SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended February 28, 1997.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
___________________ to ____________________
Commission File Number: 0-17442
MERITAGE HOSPITALITY GROUP INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified 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
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(Address of Principal Executive Offices) (Zip Code)
(616) 776-2600
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
As of April 11, 1997 there were 3,214,379 outstanding Common Shares, $.01 par
value.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) considered necessary for a fair
presentation of the financial position, results of operations, stockholders'
equity and cash flows of the Company have been included. For further
information, please refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996. Certain reclassifications have been made in 1996 to
conform with the 1997 presentation. The results of operations for the three
month period ended February 28, 1997 are not necessarily indicative of the
results to be expected for the full year.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1997 AND NOVEMBER 30, 1996
- --------------------------------------------------------------------------------
FEBRUARY 28, NOVEMBER 30,
1997 1996
(UNAUDITED)
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 614,600 $ 2,265,497
Trade accounts receivable, less allowance
for doubtful accounts of $54,000 779,837 938,448
Inventories 329,137 354,226
Deferred income taxes 14,000 14,000
Prepaid expenses and other current assets 597,668 487,295
------- -------
Total Current Assets 2,335,242 4,059,466
PROPERTY, PLANT AND EQUIPMENT, NET 21,747,275 21,757,068
DEFERRED INCOME TAXES 621,000 621,000
OTHER ASSETS
Goodwill, net of amortization of $2,052,228
and $1,994,342 respectively 3,625,658 3,687,764
Land held for expansion 697,505 697,313
Financing costs, net of amortization of $59,911
and $38,591 respectively 584,273 605,593
Cash surrender value of life insurance, net of
policy loans 269,267 260,710
Sundry 277,276 239,950
------- -------
Total Other Assets 5,453,979 5,491,330
Total Assets $30,157,496 $31,928,864
=========== ===========
See notes to unaudited financial statements
<PAGE>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
FEBRUARY 28, 1997 AND NOVEMBER 30, 1996
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FEBRUARY 28, NOVEMBER 30,
1997 1996
(UNAUDITED)
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 666,548 $ 395,120
Current portion of obligations
under capital lease 243,772 232,442
Trade accounts payable 2,032,247 2,228,406
Accrued expenses 105,131 936,111
Other 486,706 164,275
------- -------
Total Current Liabilities 3,534,404 3,956,354
LONG-TERM DEBT 21,646,508 21,711,847
OBLIGATIONS UNDER CAPITAL LEASE 1,890,563 1,953,999
DEFERRED INCOME TAXES 818,000 818,000
DEFERRED COMPENSATION 70,000 61,444
COMMITMENTS AND CONTINGENCIES ---- ----
MINORITY INTEREST 1,303,424 1,405,777
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value;
authorized 5,000,000 shares;
200,000 shares designated as Series A
convertible cumulative preferred stock;
issued and outstanding 138,387 and
108,387 shares respectively (liquidation
value - $1,383,870) 1,384 1,084
Common stock - $0.01 par value;
authorized 30,000,000 shares; issued
and outstanding 3,213,017 and 3,204,483
respectively 32,131 32,045
Additional paid in capital 12,965,424 12,616,727
Note receivable from the sale of shares (5,273,950) (5,135,716)
Accumulated deficit (6,830,392) (5,492,697)
----------- -----------
Total Stockholders' Equity 894,597 2,021,443
---------- ----------
Total Liabilities and Stockholders' Equity $30,157,496 $31,928,864
=========== ===========
See notes to unaudited financial statements
<PAGE>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
1997 1996
---- ----
NET REVENUE
Room rents $ 1,135,011 $ 1,137,465
Food and beverages 7,451,794 1,963,864
Sundry 110,412 158,129
Telephone 65,691 23,368
---------- ---------
Total revenue 8,762,908 3,282,826
COST AND EXPENSES
Cost of food and beverages 2,281,742 686,023
Operating expenses 5,803,120 1,863,468
General and administrative expenses 1,015,997 949,532
Depreciation and amortization 530,925 293,321
---------- ---------
Total costs and expenses 9,631,784 3,792,344
LOSS FROM OPERATIONS (868,876) (509,518)
OTHER INCOME (EXPENSE)
Interest expense (699,737) (395,714)
Interest income 141,326 170,280
Minority interest 102,352 ----
---------- ---------
(456,059) (225,434)
Loss before federal income tax (1,324,935) (734,952)
FEDERAL INCOME TAX BENEFIT ---- 249,884
Net loss $(1,324,935) $ (485,068)
============ ==========
LOSS PER SHARE $ (0.41) $ (0.16)
============ ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,209,679 3,020,150
============ ==========
See notes to unaudited financial statements
<PAGE>
<TABLE>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED NOVEMBER 30, 1996
AND THE THREE MONTH PERIOD ENDED FEBRUARY 28, 1997
(UNAUDITED)
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<CAPTION>
SERIES A NOTE
CONVERTIBLE ADDITIONAL RECEIVABLE
PREFERRED COMMON PAID-IN SALE OF ACCUMULATED
STOCK STOCK CAPITAL SHARES DEFICIT TOTAL
----------- ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT NOVEMBER 30, 1995 $ ---- $ 30,200 $10,684,750 $(5,602,532) $(2,057,052) $ 3,055,366
Issuance of 108,387 shares of
preferred stock 1,084 ---- 1,082,786 ---- ---- 1,083,870
Issuance of 184,333 shares of
common stock ---- 1,845 1,139,281 ---- ---- 1,141,126
Recognition of interest income
on note receivable from sale
of shares ---- ---- ---- (573,274) ---- (573,274)
Dividends paid ($.50 per share) ---- ---- ---- ---- (1,510,075) (1,510,075)
Payment and present value
adjustment on note receivable
from sale of shares ---- ---- (290,090) 1,040,090 750,000
Net loss ---- ---- ---- ---- (1,925,570) (1,925,570)
------- -------- ----------- ----------- ----------- -----------
BALANCE AT NOVEMBER 30, 1996 $ 1,084 $ 32,045 $12,616,727 $(5,135,716) $(5,492,697) 2,021,443
Issuance of 8,534 shares of
common stock ---- 86 48,997 ---- ---- 49,083
Issuance of 30,000 shares of
preferred stock 300 ---- 299,700 ---- ---- 300,000
Dividends paid - preferred stock ---- ---- ---- ---- (12,760) (12,760)
Recognition of interest income
on note receivable from sale
of shares ---- ---- ---- (138,234) ---- (138,234)
Net loss ---- ---- ---- ---- (1,324,935) (1,324,935)
------- -------- ----------- ----------- ----------- -----------
BALANCE AT FEBRUARY 28, 1997 $ 1,384 $ 32,131 $12,965,424 $(5,273,950) $(6,830,392) $ 894,597
======= ======== =========== =========== =========== ==========
</TABLE>
See notes to unaudited financial statements
<PAGE>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,324,935) $ (485,068)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 530,925 293,321
Compensation and
fees paid by issuance of common
stock 49,083
Deferred income tax benefit ---- (249,884)
Minority interest in net loss of
consolidated subsidiaries (102,352)
Interest income on note receivable
from sale of shares (138,234) (155,486)
(Increase) decrease in assets
Accounts receivable 158,611 76,890
Inventories 25,089
Prepaid expenses and other current
assets (110,373) 14,581
Decrease in liabilities
Accounts payable and accrued expenses (704,708) (1,009,118)
--------- -----------
Net cash used in operating activities (1,616,894) (1,514,764)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (423,175) (249,271)
(Increase) decrease in other assets (52,051) 75,141
Additions to amounts due from related parties ---- (45,964)
---- --------
Net cash used in investing activities (475,226) (220,094)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 317,450 14,875,000
Proceeds from short-term borrowings ---- 96,646
Principal payments of long-term debt (111,361) (11,594,849)
Payments on obligations under capital leases (52,106) ----
Proceeds from issuance of preferred shares 300,000 ----
Dividends paid (12,760) ----
-------- ----
Net cash provided by financing
activities 441,223 3,376,797
------- ---------
Net increase (decrease) in cash (1,650,897) 1,641,939
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,265,497 1,336,891
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 614,600 $ 2,978,830
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION - SEE NOTE A
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
<PAGE>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
NOTE A - SUPPLEMENTAL CASH FLOW INFORMATION
1997 1996
---- ----
Cash paid for interest expense $ 701,297 $ 395,714
Schedule of non cash investing
and financing transactions
Acquisition of equipment
Cost of equipment $ 244,637 $ ----
Equipment loan 244,637 ----
------- ----
Cash down payment for equipment $ ---- $ ----
=========== ===========
Compensation and fees paid by issuance of
Common Stock $ 49,083 $ ----
=========== ===========
NOTE B - SUBSEQUENT EVENT - NOTE PAYABLE - SHAREHOLDER
On March 24, 1997 the Company's Chairman of the Board of Directors (and a
shareholder of the Company), loaned the Company $750,000. The loan is unsecured
and requires the Company to make monthly payments of interest only at prime plus
8% provided the Company is not in default under its first and second mortgage
long-term debt with its primary lender. Unpaid principal and accrued interest
must be paid by the later of December 31, 1997 or 91 days after the first and
second mortgage long-term debt is paid off.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
- ---------------------
Lodging Group
The following summarizes the Company's results of operations for the Lodging
Group for the periods ended February 28, 1997 and February 29, 1996.
Statements of Operations
--------------------------------------
$ in Thousands % of Revenue
------------------ ---------------
1997 1996 1997 1996
------- ------- ------- -------
Net revenue
Room rents $ 1,135 $ 1,138 39.3% 34.7%
Food and beverages revenue 1,622 1,964 56.2 59.8
Telephone and sundry revenue 129 182 4.5 5.5
--- --- --- ---
Total revenue 2,886 3,283 100.0% 100.0%
Costs and expenses
Cost of food and beverages 590 686 20.4 20.9
Operating expenses 2,061 1,864 71.4 56.8
General and administrative expenses 685 950 23.7 28.9
Depreciation and amortization 265 293 9.2 8.9
--- --- --- ---
Total costs and expenses 3,600 3,792 124.8% 115.5%
Loss from operations (715) (510) (24.8) (15.5)
Other income (expense)
Interest expense (589) (396) (20.4) (12.1)
Interest income 139 170 4.8 5.2
----- ----- ------ -----
(451) (225) (15.6) (6.9)
----- ----- ------ -----
Loss before federal income tax (1,165) (735) (40.4%) (22.4%)
Federal income tax benefit 0 250 0.0 7.6
----- ----- ------ -----
Net loss $(1,165) $ (485) (40.4%) (14.8%)
======== ===== ======= =======
REVENUE
Total revenue for the Lodging Group was $2,885,538 for the first quarter
of 1997 compared to $3,282,825 for the first quarter of 1996. The following
table outlines revenues (excluding sundry and telephone by category):
%
1997 1996 Decrease Decrease
--------- ---------- ----------- -------
Room revenue .................. $1,135,011 $1,137,465 $ (2,454) (.2%)
Food and beverage revenue ..... 1,621,549 1,963,864 (342,315) (17.4)
---------- ---------- ---------- -----
Total ..................... $2,756,560 $3,101,329 $ (344,769) (11.1%)
========== ========== ========== =======
<PAGE>
The slight decrease in room revenue was attributable to a decrease in
hotel occupancy from 50.7% to 49.1% for the first quarter 1996 and 1997,
respectively. The decrease in occupancy was offset by an increase in the overall
average daily rate of $6.41 (9.5%). The decrease in food and beverage revenue
was primarily attributable to a decrease in social function bookings at the
hotels during the first quarter along with a loss in food and beverage business
from local clientele due to increased competition.
Telephone and sundry revenue decreased $52,519, from $181,496 for the
first quarter of 1996 to $128,977 for the first quarter 1997. The decrease was
primarily attributable to the recognition of approximately $57,000 of expired
gift certificates as income in the first quarter of 1996. The installation of
new telephone systems at the Thomas Edison Inn and St. Clair Inn have resulted
in improved accounting for telephone charges contributing to the generation of
additional telephone income.
COST OF FOOD AND BEVERAGES
Cost of food and beverages (as a percentage of food and beverages
revenue) for the first quarter of 1997 was 36.4% compared to 34.9% for the same
period of 1996. This increase was attributable to the decline in social
functions at the hotels, which have a relatively lower food and beverage cost
than food and beverage costs for restaurant and lounge business.
OPERATING EXPENSES
Operating expenses for the first quarter of 1997 and 1996 were
$2,061,037 and $1,863,468, respectively, an increase of $197,569 (10.6%). As a
percentage of total revenue, operating expenses increased 14.6 percentage
points, from 56.8% for the first quarter of 1996 to 71.4% for the first quarter
of 1997. The increase in operating expenses was primarily attributable to a 7.3
percentage point increase in payroll costs due to increased staffing. In an
effort to counter the decline in revenues, additional advertising and
promotional expenses were incurred, resulting in an increase in these expenses
of approximately 16.8% in the first quarter of 1997 compared to the first
quarter of 1996. Music and entertainment expenses increased from approximately
$32,000 for the first quarter of 1996 to approximately $67,000 for the first
quarter of 1997. In January 1997 the Company conducted a thorough review of the
expenses above (as well as other operating expenses) in connection with the
decline in revenue for the first quarter and cost reductions were made where
appropriate.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $264,304 for the first
quarter of 1997 compared to the same period of 1996. The decrease in general and
administrative expenses for the first quarter of 1997 is primarily due to
approximately $173,000 of expense incurred in 1996 in connection with the
replacement and restructuring of management of the Company.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $28,824 (9.8%) for the
first quarter of 1997 compared to the same period last year. Property and
equipment acquired at the inception of the Company was fully depreciated,
thereby decreasing the depreciation and amortization expense.
<PAGE>
INTEREST EXPENSE
Interest expense for the first quarter of 1997 and 1996 was $588,958 and
$395,714, respectively. The increase of $193,244 was due to additional
borrowings in fiscal 1996. See "Liquidity and Capital Resources" of this item
for details of the Company's long-term debt.
INTEREST INCOME
Interest income decreased $31,824 for the first quarter of 1997 compared
to the same period of 1996. The decrease in interest income was due to a
decrease in cash and cash equivalents during the first quarter of 1997. The
decrease is also attributable to the decrease in interest income from the note
receivable from the sale of stock due to the reduction in the note receivable
from the principal payment received in May 1996.
Food Service Group
On October 31, 1996, the Company acquired a majority interest in the
Wendy's of West Michigan Limited Partnership (the "Wendy's Partnership"). At
February 28, 1997, the Company owned approximately 54% of the Wendy's
Partnership, all of which was acquired in fiscal 1996. Because of this
acquisition, the results of operations of the Wendy's Partnership have been
included in the Company's Consolidated Statements of Operations for the entire
three month period ended February 28, 1997 (included on page 5). Below is a
summary of the results of the Food Service Group (the Wendy's Partnership) for
the three months ended February 28, 1997. Because the Wendy's Partnership is not
a wholly owned subsidiary and its daily operations are managed at a separate
location from the Lodging Group, the Wendy's Partnership has its own
administrative expenses related solely to its operations. Therefore, all
executive level general and administrative expenses of the Company are included
in the Lodging Group operations.
Statement of Operations
----------------------------
$ in Thousands % of Revenue
-------------- ------------
NET REVENUE
Food and beverage revenue $ 5,830 99.2%
Sundry revenue 47 0.8
------- -----
Total revenue 5,877 100.0
COSTS AND EXPENSES
Cost of food and beverages 1,692 28.8
Operating expenses 3,742 63.7
General and administrative expenses 331 5.6
Depreciation and amortization 227 3.9
------- -----
Total costs and expenses 5,992 102.0
LOSS FROM OPERATIONS (115) (2.0)
OTHER INCOME (EXPENSE)
Interest expense (111) (1.9)
Interest income 3 0.0
------- -----
(108) (1.9)
------- -----
Loss before federal income tax (223) (3.8)
------- -----
FEDERAL INCOME TAX 0 0.0
------- -----
Net loss $ (223) (3.8%)
========= ======
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 1997, the Company's current liabilities exceeded its
current assets by $1,199,162 compared to November 30, 1996 when current assets
exceeded current liabilities by $103,112. At these dates, the ratios of current
assets to current liabilities were .66:1 and 1.03:1 respectively. Because of the
net loss in the first quarter of 1997, the Company's operating activities did
not provide positive cash flow. As a result, cash (and cash equivalents) on hand
and $300,000 in proceeds from the issuance of preferred stock (see Part II, Item
2) provided the necessary working capital for the Company to meet its financial
requirements for the first quarter of 1997. The uses of cash and working capital
in the first quarter of 1997 included the acquisition of approximately $423,000
in property, plant and equipment of which approximately $245,000 was provided by
proceeds from long-term debt. Additional sources of cash for the remainder of
1997 are detailed later in this section.
The Company's long-term debt consists primarily of the following:
1) $14,000,000 first mortgage loan requiring monthly payments of
$137,897, including interest at 10.3%, through December 31, 2003 when
the remaining unpaid principal will be due.
2) $5,250,000 second mortgage loan requiring monthly payments of interest
only at 8% over the prime rate through November 1, 1997. Beginning
December 1, 1997, monthly principal payments of $50,000, plus interest
at 8% over the prime rate, will be required through March 1, 1998.
Beginning April 1, 1998, monthly principal payments of $100,000, plus
interest at 8% over the prime rate, will be required until the loan is
retired in June 2002.
3) $2,265,163 revolving term loan of the Wendy's Partnership requiring
monthly payments of $43,313, including interest at 1% over the prime
rate, through February 2005 when any remaining unpaid principal will
be due. Under the revolving loan agreement, the required monthly
payments may be offset by additional borrowings up to the unused
available borrowings. The total available borrowings under the loan
agreement were $2,917,341 at February 28, 1997.
4) $582,359 note payable requiring monthly payments of $14,693, including
interest at 8.8%, through October 2000.
The loan agreement with the Company's primary lender contains numerous
covenants regarding the maintenance of a prescribed amount of net worth, certain
financial ratios, and restrictions on certain Common Stock purchases, dividends,
additional indebtedness and executive compensation. At February 28, 1997 the
Company failed to meet the net worth covenant. However, a waiver has been
obtained through May 31, 1997.
On March 24, 1997 the Company borrowed $750,000 from the Company's
Chairman, Robert E. Schermer, Sr. The note is unsecured and requires monthly
payments of interest only at prime plus 8% provided the Company is not in
default under its first and second mortgage long-term debt (described above).
Unpaid principal and accrued interest must be paid by the later of December 31,
1997 or 91 days after the first and second mortgage long-term debt is paid off.
Since October 1996, the Company has issued $1,383,870 (138,387 shares) of
Series A Convertible Preferred Stock. The shares have an annual dividend rate of
$0.90 per share and payment of dividends is cumulative. Based on the present
shares outstanding, quarterly dividend payments of $31,137 are due on January 1,
April 1, July 1 and October 1 of each year. Dividends paid for the three months
ended February 28, 1997 were $12,760 which was paid on January 1, 1997,
pro-rated for the portion of the fourth quarter of fiscal 1996 that the shares
were outstanding.
<PAGE>
The Company estimates 1997 capital expenditures to be approximately
$1,100,000 for building improvements, and furniture, fixtures and equipment
purchases, at its existing hotels and at the existing Wendy's Partnership
restaurants. Of the $1,100,000, approximately $500,000 is allocated for fiscal
1997 capital expenditures at existing Wendy's restaurants. Also, the Company has
received various proposals to finance (through debt or lease) both the real
estate and furniture, fixtures and equipment for any new Wendy's restaurants. Of
the $1,100,000, the Company estimates fiscal 1997 capital expenditures at its
full service hotels to be approximately $600,000. This is a reduction from
previous capital expenditures budgets for the Company's full service hotels as
the Company is reassessing how to best utilize its capital resources between the
Wendy's restaurants and its lodging operations. The Company also entered into an
agreement to acquire the General Partnership interest in the Wendy's Partnership
which would require a $200,000 cash payment in the second quarter of 1997.
Sources of funds for the estimated $1,100,000 in capital expenditures,
the $200,000 for the acquisition of the Wendy's General Partnership and any
operating cash flow deficiencies are expected to come from (i) proceeds from the
March 1997 loan in the amount of $750,000 described above, (ii) improved
operations of the Company's Lodging Group, (iii) proceeds from the private
placement of approximately 62,000 shares ($10 per share) of the unissued Series
A Convertible Preferred Stock, and (iv) the sale of certain Non-core Assets
valued at approximately $1,000,000 to $1,500,000. The acquisition of the
remaining Wendy's Partnership units, if completed, should provide the Company
with a significant source of additional cash flow.
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
On February 28, 1997, Christopher B. Hewett (the Company's President and
Chief Executive Officer) purchased for cash 20,000 shares of the Series A
Convertible Preferred Stock and Robert E. Schermer, Jr. (the Company's Executive
Vice President) purchased for cash 10,000 shares of Series A Convertible
Preferred Stock. All Convertible Preferred Shares were purchased at $10.00 per
share and, in the aggregate, are immediately convertible into 42,858 Common
Shares. These issuances are exempt from registration under the Securities Act of
1933 as private offerings pursuant to Section 4(2) of the Act.
ITEM 5. OTHER INFORMATION.
The Board of Directors believes that compensation is an important factor
in enabling the Company to attract and retain well qualified members of the
Board of Directors. On January 24, 1997, the Board of Directors approved a plan
whereby members of the Board who have completed at least one full year of
service on the Board and who have retired, resigned or not been renominated for
reasons not associated with misconduct or impropriety, are eligible to receive,
for the five years following the completion of their service, a $3,000 per year
food & beverage and rooms credit at the Company's hotels. The credit is
nontransferable and unused portions cannot be carried over into following years.
The Company has received inquiries regarding the sale of its hotels.
Because current market conditions make this an opportune time to sell full
service hotels, the Company intends to explore carefully any opportunity which
may arise regarding the sale of one or more of its hotels. To that end, on March
4, 1997, the Company retained a professional lodging broker to assist it in this
regard. Pursuant to the agreement, the broker would be paid a commission to the
extent it assists the Company in the sale of one or more of its hotels.
As reported on the Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996, the Company is negotiating the terms of a property
improvement plan mandated by Holiday Inns Franchising, Inc. which would require
an extensive renovation of the Grand Haven Holiday Inn. On April 4, 1997, the
Company's subsidiary received a 60-day notice of default in which it has been
given until June 16, 1997 to complete the work mandated by the plan. The Company
believes that its subsidiary is in compliance with the license agreement with
Holiday Inns Franchising and is evaluating, in consultation with its legal
counsel, its response to the notice.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit List.
Exhibit No. Description of Document
- ----------- -----------------------
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On January 6, 1997, the Company filed an amendment to the Form
8-K originally filed on November 30, 1996 which reported the
successful completion of the Wendy's Partnership tender offer and
the agreement whereby the Company will acquire the General
Partnership interest in the Wendy's Partnership. The amended Form
8-K included (i) audited financial statements of the Wendy's
Partnership for the fiscal year ended December 31, 1995, (ii)
unaudited financial statements of the Wendy's Partnership for the
nine months ended September 30, 1996, and (iii) pro forma
financial statements of the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 11, 1997 MERITAGE HOSPITALITY GROUP INC.
By /s/ Christopher B. Hewett
---------------------------------
Christopher B. Hewett
President and Chief Executive
Officer
By /s/ William D. Badgerow
---------------------------------
William D. Badgerow
Vice President and Treasurer
(Chief Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Document
- ----------- -----------------------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000808219
<NAME> Heritage Hospitality Group Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 614,600
<SECURITIES> 0
<RECEIVABLES> 833,837
<ALLOWANCES> 54,000
<INVENTORY> 329,137
<CURRENT-ASSETS> 2,335,242
<PP&E> 43,604,006
<DEPRECIATION> 21,856,731
<TOTAL-ASSETS> 30,157,496
<CURRENT-LIABILITIES> 3,534,404
<BONDS> 23,537,071
0
1,384
<COMMON> 32,131
<OTHER-SE> 861,082
<TOTAL-LIABILITY-AND-EQUITY> 30,157,496
<SALES> 8,762,908
<TOTAL-REVENUES> 8,762,908
<CGS> 2,281,742
<TOTAL-COSTS> 9,631,784
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 699,737
<INCOME-PRETAX> (1,324,935)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,324,935)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,324,935)
<EPS-PRIMARY> ($0.41)
<EPS-DILUTED> ($0.41)
</TABLE>
