<PAGE>
The following items were the subject of a Form 12b-25 and are included
herein: Item 6, Management's Discussion and Analysis and Plan of Operation;
Item 7, Financial Statements.
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
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
of Incorporation or Organization) Identification No.)
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
Stock, 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 stock held by non-affiliates as of
March 8, 1996, was $3,121,698 computed based upon the price ($6.00) at which
shares of voting stock sold on March 8, 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 8, 1996, there were outstanding 3,020,150 shares of Common
Stock.
Transitional Small Business Disclosure Format (check one): Yes [ ] No[X]
Documents Incorporated by Reference:
Portions of the Issuer's definitive Proxy Statement for its 1996 Annual
Meeting of Shareholders are incorporated by reference in Part III, as
specified.
<PAGE>
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 121-room Spring Lake Holiday Inn located on the Grand River in Spring
Lake, Michigan; the 96-room St. Clair Inn located on the St. Clair River in
St. Clair, Michigan; and the 150-room Thomas Edison Inn located on the
St. Clair River in Port Huron, 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, CEO, President, 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 President and as a director 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 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 Mr. 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. 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>
Thomas Edison Inn
The Thomas Edison Inn opened in 1987 and is located on approximately
9.6 acres on 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 opened in 1926 and is located on approximately 3.6
acres on the St. Clair River in downtown St. Clair, Michigan. The Hotel has
96 rooms, a 240 seat restaurant, 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 also derives substantial food and beverage revenue from local clientele.
Spring Lake Holiday Inn
The Spring Lake Holiday Inn opened in 1969 and is located on
approximately 4.0 acres on the Grand River in Spring Lake, Michigan. The
Hotel has 121 rooms, a 185 seat restaurant, 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 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
<PAGE>
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 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, former President and Chief Executive Officer of
the Company (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 year 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 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
Thomas Spring Lake National
Fiscal Year Edison Inn St. Clair Inn Holiday Inn Average
----------- ---------- ------------- ----------- --------
1994 $80.14 $75.18 $64.87 $63.37
1995 $81.48 $71.41 $67.50 $67.34
The following table illustrates the percentages of occupancy for
1994 and 1995 as compared to the national occupancy rate:
Occupancy Rates
Thomas Spring Lake National
Fiscal Year Edison Inn St. Clair Inn Holiday Inn Average
----------- ---------- ------------- ----------- --------
1994 63% 58% 62% 65%
1995 60% 60% 62% 66%
<PAGE>
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.
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 of the Company
believes that the Company's properties are adequately covered by insurance.
<PAGE>
The following table illustrates the most recent appraised values of
the Company's Hotels and certain Non-core Assets:
Appraised Value
Property Appraised Value Appraisal Date
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
==========
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 adjacent to the Spring Lake Holiday Inn, by a collateral
assignment of all life insurance policies owned by the Company on the life
of Donald W. Reynolds, former President and Chief Executive Officer of the
Company, 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.
<PAGE>
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
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 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 has previously 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.
<PAGE>
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 incumbent five directors ( Ms. Awtrey, Mr.
Ehinger, Mr. Michael, Mr. Staiger and Mr. Weigel) who will each serve until
the 1996 annual meeting of shareholders. The term of office of the Class I
directors elected at the 1996 annual meeting of shareholders will expire at
the 1997 annual meeting of shareholders. The term of office of the Class I
directors elected as such at the 1997 annual meeting of shareholders and
thereafter will expire at the second annual meeting of shareholders
following their election. The term of office of the Class II directors
elected as such at the 1996 annual meeting of shareholders and thereafter
shall expire at the second annual meeting of shareholders following their
election. The Bylaws were also amended to provide that prior to the 1998
annual meeting of shareholders, Meritage will not have the right to vote the
shares of the Company's common stock 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 stock acquired by TAI
directly or indirectly from Reynolds, his family and Innkeepers has voting
power, or (ii) permitted by a majority of the Class II directors.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information.
During fiscal year 1994 and until October 18, 1995, there was no
established public trading market for the Company's Common Stock. Since
October 18, 1995, bid and ask quotations regarding the Company's Common
Stock 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 Stock during the period
beginning on October 18, 1995 and ending on November 30, 1995 (the last day
of the 1995 fiscal year) as reported by the Nasdaq Trading and Market
Services:
Bid
Fiscal Quarter High Low
Fiscal Year 1994 No Published Bid Prices
1st, 2d & 3rd Quarters, 1995 No Published Bid Prices
October 18, 1995 -
November 30, 1995 $7.50 $5.88
<PAGE>
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 8, 1996, in which
1,000 shares of Common Stock were sold for $6.00 per share.
Holders.
There are approximately 350 holders of record of the Company's
Common Stock.
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 dividends other than the payment of a special
dividend in the amount of $.50 per share of the Company's outstanding Common
Stock (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 year 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 of Operations, Executive Director of Sales and Marketing,
Corporate Controller, Director of Purchasing, Director of Front Office and
Reservations, Director of Property Maintenance, and Director of
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 future acquisitions.
Results of Operations
The Company's net sales for fiscal years 1995 and 1994 were
$14,244,904 and $15,147,668, respectively. The decrease in fiscal year
1995 over fiscal year 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.
<PAGE>
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 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 years 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 the 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 the fiscal year ended November 30, 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 years 1995 and 1994 was ($2,049102) 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 indebtedness to the
Company. The Company does not anticipate these expenses recurring in the
future.
<PAGE>
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. The Meritage Note requires payments to the Company of
$1,312,500 commencing on September 19, 1998, and continuing each year
thereafter for the next seven 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 year 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 stockholder of approximately $248,000.
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:
<PAGE>
Year Annual Principal Payments
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
==========
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 year 1994.
As a result of its future upgrading and refurbishing 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 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 thru 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 Stockholders' Equity and Cash
Flows for the years ended November 30, 1995, and 1994, including the report
of the Company's independent certified public accountants.
<PAGE>
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, stockholders'
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.
Detroit, Michigan
February 1, 1996
(except for Note G as to which the date is February 26, 1996)
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Balance Sheet
November 30, 1995
ASSETS
Current Assets
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
============
The accompanying notes are an integral part of these financial statements.
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable - Bank (Note G) $ 200,551
Current portion of long-term debt 237,651
Amounts due to stockholders 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) -
Stockholders' Equity
Preferred stock - $0.01 par value;
authorized 5,000,000 shares; issued
and outstanding, none -
Common stock - $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 stock sale (5,602,532)
Accumulated deficit (2,057,052)
__________
Total Stockholders' Equity 3,055,366
__________
Total Liabilities and
Stockholders' Equity $17,983,503
===========
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended November 30,
1995 1994
__________ __________
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)
============ ===========
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Years Ended November 30, 1995 and 1994
Note Retained
Additional Receivable Earnings
Preferred Common Paid-In From Stock (Accumulated
Stock Stock Capital Sale Deficit) Total
_________ _______ ___________ __________ ___________ __________
<S> <C> <C> <C> <C> <C>
Balance at December 1, 1993 $ - $15,200 $5,1217,820 $ - $ 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 stock (Note I) - 15,000 5,466,930 (5,481,930) - -
Recognition of interest income on
note receivable from stock sale - - - (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
===== ======== =========== ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended November 30,
1995 1994
_________ _________
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 stock sale (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
stockholders 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
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Continued
Years Ended November 30,
1995 1994
_________ _________
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
On September 19, 1995 a non-cash transaction occurred whereby 1,500,000
shares of common stock 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.
<PAGE>
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.
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
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
=========
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
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 D.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 D.W. Reynolds, are due on demand. Repayment terms have not
been established and therefore, the receivable is classified as non-current.
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
November 30, 1995 and 1994
Note E - Amounts Due From Related Parties and Related Party Transactions
(Continued)
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 D.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 revenue
and for the period from March 1, 1995 through November 30, 1995 the fee was
2% of gross revenue. 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 1-1/2% loan guarantee fee to be paid to
D.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 D.W. Reynolds. This
note was paid in February 1996.
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
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:
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
===========
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 D.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 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.
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
November 30, 1995 and 1994
Note G - Note Payable - Bank and Long-Term Debt (Continued)
(2) D.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 D.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:
Interest
Loan Amount Rate
______________ __________ ____________
First Mortgage $12,000,000 Prime Plus 1%
Second Mortgage $ 3,000,000 Prime Plus 8%
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), common stock 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.
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
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
stock 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:
Year Ended November 30,
1995 1994
___________ ___________
Current expense (benefit) $(289,500) $ 98,000
Deferred expense (benefit) (431,900) 14,000
_________ ________
$(721,400) $112,000
========== =========
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
November 30, 1995 and 1994
Note H - Income Taxes (Continued)
Deferred tax assets and liabilities at November 30, 1995 consist of the
following:
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)
==========
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:
Years Ended November 30,
1995 1994
_________ _________
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
========== =========
Note I - Stock Purchase Agreement
On September 19, 1995, a stock purchase and sale agreement (Agreement) was
executed by the Company, its principal stockholder and Meritage Hospitality
Group Incorporated (Meritage). Under the agreement, the Company sold
1,500,000 shares of previously authorized newly issued common stock to
Meritage at a total price of $10,500,000.
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
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 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
stockholders' 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 proceeding 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 declatory judgment that the shares of common stock
that they are reported to have bought from D.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 stockholders 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.
<PAGE>
Thomas Edison Inns, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
November 30, 1995 and 1994
Note J - Litigation (Continued)
The Company has also been named, among others, in a lawsuit filed by
Meritage Hospitality Group Incorporated (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 Mr.
Reynolds and Mr. 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 action and it
is anticipated that the Company will be dismissed from the suit in the near
future.
<PAGE>
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 the 1993 fiscal year. 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
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Item 12. Certain Relationships and Related Transactions
The information required by Items 9 through 12 is
incorporated by reference from the Company's definitive proxy statement for
the 1996 annual meeting of shareholders, to be filed with the SEC pursuant
to Regulation 14A.
Item 13. Exhibits List and Reports on Form 8-K
(a) Exhibit List. The following documents are
filed as exhibits to this Annual Report:
<PAGE>
Exhibit No. Description of Document
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 Savings Bank & Trust 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
Savings Bank & Trust 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 Hospitality Group
Incorporated, Donald W. Reynolds and Innkeepers Management
Company, 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).
<PAGE>
__________________________
Exhibits previously filed and incorporated by reference from:
(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.
(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.
<PAGE>
SIGNATURES
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 9, 1996 By /s/Christopher B. Hewett
------------------------
Christopher B. Hewett
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/Rebecca L. Awtrey
- ------------------------
Rebecca L. Awtrey Director March 9, 1996
/s/William F. Ehinger
- ------------------------
William F. Ehinger Director March 9, 1996
/s/Christopher B. Hewett
- ------------------------
Christopher B. Hewett President, Chief
Executive Officer
and Director March 9, 1996
/s/David S. Lundeen
- ------------------------
David S. Lundeen Director March 9, 1996
/s/Joseph L. Maggini
- ------------------------
Joseph L. Maggini Director March 9, 1996
/s/Joseph P. Michael
- ------------------------
Joseph P. Michael Director March 9, 1996
/s/ Robert E. Schermer, Jr.
- ------------------------
Robert E. Schermer, Jr. Executive Vice
President, Chief
Financial Officer
and Director March 9, 1996
/s/Robert E. Schermer, Sr.
- -------------------------
Robert E. Schermer, Sr. Chairman of the
Board March 9, 1996
/s/Frank O. Staiger
- --------------------------
Frank O. Staiger Director March 9, 1996
/s/Raymond A. Weigel III
- -------------------------
Raymond A. Weigel III Director March 9, 1996
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Document
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 Savings Bank & Trust 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
Savings Bank & Trust 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 Hospitality Group
Incorporated, Donald W. Reynolds and Innkeepers Management
Company, 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).
<PAGE>
__________________________
Exhibits previously filed and incorporated by reference from:
(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.
