<PAGE> 1
================================================================================
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 August 31, 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
of Incorporation or Organization) No.)
40 PEARL STREET, N.W., SUITE 900
GRAND RAPIDS, MICHIGAN 49503
(Address of Principal Executive (Zip Code)
Offices)
(616) 776-2600
(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 October 10, 1997 there were 3,217,595 outstanding Common Shares, $.01 par
value.
================================================================================
<PAGE> 2
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 Meritage Hospitality Group Inc. (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 and nine month periods ended August 31,
1997 are not necessarily indicative of the results to be expected for the full
year.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
2
<PAGE> 3
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997 AND NOVEMBER 30, 1996
================================================================================
<TABLE>
<CAPTION>
ASSETS
AUGUST 31,
1997 NOVEMBER 30,
(UNAUDITED) 1996
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 998,211 $ 2,265,497
Trade accounts receivable, less allowance for
doubtful accounts of $58,000 and $54,000 respectively 624,068 938,448
Inventories 347,604 354,226
Deferred income taxes 14,000 14,000
Prepaid expenses and other current assets 589,955 487,295
-------------- --------------
Total current assets 2,573,838 4,059,466
PROPERTY, PLANT AND EQUIPMENT, NET 21,199,265 21,662,823
DEFERRED INCOME TAXES 621,000 621,000
OTHER ASSETS
Goodwill, net of amortization of $2,194,284 and
$1,994,342 respectively 3,588,088 3,687,764
Land held for expansion 697,313 697,313
Financing costs, net of amortization of $101,974 and
and $38,591 respectively 556,632 605,593
Cash surrender value of life insurance, net of policy
loans of $298,144 and $77,564 respectively 14,059 260,710
Marina development costs 1,102,399 94,245
Other 286,143 239,950
-------------- --------------
Total other assets 6,244,634 5,585,575
-------------- --------------
Total assets $ 30,638,737 $ 31,928,864
============== ==============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
3
<PAGE> 4
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
AUGUST 31, 1997 AND NOVEMBER 30, 1996
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AUGUST 31,
1997 NOVEMBER 30,
(UNAUDITED) 1996
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 1,214,553 $ 395,120
Current portion of obligations under capital lease 257,319 232,442
Trade accounts payable 1,927,596 2,228,406
Accrued expenses 918,094 936,111
Other 144,809 164,275
-------------- --------------
Total current liabilities 4,462,371 3,956,354
LONG-TERM DEBT 21,870,012 21,711,847
OBLIGATIONS UNDER CAPITAL LEASE 1,758,425 1,953,999
DEFERRED INCOME TAXES 818,000 818,000
DEFERRED COMPENSATION --- 61,444
MINORITY INTEREST 1,506,806 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 and $1,083,870 respectively) 1,384 1,084
Common stock - $0.01 par value; authorized 30,000,000
shares; issued and outstanding 3,217,094 and 3,204,483
respectively 32,171 32,045
Additional paid in capital 12,977,101 12,616,727
Note receivable from the sale of shares (5,550,415) (5,135,716)
Accumulated deficit (7,237,118) (5,492,697)
-------------- ---------------
Total stockholders' equity 223,123 2,021,443
-------------- --------------
Total liabilities and stockholders' equity $ 30,638,737 $ 31,928,864
============== ==============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
4
<PAGE> 5
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1997 AND 1996
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
NET REVENUE
Room rents $ 4,716,238 $ 4,828,014
Food and beverages 25,642,161 6,104,500
Other 734,117 366,668
Telephone 191,358 105,715
------------ ------------
Total revenue 31,283,874 11,404,897
COST AND EXPENSES
Cost of food and beverages 7,724,026 2,074,310
Operating expenses 18,521,209 5,750,952
General and administrative expenses 3,042,245 2,246,325
Depreciation and amortization 1,649,448 675,372
------------ ------------
Total cost and expenses 30,936,928 10,746,959
EARNINGS FROM OPERATIONS 346,946 657,938
OTHER INCOME (EXPENSE)
Interest expense (2,168,567) (1,194,997)
Interest income 439,260 517,382
Loss on disposal of assets (190,453) --
Minority interest (101,030) --
------------ ------------
Total other expense (2,020,790) (677,615)
------------ ------------
Loss before federal income tax (1,673,844) (19,677)
FEDERAL INCOME TAX BENEFIT -- 6,690
------------ ------------
Net loss (1,673,844) (12,987)
DIVIDENDS ON PREFERRED STOCK 70,577 --
------------ ------------
Net loss on common shares $ (1,744,421) $ (12,987)
============ ============
LOSS PER SHARE $ (0.54) $ (0.00)
============ ============
AVERAGE NUMBER OF SHARES OUTSTANDING 3,213,736 3,043,903
============ ============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
5
<PAGE> 6
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED AUGUST 31, 1997 AND 1996
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
NET REVENUE
Room rents $ 2,213,684 $ 2,256,899
Food and beverages 9,543,719 2,242,710
Other 457,200 159,101
Telephone 71,058 53,964
------------ -----------
Total revenue 12,285,661 4,712,674
COST AND EXPENSES
Cost of food and beverages 2,853,077 735,048
Operating expenses 6,750,199 2,228,167
General and administrative expenses 1,107,667 670,015
Depreciation and amortization 571,880 225,995
------------ -----------
Total cost and expenses 11,282,823 3,859,225
EARNINGS FROM OPERATIONS 1,002,838 853,449
OTHER INCOME (EXPENSE)
Interest expense (737,321) (470,252)
Interest income 155,828 159,730
Loss on disposal of assets (190,453) --
Minority interest (65,084) --
------------ -----------
Total other expense (837,030) (310,522)
------------ -----------
Earnings before federal income tax 165,808 542,927
FEDERAL INCOME TAX EXPENSE
-- (184,596)
------------ -----------
Net earnings 165,808 358,331
DIVIDENDS ON PREFERRED STOCK 31,137 --
------------ -----------
Earnings available to
common shareholders $ 134,671 $ 358,331
============ ===========
EARNINGS PER SHARE $ 0.04 $ 0.12
============ ===========
AVERAGE NUMBER OF SHARES OUTSTANDING 3,216,977 3,091,152
============ ===========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
6
<PAGE> 7
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED NOVEMBER 30, 1996 AND THE NINE MONTH PERIOD ENDED
AUGUST 31, 1997
(UNAUDITED)
<TABLE>
<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 12,611 shares of
common stock ---- 126 60,674 ---- ---- 60,800
Issuance of 30,000 shares of
preferred stock 300 ---- 299,700 ---- ---- 300,000
Dividends paid - preferred stock ---- ---- ---- ---- (70,577) (70,577)
Recognition of interest income
on note receivable from sale
of shares ---- ---- ---- (414,699) ---- (414,699)
Net loss ---- ---- ---- ---- (1,673,844) (1,673,844)
----------------------------------------------------------------------------------
BALANCE AT AUGUST 31, 1997 $ 1,384 $ 32,171 $ 12,977,101 $ (5,550,415) $ (7,237,118) $ 223,123
===================================================================================
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
7
<PAGE> 8
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1997 AND 1996
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,673,844) $ (12,987)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 1,649,448 675,372
Compensation and fees paid by issuance of common stock 60,800 --
Provision for bad debts 4,000 --
Deferred income tax benefit -- (6,690)
Loss on disposal of assets 190,453 --
Minority interest in the net earnings of consolidated subsidiaries 101,030 --
Interest income on note receivable from sale of shares (414,699) (436,073)
(Increase) decrease in assets
Accounts receivable 310,380 (294,224)
Inventories 6,622 --
Prepaid expenses and other current assets (102,660) 15,009
Refundable income taxes -- 460,068
Increase in marina development costs (342,878) --
Decrease in liabilities
Accounts payable and accrued expenses (203,569) (1,010,555)
----------- ------------
Net cash used in operating activities (414,917) (610,080)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (837,382) (1,699,839)
Purchase of investment in unconsolidated company -- (70,000)
Payments on amounts due from related parties -- 435,430
Increase in other assets (193,020) (371,373)
----------- ------------
Net cash used in investing activities (1,030,402) (1,705,782)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 936,346 14,875,000
Payments on short-term borrowings -- (2,300)
Principal payments of long-term debt (817,039) (11,967,558)
Partial prepayment of note receivable -- 750,000
Payments on obligations under capital leases (170,697) --
Proceeds from issuance of preferred shares 300,000 --
Dividends paid (70,577) (1,510,075)
----------- ------------
Net cash provided by financing activities 178,033 2,145,067
----------- ------------
Net decrease in cash (1,267,286) (170,795)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,265,497 1,336,891
----------- ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 998,211 $ 1,166,096
=========== ============
<FN>
SUPPLEMENTAL CASH FLOW INFORMATION - SEE NOTE A
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
8
<PAGE> 9
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1997 AND 1996
================================================================================
NOTE A - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash paid for interest expense $1,978,230 $1,222,245
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 $ -- $ --
========== ==========
Increase in marina development costs
Increase in marina development costs $1,233,366 $ --
Long-term debt proceeds 800,000 --
---------- ----------
Cash used in marina development costs $ 433,366 $ --
========== ==========
Compensation and fees paid by issuance of
common stock $ 60,800 $ --
========== ==========
</TABLE>
NOTE B - MORTGAGE NOTE PAYABLE TO INSURANCE COMPANY
On May 23, 1997, the Company's primary lender made a third mortgage loan of
$875,000 for the purpose of completing the improvements to the marina
condominium project being developed by the Company's subsidiary, Grand Harbor
Yacht Club Inc., adjacent to the Company's Grand Haven Holiday Inn property. The
loan requires the Company to make monthly payments of interest at 1% over the
prime rate. Principal payments of $35,000 are required at the time of the sale
of any of the marina condominium units. As of August 31, 1997, the outstanding
loan balance was $800,000 and the Company had $75,000 of available borrowings
under the loan.
NOTE C - MORTGAGE NOTE PAYABLE TO INSURANCE COMPANY - LOAN COVENANT AND LOAN
PAYMENT WAIVERS
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 August 31, 1997 the
Company failed to meet certain of these covenants. However, a waiver of these
covenants has been obtained through December 30, 1997. In addition to the loan
covenant waiver, effective October 1, 1997, the Company obtained a three month
principal and interest payment waiver on the mortgage loans. Based on the terms
of the loan agreement, the principal and interest payment waiver extends to the
payments due on the note payable to the Company's Chairman of the Board.
9
<PAGE> 10
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 August 31, 1997 and 1996.
<TABLE>
<CAPTION>
Statements of Operations
Nine month periods ended August 31, Three month periods ended August 31,
------------------------------------------- ----------------------------------------
$ in Thousands % of Revenue $ in Thousands % of Revenue
--------------------- ------------------ ------------------- ----------------
1997 1996 1997 1996 1997 1996 1997 1996
--------------------- ------------------ ------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue
Room revenue $ 4,716 $ 4,828 43.3% 42.3% $ 2,214 $ 2,257 44.9% 47.9%
Food and beverage revenue 5,380 6,105 49.4 53.5 2,230 2,243 45.3 47.6
Telephone and sundry revenue 789 472 7.2 4.1 484 213 9.8 4.5
--------------------- ------------------ ------------------- ----------------
Total revenue 10,885 11,405 100.0 100.0 4,928 4,713 100.0 100.0
Cost and expenses
Cost of food and beverages 1,886 2,075 17.3 18.2 749 736 15.2 15.6
Operating expenses 6,344 5,751 58.3 50.4 2,469 2,228 50.1 47.3
General and administrative
expenses 2,080 2,246 19.1 19.7 801 670 16.2 14.2
Depreciation and amortization 839 675 7.7 5.9 298 226 6.1 4.8
--------------------- ------------------ ------------------- ----------------
Total cost and expenses 11,149 10,747 102.4 94.2 4,317 3,860 87.6 81.9
Earnings (loss) from operations (264) 658 (2.4) 5.8 611 853 12.4 18.1
Other income (expense)
Interest expense (1,839) (1,195) (16.9) (10.5) (635) (470) (12.9) (10.0)
Interest income 429 517 3.9 4.5 153 160 3.1 3.4
--------------------- ------------------ ------------------- ----------------
Total other expense (1,410) (678) (12.9) (5.9) (482) (310) (9.8) (6.6)
--------------------- ------------------ ------------------- ----------------
Earnings (loss) before
federal income tax (1,674) (20) (15.4) (0.2) 129 543 2.6 11.5
Federal income tax benefit (expense) -- 7 -- 0.1 -- (185) -- (3.9)
--------------------- ------------------ ------------------- ----------------
Net earnings (loss) $ (1,674) $ (13) (15.4%) (0.1%) $ 129 $ 358 2.6% 7.6%
===================== ================== =================== ================
</TABLE>
10
<PAGE> 11
REVENUE
Total revenue for the Lodging Group was $10,884,943 for the nine month
period ended August 31, 1997 compared to $11,404,897 for the same period of
1996, a decrease of 4.6%. Total revenue for the Lodging Group was $4,928,178 for
the three month period ended August 31, 1997 compared to $4,712,674 for the same
period of 1996, an increase of 4.6%. The following table outlines revenues
(excluding telephone and other revenue) by category:
<TABLE>
<CAPTION>
Nine month periods ended August 31, Three month periods ended August 31,
------------------------------------------ ---------------------------------------
$ in Thousands Decrease $ in Thousands Decrease
------------------ -------------------- ----------------- ------------------
1997 1996 $ % 1997 1996 $ %
------------------ -------------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Room revenue $ 4,716 $ 4,828 $ (112) (2.3%) $ 2,214 $ 2,257 $ (43) (1.9%)
Food and beverage revenue 5,380 6,105 (725) (11.8%) 2,230 2,243 (13) (.5%)
------------------ -------------------- ----------------- ------------------
Total $ 10,096 $ 10,933 $ (837) (7.7%) $ 4,444 $ 4,500 $ (56) (1.2%)
================== ==================== ================= =================
</TABLE>
The decrease in room revenue was attributable to a decrease in hotel
occupancy from 61.6% to 59.5% for the nine month periods ended August 31, 1996
and 1997, respectively. The decrease in occupancy was partially offset by an
increase in the overall average daily rate of $5.56 (7.2%) from $77.54 for the
nine month period ended August 31, 1996 to $83.10 for the same period of 1997.
For the third quarter, hotel occupancy decreased from 76.9% in 1996 to 75.6% in
1997 and was partially offset by a $4.39 (5.0%) increase in overall average
daily rate from $87.14 for the three month period ended August 31, 1996 to
$91.53 for the same period of 1997.
The declines in room revenue are primarily attributable to increased
competition. Specifically, the hotels are experiencing the impact of new limited
service hotels which are targeting the price sensitive guest with their lower
rates. In addition to the increased competition, the Grand Haven Holiday Inn has
been under renovation over the past year causing a negative impact on room
revenue.
The decrease in food and beverage revenue of 11.8% for the nine month
period ended August 31, 1997 was also primarily attributable to increased
competition in the area. Catering sales have declined at the Thomas Edison Inn
and St. Clair Inn due to the opening of two new banquet facilities in their
market area. Additionally, a new restaurant was established a short distance
from the St. Clair Inn. While increased competition is the primary reason for
the decline in food and beverage revenue, certain changes in lounge
entertainment and menu offerings instituted by new management were not well
received by the local clientele, thus compounding the impact of increased
competition.
The Company is aggressively working towards offsetting the effect of
the increased competition by new marketing programs, hiring locally experienced
sales personnel and by continually reviewing and updating its menu offerings.
Although the long-term results of these marketing efforts cannot be determined
at this time, food and beverage revenue decreased only 0.5% in the third quarter
of 1997 compared to the third quarter of 1996 which represents a significant
improvement over the first six months of 1997.
Telephone and other revenue increased $316,760 (67.1%) for the nine
month period ended August 31, 1997 compared to the same period of 1996. For the
third quarter, telephone and other revenue increased $270,573 (127.0%). The
increase in other revenue was primarily attributable to the sale of four marina
11
<PAGE> 12
condominium units for $229,700 in the third quarter. Public room rental income
and commissions from rental of audio/visual equipment have also contributed to
the increase in other revenue. The increase in telephone revenue for both the
three and nine months ended August 31, 1997 compared to the same periods of 1996
was due to the installation of new telephone systems at the Thomas Edison Inn
and St. Clair Inn. This has resulted in improved accounting for telephone
charges which has contributed to the generation of additional telephone revenue.
COST OF FOOD AND BEVERAGES
Cost of food and beverages as a percentage of food and beverage revenue
for the nine month period ended August 31, 1997 was 35.0% compared to 34.0 % for
the same period of 1996. For the third quarter, cost of food and beverages as a
percentage of food and beverage revenue was 33.6% in 1997 compared to 32.8% in
1996. The increase was attributable to the decline in catering functions at the
hotels, which have a relatively lower cost.
OPERATING EXPENSES
Operating expenses for the nine month periods ended August 31, 1997 and
1996 were $6,343,936 and $5,750,952, respectively, an increase of $592,984
(10.3%). As a percentage of total revenue, operating expenses increased 7.9
percentage points, from 50.4% for the nine month period ended August 31, 1996 to
58.3% for the same period of 1997. The increase in operating expenses for the
nine months ended August 31, 1997 is partially due to a one-time accounting
adjustment of approximately $171,000 which decreased operating expenses in 1996.
Cost of marina condominium unit sales and an increase in property tax expense
resulted in increased operating expenses of approximately $269,000 for the nine
months ended August 31, 1997 compared to the same period of 1996. The remaining
increase is primarily attributable to a reclassification in payroll and certain
other expenses.
Operating expenses for the third quarter of 1997 and 1996 were
$2,469,125 and $2,228,167, respectively, an increase of $240,958 (10.8%). As a
percentage of total revenue, operating expenses increased 2.8 percentage points,
from 47.3% for the third quarter of 1996 to 50.1% for the same period of 1997.
Cost of marina condominium unit sales and an increase in property tax expense
resulted in increased operating expenses of approximately $189,000 for the third
quarter of 1997 compared to the third quarter of 1996.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $166,139 (7.4%), from
$2,246,325 for the nine month period ended August 31, 1996 to $2,080,186 for the
same period of 1997. For the third quarter, general and administrative expenses
increased $130,531 (19.5%) from $670,015 in 1996 to $800,546 in 1997. The
decrease in general and administrative expenses for the nine months ended August
31, 1997 compared to the same period of 1996 was due to approximately $375,000
of non-recurring expenses incurred in 1996 in connection with the replacement
and restructuring of management of the Company. Excluding the $375,000 of
non-recurring expenses incurred in the first and second quarters of 1996,
general and administrative expenses have increased in 1997 as a result of
increased management salaries required to implement the Company's strategy to
expand the Company through business acquisitions.
12
<PAGE> 13
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $163,859, from $675,372
for the nine month period ended August 31, 1996 to $839,231 for the same period
of 1997. For the third quarter, depreciation and amortization increased $72,468,
from $225,995 in 1996 to $298,463 in 1997. The increase in depreciation and
amortization for both the three and nine month periods was attributable to
significant property, plant and equipment additions in the second half of 1996
and to depreciation and amortization associated with the acquisition of a
majority interest in the Wendy's Partnership which was accounted for under the
purchase method of accounting.
INTEREST EXPENSE
Interest expense for the nine month periods ended August 31, 1997 and
1996 was $1,839,037 and $1,194,996, respectively. For the third quarter of 1997
and 1996, interest expense was $634,970 and $470,252, respectively. The increase
of $644,041 for the nine month period ended August 31, 1997 and $164,718, for
the third quarter ended August 31, 1997 was due to additional borrowings. The
additional debt included acquisition financing related to the purchase of the
Wendy's Partnership units in October 1996, and the development of the marina
condominium project at the Grand Harbor Yacht Club in 1997. See "Liquidity and
Capital Resources" of this item for details of the Company's long-term debt.
INTEREST INCOME
Interest income decreased from $517,382 for the nine month period ended
August 31, 1996 to $429,562 for the same period of 1997. Interest income
decreased from $159,730 for the third quarter of 1996 to $153,163 for the third
quarter of 1997. The decrease in interest income was due to a decrease in cash
and cash equivalents during the three and nine month periods. The decrease was
also attributable to the reduction in note receivable interest income from the
sale of stock due to the reduction in the note receivable as a result of a
$750,000 principal payment received in May 1996.
13
<PAGE> 14
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
August 31, 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 nine month and
three month periods ended August 31, 1997 (included on pages 5 and 6). Below is
a summary of the results of the Food Service Group (comprised of the Wendy's
Partnership) for the nine month and three month periods ended August 31, 1997.
Because the Wendy's Partnership is not a wholly owned subsidiary and because its
daily operations are managed separately, 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.
<TABLE>
<CAPTION>
Statements of Operations
---------------------------------------------------------
Nine month periods ended Three month periods ended
August 31, 1997 August 31, 1997
---------------------------- ---------------------------
$ in Thousands % of Revenue $ in Thousands % of Revenue
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net revenue
Food and beverage revenue $ 20,263 99.3% $ 7,313 99.4%
Other revenue 136 0.7 44 0.6
---------------------- ---------------------
Total revenue 20,399 100.0 7,357 100.0
Cost and expenses
Cost of food and beverages 5,838 28.6 2,104 28.6
Operating expenses 12,177 59.7 4,281 58.2
General and administrative expenses 962 4.7 307 4.2
Depreciation and amortization 692 3.4 234 3.2
---------------------- ---------------------
Total cost and expenses 19,669 96.4 6,926 94.1
Earnings from operations 730 3.6 431 5.9
Other income (expense)
Interest expense (330) (1.6) (103) (1.4)
Interest income 10 0.0 4 0.1
Loss on disposal of assets (190) (0.9) (190) (2.6)
---------------------- ---------------------
Total other expense (510) (2.5) (289) (3.9)
---------------------- ---------------------
Earnings before
federal income tax 220 1.1 142 1.9
---------------------- ---------------------
Federal income tax 0 0.0 0 0.0
Net earnings $ 220 1.1% $ 142 1.9%
====================== =====================
</TABLE>
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS - NINE MONTHS ENDED AUGUST 31, 1997
Cash and cash equivalents ("cash") decreased $1,267,286 from $2,265,497
as of November 30, 1996 to $998,211 as of August 31, 1997. The decrease in cash
was the result of the following:
<TABLE>
<S> <C>
Net cash used in operating activities $ (414,917)
Net cash used in investing activities (1,030,402)
Net cash provided by financing activities 178,033
---------------
Net decrease in cash $ (1,267,286)
=============
</TABLE>
Net cash used in operating activities of $414,917 was due to the net
loss before depreciation and amortization of $24,396 plus other non-cash effects
on net income and net cash used in operating activities which totaled $58,416.
The net change in non-cash assets and liabilities of $332,105 accounted for the
remaining net cash used in operating activities. Included in this amount was an
increase in marina development costs of $342,878.
Net cash used in investing activities of $1,030,402 was the result of
purchases of property, plant and equipment of $837,382. Increases in other
assets accounted for the remaining $193,020.
Net cash provided by financing activities of $178,033 was the result of
proceeds from long-term borrowings of $936,346 and proceeds from the issuance of
preferred shares of $300,000. These two items were offset by principal payments
of long-term debt of $817,039 and payments on obligations under capital leases
of $170,697. For the nine months ended August 31, 1997, the Company also paid
dividends on preferred stock of $70,577.
FINANCIAL CONDITION
At August 31, 1997, the Company's current liabilities exceeded its
current assets by $1,888,533 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 0.58:1 and 1.03:1 respectively. The
discussion above of cash flows for the nine months ended August 31, 1997
explains the decrease in cash as well as the most significant reasons for the
decrease in working capital. The other reason for the decrease in working
capital was the $819,433 increase in current portion of long-term debt from
November 30, 1996 to August 31, 1997, which is due to principal payment
requirements on the $5,250,000 second mortgage which begin December 1, 1997. See
item 2 below for a description of the terms of the second mortgage.
15
<PAGE> 16
The Company's long-term debt consists primarily of the following:
1) $13,834,833 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. (1)
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. (1)
3) $875,000 (marina) third mortgage loan requiring monthly payments
of interest at 1% over the prime rate. Principal payments of
$35,000 are required at the time of the sale of any of the marina
condominium units. As of August 31, 1997, the loan balance was
$800,000 and the Company had $75,000 of available borrowings under
the loan. (1)
4) $1,725,413 revolving term loan of the Wendy's Partnership
requiring monthly payments of a minimum 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
Wendy's Partnership had $1,067,690 of available unused borrowings
at August 31, 1997. The loan is secured by the Company and
substantially all of the assets of the Wendy's Partnership.
5) $496,806 note payable requiring monthly payments of $14,693,
including interest at 8.8%, through October 2000.
6) $750,000 note payable to the Company's Chairman of the Board of
Directors (and a shareholder of the Company). The loan requires
the Company to make monthly payments of interest only at the prime
rate plus 8% provided the Company is not in default under its
first, second and third 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, second and
third mortgage long-term debt is paid off. (1)
(1) 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 August
31, 1997, the Company failed to meet certain of these
covenants. However, a waiver has been obtained through
December 30, 1997. In addition to the loan covenant waiver,
effective October 1, 1997 the Company obtained a three month
principal and interest payment waiver on the mortgage loans
with its primary lender. Based on the terms of the loan
agreement, the principal and interest payment waiver extends
to the payments due on the note payable to the Company's
Chairman of the Board of Directors.
16
<PAGE> 17
A summary of the financial covenants as well as the Company's actual
results as of August 31, 1997 are as follows:
<TABLE>
<CAPTION>
COVENANT DESCRIPTION COVENANT REQUIREMENT ACTUAL RESULTS COVENANT COMPLIANCE
<S> <C> <C> <C>
Minimum Net Worth $4,000,000 $223,123 Waiver obtained
through
December 30, 1997
Coverage Ratio -
Earnings before interest, taxes
depreciation and amortization
("EBITDA") of hotels:
Debt Service 1.1:1 .60:1 Waiver obtained
through
December 30, 1997
Coverage Ratio -
EBITDA of hotels less capital
expenditures:
Debt Service .30:1 .10:1 Waiver obtained
through
December 30, 1997
</TABLE>
The Company 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. All dividends have been paid through October 1, 1997.
The Company estimates capital expenditures for the next twelve months
to be approximately $1,200,000 for building improvements, and furniture,
fixtures and equipment purchases, at its existing hotels and at the existing
Wendy's Partnership restaurants. Of the $1,200,000, approximately $700,000 is
allocated for capital expenditures at existing Wendy's restaurants. 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 $1,200,000, the Company estimates capital expenditures at its full service
hotels to be approximately $500,000. This does not include an estimated $124,000
of final expenditures for the marina condominium project being developed by the
Company's subsidiary, Grand Harbor Yacht Club Inc., for which the Company has
$75,000 of available borrowings on the third mortgage loan. This is a reduction
from previous capital expenditure budgets for the Company's full service hotels
as the Company is reassessing how to best utilize its capital resources between
the Lodging Group and the Food Service Group.
17
<PAGE> 18
The Company plans to meet its current obligations for the next twelve
months by:
- Waiver of the October, November, and December loan payments on the
mortgage loans as described above which total approximately
$675,000 (which will be available for operating purposes).
- Completing the acquisition of the remaining units of the Wendy's
Partnership through the issuance of the Company's Common Stock. In
fiscal 1996, net cash from operating activities of the Wendy's
Partnership was approximately $1,201,000. The Wendy's Partnership
also had available borrowings under its long-term revolving loan
of approximately $1,068,000 as of August 31, 1997.
- Attempting to sell the vacant land held for expansion valued at
approximately $1,000,000 to $1,500,000.
- Attempting to reduce the negative cash flow from the Lodging Group
through improving operating results by (i) enhancing revenue as a
result of increased marketing efforts, and (ii) decreasing
expenses as a result of renewed efforts to reduce payroll
expenditures in response to lower sales volume in the off-peak
periods.
- Attempting to execute a sale/leaseback of real estate (restaurant
buildings) owned by the Wendy's Partnership which would net the
Company approximately $2,500,000 from the transaction after
closing costs and the retirement of the underlying mortgage loans
on the Wendy's properties.
- Continuing to explore the sale of one or more of the Company's
hotel properties.
18
<PAGE> 19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As reported in the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1997, the Company owns, through its wholly owned
subsidiary MHG Food Service Inc., 680.8 (or approximately 54%) of the
outstanding limited partnership units of the Wendy's Partnership. The agreement
governing the Wendy's Partnership authorizes the removal and replacement of the
general partner of the Wendy's Partnership by a majority of the limited
partnership units. On May 19, 1997, a majority limited interest of the Wendy's
Partnership removed Wendy's West Michigan, Inc. as the general partner of the
Wendy's Partnership, and appointed MCC Food Service Inc. (an affiliate of the
Company) as the substitute general partner. Approximately 180 unit holders (from
whom Meritage acquired 482.55 of its total Wendy's Partnership units) had
previously consented to the removal of the former general partner and the
appointment of Meritage or its designee as the new general partner. On May 21,
1997, the former general partner commenced a lawsuit against the Company, MHG
Food Service, and MCC Food Service (Case No. 97-05360-CB, Kent County (Michigan)
Circuit Court, Buth, J.). The former general partner also attempted to assert
claims on behalf of the Wendy's Partnership as well. On August 29, 1997, the
former general partner amended its complaint to include Meritage Capital Corp.
and Meritage's principal officers as defendants. In addition, the principal
shareholders of the former general partner and two limited partners intervened
in the lawsuit. The former general partner and its principal shareholders seek,
among other things, (i) a declaration that Wendy's West Michigan, Inc. is the
general partner of the Wendy's Partnership, (ii) injunctive relief in the form
of a temporary restraining order or a preliminary injunction which would
prohibit the defendants from participating in the management of the Wendy's
Partnership, (iii) unspecified damages for breach of contract, and (vi)
unspecified damages for various business torts and misrepresentation. The former
general partner's motion for a temporary restraining order was denied on May 21,
1997. The intervening limited partners have alleged claims similar to those
alleged by the former general partner. In September 1997, the Wendy's
Partnership, the Company, MHG Food Service, MCC Food Service and Meritage
Capital Corp. filed claims against the former general partner and its principal
shareholders alleging (i) breach of contract, (ii) violation of SEC Rule 10b-5,
(iii) business defamation, (iv) tortious interference, and (v) breach of
fiduciary duty. The consent of Wendy's International to MCC Food Service serving
as the general partner was obtained on May 16, 1997.
ITEM 5. OTHER INFORMATION.
On July 21, 1997, the Grand Haven Holiday Inn and Holiday Inns
Franchising, Inc. entered into a voluntary termination agreement pursuant to
which the Grand Haven Holiday Inn will leave the Holiday Inn system no later
than October 15, 1997. After this time, the hotel will be independently operated
under the name "Grand Harbor Resort & Yacht Club." The Company does not believe
that ending its franchise affiliation with Holiday Inn will have a material
effect on its operations, and, in fact, believes that this event will allow the
Company to identify and market the hotel in a manner that will better compliment
and accentuate its nautical surroundings, including the newly renovated 55-slip
Grand Harbor Yacht Club which is adjacent to the hotel. Pursuant to the
voluntary termination agreement, the Grand Haven Holiday Inn released Holiday
Inn from all claims under the franchise agreement. Holiday Inn, in turn, agreed
not to pursue any claims against the Grand Haven Holiday Inn for default or
liquidated damages under the franchise agreement.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit List.
-------------
Exhibit No. Description of Document
- ----------- --------------------------------------------------------------
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed during the quarter for which
this report is filed.
20
<PAGE> 21
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: October 10, 1997 MERITAGE HOSPITALITY GROUP INC.
By /s/ Christopher B. Hewett
------------------------------------------
Christopher B. Hewett
President and Chief Executive Officer
By /s/ Pauline M. Krywanski
------------------------------------------
Pauline M. Krywanski
Vice President and Treasurer
(Chief Financial Officer)
21
<PAGE> 22
EXHIBIT INDEX
Exhibit No. Description of Document
- ----------- -----------------------
11 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule.
22
<PAGE> 1
EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (FOR THE NINE AND
THREE MONTH PERIODS ENDED AUGUST 31, 1997 AND 1996).
<TABLE>
<CAPTION>
Nine month periods ended August 31, Three month periods ended August 31,
----------------------------------- ------------------------------------
1997 1996 1997 1996
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS (LOSS) PER SHARE:
Net income (loss) $(1,673,844) $ (12,987) $ 165,808 $ 358,331
Adjustments:
Dividends declared (and paid) on
preferred stock (70,577) - (31,137) -
---------------------------- ---------------------------
Income (loss) available to common
shareholders $(1,744,421) $ (12,987) $ 134,671 $ 358,331
============================ ===========================
Weighted average shares outstanding 3,213,736 3,091,152 3,216,977 3,213,736
============================ ===========================
Primary earnings (loss) per share $ (0.54) $ (0.00) $ 0.04 $ 0.12
============================ ===========================
FULLY DILUTED EARNINGS (LOSS) PER SHARE:
Net earnings (loss) $(1,673,844) $ (12,987) $ 165,808 $ 358,331
============================ ===========================
Weighted average shares outstanding
Average common shares 3,213,736 3,091,152 3,216,977 3,213,736
Preferred stock -
conversion assumed 183,410 - 197,696 -
---------------------------- ---------------------------
3,397,146 3,091,152 3,414,673 3,213,736
============================ ===========================
FULLY DILUTED EARNINGS (LOSS) PER
share - antidilutive $ (0.49) $ (0.00) $ 0.05 $ 0.12
============================ ===========================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> AUG-31-1997
<CASH> 998,211
<SECURITIES> 0
<RECEIVABLES> 682,068
<ALLOWANCES> 58,000
<INVENTORY> 347,604
<CURRENT-ASSETS> 2,573,838
<PP&E> 43,919,168
<DEPRECIATION> 22,719,903
<TOTAL-ASSETS> 30,638,737
<CURRENT-LIABILITIES> 4,462,371
<BONDS> 23,628,437
0
1,384
<COMMON> 32,171
<OTHER-SE> 189,568
<TOTAL-LIABILITY-AND-EQUITY> 30,638,737
<SALES> 31,283,874
<TOTAL-REVENUES> 31,283,874
<CGS> 7,724,026
<TOTAL-COSTS> 30,936,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,000
<INTEREST-EXPENSE> 2,168,567
<INCOME-PRETAX> 1,673,844
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,673,844
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,673,844
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
