also been named, along with Mr. Ehinger and Mr.
Reynolds, in a proceeding (the "Meritage Suit") filed by Meritage on January 4,
1996, (Case No. 96-000017 CZ, St. Clair (Michigan) Circuit Court, Deegan, J.).
The Meritage Suit seeks (i) a declaration that the Company has repudiated the
Stock Purchase Agreement and has lost all right to enforce its rights under the
Stock Purchase Agreement and that Meritage is entitled to exercise its rights
as a shareholder of the Company without regard to any limitation on such rights
appearing in the Stock Purchase Agreement and (ii) the removal of Mr. Reynolds
and Mr. Ehinger as directors of the Company. The Company and Meritage have
agreed that Meritage would not pursue the Meritage Suit against the Company as
long as the Company fulfilled its obligations to Meritage under the Stock
Purchase Agreement. On February 26, 1996, the Company and Meritage (but not
Mr. Reynolds or Innkeepers) closed the Stock Purchase Agreement and, as a
result, it is anticipated that the Company and Mr. Ehinger will be dismissed
from the suit in the near future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 25, 1996, pursuant to the MBCA and the Company's Articles
of Incorporation and Bylaws, and with the consent of the Board of Directors,
Meritage, as majority shareholder, amended the Company's Bylaws by shareholder
consent to expand the size of the Board to ten directors and to classify the
directors into 2 classes. Class I is comprised of five Meritage nominees
appointed to fill the newly created vacancies (Mr. Hewett, Mr. Lundeen, Mr.
Maggini, Mr. Schermer, Jr. and Mr. Schermer, Sr.) and Class II is comprised of
the five incumbent directors (Ms. Awtrey and Messrs. Ehinger, Michael, Staiger
and Weigel) who will each serve until the 1996 Annual
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<PAGE> 10
Meeting. The term of office of the Class I directors elected at the 1996 Annual
Meeting will expire at the 1997 Annual Meeting. The term of office of the Class
I directors elected as such at the 1997 Annual Meeting and thereafter will
expire at the second annual meeting following their election. The term of
office of the Class II directors elected as such at the 1996 Annual Meeting and
thereafter will expire at the second annual meeting following their election.
The Bylaws were also amended to provide that prior to the 1998 Annual Meeting,
Meritage will not have the right to vote the Common Shares that Meritage owns as
of January 25, 1996 (comprising 1,550,000 shares) for the election or removal of
the Class II directors unless (i) the Company determines, or a court of
competent jurisdiction orders, that the Company's Common Shares acquired by TAI
directly or indirectly from Mr. Reynolds, his family and Innkeepers has voting
power, or (ii) permitted by a majority of the Class II directors. If for any
reason a 1998 Annual Meeting does not occur, all such voting limitations upon
the Meritage shares shall become null and void on December 31, 1998. There are
no limitations on the voting rights or voting powers of any Common Shares with
respect to which Meritage acquires ownership or voting power after January 25,
1996. Prior to the 1998 Annual Meeting, Article III, Section 1 of the Restated
and Amended Bylaws (which contains the above-described voting limitations on the
Meritage shares) may be amended only with the approval of a majority of each of
the Class I and Class II directors or by the holders of the majority of the
shares entitled to vote at an election of directors, subject to the limitations
applicable to the Meritage shares. If, however, an amendment to Article III,
Section 1 of the Restated and Amended Bylaws is to become effective on or after
the date of the 1998 Annual Meeting, such amendment may be adopted and approved
in the same manner as any other provision of the Restated and Amended Bylaws.
On and after the date of the 1998 Annual Meeting (or if no such meeting occurs,
after December 31, 1998), Article III, Section 1 of the Restated and Amended
Bylaws may be amended in the same manner as any other provision of the Restated
and Amended Bylaws.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION.
- -------------------
During fiscal 1994 and until October 18, 1995, there was no
established public trading market for the Company's Common Shares. Since
October 18, 1995, bid and ask quotations regarding the Company's Common Shares
have, from time to time, appeared under the symbol "TEIR" on the OTC Bulletin
Board of the NASDAQ Stock Market, Inc. The following table sets forth the high
and low bid prices for the Common Shares during the period beginning on October
18, 1995 and ending on November 30, 1995 (the last day of fiscal 1995) as
reported by the Nasdaq Trading and Market Services:
<TABLE>
<CAPTION>
Bid
Fiscal Quarter High Low
-------------- ----- ---
<S> <C> <C>
Fiscal 1994 No Published Quotations
1st, 2d & 3rd Quarters, 1995 No Published Quotations
October 18, 1995 -
November 30, 1995 $7.50 $5.88
</TABLE>
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions. The last
transaction reported to the Company occurred on March 20, 1996, in which 2,000
Common Shares were sold for $6.13 per share.
HOLDERS.
- --------
There are approximately 350 holders of record of the Company's Common
Shares.
DIVIDENDS.
- ----------
The Company has never paid any dividends. Pursuant to the Company's
loan agreements with GALIC (see Item 2 "Financing and Encumbrances" above), the
Company may not pay any
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<PAGE> 11
dividends other than the payment of a special dividend in the amount of $.50 per
Common Share (the "Special Dividend"). On March 9, 1996, the Board of
Directors declared the Special Dividend with a record date of March 28, 1996
and payment date of April 13, 1996.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
- -----------------
Since January 25, 1996, the Company has fundamentally changed its
operations in a manner it believes will have a positive effect on future
performance. During the first quarter of fiscal 1996, the Company (i)
appointed new executive officers and implemented a new management structure
(See Item 1 "Replacement and Restructuring of Management"), (ii) closed on $15
million in new mortgage financing (See Item 2 "Financing and Encumbrances"),
(iii) began implementing a Capital Expenditure Program to improve and upgrade
its Hotels (See Item 1 "Capital Expenditure Program"), and (iv) began
implementing a new sales and marketing program.
On January 25, 1996, the Company's Board of Directors elected new
executive officers and implemented a new management structure to internally
operate the Company's hotel operations. The Company's new management team has
extensive experience in the hospitality industry. The Company has created and
filled the following new positions: Executive Vice President, Senior Vice
President - Operations, Vice President and General Counsel, Executive Director -
Operations, Executive Director - Sales and Marketing, Corporate Controller,
Director - Purchasing, Director - Front Office and Reservations, Director -
Property Maintenance, and Director - Housekeeping.
The Company anticipates that future growth in the Company's business
will be accomplished through improving its existing hotel operations and the
acquisition of additional hotel and food service properties. The Company is
actively seeking potential acquisitions.
RESULTS OF OPERATIONS
- ---------------------
The Company's net sales for fiscal 1995 and 1994 were $14,244,904 and
$15,147,668, respectively. The decrease in fiscal 1995 over fiscal 1994 was
$902,764, or 6.0%. The decrease was primarily attributable to the
non-recurrence of a contract with one of its major customers. The Company
believes it maintains a good relationship with this customer and continues to
promote future conference business with it.
Cost of food and beverages was $2,863,554 and $3,041,499 in fiscal
1995 and 1994, respectively. The decrease of $177,945 (5.9%) was due to the
decrease in net sales discussed above.
In fiscal 1995, the Company experienced increases in operating
expenses of $35,493 (0.5%), and depreciation and amortization of $192,728
(15.6%). The increase in depreciation and amortization was a result of
increased amortization related to deferred loan costs of approximately $350,000
and a decrease in depreciation of approximately $157,000.
The net loss is substantially attributable to an increase in general
and administrative expenses of $2,384,070 of which $1,361,470 is related to the
litigation settlement described in "Impact of Unusual
- 10 -
<PAGE> 12
Events" below, associated professional fees of $792,693, and bad debt expense
of $265,000. This increase in general and administrative expenses is a result
of certain unusual events which occurred over the last year (see "Impact of
Unusual Events" below) and which the Company does not anticipate will recur in
its ordinary course of business.
Interest expense for fiscal 1995 and 1994 was $1,355,389 and
$1,206,151, respectively. The increase of $149,238 (12.4%) from 1994 to 1995
is due to increases in the prime rate. All of the Company's debt is based
on a variable interest rate that is linked to the prime rate.
Interest income was $387,099 in fiscal 1995 and $87,028 in fiscal
1994. The increase of $300,071 (344.8%) is due to increased cash and cash
equivalents in fiscal 1995 as compared to fiscal 1994.
Sundry other income in fiscal 1995 was $437,762 as compared to
$224,129 in fiscal 1994. The increase of $213,633 (95.3%) was primarily
attributed to the gain on the sale of a parcel of vacant land in the amount of
$241,646.
For fiscal 1995, the Company reported a loss before taxes and
cumulative effect of change in accounting principle of $2,770,502. This
represents an increase in loss before taxes and cumulative effect of change in
accounting principle from fiscal 1994 of $2,972,640.
The effective tax (benefit) rate was (26.0%) in 1995 and 55.4% in
1994. The 1995 effective tax rate primarily reflects adjustments from the
federal statutory rate attributable to certain non-deductible expenses and
different tax rates in previous years for net operating loss carrybacks. The
1994 effective tax primarily reflected non-deductible expenses.
Earnings (loss) before cumulative effect of change in accounting
principle for fiscal 1995 and 1994 was ($2,049,102) and $90,138, respectively,
which resulted in earnings (loss) per share for each year of ($1.13) and $.06
respectively.
IMPACT OF UNUSUAL EVENTS
- ------------------------
In 1995 the Company had general and administrative expenses of
$4,979,621, an increase of $2,384,070, of which $2,154,163 related to a
litigation settlement and associated professional fees. As discussed above,
these expenses are a result of the Derivative Proceeding, the TAI Suit, the
Meritage Suit and a lawsuit filed by Meritage against the Company, Mr. Reynolds
and his family (Case No. 1:95 CV 451, Quist, J., U.S. District Court for the
Western District of Michigan, S.D.)(the "7B Suit"). In settling the 7B Suit,
the Company agreed to pay the cost and expenses, including legal fees, of
Meritage and Mr. Reynolds and his family. In the Derivative Proceeding, the
Company advanced sums under the indemnification provisions of the Company's
Bylaws for the defense of current directors Ms. Awtrey and Messrs. Ehinger,
Michael and Weigel, and for Mr. Reynolds, a director at the time of suit. The
7B Suit has been dismissed and the Company anticipates being dismissed from the
Derivative Suit and Meritage Suit in the near future. The Company does not
anticipate incurring costs and expenses of this magnitude in its ordinary
course of business.
Included in general and administrative expenses is a $193,875
guarantee fee to Mr. Reynolds for guaranteeing the Company's indebtedness and
$260,000 bad debt expense relating to Mr. Reynolds's
- 11 -
<PAGE> 13
indebtedness to the Company. The Company does not anticipate these expenses
recurring in the future.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
The refinancing of the Company's mortgage indebtedness has placed the
Company in a stronger financial position for the coming year. In order to
increase revenues, the Company believes it must make substantial capital
expenditures in both the short and long term in order to remain competitive in
its respective markets. Consequently, the Company has embarked on a capital
expenditure program to refurbish and upgrade its Hotels (see Item 1 "Capital
Expenditure Program"). The Company has budgeted the following capital
expenditures over the next 3 years:
CAPITAL EXPENDITURES BUDGET
---------------------------
Fiscal Year Capital Expenditures
1996 $ 2,340,000
1997 $ 1,430,000
1998 $ 1,540,000
Sources of funds for capital expenditures include (i) $1,000,000 in
existing funds, (ii) the sale of some or all of the Non-core Assets (See Item 1
"Non-core Assets"), (iii) funds generated from operations, or (iv) refinancing
the First Mortgage Loan (see Item 2 "Financing and Encumbrances").
In September 1995, the Company received the Meritage Note in the
principal amount of $10,500,000 in exchange for the sale of 1,500,000 Common
Shares to Meritage. Beginning on the third anniversary of the Meritage Note,
Meritage is required to make an annual payment of $1,312,500 for the next eight
years. The Meritage Note has a present discounted value of $5,602,532 (using a
discount rate of 11%).
As of November 30, 1995, Mr. Reynolds and parties affiliated with him
owed the Company approximately $695,000. The Company believes these loans are
not on terms favorable to the Company and intends to immediately pursue
collection of all such outstanding loans. The Company has established an
allowance of $260,000 against these receivables.
As of November 30, 1995, the Company's current assets exceeded its
current liabilities by $43,681 as compared to fiscal 1994 in which current
assets exceeded current liabilities by $406,283. For these periods, the ratios
of current assets to current liabilities were 1.01:1 and 1.26:1, respectively.
The Company had a substantial increase in both current assets and current
liabilities. The increase in current assets was attributable in part to an
increase in cash and cash equivalents of approximately $715,000 and an increase
in refundable income taxes of approximately $319,000. The increase in current
liabilities was attributable in part to an increase in accrued expenses of
approximately $1,764,000 and a decrease in amounts due to shareholders of
approximately $248,000.
- 12 -
<PAGE> 14
The Company has agreed to general financial covenants in its loan
agreement(s) with GALIC. An overview of the covenants is as follows:
*A minimum net worth requirement increasing from $2,500,000 on
November 30, 1996 to $3,500,000 on November 1997 and
$250,000 per quarter thereafter.
*An Operating Cash Flow/Debt Service ratio ranging from 2.4 to
1 on November 30, 1996 to 5.1 to 1 on November 30, 2002.
*An Operating Cash Flow minus Capital Expenditures/Debt
Service ratio ranging from 0.8 to 1 on November 30,
1996 to 4.2 to 1 on November 30, 2002.
*A Total Debt/Operating Cash Flow ratio ranging from 4.1 to 1
on November 30, 1996 to 1.3 to 1 on November 30, 2002.
The Company's minimum principal payments per year on long-term debt to
maturity consisting of the First Mortgage Loan and the Second Mortgage Loan
(see Item 2 "Financing and Encumbrances") are as follows:
<TABLE>
<CAPTION>
Year Annual Principal Payments
---- -------------------------
<S> <C>
1996 $ 0
1997 1,050,000
1998 - 2001 ( 4 years) 1,400,000
2002 950,000
2003 - 2011 (9 years) 800,000
2012 200,000
----------
Total $15,000,000
==========
</TABLE>
The Company is seeking to refinance the First Mortgage Loan in an
amount up to $14 million. The Company intends to use any additional funds
raised (i) to pay down the Second Mortgage Loan; and (ii) for capital
expenditures. See Item 1 "Capital Expenditure Program."
EFFECTS OF CHANGING PRICES
- --------------------------
Similar to other businesses in the hospitality industry, the Company
is sensitive to changes in interest rates and costs. The Company currently has
indebtedness in the aggregate amount of $15,000,000, $12,000,000 of which is
subject to interest at a floating rate of 1% over the prime rate and $3,000,000
of which is subject to interest at a floating rate of 8% over the prime rate.
Increases or decreases in the prime rate would increase or decrease the
Company's interest expense for a fiscal year. In 1995, the Federal Reserve
Board increased the discount rate, resulting in an increase in the prime rate.
Because of these increases, the Company's interest expense rose by $149,238 as
compared to fiscal 1994.
As a result of its future upgrading and refurbishing of its Hotels, the
Company anticipates an improvement in the Company's revenues. The Company also
anticipates that its new management will ultimately reduce administrative
expenses and eliminate related party expenditures. As a result of GALIC's
refinancing of the Company's indebtedness on February 26, 1996, the Company
anticipates a rise in interest expense. If inflation increases or there is a
general economic recession in the Company's
- 13 -
<PAGE> 15
markets, the Company would likely experience a decline in business travel,
tourism, and attendance at conventions and conferences. Similarly, inflation
would also likely lead to higher food, beverage and labor costs. Inflationary
increases in such costs may be difficult to pass through to customers,
resulting in a reduced operating profit margin.
ITEM 7. FINANCIAL STATEMENTS
The following pages contain the Consolidated Balance Sheet of the
Company and its subsidiaries as of November 30, 1995, and the related
Consolidated Statements of Operations and Shareholders' Equity and Cash Flows
for the years ended November 30, 1995, and 1994, including the report of the
Company's independent certified public accountants.
- 14 -
<PAGE> 16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Thomas Edison Inns, Inc.
We have audited the accompanying consolidated balance sheet of Thomas Edison
Inns, Inc. (a Michigan corporation) and subsidiaries as of November 30, 1995,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years ended November 30, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Thomas Edison
Inns, Inc. as of November 30, 1995 and the consolidated results of its
operations and its consolidated cash flows for the years ended November 30,
1995 and 1994, in conformity with generally accepted accounting principles.
As discussed in Note H to the consolidated financial statements, effective
December 1, 1993 the Company changed its method of accounting for income taxes.
/s/Grant Thornton LLP
Detroit, Michigan
February 1, 1996
(except for Note G as to which the date is February 26, 1996)
- 15 -
<PAGE> 17
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
BALANCE SHEET
NOVEMBER 30, 1995
- -------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
Current Assets
<S> <C>
CASH AND CASH EQUIVALENTS $ 1,336,891
Trade accounts receivable, less allowance
for doubtful accounts of $29,000 570,428
Inventories (Note A) 208,891
Refundable income taxes 433,500
Prepaid expenses and other current assets (Notes B and H) 465,225
----------
Total Current Assets 3,014,935
PROPERTY, PLANT AND EQUIPMENT, NET (NOTES A, C AND G) 13,218,340
DEFERRED INCOME TAXES (NOTE H) 437,100
OTHER ASSETS (NOTE D) 877,698
AMOUNTS DUE FROM RELATED PARTIES (NOTE E) 435,430
__________
Total Assets $17,983,503
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- 16 -
<PAGE> 18
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
CURRENT LIABILITIES
Note payable - Bank (Note G) $ 200,551
Current portion of long-term debt 237,651
Amounts due to shareholders and related parties 2,300
Trade accounts payable 448,886
Accrued expenses (Note F) 2,081,866
---------
Total Current Liabilities 2,971,254
LONG-TERM DEBT (NOTE G) 11,204,883
DEFERRED INCOME TAXES (NOTE H) 752,000
COMMITMENTS AND CONTINGENCIES (NOTE J) -
SHAREHOLDERS' EQUITY
Preferred Shares - $0.01 par value;
authorized 5,000,000 shares; issued
and outstanding, none -
Common Shares - $0.01 par value;
authorized 30,000,000 shares; issued
and outstanding 3,020,150 shares 30,200
Additional paid in capital 10,684,750
Note receivable from sale of shares (5,602,532)
Accumulated deficit (2,057,052)
-----------
Total Shareholders' Equity 3,055,366
-----------
Total Liabilities and Shareholders' Equity $17,983,503
===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- 17 -
<PAGE> 19
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED NOVEMBER 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Net sales
Room rents $ 5,999,024 $ 6,047,510
Food and beverages 8,245,880 9,100,158
---------- ---------
Total sales 14,244,904 15,147,668
Cost and expenses
Cost of food and beverages 2,863,554 3,041,499
Operating expenses 7,215,061 7,179,572
General and administrative expenses 4,979,621 2,595,551
Depreciation and amortization 1,426,642 1,233,914
---------- ----------
Total costs and expenses 16,484,878 14,050,536
---------- ----------
Earnings (loss) from operations (2,239,974) 1,097,132
Other income (expense)
Interest expense (1,355,389) (1,206,151)
Interest income 387,099 87,028
Sundry 437,762 224,129
---------- ----------
(530,528) (894,994)
---------- ----------
Earnings (loss) before federal income tax and
cumulative effect of change in accounting principle (2,770,502) 202,138
Federal income tax expense (benefit) (Notes A and H) (721,400) 112,000
--------- ----------
Earnings (loss) before cumulative
effect of change in accounting principle (2,049,102) 90,138
Cumulative effect on prior years of changing to a different
method of accounting for income taxes (Note H) - 117,300
---------- ----------
Net loss $ (2,049,102) $ (27,162)
========== ==========
Earnings (loss) per share
Before cumulative effect of change in accounting principle $ (1.13) $ .06
Cumulative effect of change in accounting principle - (.08)
---------- ----------
After cumulative effect of change in accounting principle $ (1.13) $ (.02)
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- 18 -
<PAGE> 20
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Note Retained
Additional Receivable Earnings
Preferred Common Paid-In From Share (Accumulated
Shares Shares Capital Sale Deficit) Total
-------- --------- ------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 1,
1993 $ - $15,200 $ 5,217,820 $ - $ 19,212 $5,252,232
Net loss - - - - (27,162) (27,162)
-------- ------ ---------- ---------- --------- ---------
Balance at November 30,
1994 - 15,200 5,217,820 - (7,950) 5,225,070
Issuance of Common
Shares (Note I) - 15,000 5,466,930 (5,481,930) - -
Recognition of interest
income on note
receivable from
sale of shares - - - (120,602) - (120,602)
Net loss - - - - (2,049,102) (2,049,102)
-------- ------ ---------- ---------- ---------- ---------
Balance at November 30,
1995 $ - $30,200 $10,684,750 $(5,602,532) $(2,057,052) $3,055,366
======== ====== ========== ========== ========== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- 19 -
<PAGE> 21
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED NOVEMBER 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,049,102) $ (27,162)
Adjustments to reconcile net income to net cash provided
by operating activities
Cumulative effect of change in accounting principle - 117,300
Depreciation and amortization 1,426,642 1,232,187
Deferred income tax expense (benefit) (431,900) 14,000
Gain on disposal of property, plant and equipment (241,646) (11,769)
Bad debt expense 265,000 -
Interest income on note receivable from sale
of shares (120,602) -
(Increase) decrease in assets
Accounts receivable 100,664 (233,209)
Other current assets (19,608) (21,502)
Refundable income taxes (318,705) (114,795)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 1,814,566 43,188
Income taxes payable - (8,357)
--------- -------
Net cash provided by operating activities 425,309 989,881
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (456,132) (470,858)
Proceeds from sale of property, plant and equipment 616,646 100,964
Increase in other assets (5,981) (30,863)
Additions to amount due from related parties (682,248) (673,635)
Payments on amounts due from related parties 2,270,524 694,186
--------- -------
Net cash provided by (used in) investing activities 1,742,809 (380,206)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 46,887 -
Payments related to borrowings from
shareholders and related parties (248,163) (21,557)
Principal payments of notes payable - (7,640)
Principal payments of long-term debt (1,251,712) (409,429)
--------- -------
Net cash used in financing activities (1,452,988) (438,626)
--------- -------
Net increase in cash 715,130 171,049
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- 20 -
<PAGE> 22
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
YEARS ENDED NOVEMBER 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Cash and cash equivalents - beginning of year $ 621,761 $ 450,712
--------- ---------
Cash and cash equivalents - end of year $1,336,891 $ 621,761
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
Interest $1,355,389 $1,206,151
Income taxes - 192,500
</TABLE>
On September 19, 1995, a non-cash transaction occurred whereby 1,500,000
Common Shares were issued in exchange for a non-interest bearing note
receivable in the amount of $10,500,000. The discounted present value of the
note receivable was $5,481,930. (See Note I)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- 21 -
<PAGE> 23
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company conducts substantially all of its operations in the lodging and
restaurant industry and has three Michigan locations. The Company's
receivables are due principally from credit card companies and various entities
located primarily in Michigan and Ontario, Canada.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, St. Clair Inn, Inc., Thomas Edison Inn,
Incorporated and Spring Lake Inn, Inc. All significant intercompany balances
and transactions have been eliminated in consolidation.
INVENTORIES
Inventories of food and beverages are stated at the lower of cost or market.
Cost is determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
principally using the straight-line method.
INCOME TAXES
Income taxes are accounted for by using an asset and liability approach.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial basis of assets and
liabilities. Assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
EMPLOYMENT BENEFITS
The Company has a 401(k) Plan that covers substantially all employees. Company
contributions are voluntary and at the discretion of the Board of Directors.
There were no contributions to the Plan during the years ended November 30,
1995 and 1994.
USE OF ESTIMATES
In the preparation of financial statements management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenue and expenses
during the reporting period. Actual results could differ from those estimates.
- 22 -
<PAGE> 24
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed based upon the weighted average number
of shares outstanding during each year. The average number of shares
outstanding was 1,815,984 shares and 1,520,150 shares for the years ended
November 30, 1995 and 1994, respectively.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate their fair values.
NEW PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS) - "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be
held and used and for long-lived assets and certain intangibles to be disposed
of. This statement becomes effective for the year ended November 30, 1997.
Management does not believe that the adoption of this standard will have a
significant effect on the consolidated financial statements of the Company.
NOTE B - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following at November
30, 1995:
Prepaid insurance $ 99,574
Prepaid property taxes 43,151
Prepaid single business tax 111,700
Deferred income taxes 111,900
Sundry 98,900
--------
$ 465,225
========
- 23 -
<PAGE> 25
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows at November 30, 1995:
Land and improvements $ 1,515,513
Buildings and improvements 18,522,242
Furnishings and equipment 7,067,815
----------
27,105,570
Less accumulated depreciation and
amortization 13,887,230
----------
$ 13,218,340
==========
Depreciation expense was approximately $883,000 and $1,047,000 for the years
ended November 30, 1995 and 1994.
NOTE D - OTHER ASSETS
Other assets consist of the following at November 30, 1995:
Land held for expansion $ 642,757
Cash surrender value of officers' life
insurance (net of loans of $99,270) 188,875
Sundry 46,066
-------
$ 877,698
=======
At November 30, 1995, certain land held for expansion is pledged as collateral
for a land contract.
NOTE E - AMOUNTS DUE FROM RELATED PARTIES AND RELATED PARTY TRANSACTIONS
Amounts due from related parties consist of the following:
Amounts due from Donald W. Reynolds $ 477,321
Amounts due from other related parties 218,109
-------
695,430
Less allowance for doubtful receivables 260,000
-------
$ 435,430
=======
Amounts due from Donald W. Reynolds are due on demand. Repayment terms have
not been established and therefore the receivable is classified as non-current.
- 24 -
<PAGE> 26
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
NOTE E - AMOUNTS DUE FROM RELATED PARTIES AND RELATED PARTY TRANSACTIONS
(CONTINUED)
Donald W. Reynolds is the guarantor of an obligation of one of the Company's
subsidiaries that has a balance of $2,924,975 at November 30, 1995. Other
related parties from whom amounts are due consist of companies related by
common ownership. No specific repayment terms exist.
The Company and each of its subsidiaries have entered into a management
agreement with an affiliated company that is wholly-owned by Donald W. Reynolds.
The agreement was terminated on January 25, 1996. The affiliated Company earned
a percent of gross revenue to manage the Hotels. For the period from December
1, 1994 through February 28, 1995, the fee was 3% of gross revenues and for the
period from March 1, 1995 through November 30, 1995, the fee was 2% of gross
revenues. Management fees charged to operations totaled $402,786 and $456,750
for the years ended November 30, 1995 and 1994, respectively. The Board of
Directors approved a 1.5% loan guarantee fee to be paid to Donald W. Reynolds
for the years ended November 30, 1995 and 1994. The fee paid was $193,875 for
1995 and $193,500 for 1994.
NOTE F - ACCRUED EXPENSES
Accrued expenses consist of the following:
Litigation expenses $1,361,470
Professional fees 246,788
Property taxes 189,461
Payroll and related payroll taxes 125,685
Interest and other expenses 158,462
---------
$2,081,866
=========
In connection with the litigation described in Note J, the Company agreed to
pay certain expenses of the plaintiffs totaling $1,361,470.
NOTE G - NOTE PAYABLE - BANK AND LONG-TERM DEBT
The note payable to bank is due on February 7, 1996 and bears interest at 1%
over the prime rate (8.5% at November 30, 1995). It is collateralized by real
estate and payment of the note is guaranteed by Donald W. Reynolds. This note
was paid in February 1996.
- 25 -
<PAGE> 27
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
NOTE G - NOTE PAYABLE - BANK AND LONG-TERM DEBT (CONTINUED)
Long-term debt consists of the following obligations at November 30, 1995:
<TABLE>
<S> <C>
Mortgage note payable to bank, due $23,174 per
month including interest at prime plus 2% not to
exceed 10.5%, due October 1, 1997. (1) $ 2,924,975
Mortgage note payable to bank, due $28,108 per
month including interest at prime plus 1%, due
October 31, 1997. (2) 3,464,780
Term note payable to bank, due $16,531
per month including interest at prime
plus 1%, due October 31, 1997. (2) 808,922
Mortgage note payable to bank, due $37,194 per
month including interest at prime plus 2% but not to
exceed 10.5%, due October 1, 1997. (3) 3,929,506
Other notes and land contracts payable, requiring
monthly payments aggregating $8,950, subject to
interest at rates ranging from 6.90% to 11.00%. (4) 314,351
----------
Total 11,442,534
Less current portion 237,651
----------
$11,204,883
==========
</TABLE>
Substantially all the Company's property, plant and equipment are pledged as
collateral for the notes payable referred to above.
The prime lending rate was 8.5% at November 30, 1995.
(1) The applicable loan agreement prohibits the Company from paying
dividends or purchasing any of its outstanding shares without
obtaining the lender's permission. Payment of this obligation is
guaranteed by Donald W. Reynolds. As collateral for the guarantee, he
has pledged a note receivable and a second mortgage on his personal
residence. Company-owned life insurance policies in the amount of
$2,000,000 and a policy in the amount of $1,000,000 owned by Donald W.
Reynolds also have been assigned to the lender as collateral.
The Company is in default on several covenants under this loan
agreement at November 30, 1995.
- 26 -
<PAGE> 28
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
NOTE G - NOTE PAYABLE - BANK AND LONG-TERM DEBT (CONTINUED)
(2) Donald W. Reynolds has pledged personally-owned life insurance
policies in the amount of $3,000,000 to the lender as additional
collateral for this obligation of the Company.
The Company is in default on several loan covenants under this loan
agreement at November 30, 1995.
(3) The mortgage is collateralized by property and equipment of the
Company and a guarantee provided by Donald W. Reynolds. The Company
is in default on several covenants under this loan agreement at
November 30, 1995.
(4) In February 1996, the Company repaid certain loans with a balance at
November 30, 1995 totaling $174,707.
Minimum principal payments on long-term debt to maturity as of November 30,
1995 are as follows:
1996 $ 237,651
1997 11,078,153
1998 24,123
1999 10,128
2000 10,128
Thereafter 82,351
----------
$11,442,534
==========
On February 26, 1996, the Company entered into new loan agreements with Great
American Life Insurance Company and used the proceeds to pay off the existing
mortgage notes and to increase working capital.
The terms of the new loans are as follows:
<TABLE>
<CAPTION>
INTEREST
LOAN AMOUNT RATE
---------- ---------- -----------------
<S> <C> <C>
First Mortgage $12,000,000 Prime Plus 1%
Second Mortgage $ 3,000,000 Prime Plus 8%
</TABLE>
The first mortgage is secured by the hotel properties and the second mortgage is
secured by a first security interest in the Meritage Note (See Note I),
1,500,000 Common Shares of the Company, Company-owned life insurance policies in
the amount of $5,100,000 and various other property and equipment and a second
security interest in the hotel properties.
- 27 -
<PAGE> 29
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
NOTE G - NOTE PAYABLE - BANK AND LONG-TERM DEBT (CONTINUED)
For the first year of the loans, interest only is payable on a monthly basis.
Thereafter, the first mortgage loan is payable in monthly installments of
$66,667 plus interest with the final payment due on March 1, 2012, and the
second mortgage loan is payable in monthly installments of $50,000 plus
interest with the final payment due on March 1, 2002.
Loan covenants include a requirement for maintenance of a prescribed amount of
net worth and certain financial ratios and restrictions on certain Common Share
purchases, dividends, additional indebtedness and executive compensation.
The existing long-term debt has been classified according to its original terms
to reflect the execution of the new loan agreements.
NOTE H - INCOME TAXES
In December 1993, the Company changed its method of accounting for income taxes
from Accounting Principles Board Opinion No. 11 (APB 11) and adopted Statement
of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." The adoption of SFAS 109 changed the Company's method of accounting
for income taxes from the deferred method to an asset and liability approach.
Previously, the Company deferred the past tax effects of timing differences
between financial reporting and taxable income. The asset and liability
approach requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. According to the
provisions of SFAS 109, prior years' financial statements have not been
restated.
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
Year Ended November 30,
1995 1994
---- ----
<S> <C> <C>
Current expense (benefit) $(289,500) $ 98,000
Deferred expense (benefit) (431,900) 14,000
-------- -------
$(721,400) $112,000
======== =======
</TABLE>
- 28 -
<PAGE> 30
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
NOTE H - INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at November 30, 1995 consist of the
following:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 267,400
AMT credit carryforward 140,000
Allowance for doubtful accounts 111,900
Michigan Single Business Tax - Federal 69,000
--------
588,300
Deferred tax liabilities
Depreciation (549,000)
Michigan Single Business Tax - State (203,000)
--------
(752,000)
Less valuation allowance (39,300)
--------
Net deferred tax liability $(203,000)
========
</TABLE>
A valuation allowance of $39,300 was recorded during 1995.
The net operating loss carryforward expires in 2010.
The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows:
<TABLE>
<CAPTION>
Years Ended November 30,
1995 1994
---- ----
<S> <C> <C>
Tax (benefit) at statutory rates
applied to income before federal
income tax $(942,000) $ 68,700
Effect of nondeductible expenses,
primarily officers' life insurance 24,700 43,300
Difference in rates of net operating loss carrybacks 151,300 -
Other 44,600 -
-------- -------
$(721,400) $112,000
======== =======
</TABLE>
NOTE I - STOCK PURCHASE AGREEMENT
On September 19, 1995, a stock purchase and sale agreement (Agreement) was
executed by the Company, its principal shareholder and Meritage Hospitality
Group Incorporated (Meritage). Under the agreement, the Company sold
1,500,000 shares of previously authorized newly issued Common Shares to
Meritage at a total price of $10,500,000.
- 29 -
<PAGE> 31
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
NOTE I - STOCK PURCHASE AGREEMENT (CONTINUED)
Upon execution of the agreement, Meritage gave the Company a non-interest
bearing promissory note for $10,500,000. The Note provides that Meritage does
not have to make any payments to the Company for three years from the date of
the Note (September 19, 1995). Beginning on the third anniversary of the
Meritage Note, Meritage is required to make an annual payment of $1,312,500 for
the next eight years.
The Note is secured by the shares issued to Meritage under the Agreement. The
Note was discounted at 11% and is recorded as a reduction of shareholders'
equity.
As required by the Agreement, the parties have agreed to settle certain
litigation as described in Note J.
NOTE J - LITIGATION
The Company is involved, as both plaintiff and defendant, in certain legal
proceedings. Except as described below, all of these proceedings arose in the
ordinary course of the Company's business and, in the opinion of Management,
any potential liability of the Company with respect to these legal actions will
not, in the aggregate, be material.
The Company has been named, among other defendants, in a shareholder derivative
lawsuit. The complaint alleges that the named directors and officers breached
various fiduciary duties. In April 1995, the parties agreed to stay further
proceedings while settlement negotiations were conducted. No further action has
been taken in this case.
The Company and others are also defendants in another lawsuit where the
plaintiff (TAI) seeks a declaratory judgment that the Common Shares that it
is reported to have bought from Donald W. Reynolds and other related parties
have full voting rights. Management believes that the shares held by TAI were
the subject of at least one control share acquisition as that term is defined by
Chapter 7B of the Michigan Business Corporation Act (MBCA) and, as a result,
only have such voting rights as are conferred on them at a meeting of
shareholders held pursuant to Section 798 of the MBCA. As a result, Management
believes the shares are presently non-voting shares.
The Company has filed a counter-claim against TAI. The counter-claim maintains
that TAI has interfered in the Company's management and control of its
corporate and business affairs and otherwise injured the Company by undertaking
certain actions.
- 30 -
<PAGE> 32
THOMAS EDISON INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
NOTE J - LITIGATION (CONTINUED)
The Company has also been named, among others, in a lawsuit filed by Meritage.
This suit seeks a declaration that the Company has repudiated the Stock Purchase
Agreement and has lost all right to enforce its rights under the Stock Purchase
Agreement and that Meritage is entitled to exercise its rights as a shareholder
of the Company without regard to any limitation on such rights appearing in the
Stock Purchase Agreement and the removal of Donald W. Reynolds and William F.
Ehinger as directors of the Company. The Company and Meritage agreed that
Meritage would not pursue this action against the Company as long as the Company
fulfilled its obligations to Meritage under the Stock Purchase Agreement. No
action has occurred in this suit and it is anticipated that the Company will be
dismissed from the suit in the near future.
- 31 -
<PAGE> 33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 31, 1994, the Company changed its principal independent
accountant for fiscal 1993. This change was previously reported on a
Current Report on Form 8-K which was filed with the SEC on February 4, 1994.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
- --------------------------------
The following is information concerning each of the current directors and
executive officers and each of the former executive officers listed on the
Summary Compensation Table, as of March 27, 1996:
<TABLE>
<CAPTION>
Common Shares
Beneficially Owned
----------------------------
Name and Age (1) Position Amount (2) Percentage
<S> <C> <C> <C>
Robert E. Schermer, Sr. (3), (4) Chairman of the Board of Directors 2,488 *
60
Christopher B. Hewett (4), (5) President, Chief Executive Officer 1,553,000 51.6%
37 and Director
Robert E. Schermer, Jr. (4), (5) Executive Vice President, Chief 1,550,100 51.5%
37 Financial Officer and Director
Gerard Belisle, Jr. Senior Vice President-Operations 0 --
56
James R. Saalfeld Vice President, General Counsel and 0 --
29 Secretary
Rebecca L. Awtrey (5), (10) Director 10,000 *
37
William F. Ehinger (3), (6), (7) Director 41,056 1.3%
67
David S. Lundeen (8) Director 7,000 *
33
Joseph L. Maggini (3), (7), (9) Director 21,000 *
56
Joseph P. Michael (8) Director 0 --
56
Frank O. Staiger (7) Director 0 --
66
</TABLE>
- 32 -
<PAGE> 34
<TABLE>
<CAPTION>
Common Shares
Beneficially Owned
----------------------------
Name and Age (1) Position Amount (2) Percentage
<S> <C> <C> <C>
Raymond A. Weigel, III (7), (8) Director 4,975 *
48
Donald W. Reynolds (5) Former Chairman of the Board of 870,248 28.8%
66 Directors, President, Chief Executive
Officer, Treasurer and Secretary
David C. Distad (5),(10) Former Vice President and Chief 10,000 *
54 Financial Officer
All Current Executive Officers 1,639,619 54.3%
and Directors as a Group (12
Persons)
<FN>
(1) Unless otherwise indicated, the persons named have sole voting and
investment power and direct beneficial ownership of the securities.
(2) The column sets forth Common Shares which are deemed "beneficially owned"
by the named persons under Rule 13d-3 of the Securities Exchange
Act of 1934.
(3) Compensation Committee Member
(4) Executive Committee Member
(5) See description of Common Share ownership contained under Item 11
"Security Ownership of Certain Beneficial Owners and Management."
(6) Includes 23,100 shares held by the Grabill Kitchens and Interiors, Inc.
Retirement Trust, of which Mr. Ehinger is the sold vested beneficiary.
(7) Stock Purchase Agreement Committee Member
(8) Audit Committee Member
(9) Includes 2,000 shares held by Mr. Maggini jointly with his wife and 1,100
shares held directly by his wife.
(10)Includes 10,000 shares held in joint tenancy with Mr. Reynolds.
* Less than 1%
</TABLE>
Robert E. Schermer, Sr. has been a director of the Company since January
25, 1996. He is currently Senior Vice President and Managing Director of
Robert W. Baird & Co. Incorporated, an investment banking and securities
brokerage firm headquartered in Milwaukee, Wisconsin ("Baird"). Mr. Schermer
has held this position for more than five years. He is the father of
Mr. Schermer, Jr.
Christopher B. Hewett has been President, Chief Executive Officer and a
director of the Company since January 25, 1996. He has served as President of
Meritage since its inception in 1993. Mr. Hewett was Executive Vice President
(1990-91) and later President (1991-93) of Ocean Reef Club, Inc., which was the
owner, developer and operator of the Ocean Reef Club, a 5,000 acre mixed-use
residential resort community in Key Largo, Florida. In 1993, Ocean Reef Club,
Inc. sold the Ocean Reef Club and was renamed Key Largo Group, Inc. ("KLG").
Mr. Hewett remains President of KLG.
Robert E. Schermer, Jr. has been Executive Vice President, Chief Financial
Officer and a director of the Company since January 25, 1996. He has served as
Executive Vice President of Meritage since 1993. From 1989 until 1993, he was
Executive Vice President of Landquest Ltd, a private investment partnership
which financed and developed residential real estate and hotel investments.
Gerard Belisle, Jr. has been Senior Vice President-Operations of the
Company since January 25, 1996. He has served as Vice President of Meritage
since its inception in 1993. Mr. Belisle has served as Vice President of
KLG since 1992. Prior to 1992,
- 33 -
<PAGE> 35
Mr. Belisle was a hotel general manager for Carnival Hotels & Casinos, a
Miami-based hotel owner and management company.
James R. Saalfeld has been Vice President, General Counsel and Secretary of
the Company since March 20, 1996. From 1992 until 1996, Mr. Saalfeld was an
attorney with Dykema Gossett PLLC, a Grand Rapids, Michigan law firm.
Rebecca L. Awtrey has been a director of the Company since May 1988. She
is currently a housewife and mother. She served as the Director of Quality
Control at Innkeepers from 1990 to 1994.
William F. Ehinger has been a director of the Company since May 1988.
Since 1966, he has owned and been the President of Grabill Kitchens and
Interiors, Inc., Rockford, Michigan, a manufacturers' representative. Since
1974, he has also been Chairman of the Board of Independent Bank-West Michigan,
Rockford, Michigan.
David S. Lundeen has been a director of the Company since January 25, 1996.
From 1995, he has served as Executive Vice President and Chief Financial Officer
of BSG Corporation, Austin, Texas, an information technology consulting company.
From 1992 to 1995, Mr. Lundeen was President of Blockbuster Technology, a
division of Blockbuster Entertainment. From 1990 to 1992, he worked for
Blockbuster Entertainment as Director of Mergers & Acquisitions and Corporate
Finance. Prior to 1990, Mr. Lundeen was an investment banker at Drexel Burnham
Lambert in New York City.
Joseph L. Maggini has been a director of the Company since January 25,
1996. Since founding it in 1974, he has served as President and Chairman of
the Board of Magic Steel Corporation, Grand Rapids, Michigan, a steel service
center.
Joseph P. Michael has been a director of the Company since December 1988.
Since 1995, Mr. Michael has served as Director-Lending Services for River
Capital, Inc., Bloomfield Hills, Michigan, a mortgage brokerage firm. From
November 1992 to 1995, he was the President of Community Financial and
Mortgage, Inc., a mortgage broker. From August 1991 to November 1992, he was a
financial and business consultant. From 1983 to August 1991, he was employed
by First Federal Savings and Loan Association, a federal mutual association,
formerly known as First Federal Savings Bank and Trust of Pontiac, Michigan
("First Federal"), where he was a Senior Vice President.
Frank O. Staiger has been a director of the Company since January 8, 1996.
He is currently a member of the law firm of Davidson, Staiger & Hill, Port
Huron, Michigan. Mr. Staiger has held this position for more than 5 years.
Raymond A. Weigel, III has been a director of the Company since December
1986. Since April 1992, he has been the President of CLB Consulting Inc.,
Grand Rapids, Michigan, a business consulting firm. From 1988 to April 1992,
he was First Vice President of the Grand Rapids office of Baird. Mr. Weigel
is currently a director of First National Bank of Manatee, Manatee, Florida.
Compliance with Section 16 of the Securities Exchange Act of 1934
- -----------------------------------------------------------------
The Company is not aware of any instances where any person, who during
fiscal 1995 was required to file a report pursuant to Section 16(a) of the
Securities Exchange Act of 1934, failed to report any transaction on a timely
basis or failed to file any required report or form.
- 34 -
<PAGE> 36
ITEM 10. EXECUTIVE COMPENSATION
Compensation paid by Thomas Edison Inns, Inc. for the last three fiscal
years to its former Chief Executive Officer and all executive officers earning
in excess of $100,000 is as follows:1
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------------
Annual Compensation
- --------------------------------------------------------------------------------------------------------------------------
Name and Fiscal Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation
------------------ ---- ------ ----- ------------ ------------
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Donald W. Reynolds 1995 $ -(2) $ -- $ -- $ 193,875(3)
Former Chairman of the Board of 1994 -(2) -- -- 193,500(3)
Directors, President, Chief 1993 -(2) -- -- 193,500(3)
Executive Officer, Treasurer and
Secretary
- --------------------------------------------------------------------------------------------------------------------------
David C. Distad 1995 $ 130,150(4) $ -- $ 8,000(5) $ --
Former Vice President and Chief 1994 98,488(4) -- 8,000(5) --
Financial Officer 1993 92,000(4) -- 4,000(5) 25,000(6)
- --------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Meritage acquired majority control of the Company on January 25, 1996.
Mr. Reynolds was removed as a director and officer of the Company by
the St. Clair County (Michigan) Circuit Court on January 8, 1996. Mr.
Distad was removed by the Board of Directors on January 25, 1996.
(2) In fiscal 1995, 1994 and 1993, Mr. Reynolds received compensation from
Innkeepers. See Item 12 "Certain Relationships and Related
Transactions" below.
(3) In fiscal 1995, 1994 and 1993, St. Clair Inn, Inc. furnished an
automobile to Mr. Reynolds. In fiscal 1995, 1994 and 1993, the
Company paid $193,875, $193,500, and $193,500, respectively, to Mr.
Reynolds for his personal guarantee of certain obligations of the
Company.
(4) In fiscal 1995, 1994 and 1993, Innkeepers paid Mr. Distad's salary,
which was reimbursed by the Company to Innkeepers.
(5) Represents fees paid by the Company to Mr. Distad for attending Board
of Directors meetings.
(6) On December 2, 1992, the Company advanced $25,000 to Mr. Distad for
costs associated with his relocation in connection with his employment.
</TABLE>
The Company did not pay or distribute to its executive officers any
compensation pursuant to any employee benefit plan other than any group life,
health, hospitalization, or medical reimbursement plan that does not
discriminate in favor of any executive officer or director and that is
generally available to all salaried employees . During fiscal 1994, the
Company adopted a plan established under Section 401(k) of the Internal Revenue
Code (the "Plan") that covers substantially all employees of the Company, each
of its subsidiaries and Innkeepers. Company contributions to the Plan are
voluntary and at the discretion of the Board of Directors. The Company made no
contributions to the Plan during fiscal 1995.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following persons are the only shareholders known by the Company to own
beneficially 5% or more of its outstanding Common Shares as of March 27, 1996:
<TABLE>
<CAPTION>
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- --------
<S> <C> <C>
Christopher B. Hewett 1,553,000(1) 51.6%
Robert E. Schermer, Jr. 1,550,100(1) 51.5%
Donald W. Reynolds 870,248(2)(3) 28.8%
</TABLE>
- 35 -
<PAGE> 37
(1) Includes 1,550,000 shares held by Meritage. Mr. Hewett is the
majority shareholder, executive officer and director of Meritage, and Mr.
Schermer, Jr. is a shareholder, executive officer and director of Meritage.
(2) Includes 747,850 shares held by Mr. Reynolds in his own name, an
aggregate of 40,000 shares held in joint tenancy with his four children (one of
whom is Ms. Awtrey, formerly Rebecca L. Reynolds, and one of whom is Cynthia
Distad, the wife of Mr. Distad), and 82,398 shares held indirectly as the sole
shareholder of Innkeepers, which holds such shares.
(3) In a Schedule 13D delivered by TAI to the SEC on November 27, 1995, TAI
reported that on July 6, 1995 it entered into a Stock Purchase Agreement to
acquire 870,248 Common Shares of the Company beneficially owned by Mr. Reynolds.
TAI also reported that it received an irrevocable proxy to vote the 870,248
Common Shares. TAI further reported that on November 7, 1995, it entered into a
First Amendment to the Stock Purchase Agreement. Despite the information
reported by TAI, Mr. Reynolds, his four children and Innkeepers are identified
in the records of the Company as the owners of the 870,248 Common Shares.
The business address of Messrs. Hewett and Schermer, Jr. is 40 Pearl
Street, N.W., Suite 900, Grand Rapids, Michigan 49503.
The business address of Mr. Reynolds is 1459 Michigan Street, N.E., Grand
Rapids, Michigan 49503.
See Item 12 "Certain Relationships and Related Transactions" for a
description of Meritage's acquisition of 1,500,000 Common Shares of the Company.
- 36 -
<PAGE> 38
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Present Management is unable to determine whether the following transactions
were on terms no less favorable to the Company than those that could be obtained
from unaffiliated parties.
From the Company's inception in 1986 until January 1996, Mr. Reynolds
served as Chairman of the Board, President, Chief Executive Officer, Treasurer
and Secretary of the Company, and the Company engaged Innkeepers to manage the
Company's properties pursuant to a Management Agreement. In fiscal 1994 and
1995, the Company paid fees to Innkeepers of $456,750 and $402,786,
respectively.
As reported in the Company's Current Report on Form 8-K filed with the SEC
on February 3, 1996, Mr. Reynolds was removed as a director and officer of the
Company by the St. Clair County (Michigan) Circuit Court on January 8, 1996.
The court appointed Mr. Staiger as acting President and director. On January
25, 1996, Meritage amended the Company's Bylaws to classify the Board of
Directors into two classes, expanded the Board of Directors to 10 directors and
appointed the five new Class I directors. On January 25, 1996, the Board of
Directors removed Mr. Distad, son-in-law of Mr. Reynolds, as Vice President and
Chief Financial Officer of the Company and terminated the Management Agreement
with Innkeepers. As a result, the Company no longer employs a third party
management company; instead, it has installed new management to operate its
business directly in an effort to more effectively utilize the Company's
resources and employees. In an order entered February 12, 1996, the court
confirmed the resignation of Mr. Staiger and the appointment of Mr. Hewett as
President.
On December 12, 1986, the Company and each of its subsidiaries entered into
a Management Agreement with Innkeepers for the management of the Company's
subsidiaries. Mr. Reynolds was the owner, President and Chief Executive Officer
of Innkeepers. Mr. Distad was a Vice President of Innkeepers. The Management
Agreement provided that Innkeepers would manage the Hotels and, in connection
therewith, would supervise, hire, train and discharge hotel managers and other
employees, would enter into various contracts as agent of and for the benefit of
the Hotels, and would furnish the Hotels with budgets and financial accounting
records. Innkeepers was required only to devote so much time as it determined
reasonably necessary to fulfill its obligations under the Management Agreement.
Under the Management Agreement, Innkeepers received as compensation 3% of the
gross revenues of the Hotels. In fiscal 1994 and 1995, the Company paid fees to
Innkeepers of $456,750 and $402,786, respectively.
Spring Lake Inn, Inc., a subsidiary of the Company, developed several
condominium units adjacent to the Spring Lake Holiday Inn. The Company sold one
condominium unit in fiscal 1994 and two condominium units in 1995. In December
1987, Spring Lake Inn, Inc., transferred title to five of the condominium units
to Mr. Reynolds for $325,000, who used the units as collateral for a loan of the
same amount. Mr. Reynolds used the loan proceeds to pay Spring Lake Inn, Inc.,
for the units. At the same time, he executed a Quit Claim Deed to the
subsidiary for the pledged condominium units. Spring Lake Inn, Inc. made
payments to Mr. Reynolds on terms identical to his obligation on his personal
loan, and Mr. Reynolds used the proceeds to repay his personal loan. Under this
arrangement, the Company paid $55,550 to Mr. Reynolds for fiscal 1994. This
loan was purportedly repaid in full in fiscal 1994.
At November 30, 1995, the Company owed to Mr. Reynolds and companies
affiliated with him amounts aggregating $2,300, a decrease of $248,163 from
November 30, 1994 (exclusive of the accrued management fees referred to below).
At the same time, his indebtedness to the Company totaled $477,321, a decrease
of $951,668 from November 30, 1994. During fiscal 1994 and 1995, Mr. Reynolds
borrowed $498,951 and $657,918 from the Company and made cash payments in the
amount of, or otherwise reduced the indebtedness by, $691,555 and $1,518,217,
respectively. Approximately $62,341 and $79,311 of Mr. Reynolds's borrowings
were an advance on the management fee to be earned by Innkeepers
- 37 -
<PAGE> 39
for fiscal 1994 and 1995, respectively. In addition, from time to time,
Innkeepers purportedly purchased in privately negotiated transactions, Common
Shares of the Company.
At November 30, 1995, companies affiliated with Mr. Reynolds or Mr.
Reynolds and Mr. Ehinger owed the Company $218,109, a decrease of $636,608 from
November 30, 1994. During fiscal 1995, these affiliated companies had
borrowings of $24,330 and payments in the amount of $752,307.
During fiscal 1994 and 1995, the Company paid certain life insurance
premiums to be reimbursed by Mr. Reynolds in the aggregate amount of $33,155
and $102,284, respectively. In fiscal 1991, Mr. Reynolds transferred to the
Company his interest in shares representing 10% of the outstanding stock of
Michigan Assurance Limited, a Bermuda insurance company ("MAL"). In return,
the Company paid Mr. Reynolds $100,000, representing the amount Mr. Reynolds
paid for the stock in 1989. In fiscal 1994 and 1995, the Company purchased
fire and general liability insurance from MAL.
To collateralize the amounts due from Mr. Reynolds, the Company obtained
from him a second security interest in a nonrecourse mortgage note receivable
held by him. The mortgage note had a balance of approximately $1,200,000 at
November 30, 1994 and was collateralized by real estate located in Grand
Rapids, Michigan. The second security interest was released in fiscal 1995
when the Company's long-term borrowings were reduced.
Mr. Reynolds guaranteed the Company's obligations to First Federal in the
amount of $2,924,975 at November 30, 1995. Prior to granting to the Company
the security interest described in the preceding paragraph, Mr. Reynolds
granted to First Federal a security interest in the mortgage note as additional
collateral. To secure the loan, Mr. Reynolds also granted to First Federal a
second mortgage on his personal residence and assigned life insurance policies
owned by him with a face value, after netting out all policy loans, of not less
than $1,000,000.
Mr. Reynolds pledged personally owned life insurance policies with a face
value of $3,000,000 to Michigan National Bank as additional collateral for the
Company's obligation to this lender in the amount of $4,273,702 at November 30,
1995. In addition, Mr. Reynolds guaranteed the Company's obligation under the
First Federal Letter of Credit Reimbursement Agreement in the amount of
$3,929,506. The Letter of Credit collateralized the Michigan Strategic Fund
Bonds of the Company, which were retired in April 1992 by drawing against the
Letter of Credit. In October 1992, the amount due under the Letter of Credit
was amended to create a mortgage payable due October 1, 1997, with monthly
payments of $37,194. Mr. Reynolds also guaranteed certain notes payable to
banks in the amount of $375,258 at November 30, 1995.
The Board of Directors approved a 1.5% loan guarantee fee to be paid to Mr.
Reynolds as compensation for his loan guarantee for fiscal 1995 and 1994. The
guarantee fee paid was $193,875 for fiscal 1995 and $193,500 for fiscal 1994.
Buckeye Resource & Management, Inc. ("Buckeye") entered into a consulting
agreement with Mr. Reynolds, purportedly on behalf of the Company, in March
1995. This agreement provided that Buckeye would be paid $900,000 if it sold
the Company pursuant to an agreement that retained the personal services of Mr.
Reynolds and/or a management company that employed or contracted with Mr.
Reynolds. Under this agreement, Investall, Inc. ("Investall") was acknowledged
as being associated with Buckeye. Douglas Ziesemer is the President of
Investall and the former President of TAI. TAI reported in a Form 13D filed
with the SEC on or about November 27, 1995 that it is the owner of 5% or more of
the Company's Common Shares. The Form 13D filed by TAI also reports that
Investall believes it would receive some portion of the $900,000 fee.
In February 1995, Mr. Reynolds entered into a personal loan with Robert J.
Skandalaris for $1,500,000. In February 1995, Mr. Skandalaris also entered
into a consulting agreement with Mr. Reynolds, purportedly on behalf of the
Company, whereby the Company was obligated to pay Mr. Skandalaris $210,000 to,
among other things, make recommendations to the Company regarding long-term
planning, operational efficiencies, customer development, marketing strategies,
personnel and financial matters. Mr. Skandalaris was required to devote
no more than 100 hours of time under the consulting agreement. Mr. Skandalaris
testified in July 1995 that it was his understanding that Mr. Reynolds would
reduce the management fee charged by his wholly-owned management company
(Innkeepers) from 3% to 2% as an offset to the consulting fee to be paid to Mr.
Skandalaris. At January 19, 1996,
- 38 -
<PAGE> 40
the Company paid Mr. Skandalaris his full consulting fee ($210,000) and Mr.
Reynolds's management company received and received from the Company the full 3%
management fee.
In fiscal 1995, the Company expended $2,154,163 for litigation expenses
(including attorney's fees) on behalf of Ms. Awtrey, Messrs. Reynolds,
Ehinger, Michael and Weigel, and on behalf of Meritage. For a description of
the lawsuits and the expenses paid, see Item 3 "Legal Proceedings" and Item
6 "Impact of Unusual Events."
Management believes that the following transactions were on terms no less
favorable to the Company than those that could be obtained from unaffiliated
parties.
At November 30, 1995, Meritage was indebted to the Company in the principal
amount of $10,500,000. Messrs. Hewett and Schermer, Jr. are shareholders,
directors and officers of Meritage. Mr. Belisle is an officer of Meritage. In
September 1995, a secured, non-interest bearing promissory note in the amount of
$10,500,000 was given to the Company in exchange for 1,500,000 Common Shares.
Beginning on the third anniversary of the Meritage Note, Meritage is required to
make an annual payment of $1,312,500 for the next eight years. The note is
secured by a Stock Pledge Agreement covering all 1,500,000 shares.
At November 30, 1995, Mr. Schermer, Jr., was indebted to Spring Lake Inn,
Inc. in the amount of $70,544. This indebtedness arose from a promissory
note dated December 27, 1987 in the amount of $46,000 that Mr. Schermer, Jr.
entered into with a third party. The interest rate on the note is
7%. This note was, unbeknownst to Mr. Schermer, Jr., assigned to Spring Lake
Inn, Inc. On March 27, 1996, Mr. Schermer, Jr. paid $71,627, all sums then
due and owing on the note.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) EXHIBIT LIST. The following documents are filed as exhibits
to this Annual Report:
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C>
3(i) Articles of Incorporation of Thomas Edison Inns, Inc. (1).
3(ii) Bylaws of Thomas Edison Inns, Inc. (2).
10(a) Management Agreement (1).
10(b) Amendment No. 1 to Management Agreement (3).
10(c) Amendment No. 2 to Management Agreement (3).
10(d) Adoption Agreement For Pathway Benefit Services, Inc. Regional Prototype Non-Standardized 401(k) Profit Sharing
Plan and Trust; Pathway Benefit Services, Inc. Regional Prototype Defined Contribution Plan and Trust; as
amended May 24, 1994 (4).
10(e) Amendment No. 3 to Management Agreement dated February 11, 1995 (4).
10(f) Reimbursement Agreement between the Company and First Federal dated April 15, 1987, as amended on October 1, 1992
(4).
10(g) License Agreement between Spring Lake Inn, Inc. and Holiday Inns, Inc. dated July 26, 1983 (4).
10(h) Loan Agreement between the Company and Michigan National Bank-Central dated January 28, 1987, as amended on August
19, 1993 (4).
</TABLE>
- 39 -
<PAGE> 41
<TABLE>
<S> <C>
10(i) Loan Agreement between St. Clair Inn, Inc. and First Federal dated July 16, 1985, as amended on October 1, 1992
(4).
10(j) Assignment of Promissory Note and Mortgage as security dated June 30, 1994 (4).
10(k) Assignment of Mortgage as security dated April 15, 1987 (4).
10(l) Assignment of Promissory Note and Security Agreements as security dated April 15, 1987 (4).
10(m) Promissory Note issued by Fables-Innkeepers Management, Inc., in the principal amount of $61,538.23 dated December
31, 1992 (4).
10(n) Promissory Note issued by Fables-Innkeepers Management, Inc. in the principal amount of $117,487.65 dated December
31, 1992 (4).
10(o) Amendment No. 5 to Management Agreement (5).
10(p) Consulting Agreement between the Company and Robert J. Skandalaris dated February 20, 1995 (5).
10(q) Stock Purchase and Sale Agreement dated September 19, 1995 between the Company, Meritage, Donald W. Reynolds and
Innkeepers, and accompanying exhibits (6).
10(r) Loan Agreement dated February 26, 1996 among Thomas Edison Inns, Inc., as borrower, St. Clair Inn, Inc., Spring
Lake Inn, Inc. and Thomas Edison Inn, Incorporated, as guarantors, and Great American Life Insurance Company, as
lender (7).
16 Letter on change in certifying accountant (8).
21 List of Subsidiaries (7).
27 Financial Data Schedule.
__________________________
Exhibits previously filed and incorporated by reference from:
<FN>
(1) The registration statement on Form S-18 No. 33-10798c.
(2) The Form 8-K filed with the SEC on February 3, 1996.
(3) The Annual Report on Form 10-K for the Company's fiscal year ended November
30, 1988.
(4) The Annual Report on Form 10-KSB for the Company's fiscal year ended
November 30, 1994.
(5) The Quarterly Report on Form 10-QSB for the Company's fiscal quarter ended
May 31, 1995.
(6) The Quarterly Report on Form 10-QSB for the Company's fiscal quarter ended
August 31, 1995.
(7) The Annual Report on Form 10-KSB for the Company's fiscal year ended
November 30, 1995.
(8) The Form 8-K filed with the SEC on February 4, 1994.
</TABLE>
- 40 -
<PAGE> 42
(b) REPORTS ON FORM 8-K. The Company filed one Current Report on
Form 8-K during the last period covered by this report. The Form 8-K,
which was filed on October 4, 1995, reported on Item 1 and included no
financial statements.
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THOMAS EDISON INNS, INC.
Dated: March 28, 1996 By /s/Christopher B. Hewett
-----------------------------------
Christopher B. Hewett
President and Chief Executive Officer
- 41 -
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
Exhibit No. Description of Document
- ---------- -----------------------------------------------------------------------------------------
<S> <C>
3(i) Articles of Incorporation of Thomas Edison Inns, Inc. (1).
3(ii) Bylaws of Thomas Edison Inns, Inc. (2).
10(a) Management Agreement (1).
10(b) Amendment No. 1 to Management Agreement (3).
10(c) Amendment No. 2 to Management Agreement (3).
10(d) Adoption Agreement For Pathway Benefit Services, Inc. Regional Prototype Non-Standardized 401(k) Profit Sharing
Plan and Trust; Pathway Benefit Services, Inc. Regional Prototype Defined Contribution Plan and Trust; as
amended May 24, 1994 (4).
10(e) Amendment No. 3 to Management Agreement dated February 11, 1995 (4).
10(f) Reimbursement Agreement between the Company and First Federal dated April 15, 1987, as amended on October 1, 1992
(4).
10(g) License Agreement between Spring Lake Inn, Inc. and Holiday Inns, Inc. dated July 26, 1983 (4).
10(h) Loan Agreement between the Company and Michigan National Bank-Central dated January 28, 1987, as amended on August
19, 1993 (4).
10(i) Loan Agreement between St. Clair Inn, Inc. and First Federal dated July 16, 1985, as amended on October 1, 1992
(4).
10(j) Assignment of Promissory Note and Mortgage as security dated June 30, 1994 (4).
10(k) Assignment of Mortgage as security dated April 15, 1987 (4).
10(l) Assignment of Promissory Note and Security Agreements as security dated April 15, 1987 (4).
10(m) Promissory Note issued by Fables-Innkeepers Management, Inc., in the principal amount of $61,538.23 dated December
31, 1992 (4).
10(n) Promissory Note issued by Fables-Innkeepers Management, Inc. in the principal amount of $117,487.65 dated December
31, 1992 (4).
</TABLE>
- 42 -
<PAGE> 44
<TABLE>
<S> <C>
10(o) Amendment No. 5 to Management Agreement (5).
10(p) Consulting Agreement between the Company and Robert J. Skandalaris dated February 20, 1995 (5).
10(q) Stock Purchase and Sale Agreement dated September 19, 1995 between the Company, Meritage, Donald W. Reynolds and
Innkeepers, and accompanying exhibits (6).
10(r) Loan Agreement dated February 26, 1996 among Thomas Edison Inns, Inc., as borrower, St. Clair Inn, Inc., Spring
Lake Inn, Inc. and Thomas Edison Inn, Incorporated, as guarantors, and Great American Life Insurance Company, as
lender (7).
16 Letter on change in certifying accountant (8).
21 List of Subsidiaries (7).
27 Financial Data Schedule.
__________________________
Exhibits previously filed and incorporated by reference from:
<FN>
(1) The registration statement on Form S-18 No. 33-10798c.
(2) The Form 8-K filed with the SEC on February 3, 1996.
(3) The Annual Report on Form 10-K for the Company's fiscal year ended
November 30, 1988.
(4) The Annual Report on Form 10-KSB for the Company's fiscal year ended
November 30, 1994.
(5) The Quarterly Report on Form 10-QSB for the Company's fiscal quarter
ended May 31, 1995.
(6) The Quarterly Report on Form 10-QSB for the Company's fiscal quarter
ended August 31, 1995.
(7) The Annual Report on Form 10-KSB for the Company's fiscal year ended
November 30, 1995.
(8) The Form 8-K filed with the SEC on February 4, 1994.
</TABLE>
- 43 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<EXCHANGE-RATE> 1
<CASH> 1,336,891
<SECURITIES> 0
<RECEIVABLES> 599,428
<ALLOWANCES> 29,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,014,935
<PP&E> 27,105,570
<DEPRECIATION> 13,887,230
<TOTAL-ASSETS> 17,983,503
<CURRENT-LIABILITIES> 2,971,254
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<COMMON> 30,200
0
0
<OTHER-SE> 3,025,166
<TOTAL-LIABILITY-AND-EQUITY> 17,983,503
<SALES> 8,245,880
<TOTAL-REVENUES> 14,244,904
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<LOSS-PROVISION> 265,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,770,502)
<INCOME-TAX> (721,400)
<INCOME-CONTINUING> (2,049,102)
<DISCONTINUED> 0
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<NET-INCOME> (2,049,102)
<EPS-PRIMARY> (1.13)
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