Analysis : Fabulous Inns Winners See a Rosy Future

Jeff Krinsk was basking in his victory. And he was very much pumped.

He described his Fabulous Inns of America management team, fresh from its successful, two-year legal joust with a group of ousted officers and directors, as “new guard,” with an enormous appetite that can “digest opportunity, has demonstrated an ability to prevail, is resolute in its objectives and has an ability to fulfill the vision it has.”

Heady stuff, to be sure. But such are the boasts allowed those who emerge on top.

The honeymoon will soon be over, however, and the real challenges for Krinsk and President David Yardley will begin.

For two years they were the dissidents, protesting company policy. Then, for two years, they were the rebels who had seized the palace, albeit hamstrung by a court-ordered injunction that strapped them with spending limits.

Now they are in charge, unhampered by injunctions and lawsuits and angry former executives eager to wrestle back their jobs.

The dissidents are the establishment now.

How they perform, how they follow through on their promises to expand the company, will be watched closely. And the results will be out there for all to see--both in financial performance and in their stock’s trading price.

So far, the market has reacted favorably. Since announcing an out-of-court settlement with ousted management late last month, Fabulous Inns’ stock has climbed from about 3 to 5 in over-the-counter trading.

The increase isn’t enough to satisfy Krinsk, however, who maintains that the Mission Valley hotel company’s book value is in excess of $9 per share.

“The financial community has to appreciate that what has been accomplished is a significant business accomplishment, not just a legal one,” he said.

Expansion to Be Watched

More than the stock price, however, company observers and shareholders will be watching how Fabulous Inns expands. In their two years as handcuffed executives, Krinsk and Yardley have said they could “grow the company” if only allowed to do so.

“We have no specific deal on the table,” although there are more than 20 “prospective deals or corporations that we think might be vulnerable to some form of acquisition,” Krinsk said last week.

Cognizant of the glass house he’s in, however, Krinsk said he and Yardley will be “more careful with our first deal than any other. That sets the tone and the impression in the investment community.”

Krinsk added, “We’re not at all restricted in our investment philosophy to just the hotel area.”

First-half revenues at Fabulous Inns reached $1.1 million, with earnings of $120,000. Krinsk said operating profits for the year will exceed $500,000.

For its part, the ousted group seems to be licking its wounds. The group, led by ousted Chairman Henry Maxwell, former President Walter Palmer and former director Ernest Stanley, sold back its 48% block of Fabulous Inns stock for only 1.6 cents per share. The group also received $185,000 in legal fees.

The rest of the terms of the settlement have been sealed under court order. Included in the sealed agreement is the amount of money the ousted group acknowledged it caused in damages to the company and the status of a $1.4 million note Maxwell owed to the company.

Glad It’s Over

“I feel better than I have in three years,” Stanley said. “It’s good it’s all over.”

Stanley, of Stanley Dodge, acknowledged that the one-time dissidents “outsmarted me. But I’m a big boy, I’m more than willing to take my lumps because I bet on the wrong horse.”

Maxwell could not be reached for comment. He spends his days shuttling between San Diego and Palm Springs, where he owns Desert Isle, a time-share condominium project in which Fabulous Inns once shared ownership.

It was Fabulous Inns’ increasing equity stake in the project--it started at 25% but kept pumping in funds until the investment reached 57%--that sparked Krinsk’s protests of management self-dealing and profiteering.

Palmer, who in the past few years has declined to discuss his longtime involvement in Fabulous Inns, is embarking on a new hotel project. He is general manager of the Old Town Inn, a 151-room hotel set to open next month.

Although the legal suits have been settled, court battles still loom for Fabulous Inns.

Krinsk and Yardley likely will end up in court with the company’s insurance agency over more than $1 million in contested legal fees.

Further, management will contend that the insurance company should cover damages caused by the ousted group. “There (may be) offensive litigation to get insurance to cover the damages,” Krinsk said.

In addition, trouble may loom from within. Chula Vista investor Frank Ferreira, a plaintiff in the suit against prior management who now owns nearly 25% of company stock, has suggested that he may appeal the settlement agreement.

The truce allowed the ousted group to “get off too easy,” he said last week.

Ferreira, however, is likely to be elected a Fabulous Inns director on Thursday, and it is uncertain whether, as a director, he’d file suit to block the settlement.