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As filed with the Securities and Exchange Commission on October 15, 1997
Registration No. 333-33461
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
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MERITAGE HOSPITALITY GROUP INC.
(Exact name of Registrant as specified in its charter)
MICHIGAN 38-2730460
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
40 PEARL STREET, N.W., SUITE 900
GRAND RAPIDS, MICHIGAN 49503
(616) 776-2600
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
Gary P. Kreider, Esquire
Keating, Muething & Klekamp
1800 Provident Tower
One East Fourth Street
Cincinnati, Ohio 45202
(513) 579-6400
(Name, address, including zip code, and telephone
number, including zip code, of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
-------------------------------
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE (2)
- --------------------------------------- -------------------------------------- --------------------------------------
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Common Shares $4,320,000 $1,309
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<FN>
(1) Based on the value of $7,500 in Meritage Common Shares to be issued per
Limited Partnership Unit of Wendy's of West Michigan Limited Partnership.
(2) Computed pursuant to Rule 457(f)(2).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED OCTOBER 15, 1997
MERITAGE HOSPITALITY GROUP INC.
PROSPECTUS FOR 1,500,000 COMMON SHARES*
This Prospectus is being furnished to holders of limited partnership
units of the Wendy's of West Michigan Limited Partnership (the "WENDY'S
PARTNERSHIP") in connection with the sale of all of the assets of the Wendy's
Partnership to a limited partnership affiliated with Meritage Hospitality Group
Inc. ("MERITAGE"), and the subsequent dissolution of the Wendy's Partnership.
Upon dissolution, the Meritage Common Shares will be distributed to
non-affiliated limited partners on the basis of that number of Meritage Common
Shares that have a value of $7,500 per unit, based on the lesser of the average
high and low bid price on the OTC Bulletin Board for the 10 trading days
preceding the date of dissolution or $4.125 per share.
This Prospectus also constitutes notice of the transaction. In
accordance with Section 12.7 of the Amended and Restated Agreement of Limited
Partnership for the Wendy's Partnership, limited partners will be deemed to have
consented to the transaction unless they indicate to the contrary in writing to
the Wendy's Partnership before _________________, 1997, after which the sale of
assets and dissolution will occur. A wholly owned subsidiary of Meritage, MHG
Food Service Inc., presently holds approximately 54% of the outstanding units,
and, because affirmative consent of the holders of a majority of the units is
required to approve the proposal, approval is assured.
Meritage's Common Shares are listed on the Chicago Stock Exchange under
the symbol "MHG" and on the OTC Bulletin Board under the symbol "MHGI." On
October 9, 1997, the average high and low bid price on the OTC Bulletin Board
was $3 1/2 per share. Units of the Wendy's Partnership are not publicly traded.
There have been, to Meritage's knowledge, no sales of the Wendy's Partnership
units in the past year.
SEE "RISK FACTORS" SUMMARIZED ON PAGE 7 AND IN FULL ON PAGE 16, FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY THE LIMITED PARTNERS.
AMONG THESE ARE:
- Conflicts of Interest - Meritage can effect the transaction
without the consent of non-affiliated limited partners.
Meritage controls 54% of the limited partnership units and an
affiliate controls the general partner, which believes the
transaction is fair and is recommending the transaction to the
limited partners.
- No independent representation of limited partners.
- Limited Trading Market for Meritage's Common Shares - The
price established for the transaction may exceed that which
could be realized upon sale.
- Continuing Losses - Meritage has operated at a loss since
fiscal 1993.
* Based on an assumed price of $3.50 for Meritage Common Shares plus an
additional number of shares. The actual number of shares issued will be
determined by the trading formula upon dissolution.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is
October __, 1997
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TABLE OF CONTENTS
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AVAILABLE INFORMATION........................................................................................7
SUMMARY......................................................................................................8
The Parties.........................................................................................8
The Transaction.....................................................................................8
Wendy's Partnership Authorization...................................................................8
Meritage Common Shares Outstanding..................................................................9
Wendy's Partnership Units Outstanding...............................................................8
Certain Risk Factors...............................................................................10
Recommendation of the General Partner..............................................................12
Material Effects to the Limited Partners ..........................................................13
Background and Reasons for the Transaction.........................................................13
Tax Effects........................................................................................13
No Dissenters' Rights..............................................................................13
Fiduciary Duties of the General Partner............................................................13
Market Quotations..................................................................................14
Meritage Hospitality Group Inc. Summary Consolidated Financial Data................................15
Wendy's of West Michigan Limited Partnership Summary Consolidated Financial Data...................19
COMPARATIVE PER SHARE AND UNIT DATA.........................................................................23
RISK FACTORS AND OTHER CONSIDERATIONS.......................................................................24
Risks Associated with Dissolution of the Wendy's Partnership.......................................24
Conflicts of Interest.........................................................................24
No Dissenters' Rights.........................................................................24
No Independent Representation of Limited Partners.............................................24
Alternatives Not Pursued......................................................................24
Change in Nature of Investment and Status of Limited Partners.................................25
Risks Associated with Investment in Meritage Common Shares.........................................25
Limited Public Trading Market.................................................................25
Substantial Debt..............................................................................25
Continuing Losses.............................................................................26
Common Share Ownership and Control by Insiders................................................26
Legal Proceedings.............................................................................26
Risks Associated with Meritage's Business..........................................................27
Broadened Business Orientation................................................................27
Risks of the Lodging Industry.................................................................27
Risks Affecting Restaurant Operations.........................................................29
Geographic Concentration of Operations........................................................30
CAPITALIZATION..............................................................................................31
PRICE RANGE OF COMMON SHARES................................................................................31
DISTRIBUTION POLICIES.......................................................................................32
BACKGROUND AND REASONS FOR THE TRANSACTION..................................................................32
Background of the Transaction......................................................................32
Fees and Expenses of the Transaction...............................................................33
Determination of Consideration for Units...........................................................34
Background of the Wendy's Partnership..............................................................34
Other Considerations...............................................................................34
Fairness of Transaction............................................................................35
OPINION OF FINANCIAL ADVISOR TO THE GENERAL PARTNER.........................................................37
SELECTED CONSOLIDATED FINANCIAL DATA........................................................................44
MERITAGE HOSPITALITY GROUP INC.
SELECTED CONSOLIDATED FINANCIAL DATA...............................................................45
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MERITAGE HOSPITALITY GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.......................................................46
General............................................................................................46
Results of Operations..............................................................................46
Liquidity and Capital Resources....................................................................54
Inflation and Changing Prices .....................................................................59
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
SELECTED CONSOLIDATED FINANCIAL DATA...............................................................60
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.......................................................61
Results of Operations..............................................................................61
Liquidity and Capital Resources....................................................................63
Inflation and Changing Prices .....................................................................63
BUSINESS....................................................................................................64
General............................................................................................64
Broadened Business Orientation.....................................................................65
Replacement and Restructuring of Management........................................................65
Food Service Group.................................................................................65
Lodging Group......................................................................................66
Competition and Industry Conditions................................................................68
Relationship with Wendy's International............................................................69
Governmental Regulations...........................................................................70
Other Assets.......................................................................................70
Properties.........................................................................................71
Legal Proceedings..................................................................................71
MANAGEMENT..................................................................................................73
Directors and Executive Officers...................................................................73
Executive Compensation.............................................................................75
Certain Relationships and Related Transactions.....................................................76
PRINCIPAL SHAREHOLDERS......................................................................................79
FEDERAL INCOME TAX CONSEQUENCES.............................................................................80
DESCRIPTION OF CAPITAL SHARES...............................................................................81
Common Shares......................................................................................81
Preferred Shares...................................................................................82
Transfer Agent.....................................................................................82
COMPARATIVE RIGHTS..........................................................................................83
Federal Income Taxation............................................................................83
Management.........................................................................................83
Voting Rights......................................................................................83
Amendments to Governing Documents..................................................................84
Dividends and Distributions........................................................................84
Continuity of Existence............................................................................84
Rights Upon Liquidation............................................................................84
Dissenters' Rights.................................................................................85
Liability; Indemnification.........................................................................85
Meetings...........................................................................................85
LEGAL MATTERS...............................................................................................86
EXPERTS.....................................................................................................86
INDEX TO FINANCIAL STATEMENTS...............................................................................87
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MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......................................M-1
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..................................................W-1
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP UNAUDITED INTERIM
FINANCIAL STATEMENTS....................................................................................W-22
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS........................................................................P-1
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AVAILABLE INFORMATION
Meritage is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission.
Such reports, proxy and information statements and other information filed with
the Commission by Meritage may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, and at Seven
World Trade Center, Suite 1300, New York, New York. Copies of such material can
also be obtained, at prescribed rates, by mail from the Public Reference Section
of the Commission at its Washington, D.C. address set forth above. In addition,
material filed by Meritage can be obtained and inspected at the offices of the
Chicago Stock Exchange, 440 South LaSalle Street, Chicago, Illinois 60605, on
which Meritage's Common Shares are listed. The Commission also maintains a Web
site (located at http://www.sec.gov) that contains Meritage's reports, proxy
statements and other information.
Meritage has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act of 1933 with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which were omitted in accordance with
the rules and regulations of the Commission. Such additional information may be
obtained from the public reference room of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. For further information pertaining to Meritage and
the shares to be issued, reference is made to the Registration Statement and the
exhibits thereto, which may be inspected without charge at the office of the
Commission.
THIS MATERIAL CONCERNING MERITAGE CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934 THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. WHEN WORDS SUCH AS "ANTICIPATE," "BELIEVE," "COULD," "ESTIMATE,"
"INTENDS," "EXPECT," "PLAN," "WOULD" AND SIMILAR EXPRESSIONS ARE USED, THEY ARE
INTENDED TO IDENTIFY THE STATEMENTS AS FORWARD-LOOKING. ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS CAN DIFFER MATERIALLY FROM RESULTS SUGGESTED BY
THESE FORWARD-LOOKING STATEMENTS BECAUSE OF A VARIETY OF FACTORS, INCLUDING,
WITHOUT LIMITATION, THOSE OFFERED IN THE TEXT.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MERITAGE.
THIS PROSPECTUS DOES NOT COVER ANY RESALES OF THE MERITAGE COMMON
SHARES OFFERED HEREBY TO BE RECEIVED BY PARTNERS OF THE WENDY'S PARTNERSHIP WHO
MAY BE DEEMED TO BE AFFILIATES OF MERITAGE UPON THE CONSUMMATION OF THE
TRANSACTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF MERITAGE OR THE WENDY'S
PARTNERSHIP SINCE THE DATE HEREOF.
WENDY'S INTERNATIONAL, INC. IS NOT SELLING, OFFERING FOR SALE OR
UNDERWRITING ALL OR ANY PART OF THIS TRANSACTION. WENDY'S DOES NOT ENDORSE OR
MAKE ANY RECOMMENDATIONS WITH RESPECT TO THIS TRANSACTION.
NEITHER THE TRANSACTION NOR THE CONTENTS OF THIS PROSPECTUS (AND
SPECIFICALLY, ANY FINANCIAL DATA OR PROJECTIONS CONTAINED HEREIN) HAVE BEEN
APPROVED OR ENDORSED BY WENDY'S INTERNATIONAL, INC. AND WENDY'S INTERNATIONAL,
INC. ASSUMES NO OBLIGATIONS TO ANY INVESTOR IN CONNECTION WITH THIS TRANSACTION
OR THE ACCURACY OR ADEQUACY OF ANY PORTION OF THIS PROSPECTUS, INCLUDING ANY
STATEMENTS MADE WITH RESPECT TO IT.
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WENDY'S INTERNATIONAL, INC. FURTHER DISCLAIMS ANY LIABILITY UNDER STATE
OR FEDERAL SECURITIES LAWS ARISING OUT OF OR IN CONNECTION WITH THIS
TRANSACTION, INCLUDING WITHOUT LIMITATION ANY LIABILITY AS A SELLER, AFFILIATE
OR CONTROLLING PERSON OF A SELLER OR AFFILIATE.
WENDY'S INTERNATIONAL, INC. HAS NOT PARTICIPATED IN THE PREPARATION OF
PRO FORMA PROJECTIONS, NOR HAS WENDY'S INTERNATIONAL, INC. APPROVED OR ENDORSED
SUCH PROJECTIONS. WENDY'S INTERNATIONAL, INC. ASSUMES NO OBLIGATION TO ANY
INVESTOR IN CONNECTION WITH THIS TRANSACTION OR THE ACCURACY OR ADEQUACY OF ANY
PORTION OF THIS PROSPECTUS, INCLUDING THE PRO FORMA PROJECTIONS.
SUMMARY
THE PARTIES
Meritage is engaged in the hospitality business through its operation
of two distinct business segments. The Company's Food Service Group consists of
its majority ownership, through a wholly owned subsidiary, of the Wendy's
Partnership which operates 25 "Wendy's Old Fashioned Hamburgers" restaurants
(under franchise with Wendy's International) throughout Western and Southern
Michigan. Since November 1996, the operations of the Wendy's Partnership have
been consolidated with Meritage. MCC Food Service Inc., an affiliate of
Meritage, is the general partner of the Wendy's Partnership and operates the
Wendy's Partnership.
Meritage's Lodging Group owns and operates three full service hotels in
Michigan. 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 is considering the sale of one or more of its
hotels. The Company has retained a professional brokerage firm to assist it in
this regard but does not have any agreement for the sale of any of the hotels at
this time.
The principal executive office of both Meritage and the Wendy's
Partnership is 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.
THE TRANSACTION
MHG Food Service, a subsidiary of Meritage, owns approximately 54% of
the outstanding units and has appointed MCC Food Service, an affiliate of
Meritage, as the general partner of the Wendy's Partnership. A newly formed
limited partnership, which will be affiliated with Meritage, intends to purchase
the assets, and assume the liabilities, of the Wendy's Partnership in exchange
for Meritage Common Shares. Following such purchase, the Wendy's Partnership
will be dissolved. Upon dissolution, the Meritage Common Shares will be
distributed to non-affiliated limited partners on the basis of that number of
Meritage Common Shares that have a value of $7,500 per unit, based on the lesser
of (i) the average high and low bid price on the OTC Bulletin Board for the 10
trading days preceding the date of dissolution, or (ii) $4.125 per share. Units
held by Meritage will be canceled. As a result of the transaction, the newly
formed limited partnership will acquire all assets and assume all the
liabilities of the Wendy's Partnership and succeed to all business operations
currently conducted by the Wendy's Partnership. See "Background and Reasons for
the Transaction - Determination of Consideration for Units" for a description of
the measurement of consideration to be paid in the transaction.
WENDY'S PARTNERSHIP AUTHORIZATION
THIS PROSPECTUS CONSTITUTES NOTICE OF THE TRANSACTION. IN ACCORDANCE
WITH SECTION 12.7 OF THE WENDY'S PARTNERSHIP AGREEMENT, LIMITED PARTNERS WILL BE
DEEMED TO HAVE CONSENTED TO THE TRANSACTION UNLESS BEFORE ____ 1997, THEY
INDICATE TO THE CONTRARY IN WRITING TO THE WENDY'S OF WEST MICHIGAN LIMITED
PARTNERSHIP AT 40 PEARL STREET, N.W., SUITE 900, GRAND RAPIDS, MICHIGAN 49503,
ATTENTION: GENERAL COUNSEL. LIMITED
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PARTNERS MAY HAVE CLAIMS AGAINST MERITAGE OR THE WENDY'S PARTNERSHIP RELATING TO
THE TRANSACTION. FAILURE TO USE THIS OBJECTION PROCEDURE WOULD BE RAISED BY
MERITAGE AS A DEFENSE TO ANY SUCH CLAIMS. LIMITED PARTNERS SHOULD CONSULT WITH
THEIR OWN COUNSEL ON THESE MATTERS.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
MERITAGE COMMON SHARES OUTSTANDING
3,217,595 Common Shares are currently issued and outstanding.
WENDY'S PARTNERSHIP UNITS OUTSTANDING
1,256.8 units are currently outstanding of which 680.8 units are owned
by Meritage.
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CERTAIN RISK FACTORS
Risks Associated with Dissolution of the Partnership
- CONFLICTS OF INTEREST. MHG Food Service, a subsidiary of
Meritage, owns approximately 54% of the outstanding units of
the Wendy's Partnership and has appointed MCC Food Service, an
affiliate of Meritage, as the general partner of the Wendy's
Partnership. This ownership position results in Meritage
having a conflict of interest in purchasing the assets
because, as a practical matter, Meritage controls the outcome
of the transaction. Meritage's management and directors
beneficially own over 62% of its Common Stock, which will
still be at approximately ___% following the transaction and,
therefore, those persons will control the future course of
operations of Meritage.
- CHANGE IN NATURE OF INVESTMENT AND STATUS OF LIMITED PARTNERS.
An investment in Meritage Common Shares constitutes a
fundamental change in the nature of the investment of
non-affiliated limited partners, including the change from an
investment in a partnership that will terminate December 31,
2026 and that is designed to distribute excess cash, to an
investment in a corporation of perpetual duration that has no
present intention to pay cash dividends. If the Wendy's
Partnership were dissolved as of the date of this Prospectus
and without regard to the proposed transaction, each unit
holder would receive approximately $2,664.07 per unit in book
value of net assets. The sale of those assets could result in
a higher or lower amount of cash.
- NO DISSENTERS' RIGHTS. Limited partners do not have appraisal,
dissenters' or similar rights under Michigan law or the
Wendy's Partnership Agreement.
- NO INDEPENDENT REPRESENTATION OF LIMITED PARTNERS. The
non-affiliated limited partners received no independent
representation regarding the determination of the
consideration to be received in the transaction.
- ALTERNATIVES NOT PURSUED. The general partner, which is an
affiliate of Meritage, did not pursue a strategy of continuing
the operations of the Wendy's Partnership, selling the Wendy's
Partnership to a third party or liquidating it by sales of
properties followed by a cash liquidation because it
considered these alternatives as inferior to the proposal of
Meritage, and because Meritage controls both the Wendy's
Partnership and the general partner and would not favor any of
those alternatives.
Risks Associated with an Investment in Meritage's Common Shares
- LIMITED PUBLIC TRADING MARKET. Although the Common Shares are
traded on the OTC Bulletin Board and are listed on the Chicago
Stock Exchange, they are not actively traded. The shares may
trade below the value established for the exchange of shares
in the transaction through the trading formula. See
"Determination of Consideration for Units."
- SUBSTANTIAL DEBT. Meritage had $25.1 million of long-term debt
and capitalized lease payments outstanding at August 31, 1997.
The Company has $75,000 of long term borrowings available to
fund a marina development project. Its expansion programs will
likely result in additional debt.
The Company has obtained waivers of default under its primary
financing arrangements and a moratorium on payments due in
October, November and December, 1997. Meritage Capital Corp.
("MCC"), which owns 48.2% of Meritage's Common Shares, has
guaranteed certain portions of Meritage's debt and pledged
those shares as security for a portion of Meritage's debt.
Should the Company's lenders foreclose on the debt and the
guarantee, control of Meritage could change. See "Management's
Discussion and Results of Operations - Liquidity and Capital
Resources."
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As of the end of the third quarter, August 31, 1997, the
Company's total indebtedness was $25.1 million, which
represented 99.1% of the total capitalization. Total interest
expense for the nine month period ended August 31, 1997 was
$2,168,567 as compared to cash flow from operations (excluding
payment of interest expense) of $1,753,650 for the same nine
month period. Thus, the total interest expense is 123.7% of
the operating cash flow (excluding interest expense). The
ratio of earnings to fixed charges for the nine months ended
August 31, 1997 was less than one and produced a fixed charges
coverage deficiency of $1,572,814. The historical ratio of
earnings to fixed charges and any coverage deficiency is
demonstrated in the table under "Summary Consolidated
Financial Data."
- CONTINUING LOSSES. Meritage has had continuing losses since
fiscal 1993 resulting in a cumulative deficit at August 31,
1997 of $7,237,118 which would not be changed by completion of
the transaction.
- CONTROL BY INSIDERS. Meritage's directors and executive
officers beneficially own approximately 62% of Meritage's
outstanding Common Shares and, therefore, have the practical
ability to control its operations and policies.
- LEGAL PROCEEDINGS. Meritage received a notice from the
Internal Revenue Service that approximately $2.1 million,
which Meritage deducted as a business expense in connection
with litigation in 1995 and 1996 relating to the replacement
and restructuring of former management, should be treated as a
capital expenditure and, therefore, disallowed as a deduction.
Meritage believes the deduction was proper and is vigorously
contesting the disallowance. If the IRS were to completely
prevail in its position, then Meritage would be required to
make a payment of approximately $340,000 in additional federal
and state income taxes, not including any interest or
penalties. If Meritage is not able immediately to carry back
its 1996 tax loss to offset such payment, any amount that
Meritage would be required to pay would be refunded within 120
days of payment.
On May 19, 1997, a majority limited interest of the Wendy's
Partnership removed Wendy's West Michigan, Inc. as general
partner of the Wendy's Partnership and appointed MCC Food
Service, an affiliate of Meritage, as the substitute general
partner. Approximately 180 unit holders (from whom Meritage
acquired 482.55 of its total 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. This action was carried out in connection with
Meritage's acquisition of a controlling interest in the
Wendy's Partnership, and in accordance with Meritage's
representations during the tender offer that it may remove the
general partner and substitute itself or its designee as the
new general partner. On May 21, 1997, the former general
partner commenced a lawsuit against Meritage, MHG Food
Service, and MCC Food Service. 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 (iv) 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, Meritage, 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. Wendy's
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International stated that it does not intend to take a
position as to the rights of either party with respect to the
specific issues which have thus far been raised by this
lawsuit. The consent of Wendy's International to MCC Food
Service serving as the general partner has already been
obtained.
Risks Associated with Meritage's Business
- BROADENED BUSINESS ORIENTATION. Although Meritage was engaged
only in the lodging business prior to acquiring its interest
in the Wendy's Partnership, Meritage has recently reassessed
its long-range objectives and made a strategic decision to
further expand its Food Service Group through the acquisition
of additional chain restaurant businesses. In addition, 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 is considering
the sale of one or more of its hotels. The Company has
retained a professional brokerage firm to assist it in this
regard but does not have any agreement for the sale of any of
the hotels at this time. There is a risk that this expansion
of the business operations might not be successfully
implemented for many reasons, including the timing and prices
involved in sales of the lodging properties, the availability
and pricing of additional restaurant operations, and the
ability of management to successfully manage new restaurant
businesses.
- RISKS OF THE LODGING INDUSTRY. Meritage is subject to all of
the risks inherent to the lodging industry. These risks
include, among other factors, varying levels of demand for
rooms and related services, adverse effects of the general and
local economic and market conditions, changes in travel
patterns, changes in governmental regulations that influence
wages, prices or construction costs, changes in interest
rates, availability of credit and changes in real estate
taxes, availability of labor in a labor-intensive industry and
operating expenses, and the recurring need for renovations,
refurbishment and improvement of hotel properties. Values of
hotel properties are sensitive to changes in local market and
economic conditions and to the fluctuations in the economy as
a whole. Due to the high level of fixed costs required to
operate hotels, significant expenditures necessary to the
hotel operations cannot be reduced substantially when
circumstances cause a reduction of revenue.
- RISKS AFFECTING RESTAURANT OPERATIONS. Meritage's operations
in its Food Service Group are pursuant to franchise agreements
with Wendy's International. Restrictions that accompany this
relationship may have the effect of limiting Meritage's
ability to pursue its business plans. In addition, Meritage's
restaurant operations could be materially and adversely
affected by any adverse developments regarding the reputation
of Wendy's International on a national level.
- GEOGRAPHIC CONCENTRATION. All of Meritage's restaurant and
lodging operations are located in smaller urban areas in
Michigan. A marked decline in the Michigan economy could
adversely affect its revenues.
RECOMMENDATION OF THE GENERAL PARTNER
The General Partner, MCC Food Service, believes that the transaction is
fair and is in the best interests of the Wendy's Partnership and the Limited
Partners, excluding Meritage. The general partner believes that an exchange of
limited partnership units for Meritage Common Shares presents a better
investment opportunity, both as to its liquidity and potential for growth, than
would be presented by a continued operation of the Wendy's Partnership or a
possible liquidation and sale. Furthermore, it also bases its belief as to the
fairness of the transaction upon the opinion of Roney & Co. that the terms of
the merger are fair to the limited partners from a financial point of view. For
these reasons, the general partner is recommending approval of the transaction.
See "Background and Reasons for the Transaction."
Based upon the range of prices at which limited partners sold their
units to Meritage in voluntary transactions, and upon the presence of an
independent fairness opinion, the general partner did not obtain
12
<PAGE> 13
independent representation by way of separate counsel and separate investment
bankers for the limited partners believing that the costs to the Wendy's
Partnership would far outweigh the utility that would be provided in such
circumstances.
MATERIAL EFFECTS TO THE LIMITED PARTNERS
After the transaction closes, the limited partners of the Wendy's
Partnership will change from being partners in an entity with limited duration
that is engaged solely in the food service business, to shareholders of a
corporation of perpetual duration which is also engaged in the lodging business.
The limited partners have limited voting rights in the Wendy's Partnership,
primarily relating to removal of the General Partner, the sale of all assets and
the dissolution of the Partnership. Shareholders of Meritage have more voting
rights, including the right to vote on the election of directors annually, on
compensation plans submitted for shareholder approval, on amendments to the
Articles of Incorporation, and on major transactions such as mergers. The
Wendy's Partnership Agreement is also designed to provide for distributions of
cash to the limited partners, with past distributions ranging from $250 per unit
in 1996 to $450 per unit in 1995. By contrast, Meritage currently pays no
dividends on its Common Shares. There is no established market for the Wendy's
Partnership units. Although Meritage's Common Shares are thinly traded, they are
listed on the Chicago Stock Exchange and are quoted on the OTC Bulletin Board.
BACKGROUND AND REASONS FOR THE TRANSACTION
MCC, an affiliate of Meritage, first expressed an interest in acquiring
the Wendy's Partnership in March 1995. Meritage purchased units in 1996 and now
owns, through its wholly owned subsidiary, over half of the outstanding units.
In addition, a party affiliated with Meritage is the general partner of the
Wendy's Partnership. Meritage's ability to control the Wendy's Partnership
effectively foreclosed the ability of the general partner to consider other
alternatives to the transaction. Therefore, alternatives such as sale of the
Wendy's Partnership to a third party or the liquidation of the Wendy's
Partnership have not been considered.
Meritage initiated the transaction without the participation of the
former general partner. Meritage wants to complete the transaction so that it
may obtain total ownership of the limited partnership that owns the 25 Wendy's
restaurants. Meritage established an exchange value for each unit of $7,500,
which it believes is fair because it exceeds the highest purchase price which
Meritage paid for units in 1996. The general partner, MCC Food Service, has
obtained an opinion of an independent financial advisor that the terms of the
transaction are fair to the limited partners not affiliated with Meritage from a
financial point of view. See "Opinion of Financial Advisor to the General
Partner."
TAX EFFECTS
Unit holders receiving Meritage shares will recognize a capital gain or
loss for federal income tax purposes. Such holders may also recognize ordinary
income to the extent the consideration received is attributable to that holder's
portion of the unrealized receivables of the Wendy's Partnership, and is subject
to recapture as ordinary income through depreciation recapture or otherwise. See
"Federal Income Tax Consequences."
NO DISSENTERS' RIGHTS
None. Limited partners have the right to obtain a list of other limited
partners pursuant to Section 12.1(b) of the Wendy's Partnership Agreement.
FIDUCIARY DUTIES OF THE GENERAL PARTNER
The general partner of a limited partnership is accountable to the
limited partners as a fiduciary and consequently, must exercise good faith and
integrity in the resolution of any conflicts of interest and in other dealings
with respect to partnership affairs. The fiduciary obligations of the general
partner are in addition to the several duties and obligations of and limitations
on the general partner set forth in the Wendy's Partnership Agreement. Where the
question has arisen, courts have held that a limited partner may institute legal
action on behalf of himself/herself or all other similarly situated limited
partners (as a class action) to recover damages for a
13
<PAGE> 14
breach by the general partner of its fiduciary duty, or on behalf of the Wendy's
Partnership (a partnership derivative action) to recover damages from third
parties when the general partners have become disabled or wrongfully refused to
bring such action.
The Wendy's Partnership Agreement provides that the general partner
will not be liable to the Wendy's Partnership or to any other limited partner
for any loss or damage arising out of its management of the Wendy's Partnership
or any other activities in its capacity as the general partner, unless such loss
or damage is caused by bad faith or negligence of the general partner.
Therefore, the limited partners may have a more limited right of action than
they would have absent such limitation in the Wendy's Partnership Agreement. The
Wendy's Partnership Agreement also provides that the Wendy's Partnership will
indemnify the general partner for any loss or damage incurred by it in
connection with Wendy's Partnership business unless the loss or damage is caused
by the bad faith or negligence of the general partner.
MARKET QUOTATIONS
On September 18, 1996, the date Meritage first announced its intention
to make a tender offer for the units of the Limited Partnership, Meritage's
Common Shares were quoted at $ 4.25 bid and $ 4.75 asked. There is no trading
market for the Wendy's Partnership units. Meritage acquired 14 units for $5,000
cash per unit in June 1996, 143.25 units in July 1996 for 171,900 Meritage
Common Shares which Meritage valued at $6,000 per unit because of the
unregistered status of the Meritage shares, 482.55 units in October 1996 in the
tender offer for $7,000 cash per unit, and 41 units in November 1996 for 29,520
shares of Meritage Series A Convertible Preferred Stock which Meritage valued at
$7,200 per unit. See "Price Range of Common Shares."
Units of the Wendy's Partnership are not publicly traded. Since the
close of Meritage's tender offer on October 31, 1996, there have been, to
Meritage's knowledge, no sales of the Wendy's Partnership units among
unaffiliated parties. Meritage purchased 41 units in November 1996 for
Meritage's Series A Convertible Preferred Stock valued at $7,200 per unit.
14
<PAGE> 15
MERITAGE HOSPITALITY GROUP INC.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<TABLE>
<CAPTION>
Years Ended November 30,
------------------------------------------------------------------------------
1996
------
Actual Pro Forma 1995 1994 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Net Revenue
Rooms $ 6,282 $ 6,282 $ 5,999 $ 6,048 $ 5,681 $ 5,820
Food, beverage and other 10,603 35,139 8,442 9,312 8,564 8,525
------------------------------------------------------------------------------
Total Revenue 16,885 41,421 14,441 15,360 14,245 14,345
Cost and expenses
Cost of food and beverages 3,334 10,504 2,864 3,042 2,852 2,800
Operating expenses 9,492 24,069 7,215 7,180 7,024 6,690
General and administrative expenses 3,951 5,003 4,980 2,597 2,131 2,013
Depreciation and amortization 1,082 2,242 1,426 1,232 1,175 1,143
------------------------------------------------------------------------------
Total costs and expenses 17,859 41,818 16,485 14,051 13,182 12,646
------------------------------------------------------------------------------
Earnings (loss) from operations (974) (397) (2,044) 1,309 1,063 1,699
Other income (expense)
Interest (net) (985) (1,825) (968) (1,119) (1,063) (1,374)
Other 13 (32) 242 12 395 199
------------------------------------------------------------------------------
Total other expense (972) (1,857) (726) (1,107) (668) (1,175)
------------------------------------------------------------------------------
Earnings (loss) before federal
income tax and cumulative effect
of change in accounting principle (1,946) (2,254) (2,770) 202 395 524
Federal income tax expense (benefit) (20) (20) (721) 112 165 225
------------------------------------------------------------------------------
Earnings (loss) before cumulative
effect of change in accounting principle (1,926) (2,234) (2,049) 90 230 299
Cumulative effect of prior years of changing
to a different method of accounting for
income taxes --- --- --- (117) --- ---
------------------------------------------------------------------------------
Net earnings (loss) (1,926) (2,234) (2,049) (27) 230 299
Preferred Stock Dividends --- --- --- --- --- ---
------------------------------------------------------------------------------
Net Earning (loss) on Common Shares $ (1,926) $ (2,234) $ (2,049) $ (27) $ 230 $ 299
==============================================================================
Earnings (loss) per share
Before cumulative effect of change
in accounting principle $ (0.62) $ (0.52) $ (1.13) $ 0.06 $ 0.15 $ 0.20
Cumulative effect of change in
accounting principle --- --- --- (0.08) --- ---
After cumulative effect of change
in accounting principle $ (0.62) $ (0.52) $ (1.13) $ (0.02) $ 0.15 $ 0.20
==============================================================================
Weighted average shares outstanding 3,082 4,316 1,816 1,520 1,520 1,520
==============================================================================
Ratio of earnings to fixed charges --- --- --- --- 1.34 1.31
Coverage deficiency (1) $ 1,947 $ 2,234 $ 2,049 $ 27 --- ---
</TABLE>
Continued on next page
15
<PAGE> 16
MERITAGE HOSPITALITY GROUP INC.
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
----------------------------
1997 (2)
-----------------------
Statement of Operations Data Actual Pro Forma 1996
-------------------------------------
<S> <C> <C> <C>
Net Revenue
Rooms $ 4,716 $ 4,716 $ 4,828
Food, beverage and other 26,568 26,568 6,577
-------------------------------------
Total Revenue 31,284 31,284 11,405
Cost and expenses
Cost of food and beverages 7,724 7,724 2,075
Operating expenses 18,521 18,521 5,751
General and administrative expenses 3,043 3,043 2,246
Depreciation and amortization 1,649 1,831 675
-------------------------------------
Total costs and expenses 30,937 31,119 10,747
-------------------------------------
Earnings from operations 347 165 658
Other expense
Interest (net) (1,729) (1,729) (678)
Other (292) (190) ---
-------------------------------------
Total other expense (2,021) (1,919) (678)
-------------------------------------
Loss before federal income
tax and cumulative effect of change in
accounting principle (1,674) (1,754) (20)
Federal income tax benefit --- --- (7)
-------------------------------------
Loss before cumulative effect of
change in accounting principle (1,674) (1,754) (13)
Cumulative effect of prior years of
changing to a different method of
accounting for income taxes --- --- ---
Net loss (1,674) (1,754) (13)
-------------------------------------
Preferred Stock Dividends 70 70 ---
-------------------------------------
Net loss on Common Shares $ (1,744) $ (1,824) $ (13)
=====================================
Loss per share
Before cumulative effect of change in
accounting principle $ (0.54) $ (0.41) $ (0.00)
Cumulative effect of change in
accounting principle --- --- ---
-------------------------------------
After cumulative effect of change $ (0.54) $ (0.41) $ (0.00)
in accounting principle =====================================
Weighted average shares outstanding 3,214 4,450 3,044
=====================================
Ratio of earnings to fixed charges --- --- ---
Coverage deficiency (1) $ 1,573 $ 1,754 $ 20
</TABLE>
Continued on next page
16
<PAGE> 17
MERITAGE HOSPITALITY GROUP INC.
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<TABLE>
<CAPTION>
Years Ended November 30,
-----------------------------------------------------------------------------
1996
----
Actual Pro Forma 1995 1994 1993 1992
----------------------- ----- ---- ---- ----
BALANCE SHEET DATA (2)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 2,265 $ 2,171 $ 1,337 $ 622 $ 451 $ 577
Working capital 103 9 44 406 (450) (4,429)
Property and equipment, net 21,757 22,797 13,218 13,645 14,069 14,867
Total assets 31,929 34,843 17,984 19,688 20,004 20,145
Long-term debt, including
current maturities 24,293 24,293 11,443 12,647 12,905 13,209
Total Liabilities 29,908 28,502 14,929 14,463 14,752 15,123
Shareholders' equity 2,021 6,341 3,055 5,225 5,252 5,022
STATEMENT OF CASH FLOWS DATA
Net increase (decrease) in cash
and cash equivalents 929 94 715 171 (127) 322
Net cash provided by (used in)
operating activities (1,496) (641) 425 990 1,056 1,687
Dividends - common stock 1,510 1,510 --- --- --- ---
Dividends - preferred stock --- --- --- --- --- ---
Distribution to partners --- 317 --- --- --- ---
</TABLE>
Continued on next page
17
<PAGE> 18
MERITAGE HOSPITALITY GROUP INC.
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
------------------------------------
1997
----
Actual Pro Forma 1996
----------------------- --------
BALANCE SHEET DATA (2)
<S> <C> <C> <C>
Cash and cash equivalents $ 998 $ 904 $ 1,166
Working capital (1,889) (1,983) 566
Property and equipment, net 21,199 22,239 14,243
Total assets 30,639 33,452 19,763
Long-term debt, including
current maturities 25,100 25,100 14,551
Total Liabilities 30,416 28,909 16,842
Shareholders' equity 223 4,543 2,921
STATEMENT OF CASH FLOWS DATA
Net increase (decrease) in cash
and cash equivalents (1,267) (1,362) (171)
Net cash provided by (used in)
operating activities (415) (415) (610)
Dividends - common stock --- --- 1,510
Dividends - preferred stock 70 70 ---
Distribution to partners --- --- ---
<FN>
(1) Earnings are inadequate to cover fixed charges in years ended 1996, 1995
and 1994 as well as the nine months ended August 31, 1997 and August 31,
1996.
(2) The transaction is reflected under the purchase method of accounting, and
the Pro Forma data is derived in accordance with such method. The Pro Forma
data prior to the effective time of the transaction may not be indicative
of the results that actually would have occurred if the transaction had
been in effect during the periods presented or which may be attained in the
future. Please refer to pages P-1 through P-7 for further Pro Forma
information.
</TABLE>
18
<PAGE> 19
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER LIMITED PARTNER UNIT DATA,
PARTNERSHIP UNITS OUTSTANDING AND RATIO DATA)
<TABLE>
<CAPTION>
(1) (2)
Eleven Months Ended Years Ended December 31,
November 30, 1996 -------------------------------------------------
----------------------
Statement of Earnings Data Actual Pro Forma 1995 1994 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue
Food, beverage and other $ 24,687 $ 24,687 $ 25,601 $ 24,910 $ 23,685 $ 22,743
------------------------------------------------------------------------------
Total Revenue 24,687 24,687 25,601 24,910 23,685 22,743
Cost and expenses
Cost of food and beverages 7,223 7,223 7,391 7,295 7,187 6,850
Operating expenses 14,662 14,662 15,099 13,987 13,264 12,819
General and administrative expenses 1,046 1,046 1,250 1,279 1,203 1,098
Depreciation and Amortization 769 971 853 857 971 950
------------------------------------------------------------------------------
Total cost and expenses 23,700 23,902 24,593 23,418 22,625 21,717
------------------------------------------------------------------------------
Earnings from operations 987 785 1,008 1,492 1,060 1,026
Other income (expense)
Interest (net) (403) (403) (512) (557) (622) (661)
Other (25) (25) 31 6 --- (17)
------------------------------------------------------------------------------
Total other expense (428) (428) (481) (551) (622) (678)
------------------------------------------------------------------------------
Earnings before extraordinary item 559 357 527 941 438 348
Extraordinary item --- --- (21) --- (87) ---
------------------------------------------------------------------------------
Net earnings $ 559 $ 357 $ 506 $ 941 $ 351 $ 348
==============================================================================
Net earnings attributable to:
Limited Partners $ 553 $ 353 $ 501 $ 931 $ 348 $ 345
General Partner 6 4 5 10 3 3
------------------------------------------------------------------------------
$ 559 $ 357 $ 506 $ 941 $ 351 $ 348
==============================================================================
Earnings per unit of limited
partnership unit
Before extraordinary item $ 440.22 $ 281.15 $ 415.14 $ 740.96 $ 345.06 $ 274.42
Extraordinary item - loss on
extinguishment of debt --- --- (16.18) --- (68.53) ---
------------------------------------------------------------------------------
After extraordinary item $ 440.22 $ 281.15 $ 398.96 $ 740.96 $ 276.53 $ 274.42
==============================================================================
Number of limited partnership units outstanding 1256.8 1256.8 1256.8 1256.8 1256.8 1256.8
==============================================================================
Ratio of earnings to fixed charges 2.36 1.87 1.94 2.65 1.49 1.52
==============================================================================
</TABLE>
Continued on next page
19
<PAGE> 20
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER LIMITED PARTNER UNIT DATA,
PARTNERSHIP UNITS OUTSTANDING AND RATIO DATA)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
----------------------------
1997 (2)
----------------------
Actual Pro Forma 1996
-------------------------------------
<S> <C> <C> <C>
Statement of Earnings Data
Net Revenue
Food, beverage and other $ 20,399 $ 20,399 $ 19,795
-------------------------------------
Total Revenue 20,399 20,399 19,795
Cost and expenses
Cost of food and beverages 5,838 5,838 5,781
Operating expenses 12,177 12,177 11,722
General and administrative expenses 962 962 958
Depreciation and amortization 692 857 631
Total cost and expenses 19,669 19,834 19,092
-------------------------------------
Earnings from operations 730 565 703
Other expense
Interest (net) (320) (320) (326)
Other (190) (190) ---
-------------------------------------
Total other expense (510) (510) (326)
-------------------------------------
Earnings before extraordinary item 220 55 377
Extraordinary item --- --- ---
-------------------------------------
Net earnings $ 220 $ 55 $ 377
=====================================
Net earnings attributable to:
Limited Partners $ 218 $ 54 $ 373
General Partner 2 1 4
-------------------------------------
$ 220 $ 55 $ 377
=====================================
Earnings per unit of limited partnership unit
Before extraordinary item $ 173.01 $ 42.86 $ 297.24
Extraordinary item - loss on extinguishment
of debt --- --- ---
-------------------------------------
After extraordinary item $ 173.01 $ 42.86 $ 297.74
=====================================
Number of limited partnership units 1256.8 1256.8 1256.8
outstanding =====================================
Ratio of earnings to fixed charges 1.66 1.16 2.11
</TABLE>
Continued on next page
20
<PAGE> 21
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER LIMITED PARTNER UNIT DATA,
LIMITED PARTNERSHIP UNITS OUTSTANDING AND RATIO DATA)
<TABLE>
<CAPTION>
(1) (2) Years Ended December 31,
Eleven months Ended ------------------------
November 30, 1996 1995 1994 1993 1992
----------------- ---- ---- ---- ----
Actual Pro Forma
------ ---------
Balance Sheet Data
<S> <C> <C> <C> <C> <C> <C>
Cash $ 394 $ 394 $ 411 $ 776 $ 409 $ 422
Working capital (850) (850) (912) (824) (1,089) (2,733)
Property and equipment, net 5,897 8,371 5,671 5,933 5,763 5,611
Total assets 9,076 11,550 8,832 9,698 9,341 9,478
Long-term debt, including
current maturities 4,379 4,379 4,469 5,127 5,494 4,176
Total liabilities 5,974 5,974 5,971 6,773 6,975 7,464
Partners' equity
Limited Partners 3,131 5,580 2,892 2,956 2,402 2,054
General Partner (29) (4) (31) (31) (36) (40)
Statement of Cash Flows Data
Net increase (decrease) in cash (17) (17) (365) 367 (12) 194
Net cash provided by operating
activities 1,201 1,201 1,366 1,808 627 1,207
Distributions 317 317 571 381 --- ---
</TABLE>
Continued on next page
21
<PAGE> 22
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER LIMITED PARTNER UNIT DATA,
LIMITED PARTNERSHIP UNITS OUTSTANDING AND RATIO DATA)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
----------------------------
1997
----
Actual Pro Forma 1996
------ --------- ----
Balance Sheet Data (2)
<S> <C> <C> <C>
Cash $ 408 $ 408 $ 277
Working capital (1,009) (1,009) (1,074)
Property and equipment, net 5,777 8,252 5,735
Total assets 8,649 11,124 8,662
Long-term debt, including
current maturities 3,919 3,919 4,111
Total liabilities 5,328 5,328 5,687
Partners' equity
Limited Partners 3,348 5,798 3,005
General Partner (27) (2) (30)
Statement of Cash Flows Data
Net increase (decrease) in cash 14 14 (6)
Net cash provided by operating
activities 1,126 1,126 1,206
Distributions --- --- 317
<FN>
(1) In fiscal 1996, the Wendy's Partnership changed its fiscal year from
December 31 to November 30, due to the consolidation of the Wendy's
Partnership's financial statements with Meritage. Meritage acquired a
majority interest in the Wendy's Partnership on October 31, 1996.
(2) The transaction is reflected under the purchase method of accounting, and
the Pro Forma data is derived in accordance with such method. The Pro Forma
data prior to the effective time of the transaction may not be indicative
of the results that actually would have occurred if the transaction had
been in effect during the periods presented or which may be attained in the
future. Please refer to pages P-1 through P-7 for further Pro Forma
information.
</TABLE>
22
<PAGE> 23
COMPARATIVE PER SHARE AND UNIT DATA
The following table sets forth certain per share and unit information for
both Meritage and the Wendy's Partnership on an historical basis and selected
unaudited, pro forma, combined, comparative per share data for Meritage and the
Wendy's Partnership combined. The transaction is reflected under the purchase
method of accounting, and pro forma data is derived in accordance with such
method. The Wendy's Partnership pro forma equivalent amounts are presented with
respect to each set of pro forma information. Such amounts are computed by
multiplying the pro forma amounts by the assumed exchange ratio of 2,142.86
shares of Meritage Common Shares for each unit held by non-affiliated limited
partners. The pro forma data prior to the effective time of the transaction may
not be indicative of the results that actually would have occurred if the
transaction had been in effect during the periods presented or which may be
attained in the future.
<TABLE>
<CAPTION>
MERITAGE THE PARTNERSHIP
(PER SHARE) (PER UNIT)
-------------------------------------
<S> <C> <C>
EARNINGS (LOSS) PER SHARE OR UNIT:
Fiscal 1996 $ (0.62) $ 440.22
Fiscal 1996 - Pro Forma (0.52) 281.15
Fiscal 1995 (1.13) 398.96
Fiscal 1994 (0.02) 740.96
Fiscal 1993 0.15 276.53
Fiscal 1992 0.20 274.42
Nine months ended August 31, 1997 - Unaudited (0.54) 173.01
Nine months ended August 31, 1997 - Pro Forma (0.41) 42.86
Nine months ended August 31, 1996 - Unaudited (0.00) 297.24
COMMON STOCK DIVIDENDS DECLARED/DISTRIBUTIONS
PER SHARE OR UNIT:
Fiscal 1996 0.50 250.00
Fiscal 1996 - Pro Forma 0.42 250.00
Fiscal 1995 --- 450.00
Fiscal 1994 --- 300.00
Fiscal 1993 --- ---
Fiscal 1992 --- ---
Nine months ended August 31, 1997 - Unaudited --- ---
Nine months ended August 31, 1997 - Pro Forma --- ---
Nine months ended August 31, 1996 - Unaudited 0.50 250.00
BOOK VALUE PER SHARE OR UNIT:
Fiscal 1996 0.29 2,491.07
Fiscal 1995 1.01 2,300.85
Fiscal 1994 3.44 2,351.90
Fiscal 1993 3.46 1,910.94
Fiscal 1992 3.30 1,634.41
Nine months ended August 31, 1997 - Unaudited (0.36) 2,664.07
Nine months ended August 31, 1997 - Pro Forma 0.71 4,613.15
Nine months ended August 31, 1996 - Unaudited 0.91 2,390.77
</TABLE>
23
<PAGE> 24
RISK FACTORS AND OTHER CONSIDERATIONS
Each Limited Partner should carefully consider the factors set forth
below, as well as other information included elsewhere herein.
RISKS ASSOCIATED WITH DISSOLUTION OF THE WENDY'S PARTNERSHIP
Conflicts of Interest
Meritage has an inherent conflict of interest in that MHG Food Service,
a subsidiary of Meritage, owns approximately 54% of the outstanding units of the
Wendy's Partnership and has appointed MCC Food Service, an affiliate of
Meritage, as the general partner of the Wendy's Partnership. Meritage is in a
position to cause the sale of assets to it and the dissolution of the Wendy's
Partnership without the vote of the non-affiliated limited partners, and
obviously would desire to pay less for the Wendy's Partnership units than the
limited partners would want to receive. As general partner, MCC Food Service is
accountable to the limited partners as a fiduciary and must, therefore, exercise
good faith and integrity in the resolution of any conflict of interest and in
its dealings with the Wendy's Partnership. MCC Food Service is a wholly-owned
subsidiary of MCC which owns approximately 48% of Meritage's outstanding Common
Shares. After the transaction, all of the income and losses of the Wendy's
Partnership will accrue to Meritage.
Meritage desires to obtain the remaining units of the Wendy's
Partnership at the best price available to it. Therefore, Meritage is not making
any recommendation with respect to the transaction. However, Meritage does
believe that the transaction is fair, from a financial point of view, to the
non-affiliated limited partners because the price paid equals the highest price
paid in independent transactions for units, and because of the opinion of Roney
& Co. that the terms of the transaction are fair from a financial point of view.
See "Background and Reasons for the Transaction."
No Dissenters' Rights
Under Michigan law and the terms of the Wendy's Partnership Agreement,
a limited partner will have no appraisal, dissenters' or similar rights (i.e.,
rights, instead of receiving Meritage Common Shares, to seek a judicial
determination of the "fair value" of the units and to compel the Wendy's
Partnership to purchase units for cash in that amount). Such rights will not
voluntarily be accorded to limited partners by Meritage or the Wendy's
Partnership. Pursuant to Section 12.7 of the Amended and Restated Agreement of
Limited Partnership for the Wendy's Partnership, limited partners who do not
indicate their opposition to the transaction in writing to the Wendy's
Partnership at 40 Pearl Street, N.W., Suite 900, Grand Rapids, Michigan 49503,
Attention: General Counsel before _________________, 1997, will be deemed to
have consented to the transaction. Should any litigation ensue with respect to
the transaction, Meritage would assert any consents returned to it as a defense.
No Independent Representation of Limited Partners
The consideration to be received by non-affiliated limited partners in
the transaction was determined by Meritage. See "Background and Reasons for the
Transaction - Determination of Consideration for Units." No independent
representative or counsel has acted on behalf of the non-affiliated limited
partners, nor did the management of Meritage negotiate the terms of the
transaction with any non-affiliated limited partner. There is a possibility
that, if such representatives or non-affiliated limited partners have taken part
in such determination and negotiation, the terms of the transaction might have
been different, and perhaps, more favorable to non-affiliated limited partners.
Alternatives Not Pursued
The general partner, which is an affiliate of Meritage, did not pursue
a strategy of continuing the operations of the Wendy's Partnership, selling the
Wendy's Partnership to a third party or liquidating it by sales of
24
<PAGE> 25
properties followed by a cash liquidation because it considered these
alternatives as inferior to the proposal of Meritage, and because Meritage
controls both the Wendy's Partnership and the general partner and would not
favor any of those alternatives.
Change in Nature of Investment and Status of Limited Partners
Upon completion of the transaction, the economic interest of the
Wendy's Partnership limited partners will change from interests in ownership of
a limited partnership with a limited duration that is designed to distribute
income, to that of a shareholder of a larger organization with perpetual
duration which presently does not intend to pay dividends. Collectively, the
Meritage Common Shares issued in the transaction will represent approximately
___% of Meritage's outstanding Common Shares as determined after the
transaction. The economic interests of the limited partners will change from
only restaurant operations, to a broader corporate operation which, unlike the
Wendy's Partnership, may include businesses other than restaurant operations.
See "Distribution Policies."
In addition, this change also results in significant modifications to
the rights of the limited partners with respect to voting, meetings of holders,
dissolution and liquidation, and access to investor lists and other books and
records. Also, there will be changes with respect to the management, taxation of
the entity, its investors, and marketability and transferability of the equity
interests. If the transaction is consummated, holders of the units would become
shareholders of Meritage, a Michigan corporation, and would therefore experience
a change in the rights from those of limited partners of a Michigan limited
partnership to those of shareholders of a Michigan corporation. See "Description
of Capital Shares" and "Comparative Rights."
RISKS ASSOCIATED WITH INVESTMENT IN MERITAGE COMMON SHARES
Limited Public Trading Market
Although the Common Shares have been continuously traded on the OTC
Bulletin Board since September 1995 and listed on the Chicago Stock Exchange
since October 22, 1996, they are not actively traded. Presently, four broker
dealer firms provide bid and asked quotations for the Common Shares. Meritage
cannot estimate the effect on the trading market that will result from the
issuance of Common Shares in the transaction. Those shares will be freely
transferable in the hands of the former limited partners who are not affiliates
of Meritage, and sales of a substantial amount of the shares could depress the
market price for the Common Shares.
Substantial Debt
Meritage had $25.1 million of long-term debt outstanding at August 31,
1997, which included current portions of long-term debt and the debt of the
Wendy's Partnership. Included in the debt is an $875,000 loan for the
development of a marina. As of August 31, 1997, $800,000 had been borrowed on
the marina development loan leaving $75,000 available. The Company's expansion
programs will likely result in additional debt. Furthermore, additional sales of
Meritage preferred stock could increase preferred dividend service requirements.
Increases in general interest rate levels and general credit tightening
situations could adversely affect Meritage's financial condition in the future.
Meritage obtained waivers of default under its primary financing
arrangements and a moratorium on payments due in October, November and December,
1997. MCC, which owns 48.2% of Meritage's Common Shares, has guaranteed certain
portions of Meritage's debt and pledged those shares as security for a portion
of Meritage's debt. Should the Company's lenders foreclose on the debt and the
guarantee, control of Meritage could change. See "Management's Discussion and
Results of Operations - Liquidity and Capital Resources."
As of the end of the third quarter, August 31, 1997, the Company's
total indebtedness was $25.1 million, which represented 99.1% of the total
capitalization. Total interest expense for the nine month period ended August
31, 1997 was $2,168,567 as compared to cash flow from operations (excluding
payment of interest expense) of $1,753,650 for the same nine month period. Thus,
the total interest expense is 123.7% of the operating cash flow
25
<PAGE> 26
(excluding interest expense). The ratio of earnings to fixed charges for the
nine months ended August 31, 1997 was less than 1. The resulting fixed ratio
deficiency was $1,572,814. The historical ratio of earnings to fixed charges and
any coverage deficiency is demonstrated in the table under "Summary Consolidated
Financial Data."
Continuing Losses
Meritage has had continuing losses since fiscal 1993 resulting in a
cumulative deficit at August 31, 1997 of $7,237,118 which would not be changed
by completion of the transaction. Since fiscal 1994 it has also had losses from
operations. The depreciation component of its losses relates to its hotel
properties and it is expected to continue as long as those properties are held.
The interest component of its losses could be reduced if Meritage sells any of
its hotel properties but there is no assurance that this will occur.
Common Share Ownership and Control by Insiders
Meritage's officers, directors, principal shareholders and their
affiliates beneficially own approximately 62% of Meritage's outstanding Common
Shares (all of which are eligible for sale under Securities and Exchange
Commission Rule 144 promulgated under the Securities Act of 1933). As a result,
these shareholders and, in particular, Meritage's officers and directors, when
acting in concert, have the ability to influence significantly most matters
requiring approval by shareholders of Meritage, including the election of a
majority of the directors. In addition, the Board of Directors has the authority
to issue up to approximately 26,780,000 Common Shares and 4,860,000 shares of
undesignated preferred stock and to determine the rights, preferences privileges
and restrictions, including voting rights, of such preferred shares, without any
future vote or action by the shareholders. The voting power of these principal
shareholders, officers and directors, or the issuance of Common Shares or
preferred stock under certain circumstances, could have the effect of delaying,
deferring or preventing a change in control of Meritage. Although the ownership
of this group will decline from approximately 62% to ___% upon completion of the
transaction, their degree of control will remain.
Legal Proceedings
In December 1996, Meritage received a notice from the Internal Revenue
Service that approximately $2.1 million, which Meritage deducted as a business
expense in connection with litigation in 1995 and 1996 relating to the
replacement and restructuring of former management, should be treated as a
capital expenditure and, therefore, disallowed as a deduction. Meritage is
vigorously contesting the disallowance. If the IRS were to completely prevail in
its position, then Meritage would be required to make a payment of approximately
$340,000 for additional federal and state income taxes, not including any
interest or penalties. If Meritage is not able immediately to carry back its
1996 tax loss to offset such payment, any amount that Meritage would be required
to pay would be refunded within 120 days of payment.
On May 19, 1997, a majority limited interest of the Wendy's Partnership
removed Wendy's West Michigan, Inc. as general partner of the Wendy's
Partnership and appointed MCC Food Service, an affiliate of Meritage, as the
substitute general partner. Approximately 180 unit holders (from whom Meritage
acquired 482.55 of its total 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. This action was carried out in connection
with Meritage's acquisition of a controlling interest in the Wendy's
Partnership, and in accordance with Meritage's representations during the tender
offer that it may remove the general partner and substitute itself or its
designee as the new general partner. On May 21, 1997, the former general partner
commenced a lawsuit against Meritage, 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
26
<PAGE> 27
would prohibit the defendants from participating in the management of the
Wendy's Partnership, (iii) unspecified damages for breach of contract, and (iv)
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, Meritage, 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. Wendy's International stated that it does not intend to take a
position as to the rights of either party with respect to the specific issues
which have thus far been raised by this lawsuit. The consent of Wendy's
International to MCC Food Service serving as the general partner has already
been obtained.
RISKS ASSOCIATED WITH MERITAGE'S BUSINESS
Broadened Business Orientation
Although Meritage was engaged only in the lodging business before its
acquisition of a controlling interest in the Wendy's Partnership, Meritage has
recently reassessed its long-range objectives and made a strategic decision to
expand further its Food Service Group through the acquisition of additional
chain restaurant businesses. In addition, 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 is considering the sale
of one or more of its hotels. The Company has retained a professional brokerage
firm to assist it in this regard but does not have any agreement for the sale of
any of the hotels at this time. Proceeds of any sale would be used to reduce the
Company's debt.
Management cannot, of course, determine whether it will sell any of its
hotels or how long it would take to sell these assets at prices acceptable to
Meritage. Furthermore, there is a risk that this expansion of the business
operations might not be successfully implemented for many reasons, including the
timing and prices involved in any sales of the lodging properties, the
availability and pricing of additional restaurant operations, and the ability of
management to successfully manage new restaurant businesses. Utilization of the
proceeds from the sale of any of the hotels and other assets to acquire
additional food service properties will involve all of the risks normally
attendant to acquisitions, including whether the selection, timing and pricing
of acquisitions will enable Meritage to operate these businesses at a profit.
The acquisition, consolidation and integration of management systems and
procedures of acquired businesses into Meritage's existing management structure
will present a significant challenge, and expansion of the Food Service Group
may require additional operating staff. Any substantial difficulties experienced
in this program could have a material adverse effect on Meritage's operations
and financial condition. Also, although Meritage may require additional debt or
equity financing to accomplish its aims, such financing may not be available or,
if available, not on terms acceptable to Meritage.
The hotel properties, which have been owned since 1986, have been
substantially depreciated and are carried on the books at approximately $14
million. As a result, if a sale occurs, the sales are expected to result in
substantial gains that will trigger the payment of approximately 34% of the tax
profit in income taxes prior to the application of any available NOL
carryforward and any current year operating losses. Thus, the net taxes paid
would reduce the proceeds available to pay down the Company's debt.
Risks of the Lodging Industry
Meritage is subject to all of the risks inherent to the lodging
industry. These risks include, among other factors, varying levels of demand for
rooms and related services, adverse effects of the general and local economic
and market conditions, changes in travel patterns, changes in governmental
regulations that influence wages, prices or construction costs, changes in
interest rates, availability of credit and changes in real estate taxes,
availability of labor in a labor-intensive industry and operating expenses, and
the recurring need for renovations, refurbishment and improvement of hotel
properties. Values of hotel properties are sensitive to changes in local market
and economic conditions and to the fluctuations in the economy as a whole. Due
to the high level of fixed costs
27
<PAGE> 28
required to operate hotels, significant expenditures necessary to the hotel
operations cannot be reduced substantially when circumstances cause a reduction
of revenue. Investments in limited purpose facilities, such as a hotel,
typically involve greater risks than do investments in multi-purpose properties,
some of which risks are as follows:
Over-building
New hotel construction is increasing from levels experienced in the
early 1990's as a result of increasing occupancy rates. Room starts declined
from an annual rate of approximately 160,000 in 1984, to less than 40,000 in the
mid-1990's and are projected to be at approximately 110,000 for 1997. These
factors could lead to an overbuilding situation, such as occurred in the 1980's,
when an oversupply of rooms adversely affected occupancy levels and room rates.
If this situation develops it could adversely affect the prices at which
Meritage values its hotel properties.
Competition for Market Share
The lodging industry is highly competitive. There is no single
competitor or small number of competitors of Meritage that are dominant in the
industry. Meritage's hotels operate in areas that contain numerous competitors,
many of which have substantially greater resources than Meritage. Competition in
the lodging industry is based generally on convenience of location, room rates,
and range and quality of services and guest amenities offered. Meritage
considers the location of its hotels and the services and guest amenities
provided by it to be among the most important factors in its business.
Demographic, geographic or other changes in one or more of Meritage's markets
could impact the convenience or desirability of the sites of certain hotels,
which would in turn affect the operations of those hotels. In addition, new or
existing competitors could significantly lower rates or offer greater
conveniences, services or amenities or significantly expand, improve or
introduce new facilities in markets in which Meritage's hotels compete, thereby
adversely affecting Meritage's operations. See "Business - Competition and
Industry Conditions."
Requirements for Capital and Labor
Hotel operations are capital, management and labor intensive. In order
to remain competitive, hotel facilities must be continually maintained,
modernized and refurbished. This increases the need for capital funds from
reserves, current cash flow or debt financing and thereby increases the
sensitivity of the investment to the cost and availability of such funds.
Capital expenditures to the properties for maintenance, improvements and
modernization often do not increase revenues, but rather, are necessary to
maintain current revenue. Given Meritage's significant level of debt, it may be
difficult to obtain debt financing for such capital expenditures as Meritage may
not be able to demonstrate revenue growth from such investments. Therefore,
Meritage may have to fund property maintenance costs from current cash flow and
may have to delay improvements and modernization. In addition, hotels are
especially susceptible to the impact of economic and other conditions outside
the control of the hotel owner.
Meritage plans to expand the Wendy's restaurant business through the
building of new stores. Debt financing may be more readily available for this
type of expansion due to the existence of new collateral and the increase in
revenues generated by the new stores.
Seasonality
The lodging industry is seasonal in nature. Generally, hotel revenues
are greater in Meritage's third fiscal quarter than in its other fiscal
quarters. This seasonality can be expected to cause fluctuations in the revenues
of Meritage. During fiscal year 1996, lodging revenue generated by quarter were
as follows: First Quarter - 22%, Second Quarter - 23%, Third Quarter - 32% and
Fourth Quarter - 23%. Quarterly earnings may also be adversely affected by
events beyond Meritage's control, such as extreme weather conditions, economic
factors and other considerations affecting travel.
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<PAGE> 29
Risks Affecting Restaurant Operations
The restaurant industry in the United States is generally viewed as
being over-expanded in relation to customer demand. This factor puts a premium
upon an operator's ability to provide products that differentiate it from its
competitors and to operate its business in an efficient manner. Although the
Company's operations are now confined to smaller urban areas in Michigan, as it
expands, Meritage will have to take into account and adjust for changing
competitive conditions in each particular food service business that it enters
into with respect to its markets. Meritage's expansion plans in the food service
industry are not limited to Wendy's Restaurants and may include any one of a
variety of existing restaurant businesses. The restaurant industry typically
involves risks such as the following:
Competition
The quick-service restaurant industry is intensely competitive with
respect to price, service, location, concept and food quality. The industry is
mature, and competition can be expected to increase. Other major quick-service
restaurant chains (with greater financial and other resources than those
possessed by Meritage) have similar or competing operational concepts to those
of Meritage. A significant change in pricing or other business strategies by one
or more of Meritage's competitors, including an increase in the number of
restaurants in Meritage's territories, could have an adverse impact on
Meritage's sales, earnings and growth.
Meritage and the quick-service restaurant industry are significantly
affected by factors such as changes in local, regional or national economic
conditions, changes in consumer tastes, and consumer concerns about the safety
and nutritional quality of quick-service food. In addition, factors such as
increases in food, labor and energy costs, the availability and cost of suitable
restaurant sites, fluctuating insurance rates, state and local regulations, and
the availability of an adequate number of hourly-paid employees can also
adversely affect the quick-service restaurant industry. See "Business -
Competition and Industry Conditions."
Restrictions Imposed by Wendy's International
As the general partner of the Wendy's Partnership, MCC Food Service, an
affiliate of Meritage, now directs the operations of the 25 Wendy's restaurants
operated by the Wendy's Partnership. MCC Food Service's control is being
challenged in a lawsuit commenced by the former general partner of the Wendy's
Partnership. See "Risks Associated with Investment in Meritage Common Shares -
Legal Proceedings." Operations of the Wendy's Partnership are conducted pursuant
to franchise agreements with Wendy's International. In addition to the
contractual restrictions imposed by the franchise agreements, Meritage and its
affiliates which are involved in the Wendy's business, are subject to certain
restrictions imposed by policies and procedures established by Wendy's
International as in effect from time to time. These restrictions may have the
effect of limiting Meritage's ability to pursue some of its business plans.
The consent of Wendy's International may be required for certain
transactions by Meritage. If consent is required and not obtained, Meritage will
not be able to proceed with those plans which, in turn, could affect Meritage's
growth strategy and could have a material adverse effect on Meritage's financial
condition and results of operations. If Meritage proceeds without Wendy's
International's consent, Wendy's International could terminate its franchise
agreements. Termination of the franchise agreements would have a material
adverse effect on Meritage's financial condition and results of operations.
Part of Meritage's business strategy is to expand its operations
through the development and acquisition of Wendy's restaurants. The approval of
Wendy's International is required for the development or acquisition of any
interest in Wendy's restaurants outside of Meritage's designated market area
(the Michigan counties of Allegan, Calhoun, Kalamazoo, Kent, Muskegon, Ottawa
and Van Buren) Wendy's consent to any acquisitions or development may be
withheld in Wendy's sole and absolute discretion. Pursuant to its agreement with
Wendy's International, Meritage is also limited in both the acquisition or
development of other chain restaurant businesses. Wendy's International has
restricted Meritage's involvement with any quick-service restaurant in
Meritage's market
29
<PAGE> 30
area, and any quick-service restaurant outside of Meritage's market area that
sells chicken sandwiches, hamburgers or products similar to Wendy's
International and which is located within a three mile radius of another Wendy's
restaurant.
Wendy's International must approve the opening by Meritage of any new
restaurant, including restaurants opened within Meritage's existing franchise
territories. Wendy's International also maintains discretion over the menu items
that may be offered in Meritage's restaurants. By virtue of franchise and other
agreements, Meritage is required to pay to Wendy's International technical
assistance fees upon the opening of new restaurants and monthly royalty and
national advertising fees. These agreements also provide for the termination of
Meritage as a franchisee upon the failure of Meritage to comply with certain
restrictions and obligations imposed on Meritage. The franchise agreements with
Wendy's International generally have a 20 year term and can be renewed for an
additional 10 years provided certain conditions are met.
Dependence Upon Wendy's International
Meritage's restaurant operations are largely dependent on the Wendy's
restaurant chain, which in turn is dependent upon the management and financial
condition of Wendy's International and the reputation developed by Wendy's
restaurants operated by other Wendy's franchisees. Should Wendy's International
be unable to compete effectively with similar restaurant chains in the future,
Meritage would be materially and adversely affected. Furthermore, many of the
attributes which lead to the success of Wendy's operations are factors over
which Meritage has no control, such as marketing efforts, introduction of new
products, quality assurance and other operational systems. Adverse publicity
involving other Wendy's franchisees could have an adverse effect on all
franchisees including Meritage.
Geographic Concentration of Operations
All of Meritage's restaurant operations and hotels are now concentrated
in smaller urban areas of Michigan. A marked decline in the Michigan economy
could adversely affect Meritage's operations.
30
<PAGE> 31
CAPITALIZATION
The following table sets forth the capitalization of Meritage at August
31, 1997 and as adjusted to give effect to the issuance of Common Shares in the
transaction whereby Meritage will acquire all remaining units of the Wendy's
Partnership not owned by Meritage. The table should be read in conjunction with
Meritage's Consolidated Financial Statements and related Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
August 31, 1997
-------------------------------
Actual Pro Forma
------------ ------------
<S> <C> <C>
Long-term debt, including current maturities $ 25,100,309 $ 25,100,309
Shareholders' equity:
Preferred Stock, 5,000,000 shares authorized,
138,387 issued and outstanding 1,384 1,384
Common Shares, 30,000,000, 3,217,094 (actual) and
4,451,380 (as adjusted) issued and outstanding 32,171 44,514
Additional paid-in capital 12,977,101 17,284,758
Note receivable from sale of shares (5,550,415) (5,550,415)
Accumulated deficit (7,237,118) (7,237,118)
------------ ------------
Total Shareholders' equity $ 223,123 $ 4,543,123
------------ ------------
Total capitalization $ 25,323,432 $ 29,643,432
============ ============
</TABLE>
PRICE RANGE OF COMMON SHARES
Meritage's Common Shares are currently traded on the OTC Bulletin Board
under the symbol "MHGI" and on the Chicago Stock Exchange under the symbol
"MHG." No recent quotations were published until the beginning of Meritage's
fourth quarter of fiscal 1995. The following are published high and low bid
prices (beginning on October 18, 1995) for the Company's Common Shares as
reported on the OTC Bulletin Board.
<TABLE>
<CAPTION>
============================================== =========== ===========
HIGH LOW
---------------------------------------------- ----------- -----------
<S> <C> <C>
FISCAL YEAR ENDED NOVEMBER 30, 1995
---------------------------------------------- ----------- -----------
October 18, 1995 - November 30, 1995 $ 7 1/2 $ 5 7/8
---------------------------------------------- ----------- -----------
FISCAL YEAR ENDED NOVEMBER 30, 1996
---------------------------------------------- ----------- -----------
First Quarter $ 7 1/8 $ 5 1/2
---------------------------------------------- ----------- -----------
Second Quarter $ 6 3/8 $ 5 5/8
---------------------------------------------- ----------- -----------
Third Quarter $ 6 3/8 $ 4 1/4
---------------------------------------------- ----------- -----------
Fourth Quarter $ 6 1/4 $ 4 1/4
============================================== =========== ===========
</TABLE>
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<PAGE> 32
<TABLE>
<CAPTION>
============================================== =========== ===========
HIGH LOW
---------------------------------------------- ----------- -----------
<S> <C> <C>
FISCAL YEAR 1997
---------------------------------------------- ----------- -----------
First Quarter $ 6 1/4 $ 5 3/8
---------------------------------------------- ----------- -----------
Second Quarter $ 5 1/4 $ 4
---------------------------------------------- ----------- -----------
Third Quarter $ 4 $ 2 5/8
---------------------------------------------- ----------- -----------
Fourth Quarter (through October 9) $ 3 1/2 $ 3 1/64
============================================== =========== ===========
</TABLE>
As of July 31, 1997, there were approximately 600 record holders of the
Common Shares which Meritage believes represents approximately 1,400 beneficial
holders.
DISTRIBUTION POLICIES
Other than a special dividend in the amount of $.50 per share of
Meritage's outstanding Common Shares paid on April 26, 1996, Meritage has not
paid cash dividends on its Common Shares. It intends to continue its current
policy of retaining funds for operations. Moreover, payment of dividends on the
Common Shares is prohibited by the terms of Meritage's loan agreement with its
primary long-term lender. See "Capitalization," "Meritage Hospitality Group Inc.
- - Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources" and "Description of Capital
Shares."
Previously, the general partner reviewed the Wendy's Partnership's
results of operations and cash requirements on a semi-annual basis and
determined the cash flow from operations available for distribution to the
limited partners. The loan agreement for the Wendy's Partnership limited the
cash available for distribution. See "Wendy's of West Michigan Limited
Partnership - Management's Discussion and Analysis of Financial Condition and
Results of Operation - Liquidity and Capital Resources." In January 1995, July
1995, January 1996 and July 1996, the Wendy's Partnership distributed $250,
$200, $100 and $150, respectively, per unit. There have been no additional
distributions since July 1996.
BACKGROUND AND REASONS FOR THE TRANSACTION
BACKGROUND OF THE TRANSACTION
The Prospectus relates to Meritage's plans to cause the Wendy's
Partnership to sell all of its assets, subject to liabilities, to a new limited
partnership being formed under the direction of Meritage. The Wendy's
Partnership will receive Meritage Common Shares in consideration of the sale of
assets. The Wendy's Partnership will then be dissolved and the Common Shares
distributed to all limited partners other than Meritage. The number of shares to
be distributed will be that number that has a value of $7,500 for each limited
partnership unit, based on the lesser of (i) the average high and low bid price
on the OTC Bulletin Board for the 10 trading days preceding the date of
dissolution, or (ii) $4.125 per share. The partnership units held by Meritage
will be canceled.
The transaction will be accomplished in accordance with Section 12.7 of
the Wendy's Partnership Agreement. Under Section 12.7, the limited partners are
deemed to have consented to the transaction unless they indicated to the
contrary in writing to the Wendy's Partnership before ___________, 1997. The
transaction requires approval by the general partner and over half of the
outstanding limited partnership units. Since Meritage is affiliated with the
general partner, and owns over half of the outstanding limited partnership
units, the transaction will be approved regardless of the vote or objections of
non-affiliated limited partners.
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<PAGE> 33
In March 1995, MCC (Meritage's principal shareholder) made an inquiry
to a representative of Wendy's West Michigan, Inc., the former general partner
of the Wendy's Partnership, regarding the possible acquisition of the Wendy's
Partnership. In August 1995, MCC made a formal offer to a representative of the
former general partner to purchase the Wendy's Partnership in a transaction
whereby each limited partner would receive approximately $6,000 per unit. The
offer was not presented to the limited partners for its approval.
Meritage then commenced privately negotiated purchase of units. On June
11, 1996, Meritage purchased 14 units for $5,000 cash per unit. On July 10,
1996, Meritage purchased an additional 143.25 units in exchange for 171,900
Meritage Common Shares which Meritage valued at $6,000 per unit based on the
unregistered nature of such shares and the then two-year holding period. One of
those sellers, Robert E. Schermer, Sr., is Chairman of Meritage's Board of
Directors. On October 31, 1996, Meritage acquired 482.55 units in a tender offer
for $7,000 cash per unit. Meritage also stated in the tender offer that its
ultimate objective was to acquire all of the units of the Wendy's Partnership.
Meritage initiated this transaction in fulfillment of that statement as soon as
practical after it obtained the necessary consents of Wendy's International to
its acquisition of the franchises and the business of the Wendy's Partnership.
In November 1996, Meritage acquired 41 units for 29,520 shares of Meritage
Series A Convertible Preferred Stock, which Meritage valued at $7,200 per unit.
Meritage decided the purchase prices for such units based on its determination
of the value of the Wendy's Partnership.
As a result of these transactions, Meritage owns (through its
subsidiary MHG Food Service) approximately 54% of the units. The Wendy's
Partnership Agreement provides that the replacement of the general partner of
the Wendy's Partnership, the sale of all of the assets of the Wendy's
Partnership and its dissolution can be authorized by the affirmative vote of a
majority of all limited partnership units. On May 19, 1997, Meritage appointed
MCC Food Service, an affiliate of Meritage, as substitute general partner of the
Wendy's Partnership. A majority in interest of the Wendy's Partnership (held by
approximately 180 unit holders) consented to the replacement of the former
general partner with MCC Food Service. The removal of the former general partner
was carried out in connection with Meritage's assumption of control of a
majority of the units of the Wendy's Partnership, and in accordance with
Meritage's representations during the tender offer that it may remove the
general partner and substitute itself or its designee as the new general
partner. Meritage's ownership position is sufficient to allow it, without the
consent of any of the other limited partners, to effectuate the sale of assets
to Meritage in exchange for Meritage Common Shares and to dissolve the Wendy's
Partnership. In the dissolution, each non-affiliated limited partner will
receive Meritage Common Shares valued at $7,500 per unit. Meritage proposed the
transaction in order to obtain all assets of the Wendy's Partnership. No
alternatives were considered as part of Meritage's goal to dissolve the Wendy's
Partnership.
The Meritage Common Shares to be issued in the dissolution have been
registered under the Securities Act of 1933. Although this transaction is not
governed by the proxy statement rules of the Securities Exchange Act of 1934, it
is subject to regulations of the Securities and Exchange Commission. These
regulations require, among other things, that this prospectus be delivered to
unit holders at least 60 days prior to the date of the sale of assets and
dissolution of the Wendy's Partnership.
FEES AND EXPENSES OF THE TRANSACTION
Meritage will pay the following fees associated with the transaction:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 1,500
Legal fees and expenses ....................................... 50,000
Accounting fees and expenses .................................. 15,000
Printing fees ................................................. 10,000
State securities laws fees and expenses ....................... 10,000
Miscellaneous ................................................. 8,000
-------
$94,500
=======
</TABLE>
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<PAGE> 34
DETERMINATION OF CONSIDERATION FOR UNITS
In arriving at the consideration of $7,500 of Meritage Common Shares
per unit in the transaction, Meritage is offering an amount per unit which
exceeds, or is at least equal to, the most that Meritage has paid for any of the
units it acquired. In November 1996, Meritage purchased 41 units for Meritage
Series A Convertible Preferred Stock value at $7,200 per unit. All other
purchases by Meritage were for less than $7,200 per unit. Although Meritage
booked a purchase price of $7,500 per unit for the purchase of a substantial
number of units for Meritage Common Shares in July 1996, Meritage believes that
the fair market value of the consideration for such units was less. This
transaction involved a purchase by Meritage of 143.25 units at a price of 1,200
Meritage Common Shares per unit. The Meritage shares were not registered under
the Securities Act of 1933 and consequently are subject to a two year holding
period before the shares can be sold publicly. For that reason, and the
significant block of Meritage Common Stock involved, Meritage estimates that the
value of the stock per unit was $6,000 per unit which is 80% of the asked quote
on the date of sale.
Meritage initially determined to base the number of shares to be issued
for each unit on the average trading prices during the ten trading days
preceding the date of dissolution of the Wendy's Partnership. In September 1997,
it restructured the offer to place a ceiling of $4.125 per share on the value of
Meritage's shares to be issued in the exchange, with the result that the
transaction will now consist of that number of Meritage Common Shares that is
equal to $7,500 per unit divided by the lesser of (i) the trading range formula,
or (ii) $4.125 per share. The ceiling of $4.125 per share was added to improve
the fairness of the transaction, and was established based on the estimated fair
market value of the Company's total assets, including the net present value of
the note receivable from the sale of shares to MCC which, due to GAAP
requirements, is carried at zero value on Meritage's audited financial
statements. See "Business - Other Assets." The choice of this figure is
arbitrary and may have no relation to where Meritage Common Shares will trade
now or in the future.
BACKGROUND OF THE WENDY'S PARTNERSHIP
The Wendy's Partnership began operations on December 12, 1986, with the
admission into the Partnership as investor limited partners of 499 persons who
subscribed for 1,256.8 limited partnership units and contributed $6,284,000 to
the capital of the Wendy's Partnership.
On December 13, 1986, the Wendy's Partnership consummated the purchase
of all of the issued and outstanding stock of Wendy's of Michigan, Inc., a
Michigan corporation, that owned and operated 20 "Wendy's Old Fashioned
Hamburgers" restaurants in the Western and Southern Michigan counties of
Allegan, Calhoun, Kalamazoo, Kent, Muskegon, Ottawa and VanBuren. Immediately
upon completing the stock purchase, the Wendy's Partnership conveyed all of the
assets and liabilities of Wendy's of Michigan, Inc. to the Wendy's Partnership
in exchange for the stock, in complete liquidation of Wendy's of Michigan, Inc.
Since the acquisition, five additional restaurants have been added to
the Wendy's Partnership which now operates a total of 25 restaurants.
OTHER CONSIDERATIONS
The general partner did not consider alternatives to the transaction.
Meritage intends to acquire all assets of the Wendy's Partnership. If the
transaction is not consummated, limited partners would continue to hold a
minority interest in the Wendy's Partnership. Limited partners would also only
have an interest in the food service operations of the Wendy's Partnership as
opposed to the combined operations of Meritage and the Wendy's Partnership.
The general partner could have determined to continue the Wendy's
Partnership in its present form, attempted to sell it to a third party or sell
all of its assets for cash and liquidate. The lack of market liquidity for the
units, the fact that net sales and distributions over the last three fiscal
years of the Wendy's Partnership have been relatively static or declining, and
the sales by limited partners to Meritage resulting in Meritage controlling the
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Wendy's Partnership, all led to a decision to terminate rather than continue the
Wendy's Partnership operations. Since Meritage owns a controlling position of
the Wendy's Partnership, a sale to a third party was not a viable alternative.
Finally, a plan to sell all of the assets and reduce the Wendy's Partnership to
cash followed by a liquidation would have involved an indeterminate amount of
time and expense without any probability that the prices received for the
properties would exceed the price being offered by Meritage. In addition, it was
clear that Meritage (as the controlling party of the Wendy's Partnership) would
not favor any of these alternatives and desired to acquire the remainder of the
Wendy's Partnership for itself. The general partner believes that the
transaction proposed by Meritage will provide unit holders with securities for
which there is a public, although limited, market and thus provide a liquidity
to the unit holders for their investment which they have not previously enjoyed.
Furthermore, the general partner believes an investment in Meritage, as an
enterprise not confined to the operation of Wendy's restaurants in Western and
Southern Michigan and with other current operations, will provide greater growth
activities than continuation of the Wendy's Partnership and a greater value than
would be realized in the sale of assets followed by liquidation.
The general partner is entitled to a maximum management/administration
fee of 2% of gross operating revenues. This arrangement would have called for
payment to the prior general partner of $494,032 for fiscal 1994 and $507,292
for fiscal 1995. However, this amount was voluntarily reduced by the former
general partner to $160,000 for each of those two years and the former general
partner received a fee on an annual basis of $160,000 until replaced by MCC Food
Service on May 19, 1997. MCC Food Service, the present general partner, has also
voluntarily agreed to reduce the management fee to an annual basis of $160,000
for fiscal 1997.
The general partner of a limited partnership is accountable to the
limited partners as a fiduciary and consequently, must exercise good faith and
integrity in the resolution of any conflicts of interest and in other dealings
with respect to partnership affairs. The fiduciary obligations of the general
partner are in addition to the several duties and obligations of and limitations
on the general partner set forth in the Wendy's Partnership Agreement. Where the
question has arisen, courts have held that a limited partner may institute legal
action on behalf of himself/herself or all other similarly situated limited
partners (as a class action) to recover damages for a breach by the general
partner of its fiduciary duty, or on behalf of the Wendy's Partnership (a
partnership derivative action) to recover damages from third parties when the
general partners have become disabled or wrongfully refused to bring such
action.
The Wendy's Partnership Agreement provides that the general partner
will not be liable to the Wendy's Partnership or to any other limited partner
for any loss or damage arising out of its management of the Wendy's Partnership
or any other activities in its capacity as the general partner, unless such loss
or damage is caused by bad faith or negligence of the general partner.
Therefore, the limited partners may have a more limited right of action than
they would have absent such limitation in the Wendy's Partnership Agreement. The
Wendy's Partnership Agreement also provides that the Wendy's Partnership will
indemnify the general partner for any loss or damage incurred by it in
connection with Wendy's Partnership business unless the loss or damage is caused
by the bad faith or negligence of the general partner.
FAIRNESS OF TRANSACTION
The general partner, MCC Food Service, an affiliate of Meritage,
believes that the transaction is fair, from a financial point of view, to the
non-affiliated limited partners and recommends approval for the transaction. In
arriving at these conclusions, the general partner based its belief upon the
following factors:
- That, although the Meritage Common Shares are thinly traded,
in the transaction non-affiliated limited partners would be
receiving fully registered securities which are currently
traded on the OTC Bulletin Board and the Chicago Stock
Exchange. No active market exists for the limited partnership
units.
- That Meritage would be acquiring a minority interest in the
transaction but is offering no less than the equivalent of the
highest amount of consideration paid by Meritage for any
previously acquired units.
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- That Meritage believes all sales of units prior to Meritage's
interest in the Partnership were for $5,000 or less; and
- That the net book value per unit is$2,664.07 as of August 31,
1997.
- The opinion of the independent financial advisor that the
proposed transaction is fair to non-affiliated limited
partners from a financial point of view.
In 1996, the former general partner investigated the possibility of
acquiring the Wendy's Partnership units in a leveraged buyout transaction. That
proposed transaction was not consummated for unknown reasons. Also in 1996, U.S.
Restaurants investigated a proposed acquisition of the Wendy's Partnership.
However, that transaction did not proceed to the point where U.S. Restaurants
made a formal offer. The former general partner would not provide specific
details to Meritage regarding these proposed transactions.
Meritage acknowledges that the transaction may be viewed as unfair from
a procedural standpoint for the following reasons:
- The result is already determined since Meritage controls a
sufficient interest in the Wendy's Partnership to accomplish
the transaction regardless of the objections of unaffiliated
limited partners.
- No separate consent of the unaffiliated limited partners
regarding the transaction is required.
- There are no dissenters' rights.
- No independent representation of the unaffiliated limited
partners is required.
The general partner gave greater weight to the substantive fairness
considerations than to procedural matters. It also gave greater weight to the
previous consideration paid by Meritage in its acquisitions of units and to the
opinion of the independent financial advisor than to the other factors listed.
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OPINION OF FINANCIAL ADVISOR TO THE GENERAL PARTNER
BACKGROUND
In September, 1997, the Board of Directors of MCC Food Service the
general partner of the Wendy's Partnership, retained Roney & Co., L.L.C.
("Roney") to render a fairness opinion. As part of its services, Roney analyzed
the Wendy's Partnership and its operations, historical performance, future
prospects, industry data and comparable companies, in order to provide an
opinion as to the fairness, from a financial point of view, of the consideration
paid to the limited partners of the Wendy's Partnership.
Meritage had earlier obtained a report from Roney dated June 26, 1996
which valued the Wendy's Partnership units based on its 1995 results. The report
stated values at $6,359 per unit on a present value discounted cash flow basis
and $6,304 as a market comparison average. The report did not render any values
based on net book value, disaggregation value or acquisition value. The report
did not address the fairness of these values to the Wendy's Partnership or the
limited partners. It did conclude that the fair market value of the units was
$6,332 per unit and noted that interim results available indicated that the
Wendy's Partnership was below budget for 1996 and warned that if results did not
meet budget, the conclusions would have to be discounted. Meritage did not
utilize this report to establish prices but instead determined to purchase units
at the best prices it could negotiate with third parties.
Roney is a nationally recognized investment banking firm regularly
engaged, with respect to restaurant and food service companies and other
corporations, in the valuation of businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
and secondary distributions of listed and unlisted securities. The Board of
Directors of MCC Food Service selected Roney on the basis of its familiarity
with the restaurant and food service industry, its qualifications, ability,
previous experience and its reputation with respect to mergers and acquisitions.
No limitations were imposed by the MCC Food Service Board of Directors upon
Roney with respect to the investigations made or procedures followed by Roney in
rendering its opinion.
CERTAIN FINANCIAL PROJECTIONS OF THE WENDY'S PARTNERSHIP
During the course of discussions between Meritage, the Wendy's
Partnership and Roney, the Wendy's Partnership provided to Roney certain
non-public business and financial information about the Wendy's Partnership,
including then current projections of future results of operations for the
fiscal years ending November 30, 1998, 1999, 2000, 2001 and 2002. The
projections utilized focused on internal growth at the existing restaurants.
Projections of sales revenue (dollars in thousands) for such fiscal years were
$27,783, $28,477, $29,189, $29,919 and $30,667, respectively; operating
income/EBITDA projections (dollars in thousands) were $1,976, $2,019, $2,063,
$2,107 and $2,153 respectively.
Unaudited results forecasted for the year ended November 30, 1997 were
revenue (dollars in thousands) of $27,105, operating income/EBITDA of $1,934 and
net income of $389.
The Wendy's Partnership does not as a matter of course make public any
projections as to future performance or earnings, and the projections set forth
above are not included in this Prospectus. The projections were not prepared
with a view to public disclosure or compliance with the published guidelines of
the Securities and Exchange Commission or the guidelines established by the
American Institute of Certified Public Accountants regarding projections or
forecasts. The Wendy's Partnership's internal operating projections (upon which
the projections provided to Roney were based in part) are, in general, prepared
solely for internal use and capital budgeting and other management decisions and
are subjective in many respects and thus susceptible to various interpretations
and periodic revisions based on actual experience and business developments. The
projections were based on a number of assumptions that are beyond the control of
the Wendy's Partnership or its respective financial advisors. Many of the
assumptions upon which the projections were based are dependent upon economic
forecasting (both general and specific to the Wendy's Partnership's business),
which is inherently uncertain and subjective. Accordingly, there can be no
assurance that the projected results would be realized or that actual results
would not be significantly higher or lower than those projected. Neither the
Wendy's Partnership nor Roney assumes any responsibility for the accuracy of any
of the projections.
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OPINION OF FINANCIAL ADVISER
On October 13, Roney delivered its written opinion to MCC Food
Service's Board of Directors to the effect that, as of such date, the purchase
price for the assets was fair, from a financial point of view, to the
unaffiliated limited partners of the Wendy's Partnership. Such opinion describes
the assumptions made, matters considered and the scope of the review undertaken
and procedures followed by Roney. Roney's opinion to the Board of Directors
addresses only the fairness from a financial point of view of the consideration
to be received by such limited partners pursuant to the transaction described in
this Prospectus and does not constitute a recommendation to any limited partner
of the Wendy's Partnership with respect to the approval of the transaction
contemplated by the Prospectus. LIMITED PARTNERS ARE URGED TO READ CAREFULLY
SUCH OPINION IN ITS ENTIRETY, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITS OF THE REVIEW UNDERTAKEN
THE FOLLOWING IS THE FULL TEXT OF RONEY'S OPINION:
October 13, 1997
The Board of Directors
MCC Food Service Inc., - General Partner of
Wendy's of West Michigan Limited Partnership
40 Pearl Street, N.W., Suite 900
Grand Rapids, MI 49503
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, of the proposed consideration to be received by the limited partners of
Wendy's of West Michigan Limited Partnership ("WWMLP") in connection with the
consideration to be paid by Meritage Hospitality Group Inc. ("Meritage") for the
assets ("Transaction") of WWMLP. Under the proposed terms of the Transaction,
the limited partners of WWMLP would receive $7,500 per unit ("Consideration") of
Meritage Common Shares in exchange for each unit of the limited partners. The
Consideration would be paid in Meritage Common Shares, which will be registered
on Form S-4, at the Transaction closing date, based on THE LESSER OF the average
high and low bid price on the OTC Bulletin Board for the 10 trading days
preceding the date of dissolution and $4.125.
Roney & Co. ("Roney") is a regional investment banking firm of recognized
standing. As part of our investment banking services, we are regularly engaged
in the valuation of corporate entities in connection with public offerings,
valuations and merger and acquisition transactions. Our research analysts
publish regular reports on restaurants and other food service companies. Our
firm makes principal markets in various restaurant and other food service
company stocks, and we have managed public offerings for restaurant and other
food service companies.
In arriving at the opinion as set forth below, we have, among other things:
I. Reviewed WWMLP's Annual Reports, which contained audited financial
statements and related financial information for the fiscal years
ending December 31, 1994, 1995, and the eleven months ended
November 30, 1996;
II. Reviewed WWMLP's internal financial statements for the nine months
ended August 31, 1997, and management's "statement recap" for the
above mentioned period;
III. Reviewed the historical unit price and acquisition activity for the
limited partnership units in transactions made by Meritage and its
affiliates;
IV. Reviewed the historical sales activity and trading volumes for
Meritage's common stock over the last 12 months;
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V. Reviewed certain internal historical and financial forecasts
relating to the business, earnings, cashflow, assets and prospects
for WWMLP furnished to us by WWMLP;
VI. Conducted discussions with members of senior management of WWMLP
concerning its business and prospects;
VII. Visited several of WWMLP's locations in 1996 and WWMLP headquarters
in September, 1997;
VIII. Reviewed certain asset appraisal information prepared on Meritage's
hotel assets as well as other assets owned by Meritage;
IX. Reviewed letters of intent and draft purchase agreements received
by Meritage for the purchase of all three of its hotel properties;
X. Reviewed an asset value mark to market analysis, prepared by
Meritage executives, that detailed the effect of the contemplated
sale of all three of its hotel properties on its shareholder equity
value. Such analysis was utilized by Meritage in establishing the
$4.125 price in the Transaction Consideration conversion formula;
XI. Discussed with WWMLP's operating executives the prospects of WWMLP,
identifying areas of potential concern relating to the current and
projected financial performance;
XII. Reviewed the S-4 Registration Statement filed by Meritage with the
Securities and Exchange Commission on August 12, 1997;
XIII. Discussed with WWMLP's management and advisors the legal, financial
and practical ramifications of the Transaction;
XIV. Performed various analysis and models including purchase price
premium, discounted cashflow, comparable companies, and comparable
merger and acquisition transaction analysis;
XV. Compared certain financial characteristics of WWMLP to other
publicly held companies in the industry that we deemed to be
relevant;
XVI. Researched current industry conditions and trends concerning the
valuation of recent mergers and acquisitions; and
XVII. Reviewed such other financial and industry data and performed such
other analysis and took into account such other matters as we
deemed necessary.
In preparing our opinion, we have relied on and assumed the accuracy and
completeness of all financial and other information supplied or otherwise made
available to us by WWMLP. We have not assumed any responsibility for independent
verification of such information or any independent appraisal of WWMLP's assets.
With respect to the financial forecasts furnished to us by WWMLP, we have
assumed, without any further independent investigations and analysis by Roney,
that they have been reasonably prepared and reflect the best currently available
estimates and judgment of WWMLP's management as to the expected future financial
performance of WWMLP.
In our analyses, we have made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of WWMLP. Any estimates contained in our analyses are not
necessarily indicative of future results or value, which may be significantly
more or less favorable than such estimates. Estimates of values of companies do
not purport to be appraisals or necessarily reflect the price at which companies
or their securities actually may be sold. No company or transaction utilized in
our analyses was identical to WWMLP or the Transaction highlighted in the S-4
Registration Statement. Accordingly, such analyses
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are not based solely on arithmetic calculations, rather, they involve complex
considerations and judgments concerning differences in financial and operating
characteristics of the relevant companies, the timing of the relevant
transactions and prospective buyer interests, as well as other factors that
could affect the public trading markets of WWMLP or companies to which they are
being compared. None of the analyses performed by us was assigned a greater
significance than any other.
It should be noted that this opinion is based on economic and market conditions
and other circumstances existing on, and information made available as of, the
date hereof. In addition, our opinion is, in any event, limited to the fairness,
from a financial point of view, of the Consideration being offered to the
limited partners of WWMLP pursuant to the Transaction and does not address
WWMLP's underlying business decision to effect the Transaction or any other
terms of the Transaction.
In the ordinary course of our business, we may actively trade securities of
Meritage for our own account and for the accounts of customers and, accordingly,
we may at any time hold a long or short position in such securities.
Our opinion is directed to the Board of Directors of MCC Food Service, the
general partner of WWMLP, and does not constitute a recommendation to the Board
of Directors of MCC Food Service in connection with any matter relating to the
Transaction and has been prepared solely for the confidential use of the Board
of Directors and senior management of WWMLP and will not be reproduced,
summarized, described or referred to or given to any other person without our
prior written consent. Notwithstanding the foregoing, this opinion may be
included in the S-4 Registration Statement filed in connection with the
Transaction, provided that this opinion will be reproduced in full, and any
description of or reference to us or summary of the opinion in such proxy
statement will be in a form acceptable to us and our counsel.
On the basis of, and subject to, the foregoing, we are of the opinion that, as
of the date hereof, the Consideration received by the limited partners of WWMLP
($7,500 per unit of Meritage Common Shares based on the following formula: THE
LESSER OF the average high and low bid price on the OTC Bulletin Board for the
10 trading days preceding the date of dissolution, or $4.125), as proposed in
the S-4 Registration Statement, is fair, from a financial point of view.
Sincerely,
[RONEY & CO. LOGO]
Roney's opinion is directed to the MCC Food Service Board of Directors
(acting as the general partner of the Wendy's Partnership) only, and such
opinion is directed only to the fairness from a financial point of view and does
not constitute a recommendation to any holder of the Wendy's Partnership limited
partnership units as to whether such holder should object to the transaction or
take any other action available.
For purposes of its opinion and in connection with its review of the
proposed transaction, Roney, among other things; (a) participated in discussions
among representatives of Meritage, MCC Food Service, the Wendy's Partnership and
their respective advisers that resulted in the filing of this Prospectus of
which this Registration Statement is a part; (b) reviewed drafts of this
Prospectus, of which this Prospectus is a part, as well as several other
documents; (c) reviewed certain publicly available financial statements, both
audited and unaudited, for the Wendy's Partnership and Meritage, including those
included in the Annual Reports, which contained audited financial statements for
the years ended November 30, 1994, 1995 and 1996; (d) reviewed certain financial
statements and other financial and operating data concerning the Wendy's
Partnership and Meritage prepared by their management teams; (e) reviewed the
historical sales and trading volumes for Meritage's Common Stock over the last
12 months; (f) reviewed certain financial projections of the Wendy's
Partnership, prepared on a stand-alone basis, by the Wendy's Partnership's
management; (g) discussed certain aspects of the past and current business
operations, results of the Wendy's Partnership's customer profiles and
purchasing preferences, financial condition and future prospects of the Wendy's
Partnership with certain members of the management of the Wendy's Partnership,
MCC Food Service and Meritage; (h) reviewed the unit purchases described in this
Prospectus, the
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reported market prices and historical trading activity of the Wendy's
Partnership's units as well as the historical trading activity of Meritage's
Common Stock; (i) reviewed the proposed sale terms for Meritage's three hotel
properties and the applicable mark to market and stockholder equity analysis
resulting from these proposed transactions; (j) reviewed certain aspects of the
financial performance of the Wendy's Partnership and compared such financial
performance of the Wendy's Partnership with the stock market data relating to
similar data available for certain other restaurant companies and certain of
their publicly traded securities; (k) reviewed certain of the financial terms,
to the extent publicly available, of certain recent business combinations
involving other restaurant companies; and (l) conducted such other studies,
analyses and examinations as Roney deemed appropriate.
Roney relied upon and assumed without independent verification the
accuracy and completeness of all of the financial and other information provided
to it by MCC Food Service, Meritage, the Wendy's Partnership, their respective
representatives and of the publicly available information reviewed by Roney.
Roney also relied upon the management of MCC Food Service, Meritage and the
Wendy's Partnership as to the reasonableness and achievability of the financial
and operating forecasts provided to Roney (and the assumptions and basis
therefore). In that regard, Roney assumed that such forecasts, including without
limitation projected cost savings and operating synergies resulting from the
operational improvements, reflect the best currently available estimates and
judgements of management and that such projections and forecasts will be
realized in the amounts and in the time periods currently estimated by the
management of MCC Food Service, Meritage and the Wendy's Partnership. Roney did
not independently verify and relied on and assumed that the aggregate value of
assets set forth in the balance sheet of Meritage at July 31, 1997, was accurate
and complied fully with applicable law, and sound business practice as of the
date of such financial statements. Roney did not independently verify the
carrying values of property, plant and equipment as well as other assets carried
on Meritage's balance sheet, and Roney assumed that such values were
representative of such date. Roney did not verify contracts, by third parties,
to purchase any of Meritage's assets. Roney was not retained to and did not
conduct a physical inspection of any of the properties or facilities of MCC Food
Service, Meritage and the Wendy's Partnership, nor did Roney make any
independent evaluation or appraisal of the assets, liabilities or prospects of
MCC Food Service, Meritage or the Wendy's Partnership.
Prior to rendering its written opinion dated October 13, 1997, Roney
rendered an oral opinion to the MCC Food Service Board of Directors on September
23, 1997. Set forth below is a brief summary of the analyses performed by Roney
in reaching its October 13, 1997 opinion.
In analyzing the value of the Wendy's Partnership's limited partner
units, Roney (i) analyzed and reviewed the proposed consideration offered by
Meritage, $7,500, versus the historical unit price and acquisition activity for
the limited partnership units in transactions made by Meritage and its
affiliates over the last twelve months (the "Purchase Price Premium Analysis");
(ii) performed a discounted cashflow analysis; (iii) performed a comparable
company analysis; and (iv) performed a comparable merger and acquisition
transaction analysis.
The following description summarizes the analyses used by Roney as the
basis for its opinion:
UNIT TRADING HISTORY (PURCHASE PREMIUM ANALYSIS) Roney analyzed the
purchase prices of the limited partner units, paid by Meritage or its affiliates
over the 12-month period preceding this Prospectus and the purchase price
premiums implied by the Purchaser's offer as of certain such dates. This
analysis indicated that limited partner unit holders in this Transaction would
be receiving a premium of 4.2% to 50.0% based on other unit purchases made by
Meritage over the last 12 months. Roney noted that the market for the limited
partner units was highly illiquid for a publicly traded limited partnership and
experienced relatively few trades historically.
DISCOUNTED CASH FLOW ANALYSIS Roney performed a discounted cash flow
analysis of the projected unleveraged cash flows of the Wendy's Partnership from
November 30, 1997 through November 30, 2002, if the Wendy's Partnership
performed in accordance with management's forecast. Roney also analyzed two
other scenarios utilizing figures that were different than management's forecast
("Aggressive" and "Conservative" scenarios). Roney also estimated the terminal
value of the Wendy's Partnership's common equity as of November 30, 1997, by
applying a range of multiples to the Wendy's Partnership's projected 2002
cashflow. Roney applied a discount rate of 13.6% and a terminal value multiple
of 5.5x to the projected unleveraged cash flows. This analysis resulted in a
range of values for the Wendy's Partnership of $4,700 to $6,599 per limited
partner unit, with a mean value of $5,656.
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COMPARABLE COMPANY ANALYSIS Roney reviewed certain actual and estimated
financial, operating and stock market information of the Wendy's Partnership, if
applicable, and a group ("the Wendy's Partnership Group") of publicly traded
restaurant companies judged to be generally comparable to the Wendy's
Partnership. Restaurant companies selected as comparable to the Wendy's
Partnership were Au Bon Pain Co., Inc, Blimpie International, Inc., Boston
Chicken, Inc., Schlotzsky's, Inc., Back Yard Burgers, Inc., Checkers Drive-In
Restaurants, CKE Restaurants, Inc., Consolidated Products, Davco Restaurants,
Inc., Einstein Bagel Corporation, Koo Koo Roo, Inc., McDonald's Corporation,
Morgan's Foods, Inc., Nathan's Famous, NPC International, Inc., PJ America,
Inc., Papa John's International, Inc., Quality Dining, Inc., Rally's Hamburgers,
Inc., Sbarro, Inc., Showbiz Pizza Time, Inc., Taco Cabana, Inc., and Wendy's
International. Roney selected the following companies to be representative
comparable companies to the Wendy's Partnership: i) Davco Restaurants; ii)
Morgan's Foods; iii) Taco Cabana, Inc. and iv) Wendy's International. These four
companies had a range of Total Consideration to LTM EBITDA of 5.8x to 8.1x with
a mean of 7.1x. Roney also compared equity values as a multiple of trailing net
income, projected 1997 net income, and current book value in addition to
reviewing multiples of last twelve months operating income and last twelve
months sales. All multiples were calculated using closing stock prices on
September 15, 1997. Applying the comparable company multiples to the subject,
the indicated value of each share of limited partner unit ranged from $5,825 to
$5,829, with an overall mean value of $5,827.
ANALYSIS OF SELECTED MERGER TRANSACTIONS Using publicly available
information, Roney analyzed the purchase prices and multiples paid in the
following selected transactions in the restaurant industry from 1994 through
September 1997: Apple South/Apple-Tenn-Flo L.P., Quality Dining, Inc./Grayling
Corporation, Apple South, Inc./Marcus Group, Apple South, Inc./DF&R Restaurants,
Inc., Quality Dining/Burger King Franchisee, Shareholders/Dave & Buster's,
Private-Strategic/Private I (Quick Service Segment), Private-Strategic/Private
II (Quick Service Segment), Quality Dining, Inc./Bruegger's Bagels, and Compass
Group PLC/DAKA International Inc. In addition, Roney analyzed the limited
information available on an Investor Group's proposed purchase of Davco
Restaurants, Inc. While this transaction is still pending, the estimated
purchase price and estimated multiples are relevant to this analysis. Roney
compared purchase prices as a multiple of LTM Earnings before Interest, Taxes,
Depreciation and Amortization ("EBITDA") for the year that each transaction was
consummated. Roney utilized the averages of the Quality Dining, Inc./Grayling
Corporation, Apple South, Inc./Marcus Group, Private-Strategic/Private I (Quick
Service Segment), and Private-Strategic/Private II (Quick Service Segment)
transactions. These calculations yielded a range of multiples from approximately
4.50x to 6.63x EBITDA resulting in an average of approximately 5.37x. In
addition, Roney estimated and utilized, based on the limited information, the
multiples being proposed in the Davco transaction. This analysis resulted in a
range for each limited partner unit of $5,652 to $6,590, with a mean of $6,034.
The purchase premium analysis, discounted cash flow analysis,
comparable company analysis, and comparable transaction analysis resulted in an
overall value range for each limited partner unit of $5,392 to $6,339, with a
mean of $5,866.
In addition, Roney reviewed and analyzed the mark to market, asset sale
value analysis of Meritage, which was utilized to formulate part of the
conversion pricing mechanism. This analysis, prepared by Meritage, assumes the
sale of its three hotel properties based upon sales figures highlighted in
letters of intent or similar documents Meritage has received from interested
third parties, as well as appraisal information regarding some of Meritage's
other assets. Roney found that the conversion pricing language of "the lesser of
the average high and low bid price on the OTC Bulletin Board for the 10 trading
days preceding the date of dissolution, or $4.125", to be fair from a financial
point of view, to the Wendy's Partnership limited partners.
In connection with its written opinion dated as of the date of this
Prospectus, Roney performed procedures to update certain of its analyses and
reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith.
Although the summary set forth above does not purport to be a complete
description of the analyses performed by Roney, the material analyses performed
by Roney in rendering its opinion have been summarized above. However, the
preparation of a fairness opinion is not necessarily susceptible to partial
analysis or summary description. Roney believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses, without considering all factors and analyses, would
create an incomplete view of the process underlying the analyses by which Roney
reached its opinions. In addition, Roney may have given
42
<PAGE> 43
various analyses more or less weight than any other analysis, but no analysis
was given materially more weight than any other analysis. Also Roney may have
deemed various assumptions more or less probable than other assumptions, so that
the ranges of valuations resulting from any particular analysis described above
should not be taken to be Roney's view of the actual value of the Wendy's
Partnership.
In performing its analyses, Roney made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Wendy's Partnership.
The analyses performed by Roney are not necessarily indicative of actual value
or actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
Roney's analysis of the fairness, from a financial point of view, of the
consideration to be received. The analyses do not purport to be appraisals or to
reflect the prices at which a company might actually be sold or the prices at
which any securities may trade at the present time or at any time in the future.
Roney used in its analyses various projections of future performance prepared by
the management of the Wendy's Partnership. The projections are based on numerous
variables and assumptions which are inherently unpredictable and must be
considered not certain of occurrence as projected. Accordingly, actual results
could vary significantly from those assumed in the projections and any related
analyses. Roney's opinion does not address the relative merits of the
Transaction as compared to any alternative business strategies that might exist
for the Wendy's Partnership or the effect of any other business combination in
which the Wendy's Partnership might engage. In addition, as described above,
Roney's opinion to the MCC Food Service Board of Directors was one of many
factors taken into consideration by the MCC Food Service Board of Directors in
making its determination to approve the Transaction.
Meritage paid Roney a fee of $30,000 for the report it made in June
1996. The Wendy's Partnership has agreed to pay Roney a fee of $50,000 in
connection with the opinion delivered with respect to the present transaction
involving the Wendy's Partnership.
43
<PAGE> 44
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations, balance sheet, and
statement of cash flows data as of, and for, the years ended November 30, 1996,
1995, 1994, 1993 and 1992 are derived from, and are qualified by reference to,
the consolidated financial statements of the Company audited by Grant Thornton
LLP, independent certified public accountants, appearing elsewhere in this
Prospectus. The consolidated statement of operations, balance sheet, and
statement of cash flows data as of, and for, the nine month periods ended August
31, 1997 and 1996 are unaudited but have been derived from the Company's
internal consolidated financial statements, which in the opinion of management
of the Company, have been prepared on the same basis as the audited financial
statements and reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations of the Company. The selected consolidated financial and
operating data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Consolidated Financial Statements and the Notes thereto and other
financial information appearing elsewhere in this Prospectus. The results of
operations for the period ended August 31, 1997 are not necessarily indicative
of results for the full fiscal year.
44
<PAGE> 45
MERITAGE HOSPITALITY GROUP INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months
Years Ended November 30, Ended August 31,
------------------------------------------------------- ----------------
1996 1995 1994 1993 1992 1997 1996
---- ---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue $ 16,885 $ 14,441 $ 15,360 $ 14,245 $ 14,345 $ 31,284 $ 11,405
Operating costs and expenses 17,859 16,485 14,051 13,182 12,646 30,937 10,747
Earnings (loss) from operations (974) (2,044) 1,309 1,063 1,699 347 658
Earnings (loss) before cumulative effect of
change in accounting principle (1,926) (2,049) 90 230 299 (1,674) (13)
Net earnings (loss) (1,926) (2,049) (27) 230 299 (1,674) (13)
Earnings (loss) per share:
Before cumulative effect of change in
accounting principle (0.62) (1.13) 0.06 0.15 0.20 (0.54) (0.00)
After cumulative effect of change in
accounting principle (0.62) (1.13) (0.02) 0.15 0.20 (0.54) (0.00)
Cash dividends declared per common share 0.50 --- --- --- --- --- 0.50
BALANCE SHEET DATA
Cash and cash equivalents 2,265 1,337 622 451 577 998 1,166
Working capital 103 44 406 (450) (4,429) (1,889) 566
Property and equipment, net 21,757 13,218 13,645 14,069 14,867 21,199 14,243
Total assets 31,929 17,984 19,688 20,004 20,145 30,639 19,763
Long-term debt, including current maturities 24,293 11,443 12,647 12,905 13,209 25,100 4,551
Total liabilities 29,908 14,929 14,463 14,752 15,123 30,416 16,842
Shareholders' equity 2,021 3,055 5,225 5,252 5,022 223 2,921
STATEMENT OF CASH FLOWS DATA
Net increase (decrease) in cash and cash
equivalents 929 715 171 (127) 322 (1,267) (171)
Net cash provided by (used in) operating
activities (1,496) 425 990 1,056 1,687 (415) (610)
Dividends - common stock 1,510 --- --- --- --- --- 1,510
Dividends - preferred stock --- --- --- --- --- 70 ---
</TABLE>
45
<PAGE> 46
MERITAGE HOSPITALITY GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
On October 31, 1996, Meritage acquired 482.55 units of the Wendy's
Partnership at $7,000 per unit pursuant to a tender offer. This acquisition,
coupled with an additional 198.25 units acquired by Meritage in private
transactions, has resulted in Meritage owning (through its subsidiary MHG Food
Service) approximately 54% of the outstanding units. Meritage spent
approximately $3.4 million in the tender offer, of which $3 million was financed
through Meritage's long-term lender. On May 19, 1997, Meritage appointed MCC
Food Service, an affiliate of Meritage, as the substitute general partner of the
Wendy's Partnership. Control of the Wendy's Partnership requires control of the
general partner.
In October, 1996, Meritage commenced a private offering of a newly
designated series of Series A Convertible Preferred Shares. As of May 10, 1997,
Meritage had sold 138,387 of such shares ($1,383,870 liquidation value),
consisting of 108,867 shares ($1,088,670 liquidation value) issued for cash
(24,367 shares of which certain executive officers and management elected to
take in lieu of all or a portion of their year end cash bonuses), and 29,520
shares ($295,200 liquidation value) issued in exchange for units in the Wendy's
Partnership.
RESULTS OF OPERATIONS
The following summarizes the Company's results of operations for the
Lodging Group for the nine months ended August 31, 1997 and 1996.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
----------------------------------------------
NINE MONTH PERIODS ENDED AUGUST 31,
----------------------------------------------
1997 1996 1997 1996
----------------------- ------------------
(as a percentage
(in thousands) of revenues)
----------------------- ------------------
<S> <C> <C> <C> <C>
Net revenue
Room revenue $ 4,716 $ 4,828 43.3% 42.3%
Food and beverage revenue 5,380 6,105 49.4 53.5
Telephone and other revenue 789 472 7.2 4.1
----------------------- ------------------
Total revenue 10,885 11,405 100.0 100.0
Cost and expenses
Cost of food and beverages 1,886 2,075 17.3 18.2
Operating expenses 6,344 5,751 58.3 50.4
General and administrative
expenses 2,080 2,246 19.1 19.7
Depreciation and amortization 839 675 7.7 5.9
----------------------- ------------------
Total cost and expenses 11,149 10,747 102.4 94.2
Earnings (loss) from operations (264) 658 (2.4) 5.8
Other income (expense)
Interest expense (1,839) (1,195) (16.9) (10.5)
Interest income 429 517 3.9 4.5
----------------------- ------------------
Total other expense (1,410) (678) (12.9) (5.9)
----------------------- ------------------
Loss before
federal income tax (1,674) (20) (15.4) (0.2)
Federal income tax benefit ---- 7 ---- 0.1
----------------------- ------------------
Net loss $ (1,674) $ (13) (15.4)% (0.1)%
======================= ==================
</TABLE>
46
<PAGE> 47
The following summarizes the Company's results of operations for the
Lodging Group for the years ended November 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------
1996 1995 1994 1996 1995 1994
------------------------------------ ------------------------------
(in thousands) (as a percentage of revenues)
------------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Room Revenue $ 6,282 $ 5,999 $ 6,048 42.6% 41.5% 39.4%
Food and beverage revenue 7,786 8,246 9,100 52.7 57.1 59.2
Telephone and other revenue 695 196 212 4.7 1.4 1.4
------------------------------------ --------------------------------
Total revenue 14,763 14,441 15,360 100.0 100.0 100.0
COSTS AND EXPENSES
Cost of food and beverages 2,700 2,864 3,041 18.3 19.8 19.8
Operating expenses 8,166 7,215 7,180 55.3 50.0 46.7
General and administrative 3,854 4,980 2,597 26.2 34.5 16.9
Depreciation and amortization 1,010 1,427 1,232 6.8 9.9 8.0
------------------------------------ ------------------------------
Total costs and expenses 15,730 16,485 14,051 106.6 114.2 91.5
------------------------------------ --------------------------------
Earnings (loss) from operations (967) (2,044) 1,309 (6.6) (14.2) 8.5
Other income (expense)
Interest expense (1,605) (1,355) (1,206) (10.9) (9.4) (7.9)
Interest income 658 387 87 4.5 2.7 0.6
Gain (loss) on sale of assets (7) 242 12 (0.0) 1.7 0.1
------------------------------------ --------------------------------
Total other expense (954) (726) (1,107) (6.4) (5.0) (7.2)
------------------------------------ --------------------------------
Earnings (loss) before federal income
tax and cumulative effect of change
in accounting principle (1,921) (2,770) 202 (13.0) (19.2) 1.3
Federal income tax expense (benefit) (20) (721) 112 (0.1) (5.0) 0.7
------------------------------------ --------------------------------
Earnings (loss) before cumulative
effect of change in accounting
principle (1,901) (2,049) 90 (12.9) (14.2) 0.6
Cumulative effect of change in
accounting principle --- --- (117) --- --- (0.8)
------------------------------------ --------------------------------
Net loss $ (1,901) $ (2,049) $ (27) (12.9%) (14.2)% (0.2)%
==================================== ================================
</TABLE>
47
<PAGE> 48
Comparison of Nine Month Periods Ended August 31, 1997 and August 31, 1996
- --------------------------------------------------------------------------
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
periods ended August 31, 1997 and 1996 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
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.
48
<PAGE> 49
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.
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 relating to the
49
<PAGE> 50
acquisition 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.
FOOD SERVICE GROUP
On October 31, 1996, the Company acquired a majority interest in 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 period ended August 31, 1997. Below is a summary of the results of
the Food Service Group (comprised of the Wendy's Partnership) for the nine month
period 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>
$ in Thousands % of Revenue
-------------------------------------
<S> <C> <C>
Net revenue
Food and beverage revenue $ 20,263 99.3%
Other revenue 136 0.7
-------------------------------------
Total revenue 20,399 100.0
Cost and expenses
Cost of food and beverages 5,838 28.6
Operating expenses 12,177 59.7
General and administrative expenses 962 4.7
Depreciation and amortization 692 3.4
------------------------------------
Total cost and expenses 19,669 96.4
Earnings from operations 730 3.6
Other income (expense)
Interest expense (330) (1.6)
Interest income 10 0.0
Loss on disposal of assets (190) (0.9)
--------------------------------------
Total other expense (510) (2.5)
--------------------------------------
Earnings before
federal income tax 220 1.1
-------------------------------------
Federal income tax 0 0.0
Net earnings $ 220 1.1%
=====================================
</TABLE>
50
<PAGE> 51
Comparison of Fiscal Years Ended November 30, 1996 and November 30, 1995
- ------------------------------------------------------------------------
LODGING GROUP
Revenue
Total revenue for the Lodging Group was $14,762,822 for fiscal 1996
compared to $14,441,020 for fiscal 1995, an increase of 2.2%. The following
table outlines revenues (excluding telephone and other revenue) by category:
<TABLE>
<CAPTION>
Increase %Increase
1996 1995 (Decrease) (Decrease)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Room revenue $ 6,281,711 $ 5,999,024 $ 282,687 4.7%
Food and beverage revenue 7,786,154 8,245,880 (459,726) (5.6)%
-------------------------------------------------------------------
Total $ 14,067,865 $ 14,244,904 $ (177,039) (1.2%)
===================================================================
</TABLE>
The increase in room revenue was attributable to an increase in the
overall average daily rate of $2.94 (4.0%), from $74.46 in fiscal 1995 to $77.40
in fiscal 1996. Also contributing to the increase in room revenue was a slight
increase in hotel occupancy from 60.3% in fiscal 1995 to 60.6% in fiscal 1996.
The decrease in food and beverage revenue from fiscal 1995 to fiscal 1996 was
primarily attributable to a decrease in social function bookings at the
Company's hotels during the second half of fiscal 1996. This decrease at the
Thomas Edison Inn and the St. Clair Inn is the result of increased competition
from two new banquet facilities in the market area. The Company is aggressively
working toward offsetting the effect of the increased competition by
implementing new marketing programs, hiring locally experienced sales personnel,
and continually reviewing and updating the menu offerings.
Telephone and other revenue increased $498,841, from $196,116 in fiscal
1995 to $694,957 in fiscal 1996. A large portion of the increase was
attributable to the recognition of approximately $217,000 of expired gift
certificates as income in fiscal 1996. Also contributing to the increase was the
recovery of approximately $68,000 from the collection of amounts due from
parties related to the Company prior to the change in control of the Company,
which had been written off to bad debt expense in fiscal 1995. In addition, new
telephone systems were installed at the Thomas Edison Inn and the St. Clair Inn.
Rate schedules used to calculate telephone charges were updated generating
additional telephone income.
Cost of Food and Beverages
Due to the change in revenue mix between room revenue and food and
beverage revenue displayed above, cost of food and beverages (as a percentage of
total revenue) was 18.3% in fiscal 1996 and 19.8% in fiscal 1995. As a
percentage of food and beverage revenue, cost of food and beverages was 34.7% in
both fiscal 1996 and 1995 despite the decline in food and beverage revenue.
Operating Expenses
Operating expenses for fiscal 1996 and fiscal 1995 were $8,166,380 and
$7,215,061, respectively, an increase of $951,319 (13.2%). As a percentage of
total revenue, operating expenses increased 5.3 percentage points from 50.0% of
total revenue in fiscal 1995 to 55.3% of total revenue in fiscal 1996. The
increase in operating expenses in fiscal 1996 compared to fiscal 1995 was
primarily the result of a 4.0 percentage point increase in payroll costs due to
increased staffing, and salary and wage increases aimed at improving service to
increase revenue. Increases in sales and marketing expenses, entertainment
expenses and repairs and maintenance also contributed to the increase in
operating expenses.
51
<PAGE> 52
General and Administrative
General and administrative expenses decreased $1,126,084 in fiscal 1996
compared to fiscal 1995. General and administrative expenses were abnormally
high in fiscal 1995 as a result of $2,154,163 of expenses related to various
lawsuits in fiscal 1995. See "Business - Replacement and Restructuring of
Management." Excluding this $2,154,163 of expenses, general and administrative
expenses increased $1,028,079 in fiscal 1996 compared to fiscal 1995. In fiscal
1996, the Company decided to manage the Company's hotels directly as compared to
fiscal 1995 when the hotels were managed by a management company (owned by Mr.
Reynolds, the former majority shareholder of the Company). This decision
eliminated the fees and expenses assessed by the management company, but
increased payroll costs attributable to the corporate management staff. This
additional staffing was also required to implement the Company's strategy to
expand the Company through the acquisition of new businesses (including the
Wendy's Partnership).
Depreciation and Amortization
Depreciation and amortization expense decreased $416,871, from
$1,426,642 in fiscal 1995 to $1,009,771 in fiscal 1996. Amortization expense was
abnormally high in fiscal 1995 due to the write-off of deferred loan costs of
approximately $350,000 because of the refinancing of the Company's long-term
debt in February 1996. Also, depreciation expense for fiscal 1996 was lower
compared to fiscal 1995 because of certain property and equipment that became
fully depreciated during fiscal 1995.
Interest Expense
Interest expense for fiscal 1996 and 1995 was $1,605,047 and
$1,335,389, respectively. The increase of $249,658 from fiscal 1995 to fiscal
1996 was due to additional borrowings in fiscal 1996.
Interest Income
Interest income increased from $387,099 in fiscal 1995 to $658,007 in
fiscal 1996. The increase was due to an increase in cash and cash equivalents in
fiscal 1996 compared to fiscal 1995, and an increase in interest income from a
note receivable from the sale of stock (see Note J of the Meritage Consolidated
Financial Statements for fiscal 1996).
Fourth Quarter Operations
The Company's loss before federal income tax increased from $19,677 for
the nine months ended August 31, 1996 to $1,945,570 for the year ended November
30, 1996. The significant loss in the fourth quarter of fiscal 1996 was
attributable to several factors. Hotel revenues decreased approximately 9% in
the fourth quarter of fiscal 1996 as compared to fiscal 1995. This decrease was
the result of a decline in food and beverage revenue caused by a decline in
social function bookings and a decrease in food and beverage business from local
clientele resulting from increased competition. Hotel operating expenses,
including fixed payroll costs, entertainment expense and sales and marketing
expenses, all increased in an effort to reverse the downward sales trend.
General and administrative expenses were also unusually high for the fourth
quarter of fiscal 1996 due to increased professional fees, year-end bonuses to
employees which were allocated at the discretion of the Company's Compensation
Committee, and significant costs related to public company matters including
fees and expenses associated with creating a market for the Company's Common
Stock.
FOOD SERVICE GROUP
The Company acquired a majority interest in the Wendy's Partnership on
October 31, 1996, resulting in the consolidation of the Wendy's Partnership's
operations for the month of November 1996. Revenue from the Wendy's Partnership
was $2,122,040. The Wendy's Partnership's operating loss for the month of
November was $8,136 and the loss before federal income tax was $24,745.
52
<PAGE> 53
Comparison of Fiscal Years Ended November 30, 1995 and November 30, 1994
- ------------------------------------------------------------------------
LODGING GROUP
Revenue
Total revenue of the Lodging Group decreased 6.0%, from $15,360,028 in
fiscal 1994 to $14,441,020 in fiscal 1995. The decrease in total revenue was
primarily attributable to decreased food and beverage revenue. Room revenue
decreased only $48,486 (0.8%). Food and beverage revenue, however, decreased
$854,278 (9.4%). The following table outlines revenues (excluding telephone and
other revenue) by category:
<TABLE>
<CAPTION>
Increase %Increase
1995 1994 (Decrease) (Decrease)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Room revenue $ 5,999,024 $ 6,047,510 $ (48,486) (0.8%)
Food and beverage revenue 8,245,880 9,100,158 (854,278) (9.4%)
-------------------------------------------------------------------
Total $ 14,244,904 $ 15,147,668 $ (902,764) (6.0%)
===================================================================
</TABLE>
The decrease in room revenue was the result of a decrease in overall
occupancy for the hotels in fiscal 1995 compared to fiscal 1994. Hotel occupancy
decreased 1.5%, from 61.2% in fiscal 1994 to 60.3% in fiscal 1995. The decrease
in hotel occupancy was largely offset by an increase in the overall average
daily rate of $0.55 (0.7%), from $73.91 in fiscal 1994 to $74.46 in fiscal 1995.
The decrease in food and beverage revenue from fiscal 1994 to fiscal 1995 was
primarily attributable to the decrease in meeting/conference business at the
Thomas Edison Inn due to the loss of a contract with a major customer.
Cost of Food and Beverages
As a percentage of total revenue, cost of food and beverages was 19.8%
in fiscal 1995 and fiscal 1994. As a percentage of food and beverage revenue,
cost of food and beverages increased from 33.4% in fiscal 1994 to 34.7% in
fiscal 1995. The increase in cost of food and beverages was due to a change in
product mix resulting primarily from the loss of banquet (e.g.
meetings/conferences, weddings, etc.) business at the Thomas Edison Inn
described in the previous paragraph. Food and beverage costs for banquet
business are relatively lower than food and beverage costs for restaurant and
lounge business.
Operating Expenses
Operating expenses increased 0.5%, from $7,179,572 in fiscal 1994 to
$7,215,061 in fiscal 1995. As a percentage of total revenue, operating expenses
increased 3.3 percentage points to 50.0% in fiscal 1995 compared to 46.7% in
fiscal 1994. The increase in operating expenses was primarily the result of an
increase of approximately 2 percentage points in salaries and wages. This
increase was the result of increased hourly wages (due to the tight labor market
in Michigan) and the negative impact on fixed labor of reduced revenues in
fiscal 1995 compared to fiscal 1994. Increased property taxes and an increase in
repairs and maintenance also contributed to the increase in operating expenses
(as a percentage of sales).
General and Administrative
General and administrative expenses increased $2,384,070 in fiscal 1995
compared to fiscal 1994, of which $2,154,163 related to various lawsuits in
fiscal 1995 described under "Business - Replacement and Restructuring of
Management." General and administrative expenses in fiscal 1995 also included
bad debt expense of $260,000 relating to the former majority shareholder's
indebtedness to the Company. Excluding these unusual expenses of $2,414,163,
general and administrative expenses were $2,565,458 in fiscal 1995 compared to
$2,597,278 in fiscal 1994.
53
<PAGE> 54
Depreciation and Amortization
Depreciation and amortization expense increased $194,455, from
$1,232,187 in fiscal 1994 to $1,426,642 in fiscal 1995. The increase was the
result of increased amortization due to the write-off of deferred loan costs of
approximately $350,000 because of the refinancing of the Company's long-term
debt in February 1996. Depreciation expense decreased because certain property
and equipment acquired in 1986 became fully depreciated during fiscal 1995.
Interest Expense
Interest expense for fiscal 1995 and 1994 was $1,355,389 and
$1,206,151, respectively. The increase of $149,238 from fiscal 1994 to fiscal
1995 was due to increases in the prime rate. All of the Company's debt had been
based on variable interest rates that were based on the prime rate.
Interest Income
Interest income increased from $87,028 in fiscal 1994 to $387,099 in
fiscal 1995. The increase was due to an increase in cash and cash equivalents in
fiscal 1995 compared to fiscal 1994 and an increase in interest on the payment
of outstanding loans from then related parties. Also contributing to the
increase was interest income from a note receivable from the sale of stock in
September 1995 (see Note J of the Meritage Consolidated Financial Statements for
fiscal 1996).
Gain on Sale of Assets
The gain on sale of assets of $241,646 in fiscal 1995 was primarily the
result of the sale of a portion of the land adjacent to the Thomas Edison Inn.
LIQUIDITY AND CAPITAL RESOURCES
On October 31, 1996, the Company acquired a majority interest in the
Wendy's Partnership. At November 30, 1996, the Company owned approximately 54%
of the Wendy's Partnership, all of which was acquired in fiscal 1996. As a
result of this acquisition, the financial statements of the Wendy's Partnership
have been included in the Company's consolidated operating results beginning
November 1, 1996 and the Company's consolidated balance sheet at November 30,
1996. The value of the assets of the Wendy's Partnership as of November 30,
1996, which have been included in the consolidated financial statements, was
approximately $10,500,000. This accounts for the majority of the increase in
total assets of the Company from $17,983,503 at November 30, 1995 to $31,928,864
as of November 30, 1996. The acquisition was funded by payment of approximately
$3,500,000 in cash and the issuance of approximately $1,370,000 of Company
stock. Of the cash payment $3,000,000 was provided by proceeds from borrowings.
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.
54
<PAGE> 55
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.
Cash Flows - Year ended November 30, 1996
Cash and cash equivalents ("cash") increased $928,606 from $1,336,891
as of November 30, 1995 to $2,265,497 as of November 30, 1996. The increase in
cash was the result of the following:
<TABLE>
<S> <C>
Net cash used in operating activities $ (1,496,419)
Net cash used in investing activities (5,601,790)
Net cash provided by financing activities 8,026,815
----------------
Net increase in cash $ 928,606
================
</TABLE>
Net cash used in operating activities of $1,496,419 was primarily due
to the net loss before depreciation and amortization of $843,866. Other non-cash
effects on net income and net cash used in operating activities totaled
$243,620. The net change in non-cash current assets and current liabilities of
$408,933 accounted for the remaining net cash used in operating activities.
Net cash used in investing activities of $5,601,790 was primarily the
result of purchases of property, plant and equipment of $2,211,392 and the
acquisition of the majority interest in the Wendy's Partnership for $3,184,460
(net of cash acquired upon consolidation of the Wendy's Partnership).
Net cash provided by financing activities of $8,026,815 was primarily
the result of net proceeds from long-term borrowings of $8,271,698 (proceeds of
$37,717,705 less retirement of debt $29,446,007) resulting from the Company's
long-term debt refinancing discussed below under "Financing and Encumbrances."
Other significant items which effected net cash provided by financing activities
included $750,000 in principal payments received on the note receivable from
sale of shares and proceeds from the issuance of preferred and common shares of
$545,000. These two items were offset by the payment of a one time special
dividend of $0.50 per Common Share on April 26, 1996. The total dividend paid
was $1,501,075. Of this amount $435,124 was withheld from the Company's former
majority shareholder (Mr. Reynolds) and applied against amounts due to the
Company from Mr. Reynolds and companies related to Mr. Reynolds at that date. An
additional $775,000 of the dividend was paid to MCC which then paid $750,000 to
the Company as an early prepayment on the Company's note receivable from the
sale of shares to MCC.
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.
55
<PAGE> 56
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.
56
<PAGE> 57
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 ACTUAL RESULTS COVENANT
REQUIREMENT 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 1.10:1 .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>
Since October 1996, 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 declared 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
estimated 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 of 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
(as of August 31, 1997) of final expenditures for the marina condominium project
being developed by the Company's subsidiary, Grand Harbor Yacht Club. 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 Lodging Group and the Food Service Group.
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.
57
<PAGE> 58
- Attempting to reducing 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.
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 ("Loan
A") and $3,000,000 ("Loan B"), respectively. The interest rate on Loan A was the
Prime Rate of The Provident Bank (Cincinnati, Ohio) plus 1%, fully floating. The
interest rate on Loan B was the Prime Rate of The Provident Bank plus 8%, fully
floating. Loan A had 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. Loan B had 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. Loan A could be
prepaid in whole or in part at any time without penalty upon payment of all
accrued interest and principal. Loan B could 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 would be payable if GALIC required such prepayment from the proceeds
resulting from the disposition of certain collateral securing Loan B. Loan A was
secured by, among other things, a first priority mortgage lien on the Company's
hotels. Loan B was secured by a second priority mortgage lien on the Company's
Hotels; by a first priority mortgage lien on the undeveloped land adjacent to
the Thomas Edison Inn, the commercial property adjacent to the St. Clair Inn,
and the Grand Harbor Yacht Club; by a collateral assignment of all life
insurance policies owned by the Company on the life of Mr. Reynolds; and by an
assignment of a Secured Promissory Note in the principal amount of $10,500,000
payable by MCC to the Company. Both Loan A and Loan B contained cross-default
provisions.
On October 31, 1996, the Company entered into Amendment No. 1 to the
loan agreement with GALIC to obtain an additional $3,000,000 mortgage loan
("Loan C"). The proceeds from Loan C were used to pay the costs associated with
commencing and closing the tender offer for the limited partnership units of the
Wendy's Partnership. The terms of Loan C were nearly identical to Loan B
described above, although Loan C's security included all of the outstanding
limited partnership units of the Wendy's Partnership owned by the Company.
On November 26, 1996, the Company entered into a new loan agreement
with GALIC to replace the existing loan agreement and restructure the Company's
total indebtedness. Loan A was refinanced and an additional $2,000,000 was
borrowed ("Loan I"). Loan I is with the subsidiaries of the Company and is
secured by a first mortgage lien on the Company's hotels, a first priority
security interest in the hotel personal property and an assignment of the hotel
franchise agreement. Loan I is guaranteed by the Company and bears a fixed
interest rate of 10.3%. Loan I requires equal monthly payments of principal and
interest of $137,897 (based upon a 20 year amortization) through December 1,
2003, at which time the loan matures and any remaining unpaid principal and
interest will be due. Loan I may not be prepaid, in whole or in part, within 48
months, except in the event of the sale of one of the hotels, in which case the
prepayment amount is an amount equal to a predetermined release price for the
property being sold plus a prepayment premium. The prepayment premium is 4% of
the amount prepaid if the sale is within 12 months after closing; 3% if the sale
is after 12 months and prior to 24 months after closing; 2% if the sale is after
24 months and prior to 36 months after closing; and 1% if the sale is after 36
months and prior to 48 months after closing. Beginning after the fourth
anniversary of the closing, and continuing until the sixth anniversary of the
closing, Loan I may be prepaid, with a "make whole premium" as defined in the
loan agreement.
58
<PAGE> 59
At the same time, Loan B and Loan C (together totaling $5,250,000) were
combined into one loan ("Loan II"). Loan II is with the Company and certain of
its subsidiaries, and bears an interest rate of prime (based on The Provident
Bank - Cincinnati, Ohio) plus 8%, fully floating. Loan II has a maturity date of
June 1, 2002, with monthly payments of interest only during the first year;
principal payments of $50,000 plus accrued interest from December 1, 1997
through March 1, 1998; and principal payments of $100,000 plus accrued interest
thereafter. Loan II 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 Loan II. Loan II is secured by a
second priority mortgage lien on the hotels; by a first priority security
interest on undeveloped land adjacent to the Thomas Edison Inn, commercial
property adjacent to the St. Clair Inn, and the Grand Harbor Yacht Club; by a
collateral assignment of all life insurance policies owned by the Company on the
life of Mr. Reynolds; by an assignment of the Secured Promissory Note in the
principal amount of $9,750,000 payable by MCC to the Company; by the Company's
pledge of the common stock of each of its subsidiaries; and by the Company's
pledge of its partnership interests in the Wendy's Partnership. Both Loan I and
II contain cross-default provisions.
On May 23, 1997, the Company entered into Amendment No. 1 to the loan
agreement with GALIC to obtain an additional $875,000 mortgage loan ("Loan
III"). The proceeds from Loan III are being utilized to complete the
improvements to the marina condominium project being developed by the Company's
subsidiary, Grand Harbor Yacht Club Inc., which is adjacent to the Grand Haven
Holiday Inn. The loan bears an interest rate of prime plus 1%, fully floating.
Monthly payments of interest are required. Principal payments of $35,000 are
required at the time of the sale of any of the marina condominium units. Loan
III is secured by the following: a mortgage on the real property and marina
facility owned by the Grand Harbor Yacht Club; mortgages on the real property
owned by the St. Clair Inn, Grand Harbor Resort and the Thomas Edison Inn; a
security agreement in all personal property owned by the Grand Harbor Yacht
Club; a guaranty executed by Meritage, Thomas Edison Inn, MHG Food Service, St.
Clair Inn and Grand Harbor Resort; and an assignment of certain construction
agreements, management agreements, permits and contracts. Loan III also contains
cross-default provisions.
Effective September 30, 1997 the Company obtained a waiver of principal
and interest payments due in October, November and December, 1997 on the
mortgage loans (Loans I, II, and III). 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.
The loan agreement contains a covenant that requires that (i)
Christopher B. Hewett, or another person acceptable to GALIC, serve as the
Company's President and Chief Executive Officer, (ii) Mr. Hewett own not less
than 50% of MCC, and (iii) MCC own and control at least 25% of the Company's
issued and outstanding Common Shares, or in the event of an issuance of Common
Shares by the Company, that MCC own more Common Shares than any other person or
group acting in concert and have sufficient control to cause the election of
persons nominated by MCC as a majority of the Company's directors.
The Wendy's Partnership has a note payable with First of America
Bank-Michigan, N.A. in the principal amount of $1,725,413. The loan requires
monthly payments of $43,313 based on a ten year amortization including interest
at 1% over prime. The revolving loan agreement allows the Wendy's Partnership to
apply its excess cash against the loan balance to reduce the interest charged on
the loan. As of August 31, 1997, the loan was paid down to a balance of
$1,725,413 while the permitted (amortized) balance was $2,793,103. The loan is
guaranteed by Meritage and secured by substantially all the assets of the
Wendy's Partnership.
INFLATION AND CHANGING PRICES
The rate of inflation as measured by changes in the average consumer
price index has not had a material effect on the Company's financial condition
or results of operations for the periods presented.
59
<PAGE> 60
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
(1) Years Ended December 31, Nine Months
Eleven Months Ended ------------------------ Ended August 31,
November 30, 1996 1995 1994 1993 1992 1997 1996
----------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total Revenue $ 24,687 $ 25,601 $ 24,910 $ 23,685 $ 22,743 $ 20,399 $ 19,795
Operating costs and expenses 23,700 24,593 23,418 22,625 21,717 19,669 19,092
Earnings from operations 987 1,008 1,492 1,060 1,026 730 703
Earnings before extraordinary item 559 527 941 438 348 220 377
Net earnings 559 506 941 351 348 220 377
Net earnings attributable to:
Limited Partners $ 553 $ 501 $ 931 $ 348 $ 345 $ 218 $ 373
General Partner 6 5 10 3 3 2 4
--------------------------------------------------------------------------------
$ 559 $ 506 $ 941 $ 351 $ 348 $ 220 $ 377
================================================================================
Earnings before extraordinary item per
limited partnership unit $ 440.22 $ 415.14 $ 740.96 $ 345.06 $ 274.42 $ 173.01 $ 297.24
Net earnings per limited partnership
unit 440.22 398.96 740.96 276.53 274.42 173.01 297.24
Cash distributions per limited
partnership unit 250.00 450.00 300.00 --- --- --- 250.00
BALANCE SHEET DATA
Cash 394 411 776 409 422 408 277
Working capital (850) (912) (824) (1,089) (2,733) (1,009) (1,074)
Property and equipment, net 5,897 5,671 5,933 5,763 5,611 5,777 5,735
Total assets 9,076 8,832 9,698 9,341 9,478 8,649 8,662
Long-term debt, including current
maturities 4,379 4,469 5,127 5,494 4,176 3,919 4,111
Total liabilities 5,793 5,972 6,773 6,976 7,464 5,328 5,687
Partners' equity:
Limited Partners 3,131 2,892 2,956 2,402 2,054 3,348 3,005
General Partner (29) (31) (31) (36) (40) (27) (30)
Partners' equity per limited partnership
unit 2,491.07 2,300.85 2,351.90 1,910.94 1,634.41 2,664.07 2,390.77
STATEMENT OF CASH FLOWS DATA
Net increase (decrease) in cash (17) (365) 367 (12) 194 14 (6)
Net cash provided by
operating activities 1,201 1,366 1,808 627 1,207 1,126 1,206
Distributions 317 571 381 --- --- --- 317
<FN>
(1) In fiscal 1996, the Wendy's Partnership changed its fiscal year from
December 31 to November 30, due to the consolidation of the Wendy's
Partnership's financial statements with Meritage. Meritage acquired a
majority interest in the Wendy's Partnership on October 31, 1996.
</TABLE>
60
<PAGE> 61
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
The following table summarizes the results of operations for years
ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
-----------------------------------------------------------------------
1995 1994 1995 1994
----------------------------- ----------------------------
(in thousands) (as a percentage of net sales)
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net Sales $ 25,601 $ 24,910 100.0% 100.0%
Cost of Sales 7,391 7,295 28.9 29.3
-----------------------------------------------------------------------
Gross Profit 18,210 17,615 71.1 70.7
Expense (Income):
Restaurant Operating
Expenses 15,099 13,987 59.0 56.2
General and
Administrative 1,250 1,279 4.9 5.1
Depreciation and
Amortization 853 857 3.4 3.4
Interest Expense 512 557 2.0 2.2
Loss (Gain) on
Disposal of Assets 1 (6) 0.0 0.0
Insurance in Excess
of Net Book Value of
Fire Damaged Assets (32) -0- (0.1) 0.0
Loss from Extinguishment
of Debt 21 -0- (0.1) 0.0
-----------------------------------------------------------------------
17,704 16,674 69.1 66.9
-----------------------------------------------------------------------
Net Income $ 506 $ 941 2.0% 3.8%
=======================================================================
</TABLE>
61
<PAGE> 62
Sales
Net sales (excluding other income) increased 2.6% from $24,702,000 in
1994 to $25,365,000 in 1995. The sales increase for 1995 was due to the
Partnership having additional restaurants in operation during 1995 compared to
1994. The Partnership opened its twenty-fourth restaurant in August 1994 and its
twenty-fifth restaurant in April 1995. Sales on a per restaurant basis for the
Partnership's twenty-three restaurants in operation during the entire twelve
months of both 1995 and 1994 are set forth in the table below for the three
months ended March 31, June 30, September 30 and December 31, 1995 and 1994.
Sales for 1995 have been adjusted so that comparable figures are produced to
account for one of the Partnership' restaurants being closed for seven weeks
during the second quarter of 1995 due to fire damage.
Average Net Sales Per Restaurant Unit
-------------------------------------
<TABLE>
<CAPTION>
Increase % Increase
1995 1994 (Decrease) (Decrease)
---- ---- ---------- -----------
<S> <C> <C> <C> <C>
Three months ended March 31 $ 255,107 $ 229,358 $ 25,749 11.2 %
Three months ended June 30 273,240 272,810 430 0.1 %
Three months ended September 30 279,643 286,830 (7,187) (2.5)%
Three months ended December 31 254,357 275,842 (21,485) (7.7)%
----------- ----------- ------------ ----------
$ 1,062,347 $ 1,064,840 $ (2,493) (0.2)%
=========== =========== ============ ============
</TABLE>
Net sales increased 11.2% during the first quarter of 1995 compared to
the same period of 1994 due to unusually mild winter weather during the first
quarter of 1995 compared to the same period of 1994. During the second quarter
of 1995 sales flattened. Sales decreased 2.5% and 7.7% for the third and fourth
quarters, respectively, compared to the same periods of 1995. Although sales
were flat for the year, the Partnership's sales still compared favorably with
Wendy's International, Inc. corporate owned restaurants which had average sales
of $1,014,000 per restaurant unit in 1995 and Wendy's franchise markets which
had average sales of $974,000 per restaurant unit in 1995. Due to intense
competition as described in the following paragraphs, selling price increases in
1995 were less than 1%.
Sales in the second and third quarter of 1995 were adversely impacted
by heavy marketing and price discounting by the Partnership's competition. Also
contributing to the declining sales trend was a reduction in sales of
approximately $270,000 in 1995 compared to 1994 at one of the Partnership's
restaurants due to extensive and prolonged road construction at this location.
Sales at this restaurant were down 16% in 1995 compared to 1994.
The heavy discounting and competitive intrusion continued into the
fourth quarter of 1995. This intense competition combined with unseasonable cold
and snowy weather conditions beginning in early November 1995, compared to
relatively mild weather during the fourth quarter of 1994, contributed to the
7.7% decrease in sales during the fourth quarter of 1994.
Gross Profit
Gross profit increased $567,000 in 1995 compared to 1994. This increase
was the result of increased sales combined with a .4 percentage point increase
in the Partnership's gross profit percentage (from 70.5% of sales in 1994 to
70.9% of sales in 1995). The increase in the Partnership's gross profit
percentage was primarily the result of a decline in meat prices in 1995 combined
with effective cost controls at the store operation level.
Restaurant Operating Expenses
As a percentage of sales, restaurant operating expenses increased 2.9
percentage points during 1995 compared to 1994. This increase was primarily due
to a 1.6 percentage point increase in hourly payroll costs (as a percentage of
sales). The increase in hourly payroll cost was the result of increased hourly
wage rates as average wage rates rose throughout 1995 due to intense competition
for labor in the Partnership's market where the unemployment level fell as low
as 3.5% during 1995. Average hourly wage rates were approximately 9% higher in
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<PAGE> 63
1995 than in 1994. Also contributing to the increase in restaurant operating
expenses were slight increases in utilities, repairs and maintenance, property
taxes and coupon discounts.
On a per restaurant basis, restaurant operating expenses increased from
an average of $598,000 per restaurant in 1994 to an average of $610,000 per
restaurant in 1995, an increase of 1.9% compared to the 0.2% decrease in per
restaurant sales for 1995. The 1.9% increase in restaurant operating expenses
for 1995 compares favorably with the 3.7% increase in restaurant operating
expenses in 1994 over 1993.
General and Administrative
General and administrative expenses decreased $29,000 in 1995 compared
to 1994 (from $1,279,000 to $1,250,000). As a percentage of sales, general and
administrative expenses decreased from 5.2% of sales in 1994 to 4.9% of sales in
1995. Decreases in administrative salaries, Michigan single business tax and
professional fees offset slight increases in profit sharing expenses and
increased recruiting costs (due to the labor shortage discussed earlier) to
account for the decrease in general and administrative expenses.
Interest Expense
Interest expense decreased $45,000 in 1995 compared to 1994 (from
$577,000 to $512,000). In March 1995 the Partnership refinanced its long-term
debt reducing the interest rate on the Partnership's debt from 2% over prime to
1% over prime. The new loan agreement also allows the Partnership to apply its
excess cash against the loan balance which combined with the reduction in the
interest rate caused the decrease in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
On October 31, 1996, Meritage acquired 482.55 units of the Wendy's
Partnership pursuant to a tender offer. This acquisition, coupled with an
additional 198.25 units acquired by Meritage in private transactions, has
resulted in Meritage owning (through its subsidiary MHG Food Service)
approximately 54% of the outstanding units. Effective at the time of the tender
offer Meritage's financial results included its share of the Wendy's operations.
As such, the relevant discussion regarding liquidity and capital resources will
be found under the Meritage "Liquidity and Capital Resources" section discussed
earlier in this filing.
INFLATION AND CHANGING PRICES
As discussed under "Restaurant Operating Expenses", rising hourly wage
rates had a negative impact on the Partnership's operating results for 1995.
This increase in labor costs along with periodic increases in food and other
operating expenses are normally passed on to customers in the form of price
increases. However, highly competitive market conditions have severely minimized
the Partnership's ability to offset cost increases through increased prices to
its customers.
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<PAGE> 64
BUSINESS
GENERAL
Meritage Hospitality Group is engaged in the hospitality business
through its operation of two distinct business segments. The Company's Food
Service Group consists of its majority ownership of a limited partnership which
operates 25 "Wendy's Old Fashioned Hamburgers" restaurants throughout Western
and Southern Michigan. The Company's Lodging Group owns and operates three full
service hotels in Michigan.
FOOD SERVICE GROUP
In the Food Service Group, the Company owns, through a wholly owned
subsidiary, 680.8 limited partnership units of the Wendy's Partnership,
representing approximately 54% of the total outstanding limited partnership
units. The Wendy's Partnership operates 25 "Wendy's Old Fashioned Hamburgers"
restaurants throughout Western and Southern Michigan which are operated pursuant
to franchise agreements with Wendy's International. The Partnership employs
approximately 900 people and reported sales of approximately $26.5 million in
fiscal 1996. The restaurants offer a diverse menu featuring hamburgers, chicken
breast sandwiches, baked and french fried potatoes, pita sandwiches, freshly
prepared salads, soft drinks and "Frosty" desserts.
The Wendy's restaurants are operated pursuant to license agreements
with Wendy's International. These agreements impose requirements regarding the
preparation and quality of food products, the level of service, and general
operating procedures. The Wendy's Partnership makes a monthly royalty payment to
Wendy's International (the greater of 4% of monthly gross sales or $250 per
restaurant) and commits a certain percentage of monthly gross sales to
advertising. The Wendy's Partnership is also permitted to utilize Wendy's
International's trademarks, service marks, designs and other propriety rights in
connection with the operation of the restaurants.
The franchise agreements provide, among other things, that a change in
the operational control of the Wendy's Partnership or general partner cannot
occur without prior consent of Wendy's International. The franchise agreements
also provide that any proposed sale of the Wendy's Partnership's business,
interests or franchise rights is subject to the consent and right of first
refusal of Wendy's International.
The franchise agreements currently in place with the Wendy's
Partnership generally expire 20 years after the date the restaurant at issue was
opened or under construction. Subject to certain conditions, the franchise
agreements can be renewed for an additional 10 years.
The Wendy's Partnership cannot conduct its present business without its
affiliation with Wendy's International which gives the Wendy's Partnership the
right to use certain registered trademarks and service marks such as "Wendy's"
and "Wendy's Old Fashioned Hamburgers." A default by the Wendy's Partnership
under a franchise agreement could result in adverse consequences, including
their termination of the franchise agreement.
LODGING GROUP
In the Lodging Group, the Company owns and operates three full service
hotels: the 149-room Thomas Edison Inn located on the St. Clair River in Port
Huron, Michigan; the 78-room St. Clair Inn located on the St. Clair River in St.
Clair, Michigan; and the 121-room Grand Haven Holiday Inn located on the Grand
River in Spring Lake, Michigan. Each hotel has a picturesque waterfront setting
and seeks business and leisure travelers who desire full service accommodations,
such as guest rooms and suites, a restaurant and cocktail lounge, and
meeting/conference rooms.
Meritage is a Michigan corporation incorporated in 1986. On May 21,
1996, shareholders amended the Articles of Incorporation to change the Company's
name from "Thomas Edison Inns., Inc." to "Meritage Hospitality Group Inc." 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.
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<PAGE> 65
BROADENED BUSINESS ORIENTATION
Although Meritage was engaged only in the lodging business since its
inception, Meritage has recently reassessed its long-range objectives and made a
strategic decision to further expand its Food Service Group through the
acquisition of additional chain restaurant businesses. In addition, 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
is considering the sale of one or more of its hotels. The Company has retained a
professional brokerage firm to assist it in this regard but does not have any
binding agreement for the sale of any of the hotels at this time. Proceeds of
any sale would be used to reduce the Company's debt. Management cannot, of
course, determine whether it will sell any of its hotels or determine how long
it would take to sell these assets at prices acceptable to Meritage.
REPLACEMENT AND RESTRUCTURING OF MANAGEMENT
From the Company's inception in 1986 until January 1996, Donald W.
Reynolds served as Chairman of the Board, President, Chief Executive Officer,
Treasurer and Secretary of the Company, and the Company engaged Innkeepers
Management Company, a Michigan corporation wholly-owned by Mr. Reynolds, to
manage the Company's business pursuant to a Management Agreement.
Mr. Reynolds was removed as an officer and director of the Company by
the St. Clair County (Michigan) Circuit Court on January 8, 1996 (Case NO.
95-00-33-88-CZ, Deegan, J.). While the Court's written order did not state why
Mr. Reynolds was removed, the Court questioned the manner in which Mr. Reynolds
conducted his affairs and articulated the Court's objective of protecting the
interests of the Company's minority shareholders. The Court appointed Frank O.
Staiger as acting President and director. On January 25, 1996, MCC, the
Company's majority shareholder, amended the Company's Bylaws to, among other
things, expand the Board of Directors to 10 directors and appointed 5 new
directors. On January 25, 1996, the Company's newly expanded Board of Directors
appointed Christopher B. Hewett as the Company's new President and Chief
Executive Officer. The Board also terminated the Management Agreement with
Innkeepers and removed David C. Distad, Mr. Reynolds's son-in-law, as Vice
President and Chief Financial Officer of the Company. Instead of employing a
third party management company, the Company now operates its business directly
in an effort to more effectively utilize its resources and employees.
FOOD SERVICE GROUP
General
The food service industry serves as the nation's largest retail
employer, providing jobs for over 9 million people at over 730,000 locations in
the United States. The growth rate of the quick-service segment has consistently
exceeded that of the food service industry as a whole for more than 20 years.
The historic change in domestic lifestyles which favor greater convenience has
significantly impacted this trend. Because of this growth rate, competition in
the quick-service restaurant segment is intense and can be expected to increase.
Most of the Partnership's restaurants are in close proximity to other
quick-service restaurants (e.g. McDonald's, Burger King and Taco Bell) which
compete on the basis of price, service, quality and variety. Recently, the major
competitors have attempted to draw customer traffic by a price discounting
strategy. However, neither Wendy's International nor the Company believes this
is a profitable long-term strategy. The Company intends to achieve growth both
by developing new Wendy's restaurants and by increasing the sales at existing
restaurants.
Menu
Each Wendy's restaurant offers a diverse menu containing a variety of
food items, featuring hamburgers, chicken sandwiches and pita sandwiches which
are prepared to order with the customer's choice of condiments. The Wendy's menu
also typically includes, among other things, baked and french fried potatoes,
freshly prepared salads, soft drinks and "Frosty" desserts.
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Marketing and Promotion
As required by its franchise agreements, the Wendy's Partnership
contributes at least 4% of its restaurant sales to an advertising and marketing
fund. Two and one half percent of restaurant sales is used to benefit all
restaurants owned and franchised by Wendy's International. The Wendy's National
Advertising Program, Inc. uses this fund to develop advertising and sales
promotion materials and concepts to be implemented nationally. The Wendy's
Partnership is required to spend the remainder of the 4% of its restaurant sales
on local advertising. The Wendy's Partnership typically spends local advertising
dollars in support of national television advertising, local television and
radio advertising, print media, local promotions and community goodwill
projects.
Restaurants Layout and Operations
The Wendy's Partnership's 25 restaurants typically range from 2,700 to
3,200 square feet with a seating capacity between 90 and 130 people, and are
typically open from 10:30 a.m. to 10:00 p.m., with many restaurants open for
extended evening hours. Generally, the dining areas are carpeted and informal in
design, with tables for two to four people. The Wendy's Partnership's
restaurants also feature drive-through windows. Average drive-through guests
generally exceed in-restaurants guests. In fiscal 1996, drive-through sales
constituted approximately 50% of the Wendy's Partnership's sales.
The Wendy's Partnership's reporting system provides restaurant sales
and operating data, including product sales mix, food usage and labor cost
information with respect to each restaurant operated by the Wendy's Partnership.
Physical inventories of all food items are taken weekly, and inventories of
critical food items are taken twice a day.
Raw Materials
As a Wendy's franchisee, the Wendy's Partnership complies with uniform
recipe and ingredient specifications provided by Wendy's International, and
purchase all food and beverage inventories and restaurant supplies from
independent vendors approved by Wendy's International. Except for the New Bakery
Co. of Ohio, Inc., a wholly-owned subsidiary of Wendy's International, Wendy's
International does not sell food or supplies to its franchisees. The Wendy's
Partnership purchases its sandwich buns from local bakeries for its restaurants.
The Wendy's Partnership purchases soft drink products from the Coca-Cola Company
and its affiliates. Most other food items and supplies purchased by the Wendy's
Partnership are warehoused and distributed by independent distributors. The
Wendy's Partnership and, in some instances Wendy's International, negotiate
prices directly with the vendors.
The Wendy's Partnership has not experienced any significant shortages
of food, equipment, fixtures or other products which are necessary to restaurant
operations. The Wendy's Partnership anticipates no such shortages and believes
that alternate suppliers are available in the event such shortages occur.
LODGING GROUP
The Company's hotels are full service properties that attract business
and leisure travelers. Each hotel provides fully appointed guest rooms and
numerous amenities and services including a restaurant and cocktail lounge,
meeting/conference rooms, and a swimming pool and fitness facility.
Approximately 150 full time, and 325 part time employees are involved in the
operation of the three hotels, none of whom are members of a labor union or part
of a collective bargaining unit.
The following table summarizes key information for each hotel property:
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Thomas Edison Inn St. Clair Inn Grand Haven Holiday Inn
----------------- ------------- -----------------------
<S> <C> <C> <C>
Location in Michigan Port Huron St. Clair Grand Haven
Number of guest rooms 149 78 121
Year built 1987 1926 1969
Date acquired by MHGI July 1987 October 1985 October 1985
Completed renovations during the
year ended November 30, 1996 $650,000 $500,000 $700,000
For the twelve months ended
November 30, 1996:
Average occupancy 65.50% 56.60% 57.70%
Average daily rate $80.48 $83.26 $71.02
Total room revenue/total
available rooms $52.75 $47.12 $40.94
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Thomas Edison Inn
The Thomas Edison Inn, which opened in 1987, is located on
approximately 4 acres bordering the St. Clair River in Port Huron, Michigan. The
hotel has 149 guest rooms, a 250 seat restaurant that overlooks the St. Clair
River and Lake Huron, a 150 seat cocktail lounge, and a variety of
meeting/conference rooms accommodating up to 500 people. Other facilities
include an indoor swimming pool, a pool side whirlpool, and a health club and
retail shops leased to third party vendors. The hotel's room revenue is derived
from business and leisure travelers. 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. In
1996, the hotel underwent a $650,000 renovation which included building
improvements and the installation of point-of-sale, property management and
telephone systems.
St. Clair Inn
The St. Clair Inn, which opened in 1926, is a state historic site
located on approximately 2.5 acres bordering the St. Clair River in St. Clair,
Michigan. The hotel has 78 rooms, a 240 seat restaurant that overlooks the St.
Clair River, a 60 seat cocktail lounge, and a variety of meeting/conference
rooms 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 hotel's market mix is
similar to that of the Thomas Edison Inn, and the hotel also derives substantial
food and beverage revenue from local clientele. In order to facilitate the sale
of certain assets, three buildings adjacent to the hotel are slated to be
demolished in 1997, resulting in eighteen rooms having been removed from service
in late 1996. See "Other Assets." The hotel underwent a $500,000 renovation in
1996 which included building improvements and the installation of point-of-sale,
property management and telephone systems.
Grand Haven Holiday Inn
The Grand Haven Holiday Inn, which opened in 1969, is located on
approximately 4 acres bordering the Grand River in Spring Lake, Michigan. The
hotel has 121 rooms, a 185 seat restaurant that overlooks the Grand River, a 125
seat cocktail lounge, and a variety of meeting/conference rooms accommodating up
to 300 people. Other facilities include an outdoor and indoor swimming pool. The
Grand Harbor Yacht Club, a newly renovated 55-slip marina condominium project
owned by the Company, borders the property. The hotel's market mix is similar to
that of the Thomas Edison Inn and the St. Clair Inn, and the hotel also derives
substantial food and beverage revenue from local clientele. In 1996, the hotel
underwent a $700,000 renovation whereby the exterior of the hotel was redesigned
and renovated to compliment and accentuate its nautical surroundings.
The hotel is operated under a license agreement between Holiday Inns
Franchising, Inc. and the Company's subsidiary, Grand Harbor Resort Inc. Under
this agreement, the hotel is entitled to use the service marks "Holiday Inn" and
certain other service and trademarks, and a computerized reservation network
operating
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under the name "Holidex." The hotel is required to pay a variety of fees and
assessments to Holiday Inns Franchising which, in fiscal 1996, totaled $148,811,
or 8.3% of the hotel's gross room revenues.
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.
COMPETITION AND INDUSTRY CONDITIONS
The quick-service restaurant industry is intensely competitive with
respect to price, service, location and food quality. The industry is mature and
competition can be expected to increase. There are several well-established
competitors with substantially greater financial and other resources than the
Company, some of which have been in existence substantially longer than Meritage
and may have substantially more units in the market where the Wendy's
Partnership's restaurants are or may be located. McDonald's, Burger King and
Taco Bell restaurants are the principal competitors in the Wendy's Partnership's
markets. The Company's major competitors are engaged in an attempt to draw
customer traffic by a deep discounting strategy, however, neither Wendy's
International nor Meritage believe this is a profitable long-term strategy.
The Company and the quick-service restaurant industry generally are
significantly affected by factors such as changes in local, regional or national
economic conditions, changes in consumer tastes, severe weather and consumer
concerns about the nutritional quality of quick-service food. In addition,
factors such as increases in food, labor and energy costs, the availability and
cost of suitable restaurant sites, fluctuating insurance rates, state and local
regulations and the availability of an adequate number of hourly-paid employees
can also adversely affect the quick-service restaurant industry.
The lodging industry is highly competitive. Since 1993, the industry
has been steadily recovering from the recession of the early 1990's and the
over-building of the late 1980's. Occupancy and average daily rates have
consistently increased since 1993. Also, new hotel construction has resumed.
Industry sources forecast modest increases in average daily rates, stable
occupancy rates and modest income growth for 1997.
The following table illustrates the average daily room rates for the
Company's hotels during 1995 and 1996 as compared to the national average:
<TABLE>
<CAPTION>
================== ====================== ====================== =============================== ====================
FISCAL YEAR THOMAS EDISON INN ST. CLAIR INN GRAND HAVEN HOLIDAY INN NATIONAL AVE.*
- ------------------ ---------------------- ---------------------- ------------------------------- --------------------
<S> <C> <C> <C> <C>
1995 $ 80.68 $ 71.39 $ 68.11 $ 67.34
- ------------------ ---------------------- ---------------------- ------------------------------- --------------------
1996 $ 80.48 $ 83.26 $ 71.02 $ 69.50
================== ====================== ====================== =============================== ====================
<FN>
* Source: Smith Travel, Coopers & Lybrand and CLS Estimates
</TABLE>
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The following table illustrates the average daily room rates per
available room for the Company's hotels during 1995 and 1996 as compared to the
national average:
<TABLE>
<CAPTION>
================== ====================== ====================== =============================== ====================
FISCAL YEAR THOMAS EDISON INN ST. CLAIR INN GRAND HAVEN HOLIDAY INN NATIONAL AVE.*
- ------------------ ---------------------- ---------------------- ------------------------------- --------------------
<S> <C> <C> <C> <C>
1995 $ 47.98 $ 42.77 $ 42.01 $ 44.11
- ------------------ ---------------------- ---------------------- ------------------------------- --------------------
1996 $ 52.75 $ 47.12 $ 40.94 $ 46.22
================== ====================== ====================== =============================== ====================
<FN>
* Source: Smith Travel, Coopers & Lybrand and CLS Estimates
</TABLE>
The following table illustrates the percentages of occupancy for 1995 and 1996
as compared to the national occupancy rate:
<TABLE>
<CAPTION>
================== ====================== ====================== =============================== ====================
FISCAL YEAR THOMAS EDISON INN ST. CLAIR INN GRAND HAVEN HOLIDAY INN NATIONAL AVE.*
- ------------------ ---------------------- ---------------------- ------------------------------- --------------------
<S> <C> <C> <C> <C>
1995 59.5% 59.9% 61.7% 65.5%
- ------------------ ---------------------- ---------------------- ------------------------------- --------------------
1996 65.5% 56.6% 57.7% 66.5%
================== ====================== ====================== =============================== ====================
<FN>
* Source: Smith Travel, Coopers & Lybrand and CLS Estimates
</TABLE>
The Company's hotels compete with a wide range of lodging 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, amenities and levels of service, as well as
independent hotels in each market segment. Business at the hotel varies
seasonally. Historically, demand has been greatest during the summer, resulting
in higher revenues during the Company's third fiscal quarter.
The Company operates the dominant full service hotels in its respective
markets. To maintain its market share, the Company has expanded its sales and
marketing programs and made significant capital improvements. In recent years,
most newly constructed hotels in the Company's markets have been limited service
hotel properties which offer mid-priced or economy level room rates. The Company
anticipates increased competition in its markets as a result of these new
properties.
RELATIONSHIP WITH WENDY'S INTERNATIONAL
Meritage's food service operations are presently conducted through the
Wendy's Partnership which is a franchisee of Wendy's International. The
restaurants are operated under franchise agreements between the Wendy's
Partnership and Wendy's International which generally have a 20-year term. These
agreements require the approval of Wendy's International to the assumption of
control of the franchised businesses owned by other entities.
As the general partner of the Wendy's Partnership, MCC Food Service, an
affiliate of Meritage, now directs the operations of the 25 Wendy's restaurants
operated by the Wendy's Partnership. MCC Food Service's control is being
challenged in a lawsuit commenced by the former general partner of the Wendy's
Partnership. See "Risks Associated with Investment in Meritage Common Shares -
Legal Proceedings." These operations are conducted pursuant to franchise
agreements with Wendy's International. These franchise agreements grant Wendy's
International wide discretion over advertising and other aspects of restaurant
operations. In addition to the contractual restrictions imposed by the franchise
agreements, Meritage and its affiliates which are involved in the Wendy's
business, are subject to certain restrictions imposed by policies and procedures
established by Wendy's International as in effect from time to time. These
restrictions may have the effect of limiting Meritage's ability to pursue some
of its business plans.
Wendy's International's consent may be required for certain
transactions by Meritage. If Wendy's International's consent is required and not
obtained, Meritage will not be able to proceed with those plans which, in turn,
could affect Meritage's growth strategy and could have a material adverse effect
on Meritage's financial
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condition and results of operations. If Meritage proceeds without Wendy's
International's consent, Wendy's International could terminate its franchise
agreements. Termination of the franchise agreements would have a material
adverse effect on Meritage's financial condition and results of operations.
Part of Meritage's business strategy is to expand its operations
through the acquisition and development of Wendy's restaurants. The approval of
Wendy's International is required for the development or acquisition of any
interest in Wendy's restaurants outside of Meritage's designated market area
(the Michigan counties of Allegan, Calhoun, Kalamazoo, Kent, Muskegon, Ottawa
and Van Buren). Wendy's consent to any acquisitions or development may be
withheld in Wendy's sole and absolute discretion. Pursuant to its agreement with
Wendy's International, Meritage is also limited in both the acquisition or
development of other chain restaurant businesses. Wendy's International has
restricted Meritage's involvement with any quick-service restaurant in
Meritage's market area, and any quick-service restaurant outside of Meritage's
market area that sells chicken sandwiches, hamburgers or products similar to
Wendy's International and which is located within a three mile radius of another
Wendy's restaurant.
Wendy's International must approve the opening by Meritage of any new
restaurant, including restaurants opened within Meritage's existing franchise
territories. Wendy's International also maintains discretion over the menu items
that may be offered in Meritage's restaurants. By virtue of franchise and other
agreements, Meritage is required to pay to Wendy's International technical
assistance fees upon the opening of new restaurants and monthly royalty and
national advertising fees. These agreements also provide for the termination of
Meritage as a franchisee upon the failure of Meritage to comply with certain
restrictions and obligations imposed on Meritage.
Meritage's restaurant operations are largely dependent on the Wendy's
restaurant chain, which in turn is dependent upon the management and financial
condition of Wendy's International's and the reputation developed by Wendy's
restaurants operated by other Wendy's franchisees. Should Wendy's International
be unable to compete effectively with similar restaurant chains in the future,
Meritage would be materially and adversely affected. Furthermore, many of the
attributes which lead to the success of Wendy's operations are factors over
which Meritage has no control, such as marketing efforts, introduction of new
products, quality assurance and other operational systems. Adverse publicity
involving other Wendy's franchisees could have an adverse effect on all
franchisees including Meritage.
GOVERNMENTAL REGULATIONS
The hotel, restaurant and lounge operations within the Company's
Lodging Group are subject to governmental regulation and licensing requirements,
including, but not limited to, zoning ordinances, public health certification
and liquor licenses. The Company believes its operations would be adversely
affected if these licenses or permits were terminated. The Company does not
anticipate that its licenses or permits will be terminated.
The Wendy's Partnership is also subject to extensive federal, state and
local government regulations relating to the zoning, development and operation
of the restaurants and the preparation and sale of food. The Wendy's Partnership
is also sensitive to laws governing relationships with its employees such as
minimum and overtime wage laws, health insurance coverage requirements, and
working conditions. During fiscal 1996, Congress passed the Minimum Wage Bill
which revised the minimum wage to $4.75 per hour as of October 1, 1996 and $5.15
per hour as of September 1, 1997. Substantial changes in the minimum wage or
mandatory health care coverage could have an adverse effect on the Wendy's
Partnership and on the Company's hotels.
OTHER ASSETS
The Company has a number of assets which do not directly relate to its
hospitality business. These assets include (i) approximately 5.5 acres of
undeveloped land adjacent to the Thomas Edison Inn, (ii) approximately one acre
of commercial property adjacent to the St. Clair Inn, (iii) the Grand Harbor
Yacht Club, a 55-slip marina condominium development which borders the Grand
River adjacent to the Grand Haven Holiday Inn, (iv) $5.1 million in life
insurance policies on the life of the former President and Chief Executive
Officer, and (v) a note receivable from the sale of shares in the outstanding
principal amount of $9,750,000. Except for the note receivable, the Company
intends to sell all of these assets to raise additional funds which, may be used
to pay down
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the Company's long-term indebtedness or fund acquisitions, capital expenditures
or other corporate purposes. There can be no assurances that the Company will be
able to sell these assets in the near future or as to the prices it may receive
for them.
PROPERTIES
For a description of the hotel properties that are owned and operated
by the Company and its subsidiaries, see "Business - Lodging Group" above.
The Company leases approximately 4,600 square feet of office space
located at 40 Pearl Street, N.W., Suite 900, Grand Rapids, Michigan 49503 as its
corporate headquarters and as the registered office of the Company.
The Wendy's Partnership operates 25 restaurants in the Michigan
counties of Allegan, Calhoun, Kalamazoo, Kent, Muskegon, Ottawa and Van Buren.
The Wendy's Partnership (i) owns the land and buildings comprising five
restaurants, (ii) leases the land and buildings comprising 19 restaurants, and
(iii) owns the building and leases the land comprising one restaurant. The term
of the leases (including options to renew) range from one to 24 years. All of
the equipment used in the operation of the restaurants is owned by the
Partnership. Each restaurant conforms with the size, shape, design and layout
that is required by Wendy's International. The ages of the restaurants range
from one to twenty-three years.
The Partnership also leases approximately 4,000 square feet of office
space located at 4613 West Main, Kalamazoo, Michigan 49006 as its operating
headquarters. The principal office of the general partner is located at 40 Pearl
Street, N.W., Suite 900, Grand Rapids, Michigan 49503.
The Company believes that its properties, and the properties held by
the Partnership, are adequately covered by insurance.
LEGAL PROCEEDINGS
The Company is involved in certain routine legal proceedings which are
incidental to its business. 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 or operations. The Company maintains various types of insurance
standard to the industry which would cover most actions brought against the
Company.
On December 5, 1996, the Company received a notice from the Internal
Revenue Service that approximately $2.1 million, which Meritage deducted as a
business expense in connection with litigation in 1995 and 1996 relating to the
replacement and restructuring of former management, should be treated as a
capital expenditure and, therefore, disallowed as a deduction. Meritage believes
the deduction was proper and is vigorously contesting the disallowance. If the
IRS were to completely prevail in its position, then Meritage would be required
to expend approximately $340,000 for the payment of additional federal and state
income taxes plus any interest. If Meritage is not able immediately to carry
back its 1996 tax loss to offset such payment, then any amount that Meritage
would be required to pay would be refunded within 120 days of payment.
On May 19, 1997, a majority limited interest of the Wendy's Partnership
removed Wendy's West Michigan, Inc. as general partner of the Wendy's
Partnership and appointed MCC Food Service, an affiliate of Meritage, as the
substitute general partner. Approximately 180 unit holders (from whom Meritage
acquired 482.55 of its total 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. This action was carried out in connection
with Meritage's acquisition of a controlling interest in the Wendy's
Partnership, and in accordance with Meritage's representations during the tender
offer that it may remove the general partner and substitute itself or its
designee as the new general partner. On May 21, 1997, the former general partner
commenced a lawsuit against Meritage, 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
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<PAGE> 72
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 (iv)
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, Meritage, 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. Wendy's International stated that it does not intend to take a
position as to the rights of either party with respect to the specific issues
which have thus far been raised by this lawsuit. The consent of Wendy's
International to MCC Food Service serving as the general partner has already
been obtained.
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<PAGE> 73
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following is information concerning each director and executive
officer of Meritage as of September 1, 1997:
<TABLE>
<CAPTION>
===================================== ================= ==========================================================
NAME AGE POSITION
- ------------------------------------- ----------------- ----------------------------------------------------------
<S> <C> <C>
Robert E. Schermer, Sr. (1)(2)(3) 62 Chairman of the Board
- ------------------------------------- ----------------- ----------------------------------------------------------
Christopher B. Hewett (1)(3) 38 President, Chief Executive Officer and Director
- ------------------------------------- ----------------- ----------------------------------------------------------
Robert E. Schermer, Jr. (1) 38 Executive Vice President and Director
- ------------------------------------- ----------------- ----------------------------------------------------------
Pauline M. Krywanski 37 Vice President, Treasurer and Chief Financial Officer
- ------------------------------------- ----------------- ----------------------------------------------------------
James R. Saalfeld 30 Vice President, General Counsel and Secretary
- ------------------------------------- ----------------- ----------------------------------------------------------
Gary R. Garrabrant (2)(4) 40 Director
- ------------------------------------- ----------------- ----------------------------------------------------------
David S. Lundeen (4) 35 Director
- ------------------------------------- ----------------- ----------------------------------------------------------
Joseph L. Maggini (2) 57 Director
- ------------------------------------- ----------------- ----------------------------------------------------------
Jerry L. Ruyan (3)(4) 51 Director
===================================== ================= ==========================================================
<FN>
(1) Executive Committee Member
(2) Compensation Committee Member
(3) Nominating Committee Member
(4) Audit Committee Member
</TABLE>
Robert E. Schermer, Sr. has been a director of the Company since
January 25, 1996. He is currently Senior Vice President and Managing Director of
Robert W. Baird & Co. Incorporated, an investment banking and securities
brokerage firm headquartered in Milwaukee, Wisconsin. Mr. Schermer has held this
position for more than five years. He is the father of Robert E. Schermer, Jr.
Christopher B. Hewett has been President, Chief Executive Officer and a
director of the Company since January 25, 1996. He has served as President of
MCC since its inception in 1993. Mr. Hewett was Executive Vice President (1990
to 1991) and President (1991 to 1997) of Ocean Reef Club, Inc., which was the
owner, developer and operator of the Ocean Reef Club, a 5,000 acre mixed-use
residential resort community in Key Largo, Florida. In 1993, Ocean Reef Club,
Inc. sold the Ocean Reef Club. Mr. Hewett was nominated for election to the
Board of Directors of Frisch's Restaurants, Inc., which operates more than 100
Big Boy restaurants, at its November 1997 Annual Shareholders' Meeting.
Robert E. Schermer, Jr. has been Executive Vice President and a
director of the Company since January 25, 1996. From January 25, 1996 until
September 16, 1996, Mr. Schermer also served as Treasurer of the Company. Mr.
Schermer has served as Executive Vice President of MCC since 1993. From 1989
until 1993, he was Executive Vice President of Landquest Ltd, a private
investment partnership which financed and developed residential real estate and
hotel investments. He is the son of Robert E. Schermer, Sr.
Pauline M. Krywanski has been Vice President, Treasurer and Chief
Financial Officer of the Company since May 20, 1997. From 1988 to 1997, Ms.
Krywanski was with Med Trans, a nationwide provider of healthcare
73
<PAGE> 74
transportation. Her most recent position with Med Trans was Director of
Financial Operations for the Midwest Region. Ms. Krywanski is a Certified Public
Accountant.
James R. Saalfeld has been Vice President, General Counsel and
Secretary of the Company since March 20, 1996. From 1992 until 1996, Mr.
Saalfeld was an attorney with Dykema Gossett PLLC, a Grand Rapids, Michigan law
firm.
Gary R. Garrabrant has been a director of the Company since October 24,
1996. Mr. Garrabrant is Executive Vice President of Equity Group Investments,
Inc., a private investment company headquartered in Chicago, with significant
real estate and corporate holdings. He joined Equity Group as a Senior Vice
President in January 1996. Previously, Mr. Garrabrant was Director of Sentinel
Securities Corporation and co-founded Genesis Realty Capital Management, both of
which were based in New York, and specialized in real estate securities
investment management. From 1989 to 1994, he was associated with The Bankers
Trust Company in New York. Mr. Garrabrant has been a director of Capital Trust,
a real estate finance company based in San Francisco, since January 1997.
David S. Lundeen has been a director of the Company since January 25,
1996. Mr. Lundeen is presently a private investor. From 1995 to September 1997,
he served as Executive Vice President and Chief Financial Officer of BSG
Corporation, Austin, Texas, an information technology consulting company. From
1992 to 1995, Mr. Lundeen was President of Blockbuster Technology, a division of
Blockbuster Entertainment. From 1990 to 1992, he worked for Blockbuster
Entertainment as Director of Mergers & Acquisitions and Corporate Finance. Prior
to 1990, Mr. Lundeen was an investment banker at Drexel Burnham Lambert in New
York City.
Joseph L. Maggini has been a director of the Company since January 25,
1996. Since founding it in 1974, he has served as President and Chairman of the
Board of the Magic Steel Corporation, Grand Rapids, Michigan, a steel service
center.
Jerry L. Ruyan has been a director of the Company since October 24,
1996. Since 1995, Mr. Ruyan has been a partner in Redwood Ventures, LLC, an
investment/venture capital company located in Cincinnati, Ohio. Mr. Ruyan is
also a founder of Cincinnati-based Meridian Diagnostics, Inc., which is engaged
in the production of medical diagnostic products, and has been a member of its
Board of Directors since 1977. Mr. Ruyan's other positions with Meridian
Diagnostics, Inc. included Chief Executive Officer (1992 to 1995), and President
and Chief Operating Officer (1986 to 1992). Since October 1996, Mr. Ruyan has
been a member of the Board of Directors of Frisch's Restaurants, Inc.
The following is information concerning each director and executive
officer of MCC Food Service (the general partner of the Wendy's Partnership) as
of September 1, 1997:
<TABLE>
<CAPTION>
===================================== ================= ==========================================================
NAME AGE POSITION
- ------------------------------------- ----------------- ----------------------------------------------------------
<S> <C> <C>
Christopher B. Hewett 38 Chairman of the Board, Chief Executive Officer and
Director
- ------------------------------------- ----------------- ----------------------------------------------------------
Ray E. Quada 53 President and Chief Operating Officer
- ------------------------------------- ----------------- ----------------------------------------------------------
Robert E. Schermer, Jr. 38 Executive Vice President, Treasurer, Secretary and
Director
===================================== ================= ==========================================================
</TABLE>
Ray E. Quada has been the Chief Operating Officer of the Wendy's
Partnership since March 1990. From March 1987 to March 1990, Mr. Quada was the
general manager of an entity affiliated with the Wendy's Partnership and, in
that capacity, oversaw the operations of the Wendy's Partnership. From 1994
through 1997, Mr. Quada was a member of Board of Directors of First Michigan
Bank. Mr. Quada has been a shareholder of the former general partner since
January 1994.
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<PAGE> 75
EXECUTIVE COMPENSATION
Compensation paid by Meritage for the last three fiscal years to its
former Chief Executive Officer, its current Chief Executive Officer and all
executive officers earning in excess of $100,000 is as follows:
<TABLE>
<CAPTION>
===================================================================================================================
SUMMARY COMPENSATION TABLE
===================================================================================================================
ANNUAL COMPENSATION LONG-TERM COMPENSATION
SECURITIES UNDER-LYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- -------------------------------- ---------- --------------- -------------- ----------------------------------------
<S> <C> <C> <C> <C>
Christopher B. Hewett (1) 1996 $ 127,735 $ 110,000(2) 50,000
President and Chief Executive
Officer
- -------------------------------- ---------- --------------- -------------- ----------------------------------------
Robert E. Schermer, Jr. (1) 1996 $ 114,961 $ 100,000(2) 45,000
Executive Vice President
- -------------------------------- ---------- --------------- -------------- ----------------------------------------
<FN>
(1) Messrs. Hewett and Schermer, Jr. assumed their positions as officers on
January 25, 1996.
(2) Represents Series A Convertible Preferred Stock which Messrs. Hewett and
Schermer, Jr. elected to receive in lieu of a year-end cash bonus.
</TABLE>
In fiscal 1994, the Company adopted a profit sharing plan established
under Section 401(k) of the Internal Revenue Code that covers employees of the
Company and its subsidiaries who have met certain eligibility requirements.
Effective March 1, 1997, the plan was amended to give the Plan participants
different investment options. The change required the execution of a new (i)
Qualified Retirement Plan and Trust Agreement and (ii) Adoption Agreement. The
amendment did not make any other substantive changes. Company contributions to
the Plan are voluntary and at the discretion of the Board of Directors. The
Company made no contributions to the Plan during fiscal 1996 or during the first
half of fiscal 1997.
Stock Options
The following tables contain information concerning the grant of stock
options to the executives identified in the Summary Compensation Table and the
appreciation of such options:
<TABLE>
<CAPTION>
===================================================================================================================
OPTION GRANTS IN FISCAL 1996
- -------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR OPTION
TERM
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE EXPIRATION
NAME OPTIONS GRANTED EMPLOYEES IN PRICE ($ DATE 5% 10%
FISCAL 1996 PER SHARE)
- -------------------------- ---------------- ---------------- -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Christopher B. Hewett 50,000 26.3 % $ 7.00 5/21/2006 $118,500 $395,500
- -------------------------- ---------------- ---------------- -------------- ----------- ------------ --------------
Robert E. Schermer, Jr. 45,000 23.7 % $ 7.00 5/21/2006 $106,650 $355,950
========================== ================ ================ ============== =========== ============ ==============
</TABLE>
75
<PAGE> 76
<TABLE>
<CAPTION>
===================================================================================================================
FISCAL 1996 OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR END
SHARES
NAME ACQUIRED ON VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
EXERCISE
- --------------------------- --------------- ----------------- ------------------------- ---------------------------
<S> <C> <C> <C> <C>
Christopher B. Hewett --- --- 0/50,000 $0/$0 (1)
- --------------------------- --------------- ----------------- ------------------------- ---------------------------
Robert E. Schermer, Jr. --- --- 0/45,000 $0/$0 (1)
- --------------------------- --------------- ----------------- ------------------------- ---------------------------
<FN>
(1) The Compensation Committee established the exercise price at $7.00 per
share. Because the stock is currently trading for less than $7.00 per
share, the unexercisable options have no value.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Reynolds, former Chairman of the Board, President, Chief Executive
Officer, Treasurer and Secretary of the Company, was removed from these
positions by the St. Clair County (Michigan) Circuit Court on January 8, 1996.
While the Court's written order did not state why Mr. Reynolds was removed, the
Court questioned the manner in which Mr. Reynolds conducted his affairs and
articulated the Court's objective of protecting the interests of the Company's
minority shareholders. Accordingly, Mr. Reynolds served as an officer and
director of the Company for 39 days in fiscal 1996. Mr. Reynolds's daughter,
Rebecca L. Awtrey, served as a director until May 1996. Management was installed
on January 25, 1996 and does not have specific knowledge of the following
transactions. Therefore, management is unable to determine whether transactions
with Mr. Reynolds and his affiliates were on terms no less favorable to the
Company than those that could be obtained from unaffiliated parties.
From the Company's inception in 1986 until January 1996, the Company
engaged Innkeepers Management Company, a company wholly-owned by Mr. Reynolds,
to manage the Company's hotels pursuant to a Management Agreement. For services
in fiscal 1996, prior to termination of the Management Agreement on January 25,
1996, Innkeepers received $57,650. At December 1, 1995, Mr. Reynolds, and
companies affiliated with Mr. Reynolds and former Board member William F.
Ehinger, owed the Company $695,430. In 1996, Mr. Reynolds incurred an additional
$76,364 of indebtedness and made payments of $580,053 toward this total
indebtedness. This left a balance due of $191,741 for which a $260,000 allowance
for doubtful accounts had been established on November 30, 1995, resulting in a
bad debt recovery by the Company of $68,259 in 1996.
Mr. Reynolds guaranteed the Company's obligations to the Company's
former long-term lender, First Federal Savings and Loan Association, in the
amount of $2,924,975 at December 1, 1995. Reynolds also guaranteed the Company's
obligations to First Federal under a letter of credit in the amount of
$3,929,506. Reynolds also pledged personally owned life insurance policies with
a face value of $3,000,000 as additional collateral for the Company's
obligations pursuant to a loan from another of the Company's former long-term
lenders, Michigan National Bank, in the amount of $4,273,702 at December 1,
1995. The Company's obligations to First Federal and Michigan National were paid
in full with proceeds from the refinancing with GALIC, and the guarantees were
extinguished, in February 1996.
In fiscal 1996, the Company expended approximately $280,000 for
litigation expenses on behalf of, among others, Ms. Awtrey, Mr. Reynolds, Mr.
Ehinger, Mr. Joseph P. Michael and Mr. Raymond A. Weigel, III (all former
members of the Board of Directors). These expenses related to litigation brought
by TEI Acquisitions, Inc. in its attempt to gain control of the Company through
its alleged purchase of the former majority shareholder's Common Shares. This
lawsuit was ultimately dismissed in fiscal 1996.
Management believes that all of the following transactions were on
terms no less favorable to the Company than those that could be obtained from
unaffiliated parties.
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<PAGE> 77
At November 30, 1996, MCC, owned by Messrs. Hewett and Schermer, Jr.,
owed the Company $9,750,000 pursuant to a secured, non-interest bearing note in
the original amount of $10,500,000 issued to the company in payment for
1,500,000 Common Shares. On May 21, 1996, the company's Board of Directors
approved an early prepayment of $750,000 and released 107,142 shares of the
pledged stock. The note was thereafter amended to provide for repayment in six
annual installments of $1,625,000 beginning on the fifth anniversary of the
promissory note.
At December 1, 1995, Mr. Schermer, Jr. was indebted to Grand Harbor
Resort Inc. in the amount of $70,544. This indebtedness arose from a 7%
promissory note dated December 27, 1987 that Mr. Schermer, Jr. entered into with
a third party. This note was, unbeknownst to Mr. Schermer, Jr., assigned to one
of the Company's subsidiaries. Upon learning of this assignment, Mr. Schermer,
Jr. paid the note in full on March 27, 1996.
In fiscal 1996, the Company remitted approximately $170,000 in
litigation expenses on behalf of its then parent company, MCC, in connection
with litigation brought by TEI Acquisitions, Inc. in its attempt to gain control
of the Company through its alleged purchase of Mr. Reynolds' Common Shares. This
lawsuit was ultimately dismissed in fiscal 1996. These litigation expenses were
accrued by the Company in fiscal 1995. The officers of MCC are members of the
Company's current management and have specific knowledge of the transactions
described in this paragraph. Current management believes this transaction was on
terms no less favorable to the Company than those that could be obtained from
unaffiliated parties.
On April 16, 1996, the Company's Board of Directors approved
reimbursement of $300,188 for expenditures incurred by MCC in connection with
the change in management described under "Business - Replacement and
Restructuring of Management." These expenditures included, among other things,
office furniture, equipment, staff and other associated expenses, and were
reimbursed in accordance with the Stock Purchase and Sale Agreement dated
September 19, 1995 between MCC and the Company. On April 10, 1996, the Company's
Compensation Committee conducted an item-by-item examination of the reimbursable
expenses and recommended that the Board approve the request for reimbursement.
On July 10, 1996, the Company entered into an agreement with Mr.
Schermer, Sr. to acquire 103.25 units of the Wendy's Partnership. The purchase
price was 123,900 newly-issued Company Common Shares. The Meritage shares were
not registered under the Securities Act of 1933 and consequently are subject to
a two year holding period before the shares can be sold publicly. For that
reason, and the significant block of Meritage Common Stock involved, Meritage
estimates that the value of the stock per unit was $6,000 per unit which is 80%
of the asked quote on the date of sale ($6.25 per share).
In fiscal 1996, the Company successfully completed a tender offer for a
majority interest in the Wendy's Partnership. Former board member Weigel was a
shareholder of the former General Partner of the Wendy's Partnership. Mr. Weigel
excused himself from any discussions, and abstained from any actions, regarding
this transaction.
On November 19, 1996, the Company purchased 40 units of the Wendy's
Partnership from Raymond A. Weigel, Sr. and his wife, Wavelet M. Weigel. The
company assigned a value of $7,200 to each unit. Mr. and Mrs. Weigel, Sr. are
the parents of former board member Weigel. The purchase price was 28,800 shares
of Series A Convertible Preferred Stock.
The Company's Board of Directors authorized the issuance of up to
200,000 shares of Series A Convertible Preferred Stock in a private offering of
such preferred stock. Certain officers and members of the board of Directors
purchased Convertible Preferred Stock pursuant to the private offering. Mr.
Maggini purchased 10,000 shares, Mr. Lundeen 12,500 shares, Mr. Schermer, Sr.
20,000 shares, Mr. Hewett 31,000 shares, Mr. Schermer, Jr. 20,000 shares, and
Mr. Saalfeld 1,067 shares.
On January 24, 1997, the Board of Directors approved an expense sharing
arrangement whereby MCC and its principals (Messrs. Hewett and Schermer, Jr.)
will pay the Company $2,500 per year (commencing as of January 25, 1997) for
shared office space and occasional use of equipment and employee services. The
Compensation Committee of the Board of Directors will review the arrangement on
an annual basis.
77
<PAGE> 78
On January 24 and May 20, 1997, the Board of Directors authorized
agreements whereby MCC, its principals and its subsidiary, will be indemnified
by the Company for any losses or expenses that they may incur as guarantors of
the Company's obligations to its primary financing institutions (GALIC and
Michigan National Bank) and the Company's and its subsidiaries' obligations to
their franchisors (Holiday Inn and Wendy's International). The Company and its
subsidiary also indemnified the general partner of the Wendy's Partnership (MCC
Food Service), and an individual who serves as an officer of MCC Food Service,
regarding the removal and replacement of the former general partner of the
Wendy's Partnership, and the performance of MCC Food Service's duties as the
general partner of the Wendy's Partnership.
In March 1997, the Company borrowed $750,000 from 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. 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 with the Company's long-term lender.
78
<PAGE> 79
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding ownership of
Common Shares at September 30, 1997, by management and all person beneficially
owning 5% or more of Meritage's outstanding Common Shares.
<TABLE>
<CAPTION>
================================ =================================== ============================================
COMMON SHARES (1) SERIES A CONVERTIBLE PREFERRED STOCK (1)
- -------------------------------- ----------------------------------- --------------------------------------------
NAME NO. OF SHARES PERCENT OF CLASS NO. OF SHARES PERCENT OF CLASS
- -------------------------------- ---------------- ------------------ ----------------- --------------------------
<S> <C> <C> <C> <C>
Robert E. Schermer, Sr. 163,390(2) 5.0% 20,000 14.5%
- -------------------------------- ---------------- ------------------ ----------------- --------------------------
Christopher B. Hewett 1,612,729(3) 49.3% 31,800 22.9%
- -------------------------------- ---------------- ------------------ ----------------- --------------------------
Robert E. Schermer, Jr. 39,572(4) 1.2% 20,000 14.5%
- -------------------------------- ---------------- ------------------ ----------------- --------------------------
Pauline M. Krywanski --- --- --- ---
- -------------------------------- ---------------- ------------------ ----------------- --------------------------
James R. Saalfeld 5,234 * 1,067 *
- -------------------------------- ---------------- ------------------ ----------------- --------------------------
Gary R. Garrabrant 6,395 * --- ---
- -------------------------------- ---------------- ------------------ ----------------- --------------------------
David S. Lundeen 46,359 1.4% 12,500 9.0%
- -------------------------------- ---------------- ------------------ ----------------- --------------------------
Joseph L. Maggini 52,788(5) 1.6% 10,000 7.2%
- -------------------------------- ---------------- ------------------ ----------------- --------------------------
Jerry L. Ruyan 207,875 6.4% --- ---
- -------------------------------- ---------------- ------------------ ----------------- --------------------------
All Executive Officers and
Directors as a Group 2,134,342 62.7% 95,367 68.9%
(9 Persons)
- -------------------------------- ---------------- ------------------ ----------------- --------------------------
<FN>
* Less than 1%
(1) Unless otherwise indicated, the persons named have sole voting and
investment power and beneficial ownership of the securities.
(2) Includes 2,000 shares held by Mr. Schermer, Sr.'s wife.
(3) Includes 1,551,300 shares held by MCC of which Mr. Hewett is the majority
shareholder, an executive officer and director.
(4) Includes 400 shares held by Mr. Schermer, Jr. as custodian for his minor
child.
(5) Includes 2,000 shares held by Mr. Maggini jointly with his wife and 1,000
shares held directly by his wife.
</TABLE>
79
<PAGE> 80
FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses only material federal income tax
consequences of the transaction to limited partners of the Wendy's Partnership.
Non-affiliated limited partners should consult with their own advisors as to the
effect of any local, state or foreign tax consequences to them. No ruling will
be sought from the Internal Revenue Service nor will any opinion be received
with respect to the tax treatment of the transaction.
The transaction will be treated for federal income tax purposes as a
termination of the Wendy's Partnership and a taxable sale of the limited
partnership units. The particular tax consequences for a non-affiliated limited
partner will depend upon a number of factors related to the particular limited
partner's tax situation, including the limited partner's adjusted tax basis in
the units. The gain or loss recognized will be based on the difference between
the value of the Meritage Common Shares received and the non-affiliated limited
partner's adjusted tax basis in such units. To the extent that the amount
realized exceeds the non-affiliated limited partner's adjusted basis for the
units sold, the limited partner will recognize a gain.
Except as described below, any gain or loss recognized upon a sale of
units will be treated as gain or loss attributable to the sale or disposition of
a capital asset. A non-affiliated limited partner would recognize ordinary
income, however, only to the extent that the amount realized upon the sale of a
unit that is considered attributable to the non-affiliated limited partner's
share of the "unrealized receivables" of the Wendy's Partnership, as defined in
Section 751 of the Internal Revenue Code, exceeds the basis attributable to
those assets. "Unrealized receivables" include, to the extent not previously
includable in Wendy's Partnership income, any rights to payment for services
rendered or to be rendered, and also any amounts that would be subject to
recapture as ordinary income (e.g., depreciation recapture with respect to
personal property) if the Wendy's Partnership had sold its assets at their fair
market value at the time of the sale of a unit. To the extent a non-affiliated
limited partner recognizes a capital loss, such loss can be applied to offset
capital gains from other sources. Individuals may use capital losses in excess
of capital gains to offset up to $3,000 of ordinary income in any single year
($1,500 for a married individual filing a separate return). Any corporation's
capital losses that are not used currently can be carried forward and used in
subsequent years. A corporation's capital losses in excess of current capital
gains generally may be carried back three years, with any remaining unused
portion available to be carried forward for five years.
Basis of Units
In general, a non-affiliated limited partner had an initial tax basis
equal to such person's cash investment in the Wendy's Partnership plus a
proportionate share of the Wendy's Partnership's nonrecourse liabilities at the
time the units were acquired. A non-affiliated limited partner's initial basis
generally has been increased by such limited partner's share of Wendy's
Partnership taxable income and any increases in his or her share of liabilities
of the Wendy's Partnership. Generally, such non-affiliated limited partner's
initial basis has been decreased, but not below zero, by the share of the
Wendy's Partnership cash distributions, any decreases in the share of
liabilities of the Wendy's Partnership, the share of losses of the Wendy's
Partnership, and the share of nondeductible expenditures of the Wendy's
Partnership that are not chargeable to capital. Because "syndication costs" are
chargeable to capital and not deductible for tax purposes, a non-affiliated
limited partner's basis in the units would include the share of the syndication
costs incurred by the Partnership at formation.
Passive Activity Income
A non-affiliated limited partner who disposes of an entire interest in
the Wendy's Partnership will be able to utilize any unused "passive" losses from
the Wendy's Partnership, net of any gain recognized on the dispositions, to
offset income, including income from sources other than the sale of units.
Any gain recognized by a non-affiliated limited partner in connection
with the sale of a unit pursuant to the transaction will constitute "passive
activity income" for purposes of the "passive activity loss" limitation rules.
Accordingly, such income generally may be offset by losses from all sources,
including suspended passive losses with respect to the Wendy's Partnership and
passive or active losses from other activities.
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<PAGE> 81
Any loss recognized by a non-affiliated limited partner in connection
with the sale of less than all of that limited partner's units may be subject to
limitation under the passive loss rules. Non-affiliated limited partners should
consult with their own tax advisors concerning whether, and the extent to which,
the limited partner has available suspended "passive activity" losses from
either the Wendy's Partnership or other investments that may be used to offset
gain from a sale of units and whether any losses recognized are subject to
limitation under the passive loss rules.
Backup Withholding
A limited partner (other than corporations and certain foreign
individuals) may be subject to 31% backup withholding unless the limited partner
provides his or her taxpayer identification number and certifies that such
holder is not subject to backup withholding. A non-affiliated limited partner
subject to backup withholding must contact Meritage as set forth in the Letter
of Transmittal. If backup withholding applies, Meritage will withhold 31% from
payments to such non-affiliated limited partner.
DESCRIPTION OF CAPITAL SHARES
COMMON SHARES
The holders of Meritage's Common Shares, par value $.01 per share, are
entitled to one vote for each share held of record on each matter submitted to a
vote of stockholders. Cumulative voting in the election of directors is not
permitted. As a result, the holder of more than 50% of the outstanding shares
have the power to elect all members of Meritage's Board of Directors. The quorum
required at a stockholders' meeting for consideration of any matter is a
majority of the shares entitled to vote on that matter represented in person or
by proxy. If a quorum is present, the affirmative vote of a majority of the
shares represented at the meeting and entitled to vote on the matter is required
for stockholder approval, except in the case of certain major corporate actions
detailed below.
Certain major corporate actions such as the merger or liquidation of
Meritage, an amendment to Meritage's Articles of Incorporation, or the sale of
all or substantially all of Meritage's assets, require the approval of the
affirmative vote of a majority of all shares entitled to vote on the matter,
whether or not present at a meeting called for that purpose. Meritage has
elected to be subject to Chapter 7A of the Michigan Business Corporation Act.
Consequently, certain business combinations such as mergers, liquidations, sales
of assets or exchanges of shares, between Meritage and an "interested
shareholder" (as defined in the Chapter 7A) cannot be consummated unless certain
voting requirements or certain price requirements are met. The voting
requirements require (i) an advisory statement by Meritage's Board of Directors,
(ii) a vote in favor of the business combination by the holders of not less than
90% of the votes of each class of stock of Meritage entitled to be cast by
shareholders of Meritage, and (iii) a vote in favor of the business combination
by not less than 2/3 of the votes of each class of stock entitled to be cast by
shareholders of Meritage other than the "interested shareholder," its affiliates
and associates. The price requirements mandate that the holders of Common Shares
of Meritage receive cash at least equal to the higher of (i) the highest price
per share of Common Shares paid by the "interested shareholder" within a two
year period immediately prior to the announcement date of the business
combination or in the transaction in which the "interested shareholder" became
an "interested shareholder" whichever is higher, or (ii) the market value per
share of Common Shares on the announcement date or the date on which the
"interested shareholder" first became an "interested shareholder," whichever is
higher. The pricing requirements also require certain consideration to be paid
with respect to any class or series of outstanding stock other than Meritage's
Common Shares.
The Common Shares are neither redeemable nor convertible, and the
holders of Common Shares have no preemptive rights to purchase any securities of
Meritage. Subject to the rights of any preferred stock issued and so designated,
holders of Common Shares are entitled to receive ratably such dividends as may
be lawfully declared by the Board of Directors and paid by Meritage and, in the
event of liquidation, dissolution or winding up of Meritage, are entitled to
share ratably in all assets after payment of liabilities and subject to any
liquidation rights of any preferred stock issued and so designated.
All outstanding Common Shares of Meritage are validly issued, fully
paid and nonassessable. Total authorized Common Shares are 30,000,000 shares.
81
<PAGE> 82
Effective August 13, 1996, Meritage opted out of Chapter 7B of the Act.
Chapter 7B would have required purchasers of 20% or more of the Company's Common
Shares to obtain shareholder approval, or else the purchased shares would be
non-voting shares.
PREFERRED SHARES
Meritage is authorized to issue up to 5,000,000 shares of Preferred
Stock, $.01 par value per share. The Preferred Stock may be issued from time to
time in one or more series. The Board of Directors is authorized to determine
the rights, preferences, privileges and restrictions granted to and imposed upon
any series of Preferred Stock and to fix the number of shares of any series of
Preferred Stock and the designation of any such series. The issuance of shares
of Preferred Stock could adversely affect the rights of holders of Common Shares
and could be used to prevent a hostile takeover attempt.
Series A Convertible Preferred Shares
The Series A Convertible Preferred Shares is the only series authorized
by the Board of Directors. These shares have an annual dividend rate of $0.90
per share. The right to payment of dividends is cumulative, and dividends are
payable quarterly. The liquidation value of these shares is $10 per share. Upon
a dissolution, liquidation, merger of substantially all the assets, or winding
up of Meritage, the holders of these shares will be entitled to receive, before
any payment to holders of Common Shares, all accrued but unpaid dividends plus a
liquidation value of $10 per share.
The Series A Convertible Preferred Shares are convertible into Common
Shares at a conversion price of $7 for each Common Share (taking the Series A
Convertible Preferred Shares at a liquidation value of $10 per share). The
conversion price is subject to adjustment upon the subdivision into a greater or
combined into a lesser number of Common Shares, whether by stock split or stock
dividend. Upon the merger or consolidation of the Meritage, or the
reclassification of the Common Shares, the holders of Series A Convertible
Preferred Shares will be entitled to receive the stock, securities and/or
property which they would have received had they converted their Preferred
Shares into Common Shares as of the record date for determination of the holders
of Common Shares entitled to participate in such transaction.
The Series A Convertible Preferred Shares are subject to mandatory
conversion, upon the option of Meritage, whenever the average of the closing
sale prices for the Common Shares is at least 120% of the then-effective
conversion price for at least 20 trading days within a period of 30 trading
days, ending no earlier than five trading days prior to the date of the notice
of such mandatory conversion.
Holders of this Series A Convertible Preferred Shares are not entitled
to voting rights, but if Meritage fails to make six consecutive dividend
payments, the number of directors on the Board of Directors of Meritage will be
increased by two and the holders of the Series A Convertible Preferred Shares,
voting as a class, with one vote per share, will be entitled to elect two
directors, as long as any arrearages and dividend payments remain outstanding.
Meritage may not, except upon the affirmative vote of the holders of two-thirds
of the Series A Convertible Preferred Shares outstanding at the time, amend the
terms of such shares in any manner that would result in the subordination of the
Series A Convertible Preferred Shares.
TRANSFER AGENT
Meritage's transfer agent and registrar for the Common Shares is
ChaseMellon Shareholder Services of East Hartford, Connecticut.
82
<PAGE> 83
COMPARATIVE RIGHTS
Upon completion of the transaction, the limited partners of the Wendy's
Partnership, a Michigan limited partnership, will become stockholders of
Meritage, a Michigan corporation. The following summary compares a number of
differences between the rights of stockholders of Meritage versus the rights of
limited partners of the Wendy's Partnership. With respect to the capital stock
of Meritage, the summary is qualified in its entirety by the more complete legal
description contained under "Description of Capital Shares."
Generally, the rights of stockholders of Meritage are governed by the
Michigan Business Corporation Act and Meritage's charter documents. The rights
of Limited Partners are generally governed by the Wendy's Partnership Agreement
and Michigan partnership law.
FEDERAL INCOME TAXATION
The following are material federal income tax differences between
Meritage and the Wendy's Partnership.
Meritage is classified as a corporation for Federal income tax
purposes, and as such, is taxed with respect to its income after allowable
deductions and credits. Stockholders will not be taxed with respect to
Meritage's income. They will generally be taxed with respect to dividends
received from Meritage.
The Wendy's Partnership is not a tax paying entity. Rather, each
limited partner includes that partner's share of the income and, subject to
certain limitations, the losses as such of the Wendy's Partnership, in computing
such partner's taxable income without regard to the cash distributed to the
partner. Generally, cash distributions to partners are not taxable, except to
the extent distributions exceed such partner's adjusted basis in the unit.
MANAGEMENT
The business and affairs of Meritage will be managed by or under the
direction of the Board of Directors of the Company. Meritage elects its Board of
Directors annually at its stockholders' meeting. The Meritage Bylaws provide
that vacancies resulting from death, resignation, removal, an increase in the
number of directors or otherwise may be filled by a majority vote of the
directors then in office (even if the number of directors then in office is less
than a quorum) unless filled by proper action of the shareholders. Each director
who is appointed to fill a vacancy shall hold office only until the next
election of directors by shareholders.
The general partner of a limited partnership under Michigan law is
accountable to limited partners as a fiduciary and consequently must exercise
good faith and integrity in the resolution of any conflicts of interest in all
other dealings with respect to the partnership. Under the Wendy's Partnership
Agreement, a majority in interest of the limited partners may remove the general
partner. Michigan corporate law requires directors to discharge their duties in
good faith, with the care an ordinarily prudent person in a like position would
exercise under similar circumstances and in a manner reasonably believed to be
in the best interest of the corporation. Directors may be removed, with or
without cause, by a majority of Meritage's Common Shares entitled to vote at an
election of directors.
Pursuant to the Wendy's Partnership Agreement, the general partner is
entitled to a management fee of 2% of gross operating revenues. This would have
called for payment to the general partner of $494,032 for fiscal 1994, $507,292
for fiscal 1995 and $488,767 for fiscal 1996. However, this amount was
voluntarily reduced to $160,000 for each of those years. The former general
partner also received a management fee on an annual basis of $160,000 in fiscal
1997 until its replacement by Meritage. MCC Food Service, the present general
partner, has also voluntarily agreed to reduce the management fee to an annual
basis of $160,000 for fiscal 1997.
VOTING RIGHTS
Holders of Meritage Common Shares have voting rights and are subject to
terms described under "Description of Capital."
83
<PAGE> 84
Under the Wendy's Partnership Agreement, the majority in interest of
the limited partners have the right, subject to certain limitations, to amend
the Wendy's Partnership Agreement to (i) dissolve the Wendy's Partnership, (ii)
remove a general partner and elect a substitute general partner upon such
removal, or (iii) approve or disapprove the sale of all, or substantially all,
of the assets of the Wendy's Partnership.
AMENDMENTS TO GOVERNING DOCUMENTS
Meritage's Articles of Incorporation may be amended by the holders of a
majority of all outstanding shares entitled to vote thereon at a meeting of
shareholders. Under the Wendy's Partnership Agreement, amendments must be
approved by the general partner and a majority in interest of limited partners.
No amendment can reduce a limited partner's interest or increase his or her
obligations without his or her written consent provided, however, that a limited
partner's interest can be reduced to admit additional partners.
DIVIDENDS AND DISTRIBUTIONS
Meritage presently does not intend to pay dividends on the Common
Shares. Dividends may be paid if, as, and when declared by the Board of
Directors in its sole discretion. Meritage's loan agreement with its long-term
lender currently prohibits the payment of dividends.
The Wendy's Partnership Agreement provides for cash distributions to
its limited partners. On a semi-annual basis, the general partner reviews the
Wendy's Partnership's results of operations and cash requirements and determines
the cash flow from operations available for distribution to the limited
partners. Pursuant to the Wendy's Partnership's loan agreement, the Wendy's
Partnership must maintain certain minimum Tangible New Worth and Cash
Availability (as defined in the loan agreement) which may limit the amount of
cash distributions to the limited partners.
Cash distributions for the two most recent fiscal years are set forth
below:
<TABLE>
<CAPTION>
======================================== ===================================== ====================================
DATE OF DISTRIBUTION PER LIMITED PARTNERSHIP UNIT TOTAL CASH DISTRIBUTION
- ---------------------------------------- ------------------------------------- ------------------------------------
<S> <C> <C>
January 1995 $ 200.00 $ 253,899
- ---------------------------------------- ------------------------------------- ------------------------------------
July 1995 $ 250.00 $ 317,374
- ---------------------------------------- ------------------------------------- ------------------------------------
January 1996 $ 100.00 $ 126,950
- ---------------------------------------- ------------------------------------- ------------------------------------
July 1996 $ 150.00 $ 190,424
======================================== ===================================== ====================================
</TABLE>
There have been no additional distributions since July 1996.
CONTINUITY OF EXISTENCE
Under Michigan law, Meritage has perpetual existence. Pursuant to the
Wendy's Partnership Agreement, unless otherwise terminated, the term of the
Wendy's Partnership will expire on December 31, 2026.
RIGHTS UPON LIQUIDATION
Upon liquidation, dissolution or winding up of the affairs of Meritage,
the remaining assets (after provisions for payment of creditors) are distributed
first to holders of preferred stock and second to holders of Common Shares.
In a liquidation of the Wendy's Partnership, available cash and
property would be distributed in proportion to the respective capital accounts
of the limited partners, following provisions for contingent and other
liabilities of the Wendy's Partnership.
84
<PAGE> 85
DISSENTERS' RIGHTS
Holders of Meritage shares have the right, in certain circumstances, to
dissent from certain extraordinary corporate transactions as to which they have
voting rights by demanding payment in cash for their shares equal to the fair
market value of such shares, as determined by agreement with the corporation or
by a court in an action timely brought by the corporation or the dissenters.
Under applicable Michigan limited partnership laws and the Wendy's Partnership
Agreement, limited partners have no dissenters' rights.
LIABILITY; INDEMNIFICATION
The liability of Meritage's directors to Meritage or its shareholders
is limited to the fullest extent permitted by law. Directors are not personally
liable to Meritage or its shareholders for any breach of duty as a director,
except for: a breach of the director's duty of loyalty; acts or omissions not in
good faith or involving intentional misconduct or knowing violation of law;
unlawful distributions to shareholders and loans to directors, officers or
employees; or a transaction from which the director derived an improper personal
benefit.
Michigan corporations may indemnify their directors and officers. These
provisions are generally referred to as "statutory indemnification" provisions.
Corporations are permitted to adopt charter provisions or bylaws which provide
for additional indemnification of directors and officers. These non-exclusive
provisions are generally referred to as "non-statutory indemnification"
provisions. Non-statutory indemnification provisions are generally adopted to
expand the circumstances and liberalize the conditions under which
indemnification will occur. Michigan law expressly permits indemnification of
amounts paid in settlement in connection with suits brought by or in the right
of the corporation. As a result, directors, officers, employees or agents who
agree to a settlement in a derivative suit brought on behalf of Meritage may be
indemnified by Meritage for the amount paid in settlement as well as expenses
incurred in connection with the suit if the standards set forth in Michigan law
and the Meritage Bylaws are met. The Meritage Bylaws provide that its officers,
directors, employees and agents shall be indemnified to the fullest extent
authorized or permitted by law.
The Wendy's Partnership Agreement provides that the Wendy's Partnership
will indemnify the general partner, its affiliates and their respective agents
against any loss or liability incurred by the Wendy's Partnership or by such
person in connection with the Wendy's Partnership, including reasonable
attorneys' fees; provided that the party seeking indemnification acted in good
faith and in the best interest of the Wendy's Partnership, and the loss or
liability did not result from such person's negligence or misconduct. Such
indemnification is to be recovered only from the assets of the Wendy's
Partnership.
The Wendy's Partnership will indemnify the general partner, its
affiliates and their respective agents for settlements and related expenses of
lawsuits alleging securities violations, provided that a court either approves
the settlement and the indemnification or approves indemnification of litigation
costs if a successful defense is made.
The general partner will not be personally liable to return the capital
contribution of any limited partner.
Limited partners are not bound by the obligations of the Wendy's
Partnership. Under Michigan law, a limited partner who receives distributions
which are construed as a return of capital or who receives a distribution when
limited partnership liabilities exceed limited partnership assets, may be liable
to return such funds to the limited partnership.
MEETINGS
Michigan law provides that if a corporation's annual meeting is not
held for 90 days after the date designated therefor, or for 15 months after its
last annual meeting, a court may order the meeting or election to be held upon
application by a shareholder.
85
<PAGE> 86
Under Michigan law, special meetings of shareholders may be called by
the board of directors and by such person or persons as so authorized by the
articles or the bylaws. Meritage's Bylaws provide that special meetings of
shareholders may be called at any time by the Board of Directors, the Chief
Executive Officer or shareholders owning 10% of the shares entitled to vote at
the meeting.
Meetings of the Wendy's Partnership may be called by the general
partner or by ten percent in interest of the limited partners who are affiliates
or promoters of the general partner for any matters upon which the partners may
vote.
LEGAL MATTERS
Certain legal matters in connection with the Common Shares offered
hereby will be passed upon for Meritage by Keating, Muething & Klekamp PLL,
Cincinnati, Ohio. Members of that firm beneficially own 22,500 Common Shares and
5,000 shares of the Series A Convertible Preferred Stock.
EXPERTS
Meritage's financial statements as of November 30, 1996, 1995 and 1994,
and for the years then ended, included in this Prospectus have been so included
in reliance on the report of Grant Thornton LLP, independent certified public
accountants, given on the authority of said firm as experts in auditing and
accounting.
The Wendy's Partnership's financial statements as of November 30, 1996
and December 31, 1995 and for the Eleven months ended November 30, 1996 and the
years ended December 31, 1995 and 1994 included in this Prospectus have been so
included in reliance on the report of BDO Seidman, LLP, independent certified
public accountants, given on the authority of said firm as experts in auditing
and accounting.
86
<PAGE> 87
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES Page
----
<S> <C>
Report of Independent Certified Public Accountants .........................................................M-3
Consolidated Balance Sheets - November 30, 1996 and 1995 and August 31, 1997 (unaudited)....................M-4
Consolidated Statements of Operations - Years Ended November 30, 1996, 1995 and 1994
and Nine Month Periods Ended August 31, 1997 (unaudited) and August 31, 1996 (unaudited)..................M-6
Consolidated Statements of Stockholders' Equity - Years Ended November 30, 1996, 1995
and 1994 and Nine Month Period Ended August 31, 1997 (unaudited)..........................................M-8
Consolidated Statements of Cash Flows - Years Ended November 30, 1996, 1995
and 1994 and Nine Month Periods Ended August 31, 1997 (unaudited) and August 31, 1996 (unaudited).........M-9
Notes to Consolidated Financial Statements ................................................................M-12
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP Page
----
Report of Independent Certified Public Accountants .........................................................W-3
Balance Sheets - November 30, 1996 and December 31, 1995 .................................................. W-5
Statements of Income - Eleven Months Ended November 30, 1996 and Years Ended
December 31, 1995 and 1994................................................................................W-7
Statements of Changes in Partners' Equity - Eleven Months ended November 30, 1996
and Years Ended December 31, 1995 and 1994 ..............................................................W-9
Statements of Cash Flows - Eleven Months Ended November 30, 1996 and Years Ended
December 31, 1995 and 1994 ..............................................................................W-10
Notes to Financial Statements .............................................................................W-13
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP Page
----
Unaudited Balance Sheet - August 31, 1997 .................................................................W-23
Unaudited Statements of Operations - Nine Months Periods Ended August 31, 1997 and 1996 .................. W-25
Unaudited Statements of Changes in Partners' Equity - Periods Ended August 31, 1997,
November 30, 1996 and August 31, 1996 .....................................................................W-26
Unaudited Statements of Cash Flows - Nine Month Periods Ended August 31, 1997 and 1996 ...................W-27
Note to Unaudited Financial Statements ....................................................................W-29
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES Page
----
Unaudited Pro Forma Consolidated Balance Sheet - August 31, 1997 ...........................................P-1
Unaudited Pro Forma Consolidated Statement of Operations - Nine Month Period Ended
August 31, 1997 ..........................................................................................P-2
Unaudited Pro Forma Consolidated Statement of Operations - Year Ended November 30, 1996 ....................P-3
Unaudited Pro Forma Consolidated Statement of Cash Flows - Nine Month Period Ended
August 31, 1997 ..........................................................................................P-4
Unaudited Pro Forma Consolidated Statement of Cash Flows - Year Ended November 30, 1996 ....................P-5
Notes to Unaudited Pro Forma Consolidated Financial Statements .............................................P-6
</TABLE>
87
<PAGE> 88
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994
AND NINE MONTHS ENDED AUGUST 31, 1997 AND 1996
M-1
<PAGE> 89
CONTENTS
PAGE
Report of Independent Certified Public Accountants...................... M-3
FINANCIAL STATEMENTS
Consolidated Balance Sheets......................................... M-4
Consolidated Statements of Operations............................... M-6
Consolidated Statements of Stockholders' Equity..................... M-8
Consolidated Statements of Cash Flows............................... M-9
Notes to Consolidated Financial Statements.......................... M-12
M-2
<PAGE> 90
Grant Thornton LLP
Accountants and Management Consultants
Suite 400
First Center Office Plaza
26911 Northwestern Highway
Southfield, Michigan 48034
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Meritage Hospitality Group Inc.
We have audited the accompanying consolidated balance sheets of Meritage
Hospitality Group Inc. (a Michigan corporation) and subsidiaries as of November
30, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended November 30, 1996. 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 audits 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 Meritage
Hospitality Group Inc. and subsidiaries as of November 30, 1996 and 1995 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended November 30, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note G to the consolidated financial statements, effective
December 1, 1993 the Company changed its method of accounting for income taxes.
/s/ Grant Thornton LLP
Detroit, Michigan
January 21, 1997 (except for
Note N as to which
the date is August 6, 1997,
and Note O as to which the date
is September 30, 1997.)
M-3
<PAGE> 91
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------- AUGUST 31,
ASSETS 1996 1995 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,265,497 $ 1,336,891 $ 998,211
Trade accounts receivable, less allowance
for doubtful accounts of $58,000 in 1997,
$54,000 in 1996 and $29,000 in 1995
respectively 938,448 570,428 624,068
Inventories 354,226 208,891 347,604
Deferred income taxes 14,000 111,900 14,000
Refundable income taxes - 321,600
Prepaid expenses and other current assets 487,295 465,225 589,955
----------- ----------- -----------
Total Current Assets 4,059,466 3,014,935 2,573,838
PROPERTY, PLANT AND EQUIPMENT, NET 21,757,068 13,218,340 21,199,265
DEFERRED INCOME TAXES 621,000 437,100 621,000
OTHER ASSETS
Goodwill, net of amortization of $2,194,284
and $1,994,342 in 1997 and 1996 3,687,764 - 3,588,088
Land held for expansion 697,313 642,757 697,313
Financing costs, net of amortization of $101,974
and $38,591 in 1997 and 1996 605,593 - 556,632
Cash surrender value of life insurance, net of policy
loans of $298,144, $77,564 and $99,270 in
1997, 1996 and 1995, respectively 260,710 188,875 14,059
Marina development costs - - 1,102,399
Sundry 239,950 46,066 286,143
----------- ----------- -----------
Total Other Assets 5,491,330 877,698 6,244,634
AMOUNTS DUE FROM RELATED PARTIES - 435,430 -
----------- ----------- -----------
Total Assets $31,928,864 $17,983,503 $30,638,737
=========== =========== ===========
</TABLE>
M-4
<PAGE> 92
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
================================================================================
<TABLE>
<CAPTION>
NOVEMBER 30,
LIABILITIES AND ------------------------------- AUGUST 31,
STOCKHOLDERS' EQUITY 1996 1995 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES
Note payable - Bank $ - $ 200,551 $ -
Current portion of long-term debt 395,120 237,651 1,214,553
Current portion of obligations under capital lease 232,442 - 257,319
Amounts due to stockholders and related parties - 2,300 -
Trade accounts payable 2,228,406 448,886 1,927,596
Accrued expenses 936,111 2,081,866 918,094
Other 164,275 - 144,809
------------ ------------ ------------
Total Current Liabilities 3,956,354 2,971,254 4,462,371
LONG-TERM DEBT 21,711,847 11,204,883 21,870,012
OBLIGATIONS UNDER CAPITAL LEASES 1,953,999 - 1,758,425
DEFERRED INCOME TAXES 818,000 752,000 818,000
DEFERRED COMPENSATION 61,444 - -
COMMITMENTS AND CONTINGENCIES (NOTES H AND N) - - -
MINORITY INTEREST 1,405,777 - 1,506,806
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
shares ($1,383,870 liquidation value) in 1997
and 108,387 shares in 1996 1,084 - 1,384
Common stock - $0.01 par value; authorized
30,000,000 shares; issued and outstanding
3,217,094, 3,204,483 and 3,020,150 shares,
in 1997, 1996 and 1995 respectively 32,045 30,200 32,171
Additional paid in capital 12,616,727 10,684,750 12,977,101
Note receivable from sale of shares (5,135,716) (5,602,532) (5,550,415)
Accumulated deficit (5,492,697) (2,057,052) (7,237,118)
------------ ------------ ------------
Total Stockholders' Equity 2,021,443 3,055,366 223,123
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 31,928,864 $ 17,983,503 $ 30,638,737
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-5
<PAGE> 93
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED NOVEMBER 30, ENDED AUGUST 31,
1996 1995 1994 1997 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue
Room rents $ 6,281,711 $ 5,999,024 $ 6,047,510 $ 4,716,238 $ 4,828,014
Food and beverages 9,885,062 8,245,880 9,100,158 25,642,161 6,104,500
Sundry 555,049 149,321 174,761 734,117 366,668
Telephone 163,040 46,795 37,599 191,358 105,715
------------ ------------ ------------ ------------ ------------
Total revenue 16,884,862 14,441,020 15,360,028 31,283,874 11,404,897
Cost and expenses
Cost of food and beverages 3,334,434 2,863,554 3,041,499 7,724,026 2,074,310
Operating expenses 9,492,345 7,215,061 7,179,572 18,521,209 5,750,952
General and administrative expenses 3,951,400 4,979,621 2,597,278 3,042,245 2,246,325
Depreciation and amortization 1,081,704 1,426,642 1,232,187 1,649,448 675,372
------------ ------------ ------------ ------------ ------------
Total cost and expenses 17,859,883 16,484,878 14,050,536 30,936,928 10,746,959
------------ ------------ ------------ ------------ ------------
Earnings (loss) from operations (975,021) (2,043,858) 1,309,492 346,946 657,938
Other income (expense)
Interest expense (1,642,735) (1,355,389) (1,206,151) (2,168,567) (1,194,997)
Interest income 658,007 387,099 87,028 439,260 517,382
Gain (loss) on sale of assets (6,900) 241,646 11,769 (190,453) -
Minority interest 21,079 - - (101,030) -
------------ ------------ ------------ ------------ ------------
(970,549) (726,644) (1,107,354) (2,020,790) (677,615)
------------ ------------ ------------ ------------ ------------
Earnings (loss) before federal
income tax and cumulative
effect of change in
accounting principle (1,945,570) (2,770,502) 202,138 (1,673,844) (19,677)
Federal income tax expense (benefit) (20,000) (721,400) 112,000 - (6,690)
------------ ------------ ------------ ------------ ------------
Earnings (loss) before
cumulative effect of
change in accounting
principle (1,925,570) (2,049,102) 90,138 (1,673,844) (12,987)
Cumulative effect on prior years of
changing to a different method of
accounting for income taxes - - 117,300 - -
------------ ------------ ------------ ------------ ------------
Net loss (1,925,570) (2,049,102) (27,162) (1,673,844) (12,987)
</TABLE>
M-6
<PAGE> 94
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
================================================================================
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED NOVEMBER 30, ENDED AUGUST 31,
1996 1995 1994 1997 1996
----------- ----------- ----------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Preferred stock dividends - - - 70,577 -
----------- ----------- ----------- ------------ ----------
Net loss on common shares $(1,925,570) $(2,049,102) $ (27,162) $ (1,744,421) $ (12,987)
=========== =========== =========== ============ ==========
Earnings (loss) per share
Before cumulative effect of
change in accounting principle $ (.62) $ (1.13) $ .06 $ (.54) $ (.00)
Cumulative effect of change in
accounting principle - - (.08) - -
----------- ----------- ----------- ------------ ----------
After cumulative effect of change
in accounting principle $ (.62) $ (1.13) $ (.02) $ (.54) $ (.00)
=========== =========== =========== ============ ==========
Weighted average shares
outstanding 3,081,885 1,815,984 1,520,150 3,213,736 3,043,903
=========== =========== =========== ============ ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-7
<PAGE> 95
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
SERIES A NOTE RETAINED
CONVERTIBLE ADDITIONAL RECEIVABLE EARNINGS
PREFERRED COMMON PAID-IN SALE OF (ACCUMULATED
STOCK STOCK CAPITAL SHARES DEFICIT) TOTAL
---------- --------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 1, 1993 $ - $15,200 $5,217,820 $ - $ 19,212 $5,252,232
Net loss - - - - (27,162) (27,162)
------ ------- ----------- ----------- ----------- -----------
Balance at December 1, 1994 - 15,200 5,217,820 - (7,950) 5,225,070
Issuance of common stock - 15,000 5,466,930 (5,481,930) - -
Recognition of interest income on
note receivable from sale of shares - - - (120,602) - (120,602)
Net loss - - - - (2,049,102) (2,049,102)
------ ------- ----------- ----------- ----------- -----------
Balance at November 30, 1995 - 30,200 10,684,750 (5,602,532) (2,057,052) 3,055,366
Issuance of 108,387 shares of preferred
stock 1,084 - 1,082,786 - - 1,083,870
Issuance of 184,333 shares of common
stock - 1,845 1,139,281 - - 1,141,126
Recognition of interest income on note
receivable from sale of shares - - - (573,274) - (573,274)
Dividends paid ($.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 (unaudited) $1,384 $32,171 $12,977,101 $(5,550,415) $(7,237,118) $ 223,123
====== ======= =========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-8
<PAGE> 96
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED NOVEMBER 30, ENDED AUGUST 31,
1996 1995 1994 1997 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,925,570) $(2,049,102) $ (27,162) $(1,673,844) $ (12,987)
Adjustments to reconcile net loss to net
cash provided by operating activities
Cumulative effect of change in
accounting principle - - 117,300 - -
Depreciation and amortization 1,081,704 1,426,642 1,232,187 1,649,448 675,372
Compensation paid by issuance
of preferred and
common stock 310,099 - - 60,800 -
Minority interest in earnings of
consolidated subsidiaries - - - 101,030 -
Deferred income tax expense
(benefit) (20,000) (431,900) 14,000 - (6,690)
Loss (gain) on disposal of
property, plant and equipment 6,900 (241,646) (11,769) 190,453 -
Provision for bad debts 32,655 280,910 8,395 4,000 -
Interest income on note
receivable from sale of shares (573,274) (120,602) - (414,699) (436,073)
(Increase) decrease in assets
Accounts receivable (201,742) 84,754 (241,604) 310,380 (294,224)
Inventories 41,198 (12,131) (21,502) 6,622 -
Prepaid expenses and other
current assets 104,707 (7,477) - (102,660) 15,009
Refundable income taxes 321,600 (318,705) (114,795) - 460,068
Increase in marina development
costs - - - (342,878) -
Increase (decrease) in liabilities
Accounts payable and
accrued expenses (674,696) 1,814,566 34,831 (203,569) (1,010,555)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided
by operating activities (1,496,419) 425,309 989,881 (414,917) (610,080)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and
equipment (2,211,392) (456,132) (470,858) (837,382) (1,699,839)
Proceeds from sale of property,
plant and equipment 40,146 616,646 100,964 - -
Additions to amount due from
related parties - (682,248) (673,635) - (70,000)
Payments on amounts due from
related parties 433,130 2,270,524 694,186 - 435,430
Acquisition of business, net of cash
acquired (3,184,460) - - - -
Increase in other assets (679,214) (5,981) (30,863) (193,020) (371,373)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided
by investing activities (5,601,790) 1,742,809 (380,206) (1,030,402) (1,705,782)
</TABLE>
M-9
<PAGE> 97
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
================================================================================
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED NOVEMBER 30, ENDED AUGUST 31,
1996 1995 1994 1997 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $ 37,717,705 $ 46,887 $ - $ 936,346 $ 14,875,000
Payments on short-term borrowings - - - - (2,300)
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 (29,446,007) (1,251,712) (409,429) (817,039) (11,967,558)
Payments on obligations under
capital leases (29,808) - - (170,697) -
Collection on note receivable from
sale of shares 750,000 - - - 750,000
Proceeds from issuance of preferred
and common shares 545,000 - - 300,000 -
Dividends paid (1,510,075) - - (70,577) (1,510,075)
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities 8,026,815 (1,452,988) (438,626) 178,033 2,145,067
------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in cash 928,606 715,130 171,049 (1,267,286) (170,795)
Cash and cash equivalents - beginning
of period 1,336,891 621,761 450,712 2,265,497 1,336,891
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents - end of period $ 2,265,497 $ 1,336,891 $ 621,761 $ 998,211 $ 1,166,096
============ ============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
Interest $ 1,709,312 $ 1,355,389 $ 1,206,151 $ 1,978,230 $ 1,222,245
Income taxes $ - $ - $ 192,500 $ - $ -
</TABLE>
During the nine months ended August 31, 1997 non-cash activities consisted of 1)
the acquisition of equipment in the amount of $244,637; 2) an increase in marina
development costs in the amount of $1,233,366 of which $800,000 was by the use
of debt financing and 3) compensation and fees in the amount of $60,800 paid by
the issuance of common stock.
Non-cash investing activities for the year ended November 30, 1996 represents
the acquisition of majority equity interest in Wendy's of West Michigan Limited
Partnership and includes assets acquired and liabilities assumed.
<TABLE>
<S> <C>
Fair value of assets net of cash acquired $10,532,850
Liabilities assumed 7,348,390
-----------
$ 3,184,460
===========
</TABLE>
M-10
<PAGE> 98
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
================================================================================
In connection with this acquisition, the Company issued 171,900 shares of common
stock and 29,520 shares of preferred stock with a value of $1,369,575.
During the year ended November 30, 1995 a non-cash transaction occurred whereby
1,500,000 Common Shares were issued in exchange for a non-interest bearing note
receivable in the amount of $10,500,000. The discounted present value of the
note receivable was $5,481,930.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-11
<PAGE> 99
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company conducts its operations in two business segments. The lodging
industry segment consists of three full service hotels. The food service
industry segment consists of a limited partnership which operates twenty-six
Wendy's Old Fashioned Hamburger restaurants under franchise agreements with
Wendy's International Inc. All operations of the Company are located in
Michigan.
INTERIM FINANCIAL DATA
The consolidated financial statements and related notes thereto as of August 31,
1997 and for the nine months ended August 31, 1997 and 1996 are unaudited. The
information reflects all adjustments, consisting only of normal recurring
entries, that, in the opinion of management, are necessary to present fairly the
financial position, results of operations and cash flows of the Company for the
periods indicated. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the full fiscal year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
the following wholly-owned subsidiaries:
St. Clair Inn, Inc.
Thomas Edison Inn, Incorporated
Grand Harbor Resort Inc.
Grand Harbor Yacht Club Inc.
MHG Food Service Inc.
All significant intercompany balances and transactions have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost or market as determined by the
first-in, first-out method. Inventories consist of restaurant food items,
beverages and food serving supplies.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
principally using the straight-line method based upon estimated useful lives
ranging from 3 to 39 years. Amortization of leasehold improvements is provided
over the terms of the various leases.
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 and tax 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.
M-12
<PAGE> 100
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FRANCHISE FEES
Franchise fees for hotel and restaurant units are amortized using the
straight-line method over the terms of the individual franchise agreements.
FINANCING COSTS
Financing costs are amortized using the straight-line method over the terms of
the various loan agreements.
GOODWILL
Goodwill is amortized using the straight-line method over periods of up to
twenty years.
The Company evaluates the reasonableness of its amortization for goodwill. In
addition, if it becomes probable that expected future undiscounted cash flows
associated with goodwill are less than the carrying value, the assets are
written down to their fair value.
OBLIGATIONS UNDER CAPITALIZED LEASES
Lease transactions relating to certain restaurant buildings and equipment are
classified as capital leases. These assets have been capitalized and the related
obligations recorded based on the fair market value of the assets at the
inception of the leases. Amounts capitalized are being amortized over the terms
of the leases.
FRANCHISE COSTS AND OTHER ADVERTISING COSTS
Royalties and national advertising costs are based on a percentage of monthly
sales. These costs and other advertising costs are charged to operations as
incurred.
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.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed based upon the weighted average number of
shares outstanding during each year. The weighted average number of shares
outstanding is 3,213,736 and 3,043,903 for the nine months ended August 31, 1997
and 1996 and 3,081,885, 1,815,984 and 1,520,150 shares for the years ended
November 30, 1996, 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.
M-13
<PAGE> 101
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate their fair values.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the presentation of the 1996 financial statements.
NEW PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121) - "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. The adoption of this standard in 1996 had no effect on the
consolidated financial statements of the Company.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123) - "Accounting for Stock-Based
Compensation." SFAS 123 establishes accounting and reporting standards for
stock-based employee compensation plans with adoption required for fiscal years
beginning after December 15, 1995. As permitted under the provisions of this
statement, the Company has elected to continue the use of APB Opinion No. 25 to
measure compensation costs and will make the pro forma disclosures of net
earnings and earnings per share.
NOTE B - ACQUISITION
During the year, the Company began purchasing partnership units in Wendy's of
West Michigan Limited Partnership (the "Wendy's Partnership") and at November
30, 1996 the Company had acquired a majority interest (54.0%). Certain of the
units in the Wendy's Partnership were purchased from Stockholders/Directors at
prices no more favorable than that paid to non-related parties. The Company then
transferred this interest to its wholly-owned subsidiary, MHG Food Service Inc.
The acquisition has been accounted for as a purchase and the acquisition cost
has been allocated to assets acquired and liabilities assumed based upon
estimates of their fair values. A total of $1,719,819, representing the excess
of acquisition cost over the fair value of assets acquired has been allocated to
goodwill.
M-14
<PAGE> 102
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE B - ACQUISITION (CONTINUED)
The Company's consolidated results of operations include the Wendy's Partnership
activity from November 1, 1996 (effective date of acquisition). The unaudited
pro forma information below presents combined results of operations as if the
acquisition had occurred at the beginning of the periods presented. The
unaudited pro forma information is not necessarily indicative of the results of
operations of the combined company had the acquisition occurred at the beginning
of the periods presented, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
----------------------------
1996 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues $43,974,000 $39,806,000
Net loss $(2,256,000) $(2,330,000)
Loss per share $ (.73) $ (1.28)
</TABLE>
The Company entered into an agreement on October 21, 1996, to acquire the
General Partnership interest in the Wendy's Partnership.
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------ AUGUST 31,
1996 1995 1997
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Land and improvements $ 2,014,914 $ 1,515,513 $ 1,936,538
Buildings and improvements 21,597,196 18,522,242 22,121,785
Furnishings and equipment 14,552,410 7,067,815 14,905,431
Leasehold improvements 2,192,253 - 2,130,074
Leased property/capital leases 2,825,338 - 2,825,338
------------ ------------ ------------
43,182,111 27,105,570 43,919,166
Less accumulated depreciation
and amortization (21,425,043) (13,887,230) (22,719,901)
------------ ------------ ------------
$ 21,757,068 $ 13,218,340 $ 21,199,265
============ ============ ============
</TABLE>
Depreciation and amortization expense was approximately $1,012,000, $883,000 and
$1,047,000 for the years ended November 30, 1996, 1995 and 1994, and $1,356,000
and $675,000 for the nine months ended August 31, 1997 and 1996, respectively.
M-15
<PAGE> 103
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE D - AMOUNTS DUE FROM RELATED PARTIES AND RELATED PARTY TRANSACTIONS
Amounts due from related parties at November 30, 1995 consisted of amounts due
from a stockholder and former officer of the Company, Donald W. Reynolds
("Reynolds"), or from companies related by common ownership to Reynolds. During
the year ended November 30, 1996, the Company collected approximately $433,000
of these receivables and wrote off the remainder.
In 1994 and 1995, the Company and each of its subsidiaries had a management
agreement with an affiliated company that was wholly-owned by Reynolds. The
agreement was terminated on January 25, 1996. Management fees charged to
operations totaled approximately $58,000, $403,000 and $457,000 for the years
ended November 30, 1996, 1995 and 1994, respectively. The Board of Directors
approved a 1-1/2% loan guarantee fee to be paid to Reynolds for the years ended
November 30, 1995 and 1994. The fee paid was $193,875 for 1995 and $193,500 for
1994.
NOTE E - ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses consist of the following: NOVEMBER 30,
------------------------- AUGUST 31,
1996 1995 1997
-------- ---------- --------
(Unaudited)
<S> <C> <C> <C>
Litigation expenses $ - $1,361,470 $ -
Professional fees 56,697 246,788 41,000
Property taxes 213,005 189,461 157,672
Payroll and related payroll taxes 526,812 125,685 303,175
Interest and other expenses 139,597 158,462 416,247
-------- ---------- --------
$936,111 $2,081,866 $918,094
======== ========== ========
</TABLE>
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following obligations at:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------- AUGUST 31,
1996 1995 1997
---------- ---------- ---------
(Unaudited)
<S> <C> <C> <C>
Mortgage note payable to bank, due $23,174
per month including interest at prime plus
2% not to exceed 10.5% due October 1,
1997 $ - $2,924,975 $ -
Mortgage note payable to bank, due $28,108
per month including interest at prime plus
1%, due October 31, 1997 - 3,464,780 -
Term note payable to bank, due $16,531 per
month including interest at prime plus 1%
due October 31, 1997 - 808,922 -
</TABLE>
M-16
<PAGE> 104
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE F - LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------- AUGUST 31,
1996 1995 1997
--------- ---------- ---------
(Unaudited)
<S> <C> <C> <C>
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. - 3,929,506 -
Mortgage note payable to insurance company,
due in monthly installments beginning
January 1, 1997 of $137,897 including interest
at 10.3% through December 31, 2003. (1) 14,000,000 - 13,834,833
Mortgage note payable to insurance company,
due in monthly installments of interest at prime
plus 8% beginning January 1, 1997 through
November 1, 1997 and monthly installments of
principal of $50,000 beginning December 1, 1997
through March 1, 1998, $100,000 beginning April 1,
1998 through May 1, 2002 plus interest and final
principal payment of $50,000 plus interest
due June 1, 2002. (2) 5,250,000 - 5,250,000
Note payable to bank, due in monthly installments
of $14,693 including interest at 8.8% through
October 8, 2000. (3) 582,359 - 496,806
Term note payable to bank, due in monthly
installments of $43,313, including interest
at 1% over prime per month through February 2005
when any remaining unpaid principal will be due
Under the revolving loan agreement, the required
monthly payments described above may be offset
by additional borrowings up to the unused available
borrowings. The total available borrowings under
the loan agreement were $2,978,702 as of
November 30, 1996. (4) 2,192,351 - 1,725,413
Note payable to Chairman of the Board and
shareholder, unsecured, interest due monthly at
prime plus 8% beginning April 15, 1997. Principal
is due the later of December 31, 1997 or 91 days
after the Company's primary lender is paid in full. - - 750,000
</TABLE>
M-17
<PAGE> 105
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE F - LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------- AUGUST 31,
1996 1995 1997
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Mortgage note payable to insurance company
due in monthly installments of interest at prime
plus 1% beginning June 1, 1997. Principal
payments of $35,000 are required at the time of the
sale of any of the marina condominium units
The total available borrowings was $75,000 as of
August 31, 1997. - - 800,000
Other notes and land contracts payable, requiring
monthly payments aggregating $15,390, $4,100
and $8,950, respectively, subject to interest at
rates ranging from 6.9% to 11.0%. 82,257 314,351 227,513
----------- ----------- -----------
22,106,967 11,442,534 23,084,565
Less current portion 395,120 237,651 1,214,553
----------- ----------- -----------
$21,711,847 $11,204,883 $21,870,012
=========== =========== ===========
</TABLE>
The prime lending rate was 8.25% at November 30, 1996 and 8.50% at August 31,
1997.
(1) The mortgage is collateralized by the hotel properties.
(2) The mortgage is collateralized by the Meritage Capital Corp. note, common
stock of the Company, life insurance policies in the amount of $5,100,000,
other property and equipment and a second security interest in the hotel
properties.
(3) The note is collateralized by certain equipment.
(4) The note is collateralized by substantially all of the assets of the
Wendy's Partnership and by the guaranty of the General Partner and the
personal guarantees of the shareholders of the General Partner.
Minimum principal payments on long-term debt to maturity as of November 30,
1996 are as follows:
<TABLE>
<S> <C>
1997 $ 395,120
1998 1,389,380
1999 1,678,253
2000 1,997,253
2001 1,911,939
Thereafter 14,735,022
----------
$22,106,967
===========
</TABLE>
M-18
<PAGE> 106
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE F - LONG-TERM DEBT (CONTINUED)
Loan covenants of the various loan agreements 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. At November 30, 1996 the Company failed
to meet one of the covenants of its agreements with the insurance company. A
waiver has been obtained.
NOTE G - 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. Income tax expense is summarized as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE NINE MONTHS
ENDED NOVEMBER 30, ENDED AUGUST 31,
1996 1995 1994 1997 1996
--------- --------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current expense (benefit) $ - $(289,500) $ 98,000 $ - $ (6,690)
Deferred expense (benefit) (20,000) (431,900) 14,000 - -
--------- --------- --------- --------- ---------
$ (20,000) $(721,400) $ 112,000 $ - $ (6,690)
========= ========= ========= ========= =========
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------- AUGUST 31,
1996 1995 1997
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 1,181,000 $ 267,400 $ 1,807,000
AMT credit carryforward 105,000 140,000 105,000
Allowance for doubtful accounts 8,500 111,900 10,000
Michigan Single Business Tax - Federal 63,000 69,000 63,000
Contribution carryforward 6,500 - 6,500
----------- ----------- -----------
1,364,000 588,300 1,991,500
Deferred tax liabilities
Depreciation (635,000) (549,000) (759,000)
Michigan Single Business Tax - State (183,000) (203,000) (183,000)
----------- ----------- -----------
(818,000) (752,000) (942,000)
Less valuation allowance (729,000) (39,300) (1,232,500)
----------- ----------- -----------
Net deferred tax liability $ (183,000) $ (203,000) $ (183,000)
=========== =========== ===========
</TABLE>
M-19
<PAGE> 107
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE G - INCOME TAXES (CONTINUED)
The net operating loss carryforward expires in 2010 - 2012.
The change in the valuation allowance is primarily attributable to the increase
in net operating loss carryforward.
The income tax provision reconciled to the tax computed at the statutory Federal
rate was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE NINE MONTHS
ENDED NOVEMBER 30, ENDED AUGUST 31,
1996 1995 1994 1997 1996
--------- --------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Tax (benefit) at statutory
rates applied to income
before federal income tax $(654,700) $(942,000) $ 68,700 $(569,000) $ (6,690)
Effect of nondeductible items (51,000) 24,700 43,300 (14,500) -
Difference in rates of net operating loss carrybacks - 151,300 - - -
Other (4,000) 5,300 - - -
Valuation allowance 689,700 39,300 - 583,500 -
--------- --------- --------- --------- ---------
$ (20,000) $(721,400) $ 112,000 $ - $ (6,690)
========= ========= ========= ========= =========
</TABLE>
NOTE H - LEASE COMMITMENTS
The Wendy's Partnership leases land and buildings used in operations under
operating agreements, with remaining lease terms (including renewal options of
up to twelve years) ranging from one to seventeen years. Included in the leases
are five with parties related through common ownership of general partners,
where a stockholder of the general partner is also a stockholder/director of the
Company.
Certain restaurant leases (eight restaurant buildings, excluding land which is
accounted for as an operating lease) and equipment leases have been capitalized.
Minimum future obligations under capital leases and noncancellable operating
leases in effect are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------------------
CAPITAL RELATED
YEARS ENDING NOVEMBER 30, LEASES PARTIES OTHERS
------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
1997 $ 465,323 $ 285,552 $ 362,378
1998 465,323 153,127 294,506
1999 465,323 111,629 208,334
2000 465,323 111,629 193,511
2001 449,365 111,629 172,440
Later Years 769,948 419,892 344,880
----------- --------- ---------
Total minimum lease obligations 3,080,605 $1,193,458 $ 1,576,049
=========== ===========
Less amount representing interest imputed
at approximately 11% 894,164
-----------
Present value of minimum lease obligations $ 2,186,441
===========
</TABLE>
M-20
<PAGE> 108
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE H - LEASE COMMITMENTS (CONTINUED)
The present value of minimum rental obligations is reflected in the balance
sheets as current and long-term obligations under capital leases.
Accumulated amortization of leased property under capital leases was $1,648,146,
at November 30, 1996.
In addition to minimum future obligations, percentage rentals may be paid under
all restaurant leases on the basis of percentage of sales in excess of minimum
prescribed amounts.
Total rental expense since the date of acquisition of the Wendy's Partnership
was $96,822 for the year ended November 30, 1996 and $956,034 for the nine
months ended August 31, 1997.
NOTE I - SERIES A CONVERTIBLE CUMULATIVE PREFERRED STOCK
In 1996, the Company designated a series of non-voting preferred stock
consisting of 200,000 shares of $0.01 par value. The shares have an annual
dividend rate of $0.90 per share and the payment of the dividends are
cumulative. The shares are also convertible into common shares at the conversion
price of $7.00 per share. The shares also have a liquidation value of $10.00 per
share.
Under certain conditions relating to the market value of the Company's common
stock, the Company has the option to cause the preferred stock to be converted
into common stock.
NOTE J - NOTE RECEIVABLE FROM SALE OF SHARES
On September 19, 1995, a stock purchase and sale agreement (Agreement) was
executed by the Company, its principal stockholder and Meritage Capital Corp.
("MCC"). Under the agreement, the Company sold 1,500,000 shares of previously
authorized newly issued common stock to MCC at a total price of $10,500,000.
Upon execution of the agreement, MCC gave the Company a non-interest bearing
promissory note in the amount of $10,500,000. The Note provides that MCC does
not have to make any payments to the Company for five years from the date of the
Note (September 19, 1995). Beginning on the fifth anniversary of the Note, MCC
is required to make six annual payments of $1,625,000.
The Note is secured by the shares issued to MCC under the Agreement. The Note
was discounted at 11% and is recorded as a reduction of stockholders' equity.
During the year ended November 30, 1996 the Company received an unscheduled
principal payment of $750,000. As a result, the present value of the note was
recalculated and reduced by approximately $290,000.
M-21
<PAGE> 109
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE K - EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution 401(k) plan that covers
substantially all employees of the lodging industry segment and corporate
employees. Contributions to the Plan may be made by the Company (which are
discretionary) or by plan participants through elective salary reductions. No
contributions were made to the plan by the Company during nine months ended
August 31, 1997 and 1996 and the years ended November 30, 1996, 1995 and 1994.
The Wendy's Partnership maintains a 401(k) profit sharing plan that covers
substantially all of its employees. Contributions to the plan may be made by the
subsidiary (which are discretionary) or by plan participants through elective
salary reductions. Contributions to the plan by the subsidiary since its date of
acquisition are not significant.
The Wendy's Partnership has a deferred compensation agreement with a key
employee which provides for the payment of $150,000 upon the completion of the
five-year term of the agreement in December 1998. The agreement is funded by the
Wendy's Partnership through payment of premiums on a split dollar life insurance
contract.
NOTE L - STOCK OPTION PLANS
The 1996 Management Equity Incentive Plan ("Incentive Plan") and, the 1996
Directors' Share Option Plan ("Directors' Plan") were approved by stockholders
on May 21, 1996.
The Incentive Plan provides for 300,000 shares of common stock to be reserved
for options that may be issued under the plan. The Board of Directors has the
discretion to designate an option to be an Incentive Share Option or a
non-qualified share option. The plan provides that the option price is not less
than the fair market value of the common stock at the date of grant. Unless the
option agreement provides otherwise, options granted under the plan become
exercisable on a cumulative basis at the rate of 20 percent during each of the
second through fifth years after the date of grant. Options granted under the
plan may have a term of from one to ten years.
The Directors' Plan provides for the non-discretionary grant of options to
non-employee directors of the Company to purchase a combined maximum of 60,000
shares. The plan provides that the option price is not less than the greater of
the fair market value of the common stock on the date of grant or $7.00 per
share. The plan provides that each non-employee director, on the date such
person becomes a non-employee director, will be granted options to purchase
5,000 shares of stock. Provided that such person is still serving as a
non-employee director, they will automatically be granted options to purchase
1,000 additional shares each year thereafter on the date of the Annual
Shareholders' Meeting. Options granted under the plan have a term of ten years.
M-22
<PAGE> 110
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE L - STOCK OPTION PLANS (CONTINUED)
The following table summarizes the changes in the number of common shares under
stock options granted pursuant to the preceding plans:
<TABLE>
<CAPTION>
1996 MANAGEMENT 1996 DIRECTOR'S
EQUITY INCENTIVE PLAN STOCK OPTION PLAN
-------------------------- ------------------------
AVERAGE AVERAGE
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Options outstanding at
December 1, 1995 - - - -
Options granted during the year 190,000 50,000
-------- ------
Options outstanding at
November 30, 1996 190,000 $7.00 50,000 $7.00
Options granted during the period 113,500 6,000
-------- ------
Options outstanding at August 31, 1997 303,500 $7.00 56,000 $7.00
======== =======
Options exercisable at
November 30, 1996 - 50,000
======== =======
Options exercisable at August 31, 1997 28,500 56,000
======== =======
Options available for grant at
November 30, 1996 110,000 10,000
======== =======
Options available for grant at
August 31, 1997 171,500 64,000
======== =======
</TABLE>
NOTE M - BUSINESS SEGMENT INFORMATION
The Company operates in two business segments, lodging and food service
operations. Intersegment transactions are not reported separately since they are
not significant.
Identifiable assets are those assets applicable to the respective industry
segment.
<TABLE>
<CAPTION>
Data by business segment is as follows: FOR THE YEAR ENDED NOVEMBER 30, 1996
----------------------------------------------
LODGING FOOD
GROUP SERVICE CONSOLIDATED
----------- ---------- ------------
<S> <C> <C> <C>
Revenues $ 14,762,822 $ 2,122,040 $ 16,884,862
Loss from operations $ (966,885) $ (8,136) $ (975,021)
Identifiable assets $ 21,418,956 $ 10,509,908 $ 31,928,864
Depreciation and amortization expense $ 1,009,771 $ 71,933 $ 1,081,704
Capital additions $ 2,198,341 $ 13,051 $ 2,211,392
</TABLE>
M-23
<PAGE> 111
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE M - BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED AUGUST 31, 1997
(UNAUDITED)
------------------------------------
LODGING FOOD
GROUP SERVICE CONSOLIDATING CONSOLIDATED
----- ------- ------------- ------------
<S> <C> <C> <C>
Revenues $ 10,884,943 $ 20,398,931 $ 31,283,874
Earnings (loss) from operations (264,691) 729,915 (118,278) 346,946
Identifiable assets 21,989,443 8,649,294 30,638,737
Depreciation and amortization expense 839,231 691,939 118,278 1,649,448
Capital additions 489,869 592,143 1,082,012
</TABLE>
NOTE N - LEGAL PROCEEDINGS
The Company is involved in certain routine legal proceedings which are
incidental to the business. 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. The Company maintains various types of insurance which cover most of
the actions brought against the Company.
On December 5, 1996, the Company received a notice from the Internal Revenue
Service that approximately $2.1 million, which the Company deducted as a
business expense in connection with litigation in 1995 and 1996 relating to the
replacement and restructuring of former management, should be treated as a
capital expenditure and, therefore, disallowed as a deduction. The Company
believes the deduction was proper and is vigorously contesting the disallowance.
To the extent the IRS completely prevails in its position, the Company would be
required to make a payment of approximately $340,000 in additional federal and
state income taxes, not including interest or penalties. If the Company is not
able to immediately carry back its 1996 tax loss to offset such payment, then
any amount that the Company would be required to pay would be refunded within
120 days of payment.
NOTE O - SUBSEQUENT EVENTS
On May 19, 1997, Wendy's West Michigan, Inc. was removed as general partner of
the Wendy's Partnership and replaced with MCC Food Service, an affiliate of
Meritage. On May 21, 1997, Wendy's West Michigan, Inc. commenced a lawsuit
against Meritage, MHG Food Service, and MCC Food Service (Case No. 97-05360-CB,
Kent County (Michigan) Circuit Court, Buth, J.). Wendy's West Michigan, Inc. has
attempted to assert claims on behalf of the Wendy's Partnership as well. The
complaint seeks, 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, and (iii) damages for various business
torts. Plaintiff's motion for a temporary restraining order was denied on May
21, 1997.
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
M-24
<PAGE> 112
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
these covenants. However, a waiver has been obtained through December 30, 1997.
On September 30, 1997 the Company received a waiver of principal and interest
payments due in October, November and December, 1997 from its primary lender on
its mortgage notes. This payment waiver also extends to principal and interest
payments due on the unsecured note to the Company's Chairman of the Board.
M-25
<PAGE> 113
WENDYS OF WEST MICHIGAN
LIMITED PARTNERSHIP
Financial Statements
Eleven Months Ended November 30, 1996 and
Years Ended December 31, 1995 and 1994
W-1
<PAGE> 114
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
CONTENTS
INDEPENDENT AUDITORS' REPORT W-3
FINANCIAL STATEMENTS
Balance Sheets W-5
Statements of Income W-7
Statements of Changes in Partners' Equity W-9
Statements of Cash Flows W-10
Notes to Financial Statements W-13
W-2
<PAGE> 115
BDO Seidman, LLP
Accountants and Consultants
99 Monroe Avenue N.W., Suite 800
Grand Rapids, Michigan 49503
INDEPENDENT AUDITORS' REPORT
To the Partners
Wendy's of West Michigan
Limited Partnership
Kalamazoo, Michigan
We have audited the accompanying balance sheets of Wendy's of West Michigan
Limited Partnership as of November 30, 1996 and December 31, 1995, and the
related statements of income, changes in partners' equity and cash flows for the
eleven months ended November 30, 1996 and years ended December 31, 1995 and
1994. These financial statements are the responsibility of the Partnership'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 financial position of Wendy's of West Michigan
Limited Partnership at November 30, 1996 and December 31, 1995, and the results
of its operations and its cash flows for the eleven months ended November 30,
1996 and years ended December 31, 1995 and 1994, in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
January 10, 1997
W-3
<PAGE> 116
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
W-4
<PAGE> 117
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, December 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------------
ASSETS (Note 3)
<S> <C> <C>
CURRENT ASSETS
Cash $ 394,066 $ 411,198
Receivables, including amounts due from related parties 215,879 53,887
Inventories 180,250 145,807
Prepaid expenses 125,445 139,202
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 915,640 750,094
- -----------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land 749,000 749,000
Leasehold improvements 2,192,253 2,156,926
Buildings and improvements 2,398,127 2,398,127
Furnishings and equipment 4,296,289 3,595,913
Vehicles 79,734 83,826
Leased property under capital leases (Note 4) 2,825,338 2,825,338
- -----------------------------------------------------------------------------------------------------------------
12,540,741 11,809,130
Less accumulated depreciation and amortization 6,643,697 6,137,807
- -----------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 5,897,044 5,671,323
- -----------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net of amortization of $1,981,200 and $1,799,590 1,981,087 2,162,697
Franchise fees, net of amortization of $395,488 and $365,643 154,512 184,357
Other 127,404 63,534
- -----------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 2,263,003 2,410,588
- -----------------------------------------------------------------------------------------------------------------
$ 9,075,687 $ 8,832,005
=================================================================================================================
</TABLE>
W-5
<PAGE> 118
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, December 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 770,770 $ 785,355
Accruals:
Salaries and wages 349,320 305,044
Taxes 267,698 293,705
Percentage rent 107,257 79,816
Other current liabilities, including amounts due to related parties 38,546 38,963
Current maturities of obligations under capital leases (Note 4) 232,442 159,572
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,766,033 1,662,455
DEFERRED COMPENSATION (Note 2) 61,444 -
OBLIGATIONS UNDER CAPITAL LEASES, less current maturities (Note 4) 1,953,999 1,808,828
LONG-TERM DEBT, less current maturities (Note 3) 2,192,351 2,500,340
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,973,827 5,971,623
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 4 and 5)
PARTNERS' EQUITY (Note 1)
Limited Partners 3,130,775 2,891,712
General Partner (28,915) (31,330)
- --------------------------------------------------------------------------------------------------------------------
TOTAL PARTNERS' EQUITY 3,101,860 2,860,382
- --------------------------------------------------------------------------------------------------------------------
$ 9,075,687 $ 8,832,005
====================================================================================================================
</TABLE>
See accompanying notes to financial statements.
W-6
<PAGE> 119
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended
ELEVEN December 31,
MONTHS ENDED ------------------------------------
NOVEMBER 30,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 24,438,338 $ 25,364,596 $ 24,701,627
COST OF SALES 7,222,691 7,390,886 7,295,008
- --------------------------------------------------------------------------------------------------------------------
Gross profit 17,215,647 17,973,710 17,406,619
- --------------------------------------------------------------------------------------------------------------------
EXPENSES (INCOME)
Restaurant operating costs, including
amounts to related parties:
Labor 6,747,046 6,962,082 6,396,415
Occupancy 2,555,026 2,526,139 2,305,252
Advertising 1,535,930 1,519,903 1,464,845
Food service supplies 1,008,536 1,087,791 1,023,853
Royalties 977,508 1,014,569 988,084
Other 1,838,291 1,988,597 1,808,872
- --------------------------------------------------------------------------------------------------------------------
Total restaurant operating costs 14,662,337 15,099,081 13,987,321
General and administrative expenses, including
amounts to related parties 1,046,177 1,250,468 1,278,659
Depreciation and amortization 768,653 852,803 856,871
Interest expense 403,435 511,939 557,056
Loss (gain) on sale of assets 25,453 1,097 (5,675)
Other income (249,260) (236,309) (208,256)
Insurance proceeds in excess of net book value of
fire damaged assets - (32,377) -
- --------------------------------------------------------------------------------------------------------------------
Net expenses 16,656,795 17,446,702 16,465,976
- --------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 558,852 527,008 940,643
EXTRAORDINARY ITEM - loss on
extinguishment of debt - (20,536) -
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 558,852 $ 506,472 $ 940,643
====================================================================================================================
</TABLE>
W-7
<PAGE> 120
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended
ELEVEN December 31,
MONTHS ENDED ------------------------------------
NOVEMBER 30,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income attributed to:
Limited Partners $ 553,263 $ 501,407 $ 931,237
General Partner 5,589 5,065 9,406
- --------------------------------------------------------------------------------------------------------------------
$ 558,852 $ 506,472 $ 940,643
====================================================================================================================
Income before extraordinary item per unit of limited
partnership interest (1,256.8 units outstanding)
$ 440.22 $ 415.14 $ 740.96
====================================================================================================================
Extraordinary item - loss on extinguishment of debt per unit of limited
partnership interest (1,256.8 units
outstanding) $ - $ (16.18) $ -
====================================================================================================================
Net income per unit of limited partnership interest
(1,256.8 units outstanding) $ 440.22 $ 398.96 $ 740.96
====================================================================================================================
</TABLE>
See accompanying notes to financial statements.
W-8
<PAGE> 121
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, January 1, 1994 $ 2,401,668 $ (36,280) $ 2,365,388
Net income for the year 931,237 9,406 940,643
Distributions to partners (377,040) (3,808) (380,848)
- --------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 2,955,865 (30,682) 2,925,183
Net income for the year 501,407 5,065 506,472
Distributions to partners (565,560) (5,713) (571,273)
- --------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 2,891,712 (31,330) 2,860,382
Net income for the period 553,263 5,589 558,852
Distributions to partners (314,200) (3,174) (317,374)
- --------------------------------------------------------------------------------------------------------------------
BALANCE, November 30, 1996 $ 3,130,775 $ (28,915) $ 3,101,860
====================================================================================================================
</TABLE>
See accompanying notes to financial statements.
W-9
<PAGE> 122
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN Years ended
MONTHS ENDED December 31,
NOVEMBER 30, ------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 558,852 $ 506,472 $ 940,643
Adjustments to reconcile net income to net cash from
operating activities:
Loan costs written off due to refinancing - 20,536 -
Loan costs incurred due to refinancing - (31,477) -
Depreciation and amortization 768,653 852,803 856,871
Loss (gain) on sale of property and equipment 25,453 1,097 (5,675)
Undepreciated cost of equipment destroyed by fire - 1,194 -
Increase in cash value of life insurance (61,444) - -
Increase in deferred compensation 61,444 - -
Changes in operating assets and liabilities:
Receivables (161,992) 13,681 (23,268)
Inventories (34,443) 16,968 18,242
Prepaid expenses 13,757 25,429 (41,188)
Accounts payable (14,585) (8,681) (12,976)
Accrued salaries and wages 44,276 21,391 203,215
Accrued taxes (26,007) (35,821) (61,574)
Accrued percentage rent 27,441 (6,580) 1,596
Other current liabilities (417) (11,234) (68,239)
- --------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 1,200,988 1,365,778 1,807,647
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 5,449 122,500 24,961
Additions to property and equipment (427,872) (471,092) (690,879)
Payment of franchise fees - (50,000) (25,000)
Purchase of other assets (8,784) - -
- --------------------------------------------------------------------------------------------------------------------
Net cash for investing activities (431,207) (398,592) (690,918)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
W-10
<PAGE> 123
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN Years ended
MONTHS ENDED December 31,
NOVEMBER 30, ------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from long-term debt $ - $ 2,022,499 $ -
Repayment of short-term notes payable - (102,724) (1,776)
Repayment of long-term debt (307,989) (2,537,612) (239,521)
Payments made on obligations under capital leases (161,550) (142,920) (128,005)
Distributions to partners (317,374) (571,273) (380,848)
- --------------------------------------------------------------------------------------------------------------------
Net cash for financing activities (786,913) (1,332,030) (750,150)
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (17,132) (364,844) 366,579
CASH, beginning of period 411,198 776,042 409,463
- --------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 394,066 $ 411,198 $ 776,042
====================================================================================================================
</TABLE>
W-11
<PAGE> 124
<TABLE>
<CAPTION>
Wendy's of West Michigan Limited Partnership
Statement of Cash Flows
ELEVEN Years ended
MONTHS ENDED December 31,
NOVEMBER 30, ------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest expense $ 408,680 $ 499,673 $ 558,000
- --------------------------------------------------------------------------------------------------------------------
Noncash investing and financing
transactions:
Capital lease obligation incurred for use
of equipment 379,591 - -
Retirement of note payable - bank
with new revolving term note
payable - bank - 1,331,221 -
- --------------------------------------------------------------------------------------------------------------------
Purchase of land:
Cost of land - - 121,000
Short-term note payable - - 104,500
- --------------------------------------------------------------------------------------------------------------------
Cash down payment for land - - 16,500
- --------------------------------------------------------------------------------------------------------------------
Purchase of vehicle:
Cost of vehicle - - 10,482
Trade-in allowance - - 7,019
- --------------------------------------------------------------------------------------------------------------------
Cash paid for vehicle - - 3,463
====================================================================================================================
</TABLE>
See accompanying notes to financial statements.
W-12
<PAGE> 125
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ORGANIZATION
SIGNIFICANT
ACCOUNTING Wendy's of West Michigan Limited Partnership
POLICIES (Partnership) is a Michigan limited
partnership organized on July 31, 1986. The
Partnership operates 26 Wendy's Old Fashioned
Hamburger restaurants in western Michigan
under franchise agreements with Wendy's
International, Inc. Subject to the consent of
the Limited Partners where required by the
Partnership Agreement, the General Partner has
the exclusive right to manage the Partnership.
The Limited Partners are not liable for
Partnership debts beyond the amount of their
original contributions and share of
undistributed net profits.
The Partnership Agreement provides that the
Limited Partners (as a group) are to share in
99% of the Partnership's net income or loss,
except as discussed in the following
paragraph, and receive 99% of all cash flow
from operations as defined by the Partnership
Agreement.
The net profits of the Partnership arising
from the sale or other disposition, whether as
a result of foreclosure, condemnation or
otherwise, of all or part of the property,
shall be allocated among the Partners in
accordance with the provisions of the
Partnership Agreement.
A Partnership administration fee is payable to
the General Partner equal to 2% of gross
partnership revenues from operations, as
defined in the Partnership Agreement. The
General Partner has elected to reduce the
Partnership administration fee to the General
Partner from 2% of gross partnership revenues
from operations to $146,667, $160,000 and
$160,000 for 1996, 1995 and 1994,
respectively.
The Partnership shall exist until December 31,
2026, unless terminated sooner as provided in
the Partnership Agreement. A Limited Partner
may, in accordance with the agreement, assign
his interest in the Partnership by a properly
executed and
W-13
<PAGE> 126
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
acknowledged instrument, the terms of which
are not inconsistent with or contrary to the
provisions of the Partnership Agreement and
are otherwise satisfactory to the General
Partner, subject to the approval of the
General Partner.
During the period ended November 30, 1996,
Meritage Hospitality Group Inc. (Meritage)
acquired 680.8 units of limited partnership
interest, representing approximately 54% of
the outstanding limited partner units. As a
result, the Partnership has changed its fiscal
year-end to November 30, 1996 to conform with
Meritage's fiscal year-end.
Meritage entered into an agreement on October
21, 1996, to acquire the general partnership
interest in the Partnership. This acquisition
is conditioned upon, among other things, the
approval of Wendy's International, Inc., the
franchisor of the Wendy's restaurants operated
by the Partnership.
Competition in the quick-service restaurant
industry is intense. Most of the Partnership's
restaurants are in close proximity to other
quick-service restaurants which compete on the
basis of price, service and product quality
and variety. Meritage and the current General
Partner believe that the Partnership competes
effectively in these areas.
USE OF ESTIMATES
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
W-14
<PAGE> 127
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
INVENTORIES
Inventories are stated at the lower of cost
(first-in, first-out) or market. Inventories
consist of restaurant food items and food
serving supplies.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost.
Expenditures for renewals and betterments
which extend the originally estimated economic
life of assets are capitalized. Expenditures
for maintenance or repairs are charged to
expense when incurred. For financial reporting
purposes, depreciation is computed using the
straight-line method over the estimated
economic lives of the assets. For tax
purposes, useful lives and methods are used as
permitted by the Internal Revenue Code.
Amortization of leasehold improvements is
provided over the primary terms of the various
leases.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS
In 1995, the Partnership adopted Statement of
Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be
Disposed of. This statement requires that
long-lived assets and certain identifiable
intangibles to be held and used by an entity
be reviewed for impairment whenever events or
changes in circumstances indicate that the
carrying amount of an asset may not be
recoverable. This statement also requires that
long-lived assets and certain identifiable
intangibles to be disposed of be reported at
the lower of carrying amount or fair value
less cost to sell. This new accounting
standard had no impact on the financial
statements.
W-15
<PAGE> 128
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
OTHER ASSETS
Franchise fees for restaurant units are being
amortized over the terms of the individual
restaurant franchise agreements. Loan costs
are being amortized over 120 months, the
period of the loan. All amortization is under
the straight-line method.
The excess of cost over fair value of net
assets acquired (goodwill) is being amortized
on the straight-line method over 240 months.
Amortization expense for goodwill for the
periods 1996, 1995 and 1994 amounted to
$181,610, $198,120 and $198,120, respectively.
The Partnership evaluates the recoverability
of the goodwill whenever events or changes in
circumstances indicate that the carrying
amount of goodwill may not be recoverable and
considers whether the goodwill should be
completely or partially written off or the
amortization period accelerated. The
Partnership assesses the recoverability of
goodwill based on undiscounted estimated
future operating cash flows. If the
Partnership determines that the carrying value
of the goodwill has been impaired, the
measurement of the impairment will be based on
discounted estimated future operating cash
flows.
FRANCHISE COSTS AND OTHER ADVERTISING COSTS
Royalties and national advertising costs are
based on a percentage of monthly sales. These
costs and other advertising costs are charged
to operations as incurred.
CAPITALIZED LEASE OBLIGATIONS
Lease transactions relating to certain
restaurant buildings and equipment are
classified as capital leases. These assets
have been capitalized and the related
obligations recorded based on the fair market
value of the assets at the inception of the
leases. Amounts capitalized are being
amortized over the terms of the leases.
W-16
<PAGE> 129
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
INCOME TAXES
No provision for income taxes has been made in
the accompanying financial statements. A
Partner's share of the income or loss of the
Partnership is includable in the individual
tax returns of the Partners.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Partnership's
financial instruments, consisting of cash,
receivables, accounts payable and long-term
debt, approximate their fair value.
RECLASSIFICATIONS
Certain balances from the 1995 financial
statements have been reclassified to be
consistent with classifications as reported in
the 1996 financial statements. These
reclassifications had no effect on previously
reported net income or partners' equity.
2. DEFERRED COMPENSATION The Partnership has a deferred compensation
agreement with a key employee which provides
for the payment of $150,000 upon the
completion of the five-year term of the
agreement in December 1998. The agreement is
funded by the Partnership through payment of
premiums on a split dollar life insurance
contract which had a cash value at November
30, 1996 of $61,444. Charges to operations
related to this agreement were $27,913,
$25,295 and $16,000 for 1996, 1995 and 1994,
respectively. In accordance with the
agreement, the Partnership is required to make
premium payments of approximately $31,000 and
$36,000 during 1997 and 1998, respectively.
W-17
<PAGE> 130
Wendy's of West Michigan Limited Partnership
Notes to Financial Statements
3. LONG-TERM DEBT Long-term debt at November 30, 1996 and
December 31, 1995 consisted of a revolving
term note payable - bank, secured by
substantially all assets of the Partnership
and by the guaranty of the General Partner and
the personal guarantees of the shareholders of
the General Partner. The loan agreement
requires monthly payments of $43,313,
including interest at 1% over prime
(effectively 9.25% at November 30, 1996)
through February 2005 when any remaining
unpaid principal will be due. Under the
revolving loan agreement, the required monthly
payments described above may be offset by
additional borrowings up to the unused
available borrowings. The total available
borrowings under the loan agreement were
$2,978,702 as of November 30, 1996. The total
available borrowings decrease monthly based on
the original term note amortization over 120
months. The loan agreement also requires that
the Partnership maintain certain financial
ratios and a minimum tangible net worth, as
defined in the loan agreement, of
approximately $668,000. The Partnership was in
compliance with these covenants at November
30, 1996. The outstanding balances were
$2,192,351 and $2,500,340 as of November 30,
1996 and December 31, 1995, respectively.
The following is a schedule by year of annual
maturities under the loan agreements:
<TABLE>
<CAPTION>
Year ending November 30,
---------------------------------------------
<S> <C>
1997 $ -
1998 -
1999 49,146
2000 339,034
2001 375,677
Later years 1,428,494
---------------------------------------------
$ 2,192,351
=============================================
</TABLE>
W-18
<PAGE> 131
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. DESCRIPTION OF The Partnership leases land and buildings used
LEASING in operations under operating agreements, with
ARRANGEMENTS remaining lease terms (including renewal
(INCLUDING THOSE options of up to twelve years) ranging from
WITH AFFILIATED one to seventeen years. Included in the leases
PARTNERSHIP) are five leases with parties related through
common ownership of general partners. Total
lease expense (including taxes, insurance and
maintenance when included in rent) related to
all operating leases and all percentage
rentals is as follows:
<TABLE>
<CAPTION>
Period ended 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Leases with related parties:
Minimum rentals $ 266,358 $ 230,848 $ 172,403
Percentage rentals 168,370 150,867 125,957
Other leases:
Minimum rentals 403,613 414,539 415,357
Percentage rentals 275,993 309,228 313,461
-------------------------------------------------------------------------------
$ 1,114,334 $ 1,105,482 $ 1,027,178
===============================================================================
</TABLE>
Certain restaurant leases (eight restaurant
buildings, excluding land which is accounted
for as an operating lease) and equipment
leases have been capitalized. Minimum future
obligations under capital leases and
noncancellable operating leases in effect are
as follows:
W-19
<PAGE> 132
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Operating leases
--------------------------------
Capital Related
Year ending November 30, leases parties Others
--------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 465,323 $ 285,552 $ 362,378
1998 465,323 153,127 294,506
1999 465,323 111,629 208,334
2000 465,323 111,629 193,511
2001 449,365 111,629 172,440
Later years 769,948 419,892 344,880
--------------------------------------------------------------------------------
Total minimum lease
obligations 3,080,605 $ 1,193,458 $ 1,576,049
================================
Less amount representing
interest imputed at
approximately 11% 894,164
----------------------------------------------
Present value of minimum
lease obligations $ 2,186,441
==============================================
</TABLE>
The present value of minimum rental
obligations is reflected in the balance sheets
as current and long-term obligations under
capital leases.
Accumulated amortization of leased property
under capital leases was $1,648,146 and
$1,495,796 at November 30, 1996 and December
31, 1995, respectively.
In addition to minimum future obligations,
percentage rentals may be paid under all
restaurant leases on the basis of percentage
of sales in excess of minimum prescribed
amounts.
W-20
<PAGE> 133
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. PROFIT-SHARING The Partnership maintains a 401(k)
PLAN profit-sharing plan. The plan covers
substantially all employees of the Partnership
who are at least 21 years old and who have
completed at least one year of service (of at
least 1,000 hours) with the Partnership.
Contributions to the plan may be made by the
Partnership (which are purely discretionary in
nature) or by plan participants through
elective salary reductions. Contributions to
the plan by the Partnership for the periods
ended 1996 and 1995, totaled $30,721 and
$12,000. There were no contributions to the
plan by the Partnership for the year ended
December 31, 1994.
W-21
<PAGE> 134
WENDY'S OF WEST MICHIGAN LIMITED
PARTNERSHIP
UNAUDITED INTERIM FINANCIAL STATEMENTS
W-22
<PAGE> 135
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
UNAUDITED BALANCE SHEET
AUGUST 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 407,733
Receivables 82,544
Inventories 169,380
Prepaid expenses 120,409
----------
Total current assets 780,066
PROPERTY, PLANT AND EQUIPMENT, NET 5,777,418
OTHER ASSETS
Goodwill, net of amortization of $2,129,790 1,832,497
Financing costs, net of amortization of $32,474 51,974
Other 207,340
----------
Total other assets 2,091,811
----------
Total assets $8,649,295
==========
</TABLE>
See note to unaudited financial statements
W-23
<PAGE> 136
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
UNAUDITED BALANCE SHEET - CONTINUED
AUGUST 31, 1997
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 123,186
Current portion of obligations under capital lease 257,319
Trade accounts payable 733,458
Accrued expenses 657,912
Other 17,028
-----------
Total current liabilities 1,788,903
LONG-TERM DEBT 1,780,477
OBLIGATIONS UNDER CAPITAL LEASES 1,758,425
-----------
Total liabilities 5,327,805
PARTNERS' EQUITY
Limited partners 3,348,209
General partner (26,719)
-----------
Total partners' equity 3,321,490
-----------
Total liabilities and partners' equity $ 8,649,295
===========
</TABLE>
See note to unaudited financial statements
W-24
<PAGE> 137
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
UNAUDITED STATEMENTS OF INCOME
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
NET REVENUE
Food and beverages $ 20,262,599 $ 19,669,964
Other 136,332 125,478
------------ ------------
Total revenue 20,398,931 19,795,442
COST AND EXPENSES
Cost of food and beverages 5,837,745 5,781,189
Operating expenses 12,177,273 11,722,248
General and administrative expenses 962,059 957,606
Depreciation and amortization 691,939 631,252
------------ ------------
Total costs and expenses 19,669,016 19,092,295
------------ ------------
EARNINGS FROM OPERATIONS 729,915 703,147
OTHER INCOME (EXPENSE)
Interest expense (329,529) (334,676)
Interest income 9,697 8,872
Loss on disposal of assets (190,453) ---
------------ ------------
Total other expense (510,285) (325,804)
------------ ------------
NET INCOME $ 219,630 $ 377,343
============ ============
NET INCOME ATTRIBUTED TO:
Limited Partners 217,434 373,570
General Partner 2,196 3,773
------------ ------------
$ 219,630 $ 377,343
============ ============
NET INCOME PER LIMITED PARTNERSHIP UNIT
(1256.8 units outstanding) $ 173.01 $ 297.24
============ ============
</TABLE>
See note to unaudited financial statements
W-25
<PAGE> 138
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
UNAUDITED STATEMENTS OF CHANGES IN PARTNERS'
EQUITY FOR THE PERIODS ENDED AUGUST 31, 1997, NOVEMBER 30, 1996
AND AUGUST 31, 1996
<TABLE>
<CAPTION>
Limited
Partners General Partner Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 1, 1995 $ 2,945,356 $ (30,787) $ 2,914,569
Net income for the period 373,570 3,773 377,343
Distribution to partners (314,200) (3,174) (317,374)
----------- ----------- -----------
Balance, August 31, 1996 3,004,726 (30,188) 2,974,538
Net income for the period 126,049 1,273 127,322
----------- ----------- -----------
Balance, November 30, 1996 3,130,775 (28,915) 3,101,860
Net income for the period 217,434 2,196 219,630
----------- ----------- -----------
Balance, August 31, 1997 $ 3,348,209 $ (26,719) $ 3,321,490
=========== =========== ===========
</TABLE>
See note to unaudited financial statements
W-26
<PAGE> 139
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 219,630 $ 377,343
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 691,939 631,252
Loss on disposal of assets 190,453 ---
(Increase) decrease in assets
Receivables 133,335 (4,023)
Inventories 10,870 (27,884)
Prepaid expenses 5,036 24,604
Increase (decrease) in liabilities:
Accounts payable and accrued expenses
(125,193) 204,614
----------- -----------
Net cash provided by operating activities
1,126,070 1,205,906
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (347,507) (500,386)
Increase in other assets (60,874) (25,000)
----------- -----------
Net cash used in investing activities (408,381) (525,386)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (533,325) (253,466)
Payments on obligations under capital leases (170,697) (115,510)
Distribution to partners --- (317,374)
----------- -----------
Net cash used in financing activities (704,022) (686,350)
----------- -----------
Net increase in cash 13,667 (5,830)
CASH - BEGINNING OF PERIOD 394,066 283,292
----------- -----------
CASH - END OF PERIOD $ 407,733 $ 277,462
=========== ===========
</TABLE>
See note to unaudited financial statements
W-27
<PAGE> 140
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
UNAUDITED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1997 AND 1996
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash paid for interest expense $333,518 $335,760
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 $ --- $ ---
======== ========
</TABLE>
See note to unaudited financial statements
W-28
<PAGE> 141
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTE TO UNAUDITED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED AUGUST 31, 1997 AND 1996
NOTE A - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position at August 31, 1997 and the results of
operations, partners' equity and cash flows for the nine months ended August 31,
1997 and 1996.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for the interim financial information
and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do
not include footnotes and certain financial presentations normally required
under generally accepted accounting principles and therefore, should be read in
conjunction with the audited financial statements of Wendy's of West Michigan
Limited Partnership beginning on page W-1. The results of operations for the
nine months ended August 31, 1997 are not necessarily indicative of the results
to be expected for the full year.
W-29
<PAGE> 142
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AUGUST 31, 1997
<TABLE>
<CAPTION>
MERITAGE
HOSPITALITY PRO
GROUP INC. & PRO FORMA FORMA CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS REF. PRO FORMA
-------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 998,211 $ (94,500) (1) $ 903,711
Accounts receivable 624,068 624,068
Inventories 347,604 347,604
Deferred income taxes 14,000 14,000
Prepaid expenses and other 589,955 589,955
-------------------------------------------------------------
TOTAL CURRENT ASSETS 2,573,838 (94,500) 2,479,338
PROPERTY, PLANT AND EQUIPMENT, NET 21,199,265 1,040,116 (1) 22,239,381
DEFERRED INCOME TAXES 621,000 621,000
OTHER ASSETS 2,656,546 2,656,546
GOODWILL 3,588,088 1,867,578 (1) 5,455,666
-------------------------------------------------------------
Total Assets $ 30,638,737 $ 2,813,194 $ 33,451,931
=============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,214,553 $ 1,214,553
Current portion of obligations under
capital leases 257,319 257,319
Trade accounts payable 1,927,596 1,927,596
Accrued expenses 1,062,903 1,062,903
-------------------------------------------------------------
Total Current Liabilities 4,462,371 4,462,371
LONG-TERM DEBT, 21,870,012 21,870,012
OBLIGATIONS UNDER CAPITAL LEASES, 1,758,425 1,758,425
DEFERRED INCOME TAXES 818,000 818,000
MINORITY INTEREST 1,506,806 (1,506,806) (1) ---
-------------------------------------------------------------
Total Liabilities 30,415,614 (1,506,806) 28,908,808
SHAREHOLDERS' EQUITY
Preferred shares 1,384 1,384
Common shares 32,171 12,343 (1) 44,514
Additional paid in capital 12,977,101 4,307,657 (1) 17,284,758
Note receivable from sale of shares (5,550,415) (5,550,415)
Accumulated deficit (7,237,118) (7,237,118)
-------------------------------------------------------------
Total Shareholders' Equity 223,123 4,320,000 4,543,123
-------------------------------------------------------------
Total Liabilities & Shareholders' Equity $ 30,638,737 $ 2,813,194 $ 33,451,931
=============================================================
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
P-1
<PAGE> 143
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
MERITAGE
HOSPITALITY PRO
GROUP INC. & PRO FORMA FORMA CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS REF. PRO FORMA
--------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Room rents $ 4,716,238 $ 4,716,238
Food and beverage revenue 25,642,161 25,642,161
Sundry revenue 734,117 734,117
Telephone revenue 191,358 191,358
--------------------------------------------------------------------
Total Revenue 31,283,874 31,283,874
COST AND EXPENSES
Cost of food and beverages 7,724,026 7,724,026
Operating expenses 18,521,209 18,521,209
General and administrative expenses 3,042,245 3,042,245
Depreciation and amortization 1,649,448 181,475 (3) 1,830,923
--------------------------------------------------------------------
Total costs and expenses 30,936,928 181,475 31,118,403
--------------------------------------------------------------------
EARNINGS FROM OPERATIONS 346,946 (181,475) 165,471
OTHER INCOME (EXPENSE)
Interest expense (2,168,567) (2,168,567)
Interest income 439,260 439,260
Loss on disposal of assets (190,453) (190,453)
Minority interest (101,030) 101,030 (4)
--------------------------------------------------------------------
Loss before federal income tax (1,673,844) (80,445) (1,754,289)
--------------------------------------------------------------------
FEDERAL INCOME TAX BENEFIT
Net loss (1,673,844) (80,445) (1,754,289)
PREFERRED STOCK DIVIDENDS 70,577 70,577
--------------------------------------------------------------------
NET LOSS ON COMMON SHARES $(1,744,421) $ (80,445) (1,824,866)
============ =========== ============
LOSS PER SHARE $ (0.54) $ (0.41)
=========== ============
AVERAGE NUMBER OF SHARES OUTSTANDING 3,213,736 4,450,006
=========== ============
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
P-2
<PAGE> 144
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
MERITAGE WENDY'S OF
HOSPITALITY WEST MICHIGAN PRO
GROUP INC. & LIMITED PRO FORMA FORMA CONSOLIDATED
SUBSIDIARIES PARTNERSHIP ADJUSTMENTS REF. PRO FORMA
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE
Room rents $ 6,281,711 $ 6,281,711
Food and beverage revenue 9,885,062 24,272,961 34,158,023
Sundry revenue 555,049 263,254 818,303
Telephone revenue 163,040 163,040
-------------------------------------------------------------------
Total Revenue 16,884,862 24,536,215 41,421,077
-------------------------------------------------------------------
COST AND EXPENSES
Cost of food and beverages 3,334,434 7,168,861 10,503,295
Operating expenses 9,492,345 14,576,864 24,069,209
General and administrative expenses 3,951,400 1,051,455 5,002,855
Depreciation and amortization 1,081,704 770,036 390,982 (3) 2,242,722
-------------------------------------------------------------------
Total costs and expenses 17,859,883 23,567,216 390,982 41,818,081
-------------------------------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS (975,021) 968,999 (390,982) (397,004)
OTHER INCOME (EXPENSE)
Interest expense (1,642,735) (404,710) (446,875) (2) (2,494,320)
Interest income 658,007 11,432 669,439
Loss on sale of assets (6,900) (25,453) (32,353)
Minority interest 21,079 (21,079) (4)
-------------------------------------------------------------------
Earnings (loss) before
federal income tax (1,945,570) 550,268 (858,936) (2,254,238)
FEDERAL INCOME TAX BENEFIT (20,000) (20,000)
-------------------------------------------------------------------
Net earnings (loss) $(1,925,570) $ 550,268 $(858,936) $(2,234,238)
===================================================================
LOSS PER SHARE $ (0.62) $ (0.52)
=========== ===========
AVERAGE NUMBER OF SHARES OUTSTANDING 3,081,885 4,316,171
=========== ===========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
P-3
<PAGE> 145
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTH PERIOD ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
MERITAGE
HOSPITALITY PRO
GROUP INC. & PRO FORMA FORMA CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS REF. PRO FORMA
------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,673,844) $ (80,445) $(1,754,289)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 1,649,448 181,475 (2) 1,830,923
Compensation and fees paid by issuance of
common stock 60,800 60,800
Provision for bad debts 4,000 4,000
Loss on disposal of assets 190,453 190,453
Minority interest in the net earnings of
consolidated subsidiaries 101,030 (101,030) (4) 0
Interest income on note receivable from
sale of shares (414,699) (414,699)
(Increase) decrease in assets
Accounts receivable 310,380 310,380
Inventories 6,622 6,622
Prepaid expenses and other current assets (102,660) (102,660)
Increase in marina development costs (342,878) (342,878)
Increase in liabilities
Accounts payable and accrued expenses (203,569) (203,569)
-----------------------------------------------------------------
Net cash used in operating activities (414,917) (414,917)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (837,382) (837,382)
Cost of acquisition of business (94,500) (1) (94,500)
Increase in other assets (193,020) (193,020)
-----------------------------------------------------------------
Net cash used in investing operations (1,030,402) (94,500) (1,124,902)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 936,346 936,346
Principal payments of long-term debt (817,039) (817,039)
Payments on obligations under capital leases (170,697) (170,697)
Proceeds from issuance of preferred shares 300,000 300,000
Dividends paid (70,577) (70,577)
-----------------------------------------------------------------
Net cash provided by financing
activities 178,033 178,033
-----------------------------------------------------------------
Net decrease in cash (1,267,286) (94,500) (1,361,786)
Cash and cash equivalents - beginning of period 2,265,497 2,265,497
-----------------------------------------------------------------
Cash and cash equivalents - end of period $ 998,211 $ (94,500) $ 903,711
=================================================================
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
P-4
<PAGE> 146
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
MERITAGE WENDY'S OF
HOSPITALITY WEST MICHIGAN PRO
GROUP INC. & LIMITED PRO FORMA FORMA CONSOLIDATED
SUBSIDIARIES PARTNERSHIP ADJUSTMENTS REF. PRO FORMA
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,925,570) $ 550,268 $ (858,936) $ (2,234,238)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 1,081,704 770,036 390,982 (3) 2,242,722
Compensation paid by issuance of
preferred and common stock 310,099 310,099
Decrease income tax benefit (20,000) (20,000)
Loss on disposal of property, plant
and equipment 6,900 25,453 32,353
Bad debt expense 32,655 32,655
Interest income on note receivable from
sale of shares (573,274) (573,274)
(Increase) decrease in assets
Accounts receivable (201,742) (167,105) (368,847)
Inventories 41,198 (19,790) 21,408
Prepaid expenses and other current assets 104,707 19,729 124,436
Refundable income taxes 321,600 321,600
Increase (decrease) in liabilities
Accounts payable and accrued expenses (674,696) 145,259 (529,437)
----------------------------------------------------------------------
Net cash (used in) provided by
operating activities (1,496,419) 1,323,850 (467,954) (640,523)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (2,211,392) (559,606) (2,770,998)
Proceeds from sale of property, plant and
equipment 40,146 5,447 45,593
Payments on amounts due from related parties 433,130 433,130
Cost of acquisition of business (94,500) (1) (94,500)
Acquisition of business (3,184,460) (260,834) (5)
21,079 (4) (3,424,215)
Increase (decrease) in other assets (679,214) (95,228) (774,442)
Increase in deferred compensation 61,444 61,444
----------------------------------------------------------------------
Net cash used in investing operations (5,601,790) (587,943) (334,255) (6,523,988)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 37,717,705 37,717,705
Principal payments of long-term debt (29,446,007) (308,156) (29,754,163)
Payments on obligations under capital leases (29,808) (142,835) (172,643)
Collection on note receivable from sale of shares 750,000 750,000
Proceeds from issuance of preferred and
common shares 545,000 545,000
Dividends paid (1,510,075) (317,374) (1,827,449)
----------------------------------------------------------------------
Net cash provided by (used in)
financing activities 8,026,815 (768,365) 7,258,450
----------------------------------------------------------------------
Net increase (decrease) in cash 928,606 (32,458) (802,209) 93,939
Cash and cash equivalents - beginning of period 1,336,891 293,292 1,630,183
----------------------------------------------------------------------
Cash and cash equivalents - end of period $ 2,265,497 $ 260,834 $ (802,209) $ 1,724,122
======================================================================
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
P-5
<PAGE> 147
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
MHG Food Service, a subsidiary of Meritage, owns approximately
54% of the outstanding limited partnership units of the Wendy's of West Michigan
Limited Partnership and has appointed MCC Food Service, Inc., an affiliate of
Meritage, as the General Partner of the Wendy's Partnership. Under the
transaction, a newly formed limited partnership, which will be an affiliate of
Meritage, intends to purchase the assets, and assume the liabilities, of the
Wendy's Partnership in exchange for Meritage Common Shares. Following such
purchase, the Wendy's Partnership will be dissolved. Upon dissolution, the
Meritage Common Shares would be distributed to non-affiliated limited partners.
The number of Meritage Common Shares in each case will be that number that has a
value of $7,500 per unit, based on (i) the lesser of the average high and low
bid price on the OTC Bulletin Board for the 10 trading days preceding the date
of dissolution, or (ii) $4.125 per share. Units held by Meritage will be
canceled. The transaction is accounted for under the purchase method of
accounting.
The unaudited pro forma consolidated balance sheet as of
August 31, 1997 reflects this acquisition as if it occurred on that date. The
Wendy's Partnership financial statements have been included in the consolidated
financial statements of Meritage since the acquisition of a majority interest of
the Wendy's Partnership by Meritage on October 31, 1996.
The unaudited pro forma consolidated statements of operations
and the unaudited pro forma consolidated statements of cash flows for the nine
months ended August 31, 1997 and for the year ended November 30, 1996 present
the historical results of the Company combined with the historical results of
the Wendy's Partnership and the pro forma adjustments as if the Wendy's
Partnership had been acquired on December 1, 1995. The historical results of the
Wendy's Partnership include operations from December 1, 1995 through October 31,
1996. Consolidated financial statements were prepared beginning November 1,
1996.
The pro forma financial information should be read in
conjunction with the historical consolidated financial statements and notes
thereto contained in the Company's Form 10-K for the year ended November 30,
1996 and the quarterly report on Form 10-Q for the nine months ended August 31,
1997, and the historical financial statements of the Wendy's Partnership
included in this report on Form S-4. The pro forma results do not reflect any
benefit from economies which might be achieved from combined operations. These
pro forma results do not purport to be indicative of the financial condition or
results of operations that would have occurred had the acquisitions taken place
on the basis presumed above, nor are they indicative of future combined
operations.
The pro forma adjustments are as follows:
1. To record the distribution of 1,234,286 Meritage Common Shares which
have been estimated at $3.50 per share ($4,320,000) to non-affiliated
limited partners. As a result of the purchase, the value of assets
acquired have been adjusted to fair market value, to goodwill for the
amount of the excess purchase price over fair market value of the net
assets acquired and minority interest has been eliminated as a result
of 100% ownership of the Partnership upon completion of the
transaction. The net purchase price of $4,414,500 ($4,320,000 in
Meritage Common Shares plus $94,500 of estimated fees and expenses of
the transaction) is allocated as follows:
<TABLE>
<S> <C>
Property, plant and equipment $ 1,040,116
Minority interest 1,506,806
Goodwill 1,867,578
------------
Total $ 4,414,500
============
</TABLE>
P-6
<PAGE> 148
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. To record interest expense of $446,875 for the year ended November 30,
1996 from borrowings ($3,000,000) to fund the purchase of 482.55
partnership units acquired by the Company through a tender offer
completed on October 31, 1996 resulting in Meritage obtaining a
majority interest in the Partnership.
3. To record depreciation and amortization of $181,475 for the nine months
ended August 31, 1997 and $390,982 for the year ended November 30,
1996. The excess purchase price over the fair market value of the
assets acquired is being amortized over a period of twenty years. The
increase in property, plant and equipment to fair market value is being
depreciated over the estimated useful life of the assets.
4. To eliminate the minority interest in the earnings of the Partnership.
Upon completion of the transaction described above, a wholly owned
subsidiary of Meritage, MHG Food Service, will own 100% of the
Partnership.
5. To eliminate the reduction of cash acquired ($260,834) in the
acquisition of the majority interest in the Wendy's Partnership by
Meritage completed on October 31, 1996. The cash acquired is included
in the historical financial statements of the Wendy's Partnership.
P-7
<PAGE> 149
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 561 of the Michigan Business Corporation Act provides generally
and in pertinent part that a Michigan corporation may indemnify its directors
and officers against expenses, including judgments, penalties, fines, attorney's
fees and amounts paid in settlement actually and reasonably incurred by them in
connection with any civil or criminal suit or action, other than actions by or
in the right of the corporation, if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation or its shareholders, and with respect to any
criminal suit or proceeding, if the person had no reasonable cause to believe
his/her conduct was unlawful. Section 562 provides that, in connection with the
defense or settlement of any action by or in the right of the corporation, a
Michigan corporation may indemnify its directors and officers against expenses
actually and reasonably incurred by them in connection with the matters in
issue, if they acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation or its
shareholders. The right to indemnification is mandatory in the case of a
director or officer who is successful on the merits or otherwise and if the
expenses are reasonable and actually incurred. Permissive indemnification is to
be made by a court of competent jurisdiction, the majority vote of a quorum of
disinterested directors, the written opinion of independent legal counsel, by
all independent directors who are not parties to or threatened to be made
parties to the action or suit, or by the disinterested shareholders or a
committee designated by the Board of Directors and consisting of directors who
are not parties to, or threatened to be made parties to, the proceedings.
The Company's Bylaws, as well as specific indemnification agreements
with the Company's directors and officers, provide that the Company shall
indemnify such persons to the fullest extent permitted by law.
II-1
<PAGE> 150
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- ----------- -----------------------------------------------------------------
<S> <C>
3.1 Restated Articles of Incorporation of Meritage
Hospitality Group Inc. (1).
3.2 Restated and Amended Bylaws of Meritage Hospitality
Group Inc. (2).
3.3 Amended and Restated Agreement of Limited Partnership of
the Wendy's of West Michigan Limited Partnership (3).
4.1 Certificate of Designation of Series A Convertible
Preferred Shares of Meritage Hospitality Group Inc. (2).
4.2 Subscription Agreement relating to issuance of Series A
Convertible Preferred Shares of Meritage Hospitality
Group Inc. (2).
5 Opinion of Keating, Muething & Klekamp, PLL. (8).
10.1 Meritage Hospitality Group Inc. 401(k) Profit Sharing
Plan, Qualified Retirement Plan and Trust - Basic Plan
Document and Adoption Agreement, as amended March 1,
1997. (1).
10.2 Stock Purchase and Sale Agreement dated September 19,
1995 between Meritage, MCC, Donald W. Reynolds and
Innkeepers Management Company, and accompanying exhibits
(5).
10.3 Loan Agreement dated November 26, 1996 among Meritage
Hospitality Group Inc., St. Clair Inn, Inc., Grand
Harbor Resort Inc., Thomas Edison Inn, Incorporated, MHG
Food Service Inc. and Grand Harbor Yacht Club Inc., as
obligors, and Great American Life Insurance Company, as
lender (2).
10.4 Promissory Note dated November 26, 1996 by St. Clair
Inn, Inc., Grand Harbor Resort Inc., and Thomas Edison
Inn, Incorporated, as makers, and Great American Life
Insurance Company, as payee (2).
10.5 Promissory Note dated November 26, 1996 by Meritage
Hospitality Group Inc., MHG Food Service Inc. and Grand
Harbor Yacht Club Inc., as makers, and Great American
Life Insurance Company, as payee (2).
10.6 Amendment No. 1 to Loan Agreement dated November 26,
1996 among Meritage Hospitality Group Inc., St. Clair
Inn, Inc., Grand Harbor Resort Inc., Thomas Edison Inn,
Incorporated, MHG Food Service Inc. and Grand Harbor
Yacht Club Inc., as obligors, and Great American Life
Insurance Company, as lender. (1).
10.7 Promissory Note dated May 23, 1997 by Grand Harbor Yacht
Club Inc., as maker, and Great American Life Insurance
Company, as payee. (1).
10.8 Business Loan Agreement dated February 22, 1995 between
Wendy's of West Michigan Limited Partnership and First
of America Bank-Michigan, N.A. (6).
10.9 Promissory Note dated February 22, 1995 by Wendy's of
West Michigan Limited Partnership, as maker, and First
of America Bank-Michigan, N.A., as payee (6).
</TABLE>
II-2
<PAGE> 151
<TABLE>
<CAPTION>
<S> <C>
10.10 Consent Agreement dated May 16, 1997 between Wendy's
International, Inc., Wendy's of West Michigan Limited
Partnership, Meritage Hospitality Group Inc., MHG Food
Service Inc., Meritage Capital Corp., MCC Food Service
Inc., Robert E. Schermer, Jr. and Christopher B. Hewett,
with sample Unit Franchise Agreement, Guaranties, and
Release of Claims attached as exhibits. (1).
MANAGEMENT COMPENSATORY CONTRACTS
10.11 Amended 1996 Management Equity Incentive Plan (1).
10.12 Amended 1996 Directors' Share Option Plan (1).
10.11 Directors' Compensation Plan (7).
10.12 Employee Share Purchase Plan (7).
- ---------------------------
21 Subsidiaries of the Registrant (2).
23.1 Consent of Grant Thornton LLP. (4).
23.2 Consent of BDO Seidman, LLP.
23.3 Consent of Keating, Muething & Klekamp, PLL
(contained in Exhibit 5).
23.4 Consent of Roney & Co. (4).
24 Powers of Attorney (contained on the signature page).
99.1 Opinion of Roney & Co. (contained in the prospectus).
99.2 Background Report of Roney & Co. (4).
- ---------------------------
<FN>
(1) Incorporated by reference to the Quarterly Report on Form 10-Q for the
Company's fiscal quarter ended May 31, 1997.
(2) Incorporated by reference to the Annual Report on Form 10-K for the
Company's fiscal year ended November 30, 1996.
(3) Incorporated by reference to the Annual Report on Form 10-K for Wendy's of
West Michigan Limited Partnership for the fiscal year ended December 31,
1995.
(4) Filed herewith.
(5) Incorporated by reference to the Quarterly Report on Form 10-QSB for the
Company's fiscal quarter ended August 31, 1995.
(6) Incorporated by reference to the Annual Report on Form 10-K for Wendy's of
West Michigan Limited Partnership for the fiscal year ended December 31,
1994.
(7) Incorporated by reference to Registration Statement No. 333-06657 on Form
S-8 filed with the Securities and Exchange Commission by the Company on
June 24, 1996.
(8) Previously filed.
</TABLE>
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act, (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
Registration Statement for the most recent post-effective amendment thereof
which, individually or in the aggregate, represents a fundamental change in the
information set forth in the Registration Statement, and (iii) to include any
material information with respect to the Plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
II-3
<PAGE> 152
2. That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of post-effective amendment any of
the securities being registered which remain unsold in the termination of the
offering.
4. To supply by means of a post-effective amendment all information
concerning a transaction, and the Company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
5. Prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement, by
any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reoffering by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
6. That every prospectus (i) that is filed pursuant to paragraph 5
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
7. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Meritage pursuant to the provisions described under Item 20 above, or otherwise
(other than insurance), Meritage has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Meritage of expenses incurred or paid by a director, officer or
controlling person of Meritage in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the Securities being registered, Meritage will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it, other than indemnification pursuant to court order and
not including any coverage under, or agreement to pay premiums for, any policy
of insurance, is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Meritage
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing this Amendment on Form S-4 and has duly caused this
Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Grand Rapids, State of
Michigan, as of the 10th day of October, 1997.
MERITAGE HOSPITALITY GROUP INC.
By: /s/ Christopher B. Hewett
--------------------------------
Christopher B. Hewett
President and Chief Executive Officer
II-4
<PAGE> 153
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Christopher B. Hewett President, Chief Executive Officer October 10, 1997
- ------------------------------------ and Director (Principal Executive
Christopher B. Hewett Officer)
* Chairman of the Board October 10, 1997
- ------------------------------------
Robert E. Schermer, Sr.
/s/ Robert E. Schermer, Jr. Executive Vice President and Director October 10, 1997
- ------------------------------------
Robert E. Schermer, Jr.
* Director October 10, 1997
- ------------------------------------
Gary R. Garrabrant
* Director October 10, 1997
- ------------------------------------
David S. Lundeen
* Director October 10, 1997
- ------------------------------------
Joseph L. Maggini
* Director October 10, 1997
- ------------------------------------
Jerry L. Ruyan
/s/ William D. Badgerow Vice President, Treasurer and Chief October 10, 1997
- ------------------------------------ Financial Officer (Principal Accounting
William D. Badgerow Officer and Principal Financial Officer)
(Through 5/20/97)
/s/ Pauline M. Krywanski Vice President, Treasurer and Chief October 10, 1997
- ------------------------------------ Financial Officer (Principal Accounting
Pauline M. Krywanski Officer and Principal Financial Officer)
(Effective 5/20/97)
*By: /s/ Christopher B. Hewett Attorney-in-Fact October 10, 1997
------------------------------
Christopher B. Hewett
</TABLE>
II-5
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We have issued our reports dated January 21, 1997, accompanying the financial
statements and schedule of Meritage Hospitality Group Inc. contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned reports in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts".
/s/Grant Thornton LLP
Detroit, Michigan
October 13, 1997
<PAGE> 1
Exhibit 23.4
CONSENT OF RONEY & CO.
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of Meritage Hospitality Group Inc. (the "Company") in the Registration
Statement on Form S-4, as amended (File No. 333-33461), and to the reference to
our firm and such opinion in the Prospectus therein. In giving such consent, we
do not admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act 1933, as amended (the "Act"), or
the rules and regulations of the Securities and Exchange Commission thereunder
(the "Regulations"), and we do not admit that we are experts with respect to any
part of such Registration Statement within the meaning of the term "experts" as
used in the Act or the Regulations.
RONEY & CO.
/s/ Roney & Co.
October 13, 1997
<PAGE> 1
Exhibit 99.2
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
FAIRNESS OPINION
Table Of Contents
---------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
METHODOLOGIES USED IN VALUATION................................................................1
NET BOOK VALUE.................................................................................2
PURCHASE PRICE PREMIUM ANALYSIS................................................................4
PRESENT VALUE OF DISCOUNTED CASH FLOWS ("DCF").................................................5
MARKET COMPARISON APPROACH.....................................................................7
ACQUISITION VALUE..............................................................................10
Comparable Transactions...............................................................10
REAL ESTATE VALUATION SUMMARY..................................................................12
EXHIBITS
- ----------------------------------------------------------------------------------------------------
HISTORICAL & PROJECTED FINANCIAL STATEMENTS A
COMMON STOCK PRICE/VOLUME ANALYSIS - MHGI B
ASSET/BOOK VALUE ANALYSIS C
DISCOUNTED CASH FLOW ANALYSIS D
COMPARABLE COMPANY ANALYSIS E
</TABLE>
<PAGE> 2
METHODOLOGIES USED IN VALUATION
- -------------------------------
A number of appraisal methods and variations have been developed by valuation
experts over the years in assessing financial fairness. These approaches
consider quantitative factors (financial and accounting statistics), and
qualitative factors (ability of management, supplier relationships, customer
products acceptance, etc.) to arrive at an overall Fairness Opinion ("Opinion").
Three considerations must be taken into account in a valuation regardless of
which individual or combination of methodologies are eventually used. They are:
1. Restrictive agreements, if any, which may inhibit the free transfer of a
company's common stock. At Wendy's of West Michigan Limited Partnership
("WWMLP" or the "Company") there are none with regards to the transfer
of the L.P. units.
2. Analysis of an established market price or other sales of the stock
being valued. Prices determined in a free and open market are sometimes
the best indications of value.
3. Review of generally accepted approaches to valuations including Net Book
Value, Present Value of Discounted (Estimated) Future Earnings, and
Market Comparison. It should be stressed that none of these valuation
tools is inherently better than the others, and each method is used in
different circumstances.
1
<PAGE> 3
NET BOOK VALUE
- --------------
The net book value or net equity method implies that a company is worth its
accumulated retained earnings or deficit, plus its original capitalization. Net
book value is primarily an amount arrived at over a company's existence that
reflects accounting history expressed in unadjusted dollars and not the
company's potential.
In most going concerns with a viable future, net book value is lower than the
selling price of the company. Book Value is only of importance to the extent it
provides an adequate base for the continuance of operations. In most instances
where a company earns a significant return on its assets (both tangible and
intangible), the net book value approach is not representative of the company's
intrinsic business value.
Book Value is an accounting concept, augmented by appropriate Fair Market Value
asset adjustments, recording the accumulated financing input from contributed
capital and retained earnings. Intrinsic business value is an economic concept
estimating future cash output discounted to present value. In essence, book
value tells you what you have put in; intrinsic business value estimates what
can be taken out.
Bonbright commented as follows on the term "book value":
"In all respects the relationship between the commercial value of a
business and the so-called physical values of its assets is highly indirect and
uncertain. Almost never does it justify an assumption that the `values' (that
is, the depreciated costs) of the latter even roughly measure the value of the
former." (1)
The United States Court of Appeals in KETLER VS. COMMISSION (2) rejected book
value as a primary valuation factor stating, "It is quite evident that the book
value of a stock is a very unreliable basis upon which to determine the fair
market value." The court referred to the case of ANSON EVANS (3), to the effect
that "Book Value frequently bears no relationship to actual cash or fair market
value."
Despite the early and widespread recognition of the inadequacy of "book value"
as a primary valuation factor, there have been litigated cases(4) in which
either the Internal Revenue Service or the taxpayer contended that the fair
market value of stock approximated its "book value". It is notable that the
courts in all cases rejected the contention that book value approximated the
fair market value of the capital stock.
Net tangible book value represents net book value less all intangible assets,
such as, but not limited to: excess of cost or acquired companies over fair
value of net assets acquired (more commonly known as "Goodwill"), unamortized
securities issuance costs, patents, etc.
- --------
1 Bonbright, Valuation of Property 265
2 KETLER VS. COMMISSION, 196 f.2d 822
3 ANSON EVANS, 29 B.T.A. 710
4 Among these were COLONIAL TRUST CO. VS. KRAEMER, 63 F.
Supp. 866; BARTRAM, EXEC. VS. GRAHAM ADMX., 157 F.
Supp. 757; ESTATE OF SAMUEL E. MONTGOMERY, 127 T.C.M.
1380; ESTATE OF MARY K. MILLER, 18 T.C.M. 1127.
2
<PAGE> 4
We have reviewed the book value of WWMLP's assets in limited detail. This review
included visits to several of the Company's restaurant locations in June, 1996.
While the liquidation value of the assets could possibly exceed their book
value, it is not clear what effect this has on earnings potential, or ultimately
the Company's value. Further, because of the nature of WWMLP's business, it is
unclear whether the fair market value of these assets would be at the same value
level as the net book value.
<TABLE>
<CAPTION>
=================================================================
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
ASSET/BOOK VALUE ANALYSIS
As of August 31, 1997
($'s in thousands)
-----------------------------------------------------------------
NET BOOK FORCED
VALUE VALUE
-----------------------------------------------------------------
<S> <C> <C>
Current Assets
Land
Leasehold Improvements
Building & Improvements
Restaurant Equipment
Office Equipment
Leased Property
Gross Amount
Less: Total Liabilities
----------- -----------
Shareholder's Equity
Total Shares Outstanding (000's)
----------- -----------
ASSET VALUE PER WWMLP SHARE
=================================================================
</TABLE>
3
<PAGE> 5
PURCHASE PRICE PREMIUM ANALYSIS
- -------------------------------
Since June, 1996, Meritage and its affiliates have acquired approximately 54% of
the units of WWMLP. These transactions are the basis for analyzing the
differences between all of the prices offered and the Proposed Transaction
Purchase Price, and are distributed below:
<TABLE>
<CAPTION>
================================================================================================================
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
PURCHASE PRICE PREMIUM ANALYSIS
================================================================================================================
TOTAL PROPOSED
EQUIVALENT CONSIDERATION TRANSACTION %
DATE # OF UNITS CONSIDERATION VALUE VALUE CONSIDERATION (A) PREMIUM
- ----------- ------------- --------------------- -------------- ---------------- ------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
6/96 14 Cash $5,000 $70,000 $7,500 50.0%
7/96 143.25 MHGI Stock $6,000 $859,500 $7,500 25.0%
(unregistered)
10/96 482.55 Cash $7,000 $3,377,850 $7,500 7.1%
11/96 41 Series A $7,200 $295,200 $7,500 4.2%
Convertible
Preferred Stock
NOTES:
<FN>
(A) The Consideration would be paid in Meritage Common Shares which will be
registered on form S-4, at the transaction closing date, based on the lesser
of the average high and low bid price on the OTC Bulletin Board for the 10
trading days preceding the date of dissolution and $4.125.
================================================================================================================
</TABLE>
4
<PAGE> 6
PRESENT VALUE OF DISCOUNTED CASH FLOWS ("DCF")
- ----------------------------------------------
This approach argues that a potential investor will pay a price for a security
that yields a targeted minimum rate of return on invested capital (both to
suppliers of debt and equity). Using this targeted rate of return as a discount
factor, the present value of an estimated future earnings stream for a given
number of years can be computed by discounting each year's estimated earnings to
the present time. Other factors considered include the expected cyclicality or
unpredictability (if any) of a company's earnings and cash flow and the
investors' willingness to wait out a given length of ownership.
To state the premise another way, DCF valuation posits that the buyer purchases
a time series of free cash flows that are generated by the assets purchased. DCF
does not value the total cash flow of the business. Rather, it values only the
FREE CASH FLOW. In doing so, this analysis separates and ascribes a value only
to the cash flows that an investor can remove from the business. Cash that is
generated but used to sustain the business (such as increases in working capital
and capital expenditures) is not included in the DCF value. Cash flow that must
be retained in the business creates no incremental value to the buyer.
Before defining free cash flow, another methodological nuance should be noted.
As noted, DCF valuation uses a discount rate that reflects the firms weighted
cost of capital or the price it must pay to suppliers of both debt and equity.
Accordingly, discounted free cash flow is independent of financing costs. For
Wendy's of West Michigan Limited Partnership, we have considered management's
projected financial statements to estimate Free Cash Flow (See EXHIBIT A).
TERMINAL VALUE
- --------------
DCF valuation is composed of two values: a forecast of free cash flows for some
term of years and a terminal value that is a surrogate for the present value of
the discounted cash flows that are expected to occur in the years after the end
of the forecast period.
Terminal value at the end of the period of cash flow forecasts may be arrived at
in different ways, such as estimating book value, applying a price/earnings
multiple to forecasted earnings or employing a cash flow multiple. We feel using
a cash flow or operating income multiple is most consistent with DCF
methodology. In essence, this technique multiplies the operating income in the
last year of the forecast by a multiplier that attempts to estimate the value of
cash flows in perpetuity. We have used a multiple of 5.5 which equates to a
perpetuity value of 12.0%(5).
COST OF CAPITAL (DISCOUNT RATE)
- -------------------------------
Once the free cash flows and terminal values are estimated, the present value of
these components is calculated. The acquirer is paying today for access to the
cash flows generated by the assets in the future, therefore, these cash flows
must be discounted to the present. The proper discount rate can be estimated by
calculating the marginal weighted average cost of capital. In essence, the
discount rate attempts to approximate the rate of return the suppliers of
capital will expect to earn. In WWMLP's instance, because of its asset
structure, working capital liquidity needs and capitalization requirements, a
purchaser would not be able to borrow all of the acquisition funds on a senior
basis. Thus, a component of the capital structure could, by necessity, consist
of equity related subordinated debt, commonly referred to as "mezzanine
capital", along with a substantial amount of equity. On this basis, the
risk-adjusted cost of capital for WWMLP is calculated as follows:
<TABLE>
<CAPTION>
- --------
<S> <C>
5 ( 1 -.34 )= 12.0% where 5.5 is the EBIT multiple required and 34.0% is the corporate income tax rate
-----------
( 5.5 )
</TABLE>
5
<PAGE> 7
COST OF CAPITAL (CONT'D)
- ------------------------
<TABLE>
<CAPTION>
=======================================================================================================
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
WEIGHTED AVERAGE COST OF CAPITAL CALCULATION
=======================================================================================================
WEIGHTED
COMPONENT WEIGHT COST TAX BENEFIT AFTER-TAX COST
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Senior Debt 60% 9.0% 34.0% 6.1% 3.6%
Subordinated Debt 0% 20.0% 34.0% 13.1%
Equity 40% 25.0% 0.0% 10.0% 10.0%
--------------------------------------------------------------------
COST OF CAPITAL 100% 13.6%
=======================================================================================================
</TABLE>
ANALYSIS
- --------
We have made a five year projection of income statements and balance sheets
based, in part, on projections provided by the Company and considering
historical financial performance. We analyzed three distinct scenarios: i)
Conservative Scenario, ii) Management Budgeted Scenario, and iii) Aggressive
Scenario. We have utilized these projections and reformatted the financial
information, (to value the real estate owned by the Company separately)
contained within the statements to arrive at a number that approximates WWMLP's
net after tax cash flow from operations. To this operations only figure, we
added back the real estate value of the Company owned properties. Based on the
historical and projected financial statements (EXHIBIT A), we have prepared a
discounted cash flow analysis (EXHIBIT D).
DCF ANALYSIS (000'S)
- --------------------
This value is achievable only if the assumptions used in making the forecasts
are defensible and accurate. If the assumptions are not defensible, a discount
to these values would be appropriate.
<TABLE>
<CAPTION>
=======================================================================================
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
DISCOUNTED CASHFLOW ANALYSIS
For the 12 months ended November 30, 1997
($'s in thousands)
=======================================================================================
Management
Conservative Budgeted Aggressive
ASSUMPTIONS Scenario Scenario Scenario
- ----------- -------- -------- --------
<S> <C> <C> <C>
Terminal Value Discount Rate 13.6% 13.6% 13.6%
Cash Flow Discount Rate 13.6% 13.6% 13.6%
Terminal Value Multiple 5.5x 5.5x 5.5x
DESCRIPTIONS
- ------------
PV of Free Cash Flows $3,423 $3,850 $4,409
PV of Terminal Value $1,479 $2,269 $2,878
--------------------------------------
INTRINSIC BUSINESS VALUE $4,902 $6,119 $7,287
ADJUSTMENTS
- -----------
Plus: Cash & Equivalents $0 $0 $0
Plus: Prepaids & Other Assets $0 $0 $0
Less: Funded Debt ($3,609) ($3,609) ($3,609)
Less: Other ($0) ($0) ($0)
--------------------------------------
Subtotal ($3,609) ($3,609) ($3,609)
UNITHOLDER VALUE (OPERATIONS ONLY) $1,293 $2,510 $3,678
UNITHOLDER VALUE (REAL ESTATE - SEE PAGE 12) $4,615 $4,615 $4,615
--------------------------------------
TOTAL UNITHOLDER VALUE $5,908 $7,125 $8,293
TOTAL WWMLP UNITS OUTSTANDING (000'S) 1.2568 1.2568 1.2568
--------------------------------------
UNITHOLDER VALUE PER UNIT OF WWMLP $4,700 $5,670 $6,599
======================================
MEAN VALUE $5,656
=======================================================================================
</TABLE>
6
<PAGE> 8
MARKET COMPARISON APPROACH
- --------------------------
This approach assumes that a degree of comparability exists between the Company
and other similar firms for which a value has been established over a five year
time horizon in an active and free trading market. Once similarity is
established, the relationship to market value is expressed as a Price/Earnings
ratio. This ratio, then, may be modified to reflect special conditions, risks,
or opportunities which are unique to the Company.
There are obvious problems in identifying publicly traded firms whose total
business parallels the Company's. Generally, the Company's area of operations is
not identically represented in the operations of the companies to which it is
being compared. Despite this difficulty, we feel this method provides a valid
technique for the valuation of the Company in a stable market environment over a
suitable analytical period. Under this method, the Company reflects both its
hypothetical worth and value, absent special considerations, as if it were an
actively traded security.
MARKET COMPARISONS
- ------------------
EXHIBIT E details the financial comparison for selected public companies in the
related industries. In valuing WWMLP as a public company, a number of factors
were considered, as follows:
A. Industry Niche (technical expertise with high market share)
B. Earnings Growth
C. Revenue Size and Growth
D. Market Diversity
E. Balance Sheet Strength
F. Return on Equity
G. Trading Volume (potential market capitalization)
We have reviewed those companies in EXHIBIT E and have condensed the list to
those companies we feel have similar operating characteristics to WWMLP. With
WWMLP's unique operating niche, we chose the following companies we deem to be
truly comparable. In each instance, the following companies have some degree of
comparability or at least have significant assets utilized in a similar industry
segment:
<TABLE>
<CAPTION>
===================================================================================================
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
COMPARABLE COMPANIES
===================================================================================================
COMPANY DESCRIPTION
- ---------------------------------------------------------------------------------------------------
<S> <C>
Davco Restaurants, Inc. Operates approximately 228 fast food restaurants under the
trade name "Wendy's Old Fashioned Hamburgers".
Morgan's Foods, Inc. Operates 40 "Kentucky Fried Chicken" restaurants in five
states.
Taco Cabana, Inc. Operates a chain of 121 Mexican food restaurants which are
operated directly or through franchises.
Wendy's International Operates or franchises over 4,933 "Wendy's" and "Tim Hortons"
restaurants in the United States and 33 countries and
territories.
===================================================================================================
</TABLE>
MARKET COMPARISON ANALYSIS
- --------------------------
Wendy's International, Davco Restaurants, Morgan's Foods and Taco Cabana
represent (in the order presented) the most comparable companies to WWMLP.
Generally, the average P/E and Total Consideration/Operating Income ratios for
these companies most accurately reflect the market valuation for quality
participants in the quick service restaurant industry segment, as measured
primarily by return on equity and other ratios.
For purposes of our analysis, we believe that all four companies would be the
best comparable companies to utilize. The valuation of a publicly traded company
is normally expressed as a function of its P/E ratio. We feel that the public
market provides objective evidence as to value. However, we feel the proper way
to view a company's valuation by the public is as a function of Total
Consideration and EBITDA (Earnings Before Interest, Taxes, Depreciation &
Amortization). In using EBITDA as a proxy for free cash flow from operations, we
assume that depreciation & amortization and capital expenditures do not offset
each other. In doing so, we are valuing a
7
<PAGE> 9
company based more on its intrinsic business value or Total Consideration,
rather than relying solely on the public market's current P/E valuation
perception. On this basis, the four comparable companies are trading at
approximately 7.1x LTM EBITDA while the comparable group has a mean (excluding
the high and low) of approximately 11.9x LTM EBITDA. In addition to analyzing
EBITDA, we feel that it is important to examine the share price relative to the
earning of these comparable companies as well. The four comparable company mean
(excluding the high and low) P/E ratio (based off of 1997F earnings) was
approximately 21.9x. In reviewing the four comparable companies financial
performance relative to WWMLP's, we note that three of the four comparable
companies operating income percentages are significantly above those earned by
WWMLP (Morgan Foods has margins below WWMLP's).
Based on our transactional analysis, we believe that the public market multiple
of Total Consideration to EBITDA indicated for the comparable companies is in
excess of the multiple a prospective investor would consider fair or an acquirer
would pay in a market for corporate control for all the Units of WWMLP.
We think WWMLP would command a multiple lower than the 7.1x LTM EBITDA multiple
indicated for a number of reasons. First, from an aggregate size standpoint,
WWMLP is small relative to the size of the comparable companies. Size alone,
while not necessarily having any impact on intrinsic value, does impact a
Company's ability to withstand competitive pressures, whether from suppliers or
customers. Further, size impacts a prospective purchasers pool of synergy
opportunities (i.e. Selling, General and Administrative savings). Additionally,
WWMLP's industry is in a very competitive mode where margins may become more
narrow in the future, thus placing pressure on the business. Thus we believe
that a more appropriate multiple of LTM EBITDA would be 5.5x.
8
<PAGE> 10
Earnings are calculated as follows:
<TABLE>
<CAPTION>
==================================================================================
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
MARKET COMPARABLE ANALYSIS
($'s in thousands)
==================================================================================
1998F 1999F
MGMT. MGMT.
CATEGORY BUDGET(A) BUDGET(A)
- ----------------------------------------------------------------------------------
EBITDA MULTIPLE ANALYSIS
- ------------------------
<S> <C> <C> <C>
FORECASTED EBIT (FYE 11/30) $772 $849
Rebate Income $265 $271
Real Estate Lease Obligation (B) ($484) ($496)
-------------------------
ADJUSTED EBIT $553 $624
Depreciation $698 $741
Amortization $198 $198
-------------------------
ADJUSTED EBITDA $1,449 $1,563
Normalized Capital Expenditures ($300) ($300)
-------------------------
OPERATING CASH FLOW $1,149 $1,263
Multiple-Operating Cashflow 5.50 5.00
-------------------------
INDICATED CAPITALIZED VALUE $6,320 $6,315
SHAREHOLDER VALUE ADJUSTMENT
Plus: Cash & Equivalents $0 $0
Plus: Prepaids & Other Assets $0 $0
Less: Funded Debt ($3,609) ($3,609)
Less: Notes Payable ($0) ($0)
-------------------------
Total Shareholder Value Adj. ($3,609) ($3,609)
TOTAL UNITHOLDER VALUE (OPERATIONS ONLY) $2,710 $2,706
TOTAL UNITHOLDER VALUE (REAL ESTATE - SEE PAGE 12 $4,615 $4,615
-------------------------
TOTAL UNITHOLDER VALUE $7,325 $7,321
Total WWMLP Units Outstanding (000's) 1.2568 1.2568
-------------------------
TOTAL UNITHOLDER VALUE PER SHARE $5,829 $5,825
=========================
MEAN $5,827
<FN>
A. Roney & Co.'s usage of Management's Budget reflects only operational EBIT
B. These figures assume 8.5% rents for the 5 Company owned locations and 5%
rent for the building lease on the ground lease property.
==================================================================================
</TABLE>
9
<PAGE> 11
ACQUISITION VALUE
- -----------------
The acquisition value of a company seeks to estimate the price at which the
company would "trade in the market for corporate control." Acquisition value is
the price an acquirer would pay to control the target's assets and the free cash
flows (FCF) they generate. Transactions occur in the public market almost daily
at prices significantly above current secondary trading levels. The premium paid
over the market trading level of the stock of a company is, in fact, a derived
figure rather than an analytical tool(6). When the various valuation methods
outlined previously justify a price over current trading prices, then a premium
price is paid. The price paid rests on the conclusion of the analysis. To some
degree, the prices paid are a result of the intense amount of competition among
buyers for quality businesses and to a greater degree they reflect the economic
benefits of all the synergies that a buyer may bring to a seller in a corporate
combination.
Thus, the value of a company (its intrinsic value) as an independent entity
often will be different than the value of the company when it is combined with
another firm. The acquisition value will reflect incremental cash flow generated
by consolidated tax savings, cost savings due to the elimination of redundant
operations, distribution economies, or other business benefits.
The first step in this approach is to determine a sample of comparable companies
that have been involved in a merger or acquisition. From a comparability
standpoint, we look at the following aspects of a company: industry, products,
processes, customers, distribution channels, and suppliers among others. For
WWMLP, we reviewed a number of transactions and feel they are representative of
the valuation multiples that would be paid for WWMLP, given forecasted earning,
in a competitive market place.
COMPARABLE TRANSACTIONS
- -----------------------
The following summarizes the multiples paid:
<TABLE>
<CAPTION>
======================================================================================================
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
COMPARABLE MERGERS & ACQUISITION TRANSACTIONS
- ------------------------------------------------------------------------------------------------------------
MULTIPLE
DATE TOTAL OF
COMPLETED ACQUIRER ACQUIREE CONSIDERATION EBITDA
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 Apple South Apple-Tenn-Flo L.P. $17,000,000 N/A
1994 Quality Dining, Inc. Grayling Corporation $19,900,000 6.63x
1995 Apple South, Inc. Marcus Group - Applebee's $48,000,000 6.82x
1995 Apple South, Inc. DF&R Restaurants Inc. $201,216,000 14.37x
1995 Quality Dining, Inc. Burger King Franchisee $8,600,000 N/A
1995 Shareholders Dave and Buster's $94,631,000 11.83x
1995 Shareholders Host Marriott Services $601,950,000 N/A
1996 Private-Strategic Private I (Quick Service Segment) $2,998,000 4.75x
1996 Private-Strategic Private II (Quick Service Segment) $6,250,000 4.50x
1996 Quality Dining, Inc. Bruegger's Bagels N/A N/A
1996 Investor Group America's Favorite Chicken Co. $320,000,000 N/A
1997 Investor Group Bruegger's Bagels N/A N/A
1997 Pizza Hut of Michigan Pizza Hut Corporate Territory N/A N/A
1997 Compass Group PLC DAKA International Inc. $189,122,000 13.80x
1997 Investor Group** DAVCO Restaurants $140,000,000 5.62x
<FN>
** The deal is pending - The transaction is estimated to have consideration of roughly
$140mm. The multiple is based off of this estimate.
=======================================================================================================
- --------
6 See Judson P. Reis, "The Fine Art of Valuation", Mergers & Acquisition Handbook
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
================================================================================================================
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
TRANSACTION MULTIPLE ANALYSIS
($'s in Thousands)
- ----------------------------------------------------------------------------------------------------------------
MULTIPLE
DATE TOTAL OF
COMPLETED ACQUIRER ACQUIREE CONSIDERATION EBITDA
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 Quality Dining, Inc. Grayling Corporation $19,900 6.63x
1996 Private-Strategic Private I (Quick Service Segment) $2,998 4.75x
1996 Private-Strategic Private II (Quick Service Segment) $6,250 4.50x
1997 Investor Group (A) Davco Restaurants, Inc. $140,000 5.62x
----------------------------
HIGH 6.63X
LOW 4.50X
AVERAGE 5.37X
------------------------------------------
LOW AVERAGE HIGH
------------------------------------------
<S> <C> <C> <C>
WWMLP - 1998F EBITDA $553 $553 $553
Multiple 4.50x 5.37x 6.63x
------------------------------------------
WWMLP - CALCULATED VALUE - OPERATIONS ONLY $2,489 $2,969 $3,666
WWMLP - CALCULATED VALUE - REAL ESTATE ONLY $4,615 $4,615 $4,615
------------------------------------------
WWMLP - TOTAL UNIT VALUE - TOTAL ENTITY $7,104 $7,584 $8,281
TOTAL WWMLP UNITS OUTSTANDING (000'S) 1.2568 1.2568 1.2568
==========================================
WWMLP - PER UNIT VALUE - TOTAL ENTITY $5,652 $6,034 $6,590
==========================================
================================================================================================================
</TABLE>
11
<PAGE> 13
REAL ESTATE VALUATION SUMMARY
- -----------------------------
Based on our omission of real estate cash flow from the valuation methodologies,
we need to value the real estate utilizing a separate formula. This formula
derives a multiple by utilizing the inverse of what is classified in industry
terms as a capitalization rate ("Cap Rate"). The Cap Rate is the inverse of a
multiple that would be associated with the cash flow associated with the
properties (income received for usage of the properties). In the case of Wendy's
of West Michigan L.P. we have utilized a range of Cap Rates based on our
transaction experience in the real estate arena of the quick service restaurant
industry. Based on this experience, we would attach a Cap Rate of somewhere in
the range of 10.0% - 11.0%, which would be based on the cashflows associated
with the properties and the upkeep of the properties that are Company owned by
WWMLP. The following chart illustrates the range of values of the Company owned
real estate:
<TABLE>
<CAPTION>
=========================================================================================================
WENDY'S OF WEST MICHIGAN L.P.
REAL ESTATE VALUATION SUMMARY
($'s in thousands)
- ---------------------------------------------------------------------------------------------------------
ASSUMED CAP RATE
--------------------------------------
RENT 1997F 1997F
VALUATION TECHNIQUE FACTOR /A REVENUES/B RENT 10.0% 10.5% 11.0%
- ---------------------------------------------------------------------------------------------------------
TOTAL COMPANY OWNED
- -------------------
<S> <C> <C> <C> <C> <C> <C>
2200 28th Street 8.50% $1,027,368 $87,326 $873,260 $831,676 $793,872
261 East 8th Street 8.50% $803,191 $68,271 $682,710 $650,200 $620,645
3850 S. Division 8.50% $972,564 $82,668 $826,680 $787,314 $751,527
2071 Apple Avenue 8.50% $1,098,121 $93,340 $933,400 $888,952 $848,545
4343 Chicago Drive 8.50% $1,199,758 $101,979 $1,019,794 $971,229 $927,082
GROUND LEASE
- ------------
3301 Plainfield Avenue 5.00% $1,004,940 $50,247 $502,470 $478,543 $456,791
---------------------------------------------------------------
VALUATION CONCLUSION $6,105,942 $483,831 $4,838,310 $4,607,914 $4,398,463
===============================================================
MEAN $4,615,000
<FN>
A. THE RENT FACTORS ARE BASED ON INDUSTRY STANDARDS. THE GROUND LEASE IS ESTIMATED TO BE AN ADDITIONAL
5.0% OVER THE 1.5% ALREADY PAID FOR LAND.
=========================================================================================================
</TABLE>
The above values assume that these properties would generate the industry norms
for rents, and that the operations located at these sites would continue to
maintain or increase their revenue figures. If revenues at these sites
decreased, or the sites are determined, by an appraiser, to be worn down or
neglected, the value ranges of the properties might need to be adjusted
accordingly.
12
<PAGE> 14
HISTORICAL & PROJECTED FINANCIAL STATEMENTS
(BUDGETED SCENARIO)
A-1
<PAGE> 15
<TABLE>
<CAPTION>
-------------------------------------------------------------
WENDY'S OF WEST MICHIGAN -- BUDGETED
HISTORICAL AND FORECASTED BALANCE SHEET
AS OF DECEMBER 31,
-------------------------------------------------------------
-------------------------------------------------------------------------
ASSETS 1995 1996 1997 1998F 1999F
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash $411 $777 $407 $500 $500
Marketable Securities $0 $0 $0 $188 $799
Accounts Receivable - Including related parties $53 $217 $83 $85 $87
Inventory $146 $180 $169 $173 $178
Prepaid Expenses $139 $125 $120 $123 $126
Deferred Taxes $0 $0 $0 $0 $0
Other $0 $0 $0 $0 $0
-------------------------------------------------------------------------
CURRENT ASSETS $749 $1,299 $779 $1,070 $1,690
-------------------------------------------------------------------------
Property, Plant & Equipment $11,809 $12,541 $13,233 $13,533 $13,833
Accumulated Depreciation $6,138 $6,644 $7,339 $8,037 $8,777
-------------------------------------------------------------------------
NET PROPERTY & EQUIPMENT $5,671 $5,897 $5,894 $5,496 $5,056
-------------------------------------------------------------------------
OTHER ASSETS
Goodwill & Start-up Costs $2,163 $1,981 $1,783 $1,585 $1,387
Other Non-Current Assets $248 $282 $252 $258 $265
-------------------------------------------------------------------------
TOTAL OTHER ASSETS $2,411 $2,263 $2,035 $1,843 $1,652
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TOTAL ASSETS $8,831 $9,459 $8,708 $8,409 $8,397
=========================================================================
LIABILITY AND OWNERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $785 $771 $733 $751 $770
Accrued Liabilities $679 $724 $563 $577 $591
Other Current Liabilities $39 $39 $113 $39 $39
Revolver $0 $0 $0 $0 $0
Total Current Portion of LT Debt $160 $232 $390 $250 $250
-------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES $1,663 $1,766 $1,799 $1,617 $1,651
-------------------------------------------------------------------------
Senior Debt $2,500 $2,192 $1,529 $1,279 $1,029
Capital Leases $1,809 $1,954 $1,690 $1,690 $1,690
Shareholder Debt $0 $0 $0 $0 $0
Sub Jr. Debt $0 $0 $0 $0 $0
-------------------------------------------------------------------------
TOTAL LONG TERM DEBT $4,309 $4,146 $3,219 $2,969 $2,719
-------------------------------------------------------------------------
Other Non-Current Liab. $0 $61 $0 $0 $0
-------------------------------------------------------------------------
TOTAL LIABILITY $5,972 $5,973 $5,018 $4,586 $4,370
-------------------------------------------------------------------------
SHAREHOLDERS EQUITY
Common Stock & Paid in Capital $0 $0 $0 $0 $0
Retained Earnings $2,859 $3,486 $3,690 $3,823 $4,027
-------------------------------------------------------------------------
TOTAL EQUITY $2,859 $3,486 $3,690 $3,823 $4,027
-------------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY $8,831 $9,459 $8,708 $8,409 $8,397
=========================================================================
Check $0 $0 $0 $0 $0
-------------------------------------------
Forecasted
ASSETS 2000F 2001F 2002F
-------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash $500 $500 $500
Marketable Securities $1,499 $2,299 $3,190
Accounts Receivable - Including related parties $89 $92 $94
Inventory $182 $187 $191
Prepaid Expenses $129 $132 $136
Deferred Taxes $0 $0 $0
Other $0 $0 $0
-------------------------------------------
CURRENT ASSETS $2,400 $3,210 $4,111
-------------------------------------------
Property, Plant & Equipment $14,133 $14,433 $14,733
Accumulated Depreciation $9,561 $10,387 $11,256
-------------------------------------------
NET PROPERTY & EQUIPMENT $4,572 $4,046 $3,477
-------------------------------------------
OTHER ASSETS
Goodwill & Start-up Costs $1,189 $991 $793
Other Non-Current Assets $271 $278 $285
-------------------------------------------
TOTAL OTHER ASSETS $1,460 $1,269 $1,078
-------------------------------------------
-------------------------------------------
TOTAL ASSETS $8,432 $8,525 $8,666
===========================================
LIABILITY AND OWNERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $789 $809 $829
Accrued Liabilities $606 $621 $637
Other Current Liabilities $39 $39 $39
Revolver $0 $0 $0
Total Current Portion of LT Debt $250 $250 $250
-------------------------------------------
TOTAL CURRENT LIABILITIES $1,685 $1,720 $1,755
-------------------------------------------
Senior Debt $779 $529 $279
Capital Leases $1,690 $1,690 $1,690
Shareholder Debt $0 $0 $0
Sub Jr. Debt $0 $0 $0
-------------------------------------------
TOTAL LONG TERM DEBT $2,469 $2,219 $1,969
-------------------------------------------
Other Non-Current Liab. $0 $0 $0
-------------------------------------------
TOTAL LIABILITY $4,154 $3,939 $3,724
-------------------------------------------
SHAREHOLDERS EQUITY
Common Stock & Paid in Capital $0 $0 $0
Retained Earnings $4,278 $4,586 $4,942
-------------------------------------------
TOTAL EQUITY $4,278 $4,586 $4,942
-------------------------------------------
TOTAL LIABILITIES & EQUITY $8,432 $8,525 $8,666
===========================================
Check $0 $0 $0
</TABLE>
A-2
<PAGE> 16
<TABLE>
<CAPTION>
-------------------------------------------------------------------
WENDY'S OF WEST MICHIGAN -- BUDGETED
HISTORICAL AND FORECASTED INCOME STATEMENT
FOR THE YEAR ENDING DECEMBER 31,
-------------------------------------------------------------------
-------------------------------------------------------------------------
1995 1996 1997 1998F
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $23,365 $24,438 $27,105 $27,783
Less Discounts Allowed $0 $0 $0 $0
-------------------------------------------------------------------------
Total Sales $23,365 $24,438 $27,105 $27,783
COST OF GOODS SOLD
Cost of Goods Sold - Food $16,844 $16,225 $17,997 $18,448
Labor Costs $0 $0 $0 $0
Food Service Supplies $0 $0 $0 $0
-------------------------------------------------------------------------
TOTAL COST OF GOOD SOLD $16,844 $16,225 $17,997 $18,448
-------------------------------------------------------------------------
GROSS PROFIT $8,521 $8,213 $9,108 $9,335
GROSS PROFIT % 33.6% 33.6% 33.6% 33.6%
OPERATING EXPENSE
Administrative & General $2,103 $1,815 $2,196 $1,306
Sales & Marketing $1,520 $1,536 $1,664 $2,639
Royalties $1,015 $978 $1,084 $1,111
Energy & Property Maintenance $3,134 $3,172 $3,420 $3,501
Amortization
Rebates & Rental Expense ($269) $249 $265 $225
-------------------------------------------------------------------------
TOTAL OPERATING EXPENSES $7,503 $7,252 $8,099 $8,782
-------------------------------------------------------------------------
-------------------------------------------------------------------------
OPERATING PROFIT (LOSS) /EBIT $1,018 $961 $1,009 $553
OPERATING PROFIT (LOSS) % 4.0% 3.9% 3.7% 2.0%
-------------------------------------------------------------------------
Non-Recurring Charges $0 $0 $0 $0
OTHER INCOME (EXPENSE)
Other Income $0 $0 $0 $0
Net Interest Income (Expense) ($512) ($403) ($420) ($352)
Earn out / bonus payments
-------------------------------------------------------------------------
TOTAL OTHER INCOME ($512) ($403) ($420) ($352)
-------------------------------------------------------------------------
PRETAX INCOME (LOSS) $506 $558 $589 $201
Taxes Paid $0 $0 $0 $68
-------------------------------------------------------------------------
NET INCOME (LOSS) $506 $558 $589 $133
=========================================================================
-----------------------------------------------------------
Forecasted
1999F 2000F 2001F 2002F
-----------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $28,477 $29,189 $29,919 $30,667
Less Discounts Allowed $0 $0 $0 $0
-----------------------------------------------------------
Total Sales $28,477 $29,189 $29,919 $30,667
COST OF GOODS SOLD
Cost of Goods Sold - Food $18,908 $19,381 $19,865 $20,362
Labor Costs $0 $0 $0 $0
Food Service Supplies $0 $0 $0 $0
-----------------------------------------------------------
TOTAL COST OF GOOD SOLD $18,908 $19,381 $19,865 $20,362
-----------------------------------------------------------
GROSS PROFIT $9,569 $9,808 $10,054 $10,305
GROSS PROFIT % 33.6% 33.6% 33.6% 33.6%
OPERATING EXPENSE
Administrative & General $1,338 $1,372 $1,406 $1,441
Sales & Marketing $2,648 $2,685 $2,693 $2,729
Royalties $1,139 $1,168 $1,197 $1,227
Energy & Property Maintenance $3,588 $3,678 $3,785 $3,879
Amortization
Rebates & Rental Expense $231 $236 $242 $249
-----------------------------------------------------------
TOTAL OPERATING EXPENSES $8,945 $9,136 $9,322 $9,526
-----------------------------------------------------------
-----------------------------------------------------------
OPERATING PROFIT (LOSS) /EBIT $624 $670 $731 $779
OPERATING PROFIT (LOSS) % 2.2% 2.3% 2.4% 2.5%
-----------------------------------------------------------
Non-Recurring Charges $0 $0 $0 $0
OTHER INCOME (EXPENSE)
Other Income $0 $0 $0 $0
Net Interest Income (Expense) ($314) ($289) ($265) ($241)
Earn out / bonus payments
-----------------------------------------------------------
TOTAL OTHER INCOME ($314) ($289) ($265) ($241)
-----------------------------------------------------------
PRETAX INCOME (LOSS) $310 $380 $466 $539
Taxes Paid $106 $129 $158 $183
-----------------------------------------------------------
NET INCOME (LOSS) $205 $251 $308 $355
===========================================================
</TABLE>
A-3
<PAGE> 17
<TABLE>
<CAPTION>
----------------------------------------------------------------
WENDY'S OF WEST MICHIGAN -- BUDGETED
HISTORICAL AND FORECASTED CASH FLOW STATEMENT
FOR THE YEAR ENDING DECEMBER 31,
----------------------------------------------------------------
----------------------------------------------------------------------
1995 1996 1997 1998F
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) $506 $558 $589 $133
Depreciation & Amortization $971 $857 $853 $896
Provided (used) by changes in
Accounts Receivable - Including related parties ($53) ($164) $134 ($2)
Inventory ($146) ($34) $11 ($4)
Prepaid Expenses $14 $5 ($3)
Deferred Taxes $0 $0 $0
Other $0 $0 $0 $0
Accounts Payable $785 ($14) ($38) $18
Accrued Liabilities $679 $45 ($161) $14
Other Current Liabilities $39 $0 $74 ($74)
Other Non-Current Liabilities $0 $61 ($61) $0
Other Non-Current Assets ($248) ($34) $30 ($6)
----------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $2,533 $1,289 $1,436 $941
----------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (net) ($11,809) ($732) ($692) ($300)
Marketable Securities $0 $0 $0 $188
----------------------------------------------------------------------
CASH PROVIDED BY INVESTING ($11,809) ($732) ($692) ($112)
----------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance (Repayment) of:
Current Portion of LT Debt $160 $72 $158 ($140)
Revolver $0 $0 $0 $0
Senior Debt $2,500 ($308) ($663) ($250)
Sellers Note $1,809 $145 ($264) $0
Subordinated Debt $0 $0 $0 $0
Sub Jr. Dept $0 $0 $0 $0
Common Stock Dividends $2,353 $69 ($385) $0
Issuance (Repurchase) of Common Stock $0 $0 $0 $0
----------------------------------------------------------------------
CASH PROVIDED BY FINANCING $6,822 ($22) ($1,154) ($390)
----------------------------------------------------------------------
Other Miscellaneous Cash Flow Adjustments $2,865 ($169) $40
Cash at Beginning of Period $0 $411 $777 $407
Increase (Decrease) in Cash $411 $366 ($370) $93
----------------------------------------------------------------------
----------------------------------------------------------------------
CASH AT END OF PERIOD $411 $777 $407 $500
======================================================================
----------------------------------------------------
Forecasted
1999F 2000F 2001F 2002F
----------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) $205 $251 $308 $355
Depreciation & Amortization $939 $981 $1,024 $1,067
Provided (used) by changes in
Accounts Receivable - Including related parties ($2) ($2) ($2) ($2)
Inventory ($4) ($4) ($5) ($5)
Prepaid Expenses ($3) ($3) ($3) ($3)
Deferred Taxes $0 $0 $0 $0
Other $0 $0 $0 $0
Accounts Payable $19 $19 $20 $20
Accrued Liabilities $14 $15 $15 $16
Other Current Liabilities $0 $0 $0 $0
Other Non-Current Liabilities $0 $0 $0 $0
Other Non-Current Assets ($6) ($7) ($7) ($7)
----------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $1,161 $1,250 $1,350 $1,441
----------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (net) ($300) ($300) ($300) ($300)
Marketable Securities $611 $700 $800 $891
----------------------------------------------------
CASH PROVIDED BY INVESTING $311 $400 $500 $591
----------------------------------------------------
FINANCING ACTIVITIES
Issuance (Repayment) of:
Current Portion of LT Debt $0 $0 $0 $0
Revolver $0 $0 $0 $0
Senior Debt ($250) ($250) ($250) ($250)
Sellers Note $0 $0 $0 $0
Subordinated Debt $0 $0 $0 $0
Sub Jr. Dept $0 $0 $0 $0
Common Stock Dividends $0 $0 $0 $0
Issuance (Repurchase) of Common Stock $0 $0 $0 $0
----------------------------------------------------
CASH PROVIDED BY FINANCING ($250) ($250) ($250) ($250)
----------------------------------------------------
Other Miscellaneous Cash Flow Adjustments
Cash at Beginning of Period $500 $500 $500 $500
Increase (Decrease) in Cash $0 $0 $0 $0
----------------------------------------------------
----------------------------------------------------
CASH AT END OF PERIOD $500 $500 $500 $500
====================================================
</TABLE> A-4
<PAGE> 18
- --------------------------------------------------------------------------------
HISTORICAL & PROJECTED FINANCIAL STATEMENTS
(AGGRESSIVE SCENARIO)
-------------------------------------------------------------
A-5
<PAGE> 19
Wendy's of West Michigan -- Aggressive
Historical and Forecasted Balance Sheet
As of December 31,
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Forecasted
ASSETS 1995 1996 1997 1998F 1999F 2000F 2001F 2002F
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash $411 $777 $407 $500 $500 $500 $500 $500
Marketable Securities $0 $0 $0 $365 $1,144 $2,014 $2,953 $3,982
Accounts Receivable - Including related parties $53 $217 $83 $85 $87 $89 $92 $94
Inventory $146 $180 $169 $172 $177 $181 $187 $191
Prepaid Expenses $139 $125 $120 $123 $126 $129 $132 $136
Deferred Taxes $0 $0 $0 $0 $0 $0 $0 $0
Other $0 $0 $0 $0 $0 $0 $0 $0
-----------------------------------------------------------------------------
CURRENT ASSETS $749 $1,299 $779 $1,245 $2,034 $2,914 $3,864 $4,903
-----------------------------------------------------------------------------
Property, Plant & Equipment $11,809 $12,541 $13,233 $13,533 $13,833 $14,133 $14,433 $14,733
Accumulated Depreciation $6,138 $6,644 $7,339 $8,037 $8,777 $9,561 $10,387 $11,256
-----------------------------------------------------------------------------
NET PROPERTY & EQUIPMENT $5,671 $5,897 $5,894 $5,496 $5,056 $4,572 $4,046 $3,477
-----------------------------------------------------------------------------
OTHER ASSETS
Goodwill & Start-up Costs $2,163 $1,981 $1,783 $1,585 $1,387 $1,189 $991 $793
Other Non-Current Assets $248 $282 $252 $258 $265 $271 $278 $285
-----------------------------------------------------------------------------
TOTAL OTHER ASSETS $2,411 $2,263 $2,035 $1,843 $1,652 $1,460 $1,269 $1,078
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
TOTAL ASSETS $8,831 $9,459 $8,708 $8,585 $8,741 $8,947 $9,179 $9,458
=============================================================================
LIABILITY AND OWNERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $785 $71 $733 $748 $768 $787 $809 $829
Accrued Liabilities $679 $724 $563 $574 $590 $604 $621 $637
Other Current Liabilities $39 $39 $113 $39 $39 $39 $39 $39
Revolver $0 $0 $0 $0 $0 $0 $0 $0
Total Current Portion of LT Debt $160 $232 $390 $250 $250 $250 $250 $250
-----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES $1,663 $1,766 $1,799 $1,611 $1,647 $1,680 $1,720 $1,755
-----------------------------------------------------------------------------
Senior Debt $2,500 $2,192 $1,529 $1,279 $1,029 $779 $529 $279
Capital Leases $1,809 $1,954 $1,690 $1,690 $1,690 $1,690 $1,690 $1,690
Shareholder Debt $0 $0 $0 $0 $0 $0 $0 $0
Sub Jr. Debt $0 $0 $0 $0 $0 $0 $0 $0
-----------------------------------------------------------------------------
TOTAL LONG TERM DEBT $4,309 $4,146 $3,219 $2,969 $2,719 $2,469 $2,219 $1,969
-----------------------------------------------------------------------------
Other Non-Current Liab $0 $61 $0 $0 $0 $0 $0 $0
TOTAL LIABILITY $5,972 $5,973 $5,018 $4,580 $4,366 $4,149 $3,939 $3,724
-----------------------------------------------------------------------------
SHAREHOLDERS EQUITY
Common Stock & Paid in Capital $0 $0 $0 $0 $0 $0 $0 $0
Retained Earnings $2,859 $3,486 $3,690 $4,004 $4,376 $4,797 $5,240 $5,733
-----------------------------------------------------------------------------
TOTAL EQUITY $2,859 $3,486 $3,690 $4,004 $4,376 $4,797 $5,240 $5,733
-----------------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY $8,831 $9,459 $8,708 $8,585 $8,741 $8,947 $9,179 $9,458
=============================================================================
Check $0 $0 $0 $0 $0 $0 $0 $0
</TABLE>
A-6
<PAGE> 20
Wendy's of West Michigan -- Aggressive
Historical and Forecasted Income Statement
For the Year Ending December 31,
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Forecasted
1995 1996 1997 1998F 1999F 2000F 2001F 2002F
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $25,365 $24,438 $27,105 $27,783 $28,477 $29,189 $29,919 $30,667
Less Discounts Allowed $0 $0 $0 $0 $0 $0 $0 $0
------------------------------------------------------------------------------------------
Total Sales $25,365 $24,438 $27,105 $27,783 $28,477 $29,189 $29,919 $30,667
COST OF GOODS SOLD
Cost of Goods Sold - Food $16,844 $16,225 $17,997 $18,364 $18,851 $19,322 $19,865 $20,362
Labor Costs $0 $0 $0 $0 $0 $0 $0 $0
Food Service Supplies $0 $0 $0 $0 $0 $0 $0 $0
------------------------------------------------------------------------------------------
TOTAL COST OF GOOD SOLD $16,844 $16,225 $17,997 $18,364 $18,851 $19,322 $19,865 $20,362
------------------------------------------------------------------------------------------
GROSS PROFIT $8,521 $8,213 $9,108 $9,418 $9,626 $9,867 $10,054 $10,305
GROSS PROFIT % 33.6% 33.6% 33.6% 33.6% 33.6% 33.6% 33.6% 33.6%
OPERATING EXPENSE
Administrative & General $2,103 $1,815 $2,196 $1,250 $1,225 $1,197 $1,227 $1,257
Sales & Marketing $1,520 $1,536 $1,664 $2,584 $2,620 $2,685 $2,693 $2,729
Royalties $1,015 $978 $1,084 $1,111 $1,139 $1,168 $1,197 $1,227
Energy & Property Maintenance $3,134 $3,172 $3,420 $3,445 $3,560 $3,678 $3,785 $3,879
Amortization
Rebates & Rental Expense ($269) ($249) ($265) $200 $206 $211 $217 $224
------------------------------------------------------------------------------------------
Total Operating Expenses $7,503 $7,252 $8,099 $8,590 $8,749 $8,939 $9,118 $9,317
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Operating Profit (Loss)/EBIT $1,018 $961 $1,009 $828 $877 $928 $936 $988
Operating Profit (Loss)% 4.0% 3.9% 3.7% 3.0% 3.1% 3.2% 3.1% 3.2%
------------------------------------------------------------------------------------------
Non-Recurring Charges $0 $0 $0 $0 $0 $0 $0 $0
OTHER INCOME (EXPENSE)
Other Income $0 $0 $0 $0 $0 $0 $0 $0
Net Interest Income (Expense) ($512) ($403) ($420) ($352) ($314) ($289) ($265) ($241)
Earn out / bonus payments
------------------------------------------------------------------------------------------
TOTAL OTHER INCOME ($512) ($403) ($420) ($352) ($314) ($289) ($265) ($241)
------------------------------------------------------------------------------------------
PRETAX INCOME (LOSS) $506 $558 $589 $476 $563 $639 $671 $748
Taxes Paid $0 $0 $0 $162 $191 $217 $228 $254
------------------------------------------------------------------------------------------
NET INCOME (LOSS) $506 $558 $589 $314 $372 $422 $443 $493
==========================================================================================
</TABLE>
A-7
<PAGE> 21
Wendy's of West Michigan -- Aggressive
Historical and Forecasted Cash Flow Statement
For the Year Ending December 31,
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Forecasted
1995 1996 1997 1998F 1999F 2000F 2001F 2002F
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Activities
NET INCOME (LOSS) $506 $558 $589 $314 $372 $422 $443 $493
Depreciation & Amortization $971 $857 $853 $896 $939 $981 $1,024 $1,067
Provided (used) by changes in
Accounts Receivable - Including related parties ($53) ($164) $134 ($2) ($2) ($2) ($2) ($2)
Inventory ($146) ($34) $11 ($3) ($5) ($4) ($5) ($5)
Prepaid Expenses $14 $5 ($3) ($3) ($3) ($3) ($3)
Deferred Taxes $0 $0 $0 $0 $0 $0 $0
Other $0 $0 $0 $0 $0 $0 $0 $0
Accounts Payable $785 ($14) ($38) $15 $20 $19 $22 $20
Accrued Liabilities $679 $45 ($161) $11 $15 $15 $17 $16
Other Current Liabilities $39 $0 $74 ($74) $0 $0 $0 $0
Other Non-Current Liabilities $0 $61 ($61) $0 $0 $0 $0 $0
Other Non-Current Assets ($248) ($34) $30 ($6) ($6) ($7) ($7) ($7)
------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $2,533 $1,289 $1,436 $1,148 $1,329 $1,421 $1,489 $1,579
------------------------------------------------------------------------------
Investing Activities
Capital expenditures (net) ($11,809) ($732) ($692) ($300) ($300) ($300) ($300) ($300)
Marketable Securities $0 $0 $0 $365 $779 $871 $939 $1,029
------------------------------------------------------------------------------
CASH PROVIDED BY INVESTING ($11,809) ($732) ($692) $65 $479 $571 $639 $729
------------------------------------------------------------------------------
Financing Activities
Issuance (Repayment) of:
Current Portion of LT Debt $160 $72 $158 ($140) $0 $0 $0 $0
Revolver $0 $0 $0 $0 $0 $0 $0 $0
Senior Debt $2,500 ($308) ($663) ($250) ($250) ($250) ($250) ($250)
Sellers Note $1,809 $145 ($264) $0 $0 $0 $0 $0
Subordinated Debt $0 $0 $0 $0 $0 $0 $0 $0
Sub Jr. Dept $0 $0 $0 $0 $0 $0 $0 $0
Common Stock Dividends $2,353 $69 ($385) $0 $0 $0 $0 $0
Issuance (Repurchase) of Common Stock $0 $0 $0 $0 $0 $0 $0 $0
------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING $6,822 ($22) ($1,154) ($390) ($250) ($250) ($250) ($250)
------------------------------------------------------------------------------
Other Miscellaneous Cash Flow Adjustments $3,865 ($169) $40
Cash at Beginning of Period $0 $411 $777 $407 $500 $500 $500 $500
Increase (Decrease) in Cash $411 $366 ($370) $93 $0 $0 $0 $0
------------------------------------------------------------------------------
------------------------------------------------------------------------------
CASH AT END OF PERIOD $411 $777 $407 $500 $500 $500 $500 $500
==============================================================================
</TABLE>
A-8
<PAGE> 22
- --------------------------------------------------------------------------------
HISTORICAL & PROJECTED FINANCIAL STATEMENTS
(CONSERVATIVE SCENARIO)
-------------------------------------------------------------------
A-9
<PAGE> 23
Wendy's of West Michigan -- Conservative
Historical and Forecasted Balance Sheet
As of December 31,
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Forecasted
ASSETS 1995 1996 1997 1998F 1999F 2000F 2001F 2002F
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash $411 $777 $407 $500 $500 $500 $500 $500
Marketable Securities $0 $0 $0 $117 $618 $1,184 $1,829 $2,541
Accounts Receivable - Including related parties $53 $217 $83 $85 $87 $89 $92 $94
Inventory $146 $180 $169 $173 $178 $182 $187 $191
Prepaid Expenses $139 $125 $120 $123 $126 $129 $132 $136
Deferred Taxes $0 $0 $0 $0 $0 $0 $0 $0
Other $0 $0 $0 $0 $0 $0 $0 $0
-----------------------------------------------------------------------------
CURRENT ASSETS $749 $1,299 $779 $998 $1,509 $2,084 $2,739 $3,462
-----------------------------------------------------------------------------
Property, Plant & Equipment $11,809 $12,541 $13,233 $13,533 $13,833 $14,133 $14,433 $14,733
Accumulated Depreciation $6,138 $6,644 $7,339 $8,037 $8,777 $9,561 $10,387 $11,256
-----------------------------------------------------------------------------
NET PROPERTY & EQUIPMENT $5,671 $5,897 $5,894 $5,496 $5,056 $4,572 $4,046 $3,477
-----------------------------------------------------------------------------
OTHER ASSETS
Goodwill & Start-up Costs $2,163 $1,981 $1,783 $1,585 $1,387 $1,189 $991 $793
Other Non-Current Assets $248 $282 $252 $258 $265 $271 $278 $285
-----------------------------------------------------------------------------
TOTAL OTHER ASSETS $2,411 $2,263 $2,035 $1,843 $1,652 $1,460 $1,269 $1,078
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
TOTAL ASSETS $8,831 $9,459 $8,708 $8,338 $8,217 $8,117 $8,054 $8,016
=======
LIABILITY AND OWNERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $785 $771 $733 $751 $771 $789 $809 $829
Accrued Liabilities $679 $724 $563 $577 $592 $606 $621 $637
Other Current Liabilities $39 $39 $113 $39 $39 $39 $39 $39
Revolver $0 $0 $0 $0 $0 $0 $0 $0
Total Current Portion of LT Debt $160 $232 $390 $250 $250 $250 $250 $250
-----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES $1,663 $1,766 $1,799 $1,617 $1,653 $1,685 $1,720 $1,755
-----------------------------------------------------------------------------
Senior Debt $2,500 $2,192 $1,529 $1,279 $1,029 $779 $529 $279
Capital Leases $1,809 $1,954 $1,690 $1,690 $1,690 $1,690 $1,690 $1,690
Shareholder Debt $0 $0 $0 $0 $0 $0 $0 $0
Sub Jr. Debt $0 $0 $0 $0 $0 $0 $0 $0
-----------------------------------------------------------------------------
TOTAL LONG TERM DEBT $4,309 $4,146 $3,219 $2,969 $2,719 $2,469 $2,219 $1,969
-----------------------------------------------------------------------------
Other Non-Current Liab. $0 $61 $0 $0 $0 $0 $0 $0
-----------------------------------------------------------------------------
TOTAL LIABILITY $5,972 $5,973 $5,018 $4,586 $4,372 $4,154 $3,939 $3,724
-----------------------------------------------------------------------------
SHAREHOLDERS EQUITY
Common Stock & Paid in Capital $0 $0 $0 $0 $0 $0 $0
Retained Earnings $2,859 $3,486 $3,690 $3,751 $3,845 $3,963 $4,116 $4,292
-----------------------------------------------------------------------------
TOTAL EQUITY $2,859 $3,486 $3,690 $3,751 $3,845 $3,963 $4,116 $4,292
-----------------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY $8,831 $9,459 $8,708 $8,338 $8,217 $8,117 $8,054 $8,016
=============================================================================
Check $0 $0 $0 $0 $0 $0 $0 $0
</TABLE>
A-10
<PAGE> 24
Wendy's of West Michigan -- Conservative
Historical and Forecasted Income Statement
For the Year Ending December 31,
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Forecasted
1995 1996 1997 1998F 1999F 2000F 2001F 2002F
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $25,365 $24,438 $27,105 $27,783 $28,477 $29,189 $29,919 $30,667
Less Discounts Allowed $0 $0 $0 $0 $0 $0 $0 $0
-----------------------------------------------------------------------------------------
Total Sales $25,365 $24,438 $27,105 $27,783 $28,477 $29,189 $29,919 $30,667
COST OF GOODS SOLD
Cost of Goods Sold - Food $16,844 $16,225 $17,997 $18,448 $18,937 $19,382 $19,866 $20,363
Labor Costs $0 $0 $0 $0 $0 $0 $0 $0
Food Service Supplies $0 $0 $0 $0 $0 $0 $0 $0
-----------------------------------------------------------------------------------------
TOTAL COST OF GOOD SOLD $16,844 $16,225 $17,997 $18,448 $18,937 $19,382 $19,866 $20,363
-----------------------------------------------------------------------------------------
GROSS PROFIT $8,521 $8,213 $9,108 $9,335 $9,540 $9,808 $10,053 $10,304
GROSS PROFIT% 33.6% 33.6% 33.6% 33.6% 33.6% 33.6% 33.6% 33.6%
OPERATING EXPENSE
Administrative & General $2,103 $1,815 $2,196 $1,334 $1,395 $1,489 $1,556 $1,625
Sales & Marketing $1,520 $1,536 $1,664 $2,667 $2,677 $2,715 $2,723 $2,760
Royalties $1,015 $978 $1,084 $1,111 $1,139 $1,168 $1,197 $1,227
Energy & Property Maintenance $3,134 $3,172 $3,420 $3,528 $3,617 $3,707 $3,815 $3,910
Amortization
Rebates & Rental Expense ($269) ($249) ($265) $250 $256 $261 $267 $274
-----------------------------------------------------------------------------------------
Total Operating Expenses $7,503 $7,252 $8,099 $8,890 $9,084 $9,339 $9,557 $9,796
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Operating Profit (Loss)/EBIT $1,018 $961 $1,009 $445 $456 $469 $496 $508
Operating Profit (Loss) % 4.0% 3.9% 3.7% 1.6% 1.6% 1.6% 1.7% 1.7%
-----------------------------------------------------------------------------------------
Non-Recurring Charges $0 $0 $0 $0 $0 $0 $0 $0
OTHER INCOME (EXPENSE)
Other Income $0 $0 $0 $0 $0 $0 $0 $0
Net Interest Income (Expense) ($512) ($403) ($420) ($352) ($314) ($289) ($265) ($241)
Earn out/bonus payments
-----------------------------------------------------------------------------------------
TOTAL OTHER INCOME ($512) ($403) ($420) ($352) ($314) ($289) ($265) ($241)
-----------------------------------------------------------------------------------------
PRETAX INCOME (LOSS) $506 $558 $589 $93 $142 $179 $231 $267
Taxes Paid $0 $0 $0 $32 $48 $61 $78 $91
-----------------------------------------------------------------------------------------
NET INCOME (LOSS) $506 $558 $589 $61 $94 $118 $152 $176
=========================================================================================
</TABLE>
A-11
<PAGE> 25
WENDY'S OF WEST MICHIGAN -- CONSERVATIVE
HISTORICAL AND FORECASTED CASH FLOW STATEMENT
FOR THE YEAR ENDING DECEMBER 31,
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Forecasted
1995 1996 1997 1998F 1999F 2000F 2001F 2002F
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) $506 $558 $589 $61 $94 $118 $152 $176
Depreciation & Amortization $971 $857 $853 $896 $939 $981 $1,024 $1,067
Provided (used) by changes in
Accounts Receivable - Including related parties ($53) ($164) $134 ($2) ($2) ($2) ($2) ($2)
Inventory ($146) ($34) $11 ($4) ($5) ($4) ($5) ($5)
Prepaid Expenses $14 $5 ($3) ($3) ($3) ($3) ($3)
Deferred Taxes $0 $0 $0 $0 $0 $0 $0
Other $0 $0 $0 $0 $0 $0 $0 $0
Accounts Payable $785 ($14) ($38) $18 $20 $18 $20 $20
Accrued Liabilities $679 $45 ($161) $14 $15 $14 $15 $16
Other Current Liabilities $39 $0 $74 ($74) $0 $0 $0 $0
Other Non-Current Liabilities $0 $61 ($61) $0 $0 $0 $0 $0
Other Non-Current Assets ($248) ($34) $30 ($6) ($6) ($7) ($7) ($7)
------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $2,533 $1,289 $1,436 $900 $1,051 $1,116 $1,195 $1,262
------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (net) ($11,809) ($732) ($692) ($300) ($300) ($300) ($300) ($300)
Marketable Securities $0 $0 $0 $117 $501 $566 $645 $712
------------------------------------------------------------------------------
CASH PROVIDED BY INVESTING ($11,809) ($732) ($692) ($183) $201 $266 $345 $412
------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance (Repayment) of:
Current Portion of LT Debt $160 $72 $158 ($140) $0 $0 $0 $0
Revolver $0 $0 $0 $0 $0 $0 $0 $0
Senior Debt $2,500 ($308) ($663) ($250) ($250) ($250) ($250) ($250)
Sellers Note $1,809 $145 ($264) $0 $0 $0 $0 $0
Subordinated Debt $0 $0 $0 $0 $0 $0 $0 $0
Sub Jr. Dept $0 $0 $0 $0 $0 $0 $0 $0
Common Stock Dividends $2,353 $69 ($385) $0 $0 $0 $0 $0
Issuance (Repurchase) of Common Stock $0 $0 $0 $0 $0 $0 $0 $0
------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING $6,822 ($22) ($1,154) ($390) ($250) ($250) ($250) ($250)
------------------------------------------------------------------------------
Other Miscellaneous Cash Flow Adjustments $2,865 ($169) $40
Cash at Beginning of Period $0 $411 $777 $407 $500 $500 $500 $500
Increase (Decrease) in Cash $411 $366 ($370) $93 $0 $0 $0 $0
------------------------------------------------------------------------------
------------------------------------------------------------------------------
CASH AT END OF PERIOD $411 $777 $407 $500 $500 $500 $500 $500
==============================================================================
</TABLE>
A-12
<PAGE> 26
- --------------------------------------------------------------------------------
COMMON STOCK PRICE/VOLUME ANALYSIS
MHGI
----------------------------------------------------------------
B-1
<PAGE> 27
- --------------------------------------------------------------------------------
MERITAGE HOSPITALITY GROUP
STOCK HISTORY
- --------------------------------------------------------------------------------
MERITAGE HOSPITALITY GROUP
STOCK PRICE HISTORY
<TABLE>
<S> <C>
8/2/96 6
8/16/96 5.5
8/30/96 4.35
9/6/96 4.75
9/20/96 4.35
9/27/96 4.625
10/4/96 5.25
10/18/96 6
11/15/96 5.9375
12/6/96 5.5
1/3/97 5.25
1/24/97 5.75
2/7/97 5.375
5/9/97 4
5/23/97 4
7/4/97 3
7/25/97 2.625
8/8/97 3.25
8/29/97 3.1875
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
</TABLE>
MERITAGE HOSPITALITY GROUP
STOCK VOLUME TRADED
<TABLE>
<S> <C>
8/2/96 900
8/16/96 109,600
8/30/96 142,000
9/6/96 65,100
9/20/96 414,300
9/27/96 73,700
10/4/96 45,200
10/18/96 10,700
11/15/96 3,000
12/6/96 2,200
1/3/97 9,900
1/24/97 10,300
2/7/97 11,800
5/9/97 13,000
5/23/97 2,400
7/4/97 300
7/25/97 200
8/8/97 3,900
8/29/97 3,800
450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000
</TABLE>
B-2
<PAGE> 28
- --------------------------------------------------------------------------------
ASSET/BOOK VALUE ANALYSIS
--------------------------------------------------------------------
C-1
<PAGE> 29
THIS ANALYSIS NOT UTILIZED
C-2
<PAGE> 30
- --------------------------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
(BUDGETED SCENARIO)
-------------------------------------------------------------
D-1
<PAGE> 31
WENDY'S OF WEST MICHIGAN -- BUDGETED
DISCOUNTED CASH FLOW ANALYSIS SUMMARY
<TABLE>
<CAPTION>
1998F 1999F 2000F 2001F 2002F
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $27,783 $28,477 $29,189 $29,919 $30,667
Sales Growth 2.5% 2.5% 2.5% 2.5% 2.5%
EBIT $778 $855 $906 $973 $1,028
EBIT% 2.8% 3.0% 3.1% 3.3% 3.4%
Adjustments
- -----------
Rebates $271 $278 $285 $292 $299
Additional Rent Expense ($496) ($509) ($521) ($534) ($548)
Expense Reduction $0 $0 $0 $0 $0
--------------------------------------------------------------
Total Adjustments ($225) ($231) ($236) ($242) ($249)
Adjusted EBIT $553 $624 $670 $731 $779
--------------------------------------------------------------
Adjusted EBIT% 2.0% 2.2% 2.3% 2.4% 2.5%
Taxes @ 34.0% ($188) ($212) ($228) ($249) ($265)
NOL Carry Forward Tax Credit $0 $0 $0 $0 $0
Sources-(Uses) of Cash
Net Change in Working Capital ($51) $24 $24 $25 $25
Depreciation & Amortization $896 $939 $981 $1,024 $1,067
Capital Expenditures ($300) ($300) ($300) ($300) ($300)
==============================================================
Operating Cash Flow $910 $1,074 $1,148 $1,232 $1,307
==============================================================
Takeout Value
EBIT $779
Less NOL Carry Forward (No adjustment using EBIT multiple) $0
------------
Sustainable Cash Flow $779
EBIT Multiple $5.5
------------
Takeout $4,286
Cash Flow Discount Rate 13.6%
Takeout Discount Rate 13.6%
Cash Flows from Operations $910 $1,074 $1,148 $1,232 $1,307
Cash Flow from Takeout $4,286
--------------------------------------------------------------
Present Value of Cash Flows from Opers. $801 $833 $784 $741 $692
Present Value of Cash Flows from Takeout $2,269
==============================================================
Present Value Total $801 $1,634 $2,418 $3,159 $6,119
</TABLE>
D-2
<PAGE> 32
WENDY'S OF WEST MICHIGAN -- BUDGETED
DISCOUNTED CASH FLOW ANALYSIS SUMMARY
<TABLE>
<CAPTION>
Weighted Average Cost of Capital Calculation
- -----------------------------------------------------------------------------------------------------------------------
Proportion Opportunity Tax After-Tax Contribution
Source of Capital of Capital Cost Benefit Cost to WACC
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Senior Debt 60.0% 9.0% 34.0% 5.9% 3.6%
Mezzanine Debt 0.0% 20.0% 34.0% 13.2% 0.0%
Equity 40.0% 25.0% 25.0% 10.0%
---------
Weighted Average Cost of Capital 13.6%
---------
- ------------------------------------------------------------------------------------------------------------------
Discounted Cash Flow Assumptions Takeout Calculation
- ---------------------------------------------------------------- ---------------------------------------
Cash Flow Discount Rate / WACC 13.6% EBIT $779
EBIT Multiple 5.5x EBIT Multiple 5.5x
---------
Takeout Discount Rate 13.6% Takeout Value $4,284
- ---------------------------------------------------------------- ---------------------------------------
<CAPTION>
Discounted Cash Flow Calculation
- ------------------------------------------------------------------------------------------------------------------
# of Years to Discount Present
Year Cash Flow Discount Factor Value Price/Share
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998F $ 910 1 0.8806 $801 $637.56
1999F $ 1,074 2 0.7754 $833 $662.62
2000F $ 1,148 3 0.6828 $784 $623.65
2001F $ 1,232 4 0.6012 $741 $589.29
2002F $ 1,307 5 0.5294 $692 $550.48
Take out $ 4,284 5 0.5294 $2,268 $1,804.69
----------------------
Intrinsic Value $6,119 $4,868.42
Adjustment to Shareholder Value
- -------------------------------------
Plus Excess Cash & Mkt. Secs. $0 $0.00
Plus: Prepaids & Other Assets $0 $0.00
Plus: Remaining NOL Value $0 $0.00
Less Existing Debt ($3,609) ($2,871.58)
----------------------
SHAREHOLDER VALUE $2,510 $1,996.84
----------------------
Price / Share
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
D-3
<PAGE> 33
- --------------------------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
(AGGRESSIVE SCENARIO)
------------------------------------------------------------
D-4
<PAGE> 34
WENDY'S OF WEST MICHIGAN -- AGGRESSIVE
DISCOUNTED CASH FLOW ANALYSIS SUMMARY
<TABLE>
<CAPTION>
1998F 1999F 2000F 2001F 2002F
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $27,783 $28,477 $29,189 $29,919 $30,667
Sales Growth 2.5% 2.5% 2.5% 2.5% 2.5%
EBIT $1,028 $1,083 $1,139 $1,153 $1,212
EBIT% 3.7% 3.8% 3.9% 3.9% 4.0%
Adjustments
- -----------
Rebates $296 $303 $310 $317 $324
Additional Rent Expense ($496) ($509) ($521) ($534) ($548)
Expense Reduction $0 $0 $0 $0 $0
--------------------------------------------------------------
Total Adjustments ($200) ($206) ($211) ($217) ($224)
Adjusted EBIT $828 $877 $928 $936 $988
--------------------------------------------------------------
Adjusted EBIT% 3.0% 3.1% 3.2% 3.1% 3.2%
Taxes @ 34.0% ($282) ($298) ($316) ($318) ($336)
NOL Carry Forward Tax Credit $0 $0 $0 $0 $0
Sources - (Uses) of Cash
Net Change in Working Capital ($56) $25 $24 $29 $25
Depreciation & Amortization $896 $939 $981 $1,024 $1,067
Capital Expenditures ($300) ($300) ($300) ($300) ($300)
--------------------------------------------------------------
Operating Cash Flow $1,086 $1,243 $1,318 $1,370 $1,445
==============================================================
Takeout Value
EBIT $988
Less NOL Carry Forward (No Adjustment using EBIT multiple) $0
------------
Sustainable Cash Flow $988
EBIT Multiple 5.5
------------
Takeout $5,435
Cash Flow Discount Rate 13.6%
Takeout Discount Rate 13.6%
Cash Flows from Operations $1,086 $1,243 $1,318 $1,370 $1,445
Cash Flow from Takeout $5,435
--------------------------------------------------------------
Present Value of Cash Flows from Opers. $957 $964 $900 $824 $765
Present Value of Cash Flows from Takeout $2,878
==============================================================
Present Value Total $957 $1,920 $2,820 $3,644 $7,287
</TABLE>
D-5
<PAGE> 35
WENDY'S OF WEST MICHIGAN - AGGRESSIVE
DISCOUNTED CASH FLOW ANALYSIS SUMMARY
<TABLE>
<CAPTION>
Weighted Average Cost of Capital Calculation
Preparation of Opportunity Contribution to
Source of Capital Capital Cost Tax Benefit After-Tax Cost WACC
<S> <C> <C> <C> <C> <C>
Senior Debt 60.0% 9.0% 34.0% 5.9% 3.6%
Mezzazine Debt 0.9% 20.0% 34.0% 13.2% 0.0%
Equity 49.9% 23.0% 23.0% 10.0%
------
Weighted Average Cost of Capital 13.6%
======
Discounted Cash Flow Assumptions Takeout Calculation
Cash Flow Discount Rate/WACC 13.6 % EBIT $988
EBIT Multiple 5.5x EBIT Multiple 5.5x
------
Takeout Discount Rate 13.6 % Takeout Value $1,439
Discounted Cash Flow Calculation
# of Years To Discount
Year Cash Flow Discount Factor Present Value Price/Share
--------------------------------------------------------------------------------------
1998F $1,084 1 0.6606 $937 $762.22
1999F $1,243 2 0.7734 $963 $766.39
2000F $1,318 3 0.6820 $900 $713.99
2001F $1,371 4 0.6012 $824 $655.80
2002F $1,445 5 0.5294 $765 $608.67
Take out $5,435 5 0.5294 $2,878 $2,289.55
------------------------------
Intrinsic Value $7,287 $5,797.82
Adjustment to Shareholder Value
-------------------------------
Plus Excess Cash/Mkt Secu. $0 $0.00
Plus: Prepaids & Other Assets $0 $0.09
Plus: Remaining NOL Value $0 $0.00
Less Existing Debt ($3,609) $2,871.58
-------------------------
Shareholder Value $3,678 $2,926.24
=========================
Price/Share
</TABLE>
D-6
<PAGE> 36
- --------------------------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
(CONSERVATIVE SCENARIO)
---------------------------------------------------------------
D-7
<PAGE> 37
WENDY'S OF WEST MICHIGAN -- CONSERVATIVE
DISCOUNTED CASH FLOW ANALYSIS SUMMARY
<TABLE>
<CAPTION>
1998F 1999F 2000F 2001F 2002F
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $27,783 $28,477 $29,189 $29,919 $30,667
Sales Growth 2.5% 2.5% 2.5% 2.5% 2.5%
EBIT $695 $712 $730 $763 $782
EBIT% 2.5% 2.5% 2.5% 2.6% 2.6%
Adjustments
- -----------
Rebates $246 $253 $260 $267 $274
Additional Rent Expense ($496) ($509) ($521) ($534) ($548)
Expense Reduction $0 $0 $0 $0 $0
--------------------------------------------------------------
Total Adjustments ($250) ($256) ($261) ($267) ($274)
Adjusted EBIT $445 $456 $469 $496 $508
--------------------------------------------------------------
Adjusted EBIT% 1.6% 1.6% 1.6% 1.7% 1.7%
Taxes @ 34.0% ($151) ($155) ($159) ($169) ($173)
NOL Carry Forward Tax Credit $0 $0 $0 $0 $0
Sources - (Uses) of Cash
Net Change in Working Capital ($51) $25 $22 $25 $25
Depreciation & Amortization $896 $939 $981 $1,024 $1,067
Capital Expenditures ($300) ($300) ($300) ($300) ($300)
==============================================================
Operating Cash Flow $838 $965 $1,013 $1,077 $1,128
==============================================================
Takeout Value
EBIT $508
Less NOL Carry Forward (No adjustment using EBIT multiple) $0
------------
Sustainable Cash Flow $508
EBIT Multiple 5.5
------------
Takeout $2,794
Cash Flow Discount Rate 13.6%
Takeout Discount Rate 13.6%
Cash Flows from Operations $838 $965 $1,013 $1,077 $1,128
Cash Flow from Takeout $2,794
--------------------------------------------------------------
Present Value of Cash Flows from Opers. $738 $748 $692 $647 $597
Present Value of Cash Flows from Takeout $1,479
==============================================================
Present Value Total $738 $1,487 $2,178 $2,826 $4,902
</TABLE>
D-8
<PAGE> 38
WENDY'S OF WEST MICHIGAN - CONSERVATIVE
DISCOUNTED CASH FLOW ANALYSIS SUMMARY
<TABLE>
<CAPTION>
Weighted Average Cost of Capital Calculation
Preparation of Opportunity Contribution to
SOURCE OF CAPITAL Capital Cost Tax Benefit After-Tax Cost WACC
<S> <C> <C> <C> <C> <C>
Senior Debt 60.0% 9.0% 34.0% 5.9% 3.6%
Mezzanine Debt 0.0% 20.0% 34.0% 13.2% 0.0%
Equity 40.0% 25.0% 23.0% 10.0%
----
Weighted Average Cost of Capital 13.6%
====
Discounted Cash Flow Assumptions Takeout Calculation
Cash Flow Discount Rate/WACC 13.6% EBIT $598
EBIT Multiple 5.5x EBIT Multiple 5.5x
------
Takeout Discount Rate 13.6% Takeout Value $2,793
======
Discounted Cash Flow Calculations
# of Years to Discount
Year Cash Flow Discount Factor Present Value Price/Share
----------------------------------------------------------------------------
1998F $839 1 0.8806 $738 $587.58
1999F $965 2 0.7754 $748 $595.24
2000F $1,014 3 0.6828 $692 $550.61
2001F $1,077 4 0.6012 $647 $324.99
2002F $1,128 5 0.5294 $597 $475.10
Take out $2,793 5 0.5294 $1,479 $1,176.53
--------------------------
Intrinsic Value $4,982 $3,900.04
Adjustment to Shareholder Value
-------------------------------
Plus Excess Cash/Mkt. Secu. $0 $0.00
Plus: Prepaids & Other Assets $0 $0.00
Plus: Remaining NOL Value $0 $0.00
Less Existing Debt ($3,609) ($2,071.58)
--------------------------
Shareholder Value $1,293 $1,028.47
==========================
Price/Share
</TABLE>
D-9
<PAGE> 39
- --------------------------------------------------------------------------------
COMPARABLE COMPANY ANALYSIS
--------------------------------------------------------
E-1
<PAGE> 40
<TABLE>
<CAPTION>
WENDYS OF WEST MICHIGAN LIMITED PARTNERSHIP
ANALYSIS OF COMPARABLE PUBLICITY - TRADED COMPANIES
Stock Price(1)
-----------------------------------------
Company FYE Symbol Close 52 WK H 52 WK L
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AU BON PAIN CO., INC. 12/30 ABPCA $8.75 $9.00 $5.44
BLIMPIE INTERNATIONAL, INC. 6/30 BMPE $4.56 $13.25 $4.38
BOSTON CHICKEN, INC. 12/31 BOST $14.13 $41.50 $10.63
SCHLOTZSKY'S, INC. 12/31 BUNZ $18.75 $20.38 $9.25
BACK YARD BURGERS, INC. 12/30 BYBI $1.88 $2.44 $1.63
CHECKERS DRIVE-IN REST. 1/1 CHKR $1.25 $3.03 $0.72
CKE RESTAURANTS, INC. 1/31 CKR $42.88 $43.13 $18.38
CONSOLIDATED PRODUCTS 9/27 COP $18.06 $19.00 $14.00
DAVCO RESTAURANTS, INC. 9/30 DVC $17.88 $18.13 $8.38
EINSTEIN/NOAH BAGEL CORP 12/31 ENBX $12.69 $36.50 $8.75
KOO KOO ROO, INC. 12/31 KKRO $5.31 $8.81 $3.50
MCDONALD'S CORPORATION 12/31 MCD $46.69 $54.88 $42.50
MORGAN'S FOODS, INC. 3/3 MR $2.13 $4.13 $1.50
NATHAN'S FAMOUS 3/31 NATH $4.25 $4.56 $2.75
NPC INTERNATIONAL, INC. 3/26 NPCI $12.44 $12.63 $7.88
PJ AMERICA, INC. 12/31 PJAM $15.94 $22.25 $12.13
PAPA JOHN'S INT'L, INC. 12/31 PZZA $33.00 $39.50 $22.63
QUALITY DINING, INC. 10/29 QDIN $6.06 $30.50 $3.38
RALLY'S HAMBURGERS, INC. 12/31 RLLY $2.88 $5.00 $1.88
SBARRO, INC. 12/31 SBA $27.00 $29.75 $24.25
SHOWBIZ PIZZA TIME, INC. 12/29 SHBZ $23.88 $27.38 $14.00
TACO CABANA, INC. 12/31 TACO $5.50 $8.13 $3.75
WENDY'S INTERNATIONAL 12/31 WEN $21.88 $27.94 $18.25
<CAPTION>
Shares Market Agg. Funded Debt/
Company Outsdg. Equity Value(2) Debt Equity(5)
- -----------------------------------------------------------------------------------------------
(000,S) ($MM) ($MM) ($MM)
AU BON PAIN CO., INC. 10,102 $88.4 $167.7 $82.3 91.0%
BLIMPIE INTERNATIONAL, INC 9,526 $43.4 $40.2 $0.0 0.0%
BOSTON CHICKEN, INC. 68,318 $965.3 $1,521.7 $732.5 73.0%
SCHLOTZSKY'S, INC. 5,549 $104.0 $100.3 $3.8 11.0%
BACK YARD BURGERS, INC. 4,246 $8.0 $9.2 $2.1 26.0%
CHECKERS DRIVE-IN REST. 60,750 $75.9 $110.7 $38.7 73.0%
CKE RESTAURANTS, INC. 41,786 $1,791.8 $1,849.7 $86.1 38.0%
CONSOLIDATED PRODUCTS 16,535 $298.6 $350.3 $53.1 75.0%
DAVCO RESTAURANTS, INC. 6,429 $115.0 $167.1 $53.5 114.0%
EINSTEIN/NOAH BAGEL CORP 33,270 $422.2 $477.0 $125.0 37.0%
KOO KOO ROO, INC. 17,167 $91.2 $84.3 $2.4 3.0%
MCDONALD'S CORPORATION 688,017 $32,123.5 $37,563.9 $5,742.6 66.0%
MORGAN'S FOODS, INC. 2,942 $6.3 $16.4 $12.6 399.0%
NATHAN'S FAMOUS 4,722 $20.1 $19.9 $0.0 0.0%
NPC INTERNATIONAL, INC. 24,668 $306.9 $511.1 $209.5 206.0%
PJ AMERICA, INC. 5,505 $87.7 $83.9 $0.0 0.0%
PAPA JOHN'S INT'L, INC. 28,958 $955.6 $947.7 $1.5 1.0%
QUALITY DINING, INC. 16,910 $102.5 $241.2 $140.8 204.0%
RALLY'S HAMBURGERS, INC. 20,826 $60.0 $125.8 $69.1 370.0%
SBARRO, INC. 20,440 $551.9 $459.1 $0.0 0.0%
SHOWBIZ PIZZA TIME, INC. 18,753 $447.8 $464.0 $28.9 18.0%
TACO CABANA, INC. 14,827 $81.5 $96.4 $14.9 13.0%
WENDY'S INTERNATIONAL 131,704 $2,881.7 $2,877.6 $246.6 18.0%
<CAPTION>
Aggregate Value
As a Multiple of L12M:
-----------------------------------------------
LTM L12M L12M L12M
---------------------------------------
Company Sales4 EBIT4 EBITDA4 Sales EBIT EBITDA
- --------------------------------------------------------------------------------------------------------------------
($MM) ($MM) ($MM)
<S> <C> <C> <C> <C> <C> <C>
AU BON PAIN CO., INC. $243.4 $4.6 $21.2 0.7 x 36.5 x 7.9 x
BLIMPIE INTERNATIONAL, IN $37.8 $4.7 $5.1 1.1 x 8.6 x 7.9 x
BOSTON CHICKEN, INC. $334.0 $108.8 $138.3 4.6 x 14.0 x 11.0 x
SCHLOTZSKY'S, INC. $22.4 $2.8 $4.6 4.5 x 35.8 x 21.8 x
BACK YARD BURGERS, INC. $24.5 $0.3 $1.4 0.4 x 30.7 x 6.6 x
CHECKERS DRIVE-IN REST. $155.8 ($18.8) ($6.5) 0.7 x n/a x n/a x
CKE RESTAURANTS, INC. $696.6 $50.1 $81.1 2.7 x 36.9 x 22.8 x
CONSOLIDATED PRODUCTS $255.4 $25.0 $37.8 1.4 x 14.0 x 9.3 x
DAVCO RESTAURANTS, INC. $221.4 $16.3 $24.9 0.8 x 10.2 x 6.7 x
EINSTEIN/NOAH BAGEL CORP $55.7 $4.1 $9.5 8.6 x 116.3 x 50.2 x
KOO KOO ROO, INC. $45.0 ($13.6) ($8.3) 1.9 x n/a x n/a x
MCDONALD'S CORPORATION $11,045.6 $2,655.9 $3,413.8 3.4 x 14.1 x 11.0 x
MORGAN'S FOODS, INC. $38.3 $0.4 $2.1 0.4 x 40.9 x 7.8 x
NATHAN'S FAMOUS $26.7 $1.3 $2.8 0.7 x 15.3 x 7.1 x
NPC INTERNATIONAL, INC. $326.0 $35.4 $53.7 1.6 x 14.4 x 9.5 x
PJ AMERICA, INC. $16.8 $1.7 $2.2 5.0 x 49.3 x 38.1 x
PAPA JOHN'S INT'L, INC. $392.9 $29.0 $39.9 2.4 x 32.7 x 23.8 x
QUALITY DINING, INC. $286.2 $12.1 $29.1 0.8 x 19.9 x 8.3 x
RALLY'S HAMBURGERS, INC. $144.2 $7.8 $18.2 0.9 x 16.1 x 6.9 x
SBARRO, INC. $332.8 $56.5 $79.6 1.4 x 8.1 x 5.8 x
SHOWBIZ PIZZA TIME, INC. $319.9 $50.1 $75.8 1.5 x 9.3 x 6.1 x
TACO CABANA, INC. $130.0 $6.9 $16.6 0.7 x 14.0 x 5.8 x
WENDY'S INTERNATIONAL $1,994.5 $287.9 $355.9 1.4 x 10.0 x 8.1 x
--------------------------------------------------------------------------------------------------------
MEDIAN: 1.4 x 15.3 x 8.1
MEAN: 2.1 26.1 13.5
MEAN (excluding high and low) 1.8 22.3 11.9
--------------------------------------------------------------------------------------------------------
<CAPTION>
Share Price as a Multiple of: Market
---------------------------------------------- Book Equity/
L12M 1197E 1998E Value/ Book
Company EPS EPS(3) EPS(3) Share(4) Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AU BON PAIN CO., INC. n/m x 43.8 x 25.0 x $7.65 1.1 x
BLIMPIE INTERNATIONAL, IN 12.7 x n/a x n/a x $1.94 2.4 x
BOSTON CHICKEN, INC. 12.7 x 13.2 x 10.5 x $15.06 0.9 x
SCHLOTZSKY'S, INC. 27.2 x 22.9 x 17.4 x $6.21 3.0 x
BACK YARD BURGERS, INC. 20.9 x n/a x n/a x $1.95 1.0 x
CHECKERS DRIVE-IN REST. n/m x n/a x n/a x $0.87 1.4 x
CKE RESTAURANTS, INC. 44.8 x 40.5 x 29.6 x $6.74 6.4 x
CONSOLIDATED PRODUCTS 18.5 x 17.9 x 15.2 x $4.56 4.0 x
DAVCO RESTAURANTS, INC. 31.4 x 16.0 x 14.3 x $7.78 2.3 x
EINSTEIN/NOAH BAGEL CORP 21.9 x 20.5 x 15.5 x $10.01 1.3 x
KOO KOO ROO, INC. n/m x n/a x n/a x $3.95 1.3 x
MCDONALD'S CORPORATION 20.1 x 19.2 x 17.1 x $12.21 3.8 x
MORGAN'S FOODS, INC. n/m x n/a x n/a x $1.11 1.9 x
NATHAN'S FAMOUS 23.6 x n/a x n/a x $4.76 0.9 x
NPC INTERNATIONAL, INC. 17.0 x 13.5 x 10.9 x $4.12 3.0 x
PJ AMERICA, INC. n/m x 23.4 x 19.7 x $3.89 4.1 x
PAPA JOHN'S INT'L, INC. 41.1 x 35.9 x 27.7 x $6.45 5.1 x
QUALITY DINING, INC. n/m x n/a x 22.4 x $4.08 1.5 x
RALLY'S HAMBURGERS, INC. n/m x 24.0 x 4.8 x $0.93 3.1 x
SBARRO, INC. 14.3 x 13.6 x 12.3 x $10.19 2.6 x
SHOWBIZ PIZZA TIME, INC. 23.0 x 18.8 x 16.0 x $8.45 2.8 x
TACO CABANA, INC. 39.3 x 23.9 x 16.7 x $7.63 0.7 x
WENDY'S INTERNATIONAL 18.2 x 16.0 x 13.9 x $10.00 2.2 x
- -----------------------------------------------------------------------------------------------------
MEDIAN: 21.x 19.x 16.x $6.21 2.3 x
MEAN: 24.2 22.7 17.0 $6.11 2.5
MEAN (excluding high and low) 23.5 21.9 17.0 $5.93 2.4
- -----------------------------------------------------------------------------------------------------
<FN>
All Financials taken from Strategic Investor data service except as noted
NOTES: (1)Closing prices as of 9/15/97
(2)Aggregate value equals market value of equity plus total debt and
preferred stock net of cash and marketable securities
(3)Based on median I/B/E/S estimates as of 9/16/97
(4)Financials taken from Bloomberg System
(5)Debt/Equity consists of Total Funded Debt to Total Balance Sheet
Equity
(6)Current Ratio consists of latest quarter Current Assets to latest
quarter Current Liabilities
</TABLE>
E-2
<PAGE> 41
WENDYS OF WEST MICHIGAN LIMITED PARTNERSHIP
ANALYSIS OF COMPARABLE PUBLICITY - TRADED COMPANIES
<TABLE>
<CAPTION>
Stock Price(1)
-------------------------------------
Company FYE Symbol Close 52 WK H 52 WK L
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AU BON PAIN CO., INC. 12/30 ABPCA $8.75 $9.00 $5.44
BLIMPIE INTERNATIONAL, INC. 6/30 BMPE $4.56 $13.25 $4.38
BOSTON CHICKEN, INC. 12/31 BOST $14.13 $41.50 $10.63
SCHLOTZSKY'S, INC. 12/31 BUNZ $18.75 $20.38 $9.25
BACK YARD BURGERS, INC. 12/30 BYBI $1.88 $2.44 $1.63
CHECKERS DRIVE-IN REST. 1/1 CHKR $1.25 $3.03 $0.72
CKE RESTAURANTS, INC. 1/31 CKR $42.88 $43.13 $18.38
CONSOLIDATED PRODUCTS 9/27 COP $18.06 $19.00 $14.00
DAVCO RESTAURANTS, INC. 9/30 DVC $17.88 $18.13 $8.38
EINSTEIN/NOAH BAGEL CORP 12/31 ENBX $12.69 $36.50 $8.75
KOO KOO ROO, INC. 12/31 KKRO $5.31 $8.81 $3.50
MCDONALD'S CORPORATION 12/31 MCD $46.69 $54.88 $42.50
MORGAN'S FOODS, INC. 3/3 MR $2.13 $4.13 $1.50
NATHAN'S FAMOUS 3/31 NATH $4.25 $4.56 $2.75
NPC INTERNATIONAL, INC. 3/26 NPCI $12.44 $12.63 $7.88
PJ AMERICA, INC. 12/31 PJAM $15.94 $22.25 $12.13
PAPA JOHN'S INT'L, INC. 12/31 PZZA $33.00 $39.50 $22.63
QUALITY DINING, INC. 10/29 QDIN $6.06 $30.50 $3.38
RALLY'S HAMBURGERS, INC. 12/31 RLLY $2.88 $5.00 $1.88
SBARRO, INC. 12/31 SBA $27.00 $29.75 $24.25
SHOWBIZ PIZZA TIME, INC. 12/29 SHBZ $23.88 $27.38 $14.00
TACO CABANA, INC. 12/31 TACO $5.50 $8.13 $3.75
WENDY'S INTERNATIONAL 12/31 WEN $21.88 $27.94 $18.25
<CAPTION>
Common Stock Price
-------------------------
As a % of Premium to Institutional Ownership
52 WK 52 WK Public ----------------------- LTM Dividend
Company High Low Float Net Purch. % Owned Dividend Yield
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AU BON PAIN CO., INC. 97.2% 60.8% 6,600 99 54.5% n/a 0.00%
BLIMPIE INTERNATIONAL, INC. 34.4% 4.1% 3,900 (146) 4.4% $0.03 0.66%
BOSTON CHICKEN, INC. 34.0% 32.9% 32,100 (1,063) 71.3% n/a 0.00%
SCHLOTZSKY'S, INC. 92.0% 102.7% 2,900 (48) 13.8% n/a 0.00%
BACK YARD BURGERS, INC. 77.0% 15.3% 3,100 0 1.1% n/a 0.00%
CHECKERS DRIVE-IN REST. 41.3% 73.6% 57,700 (204) 3.8% n/a 0.00%
CKE RESTAURANTS, INC. 99.4% 133.3% 32,600 2,017 55.5% $0.08 0.19%
CONSOLIDATED PRODUCTS 95.1% 29.0% 9,900 126 33.2% n/a 0.00%
DAVCO RESTAURANTS, INC. 98.6% 113.4% 2,300 82 67.4% n/a 0.00%
EINSTEIN/NOAH BAGEL CORP 34.8% 45.0% 12,300 2,676 20.9% n/a 0.00%
KOO KOO ROO, INC. 60.3% 51.7% 5,300 262 13.5% n/a 0.00%
MCDONALD'S CORPORATION 85.1% 9.9% 681,100 5,813 52.2% $0.33 0.71%
MORGAN'S FOODS, INC. 51.6% 42.0% 1,600 (106) 40.8% n/a 0.00%
NATHAN'S FAMOUS 93.2% 54.5% 1,800 328 14.8% n/a 0.00%
NPC INTERNATIONAL, INC. 98.5% 57.9% 8,900 416 25.1% n/a 0.00%
PJ AMERICA, INC. 71.6% 31.4% 3,900 911 31.8% n/a 0.00%
PAPA JOHN'S INT'L, INC. 83.5% 45.8% 9,600 3,765 79.8% n/a 0.00%
QUALITY DINING, INC. 19.9% 79.3% 9,100 367 35.4% n/a 0.00%
RALLY'S HAMBURGERS, INC. 57.6% 53.2% 1,900 830 19.1% n/a 0.00%
SBARRO, INC. 90.8% 11.3% 12,700 1,535 57.5% $1.08 4.00%
SHOWBIZ PIZZA TIME, INC. 87.2% 70.6% 15,000 1,727 69.0% n/a 0.00%
TACO CABANA, INC. 67.7% 46.7% 9,300 38 66.7% n/a 0.00%
WENDY'S INTERNATIONAL 78.3% 19.9% 108,000 34 53.6% $0.24 1.10%
---------------------------------------------------------------------
MEDIAN: $0.24 0.00%
MEAN: $0.35 0.29%
MEAN (excluding high and low) $0.22 0.13%
---------------------------------------------------------------------
<CAPTION>
Level 1 ROA
-------------
Total Oper. Inc./ Working Current EBIT EBITDA
Company Assets TA - Cash Capital Ratio(6) Margin Margin
- ----------------------------------------------------------------------------------------------------
(MM)
<S> <C> <C> <C> <C> <C> <C>
AU BON PAIN CO., INC. $192.8 2.42% $7.9 1.39 1.9% 8.7%
BLIMPIE INTERNATIONAL, IN $23.8 22.88% $8.2 0.00 12.4% 13.5%
BOSTON CHICKEN, INC. $2,005.8 5.95% $182.6 5.07 32.6% 41.4%
SCHLOTZSKY'S, INC. $42.3 8.08% $11.9 5.09 12.5% 20.5%
BACK YARD BURGERS, INC. $11.3 2.87% $0.3 1.26 1.2% 5.7%
CHECKERS DRIVE-IN REST. $124.9 -15.54% ($16.2) 0.51 -12.1% -4.2%
CKE RESTAURANTS, INC. $410.0 13.12% ($17.4) 0.79 7.2% 11.6%
CONSOLIDATED PRODUCTS $157.9 15.97% ($20.5) 0.43 9.8% 14.8%
DAVCO RESTAURANTS, INC. $118.3 13.94% ($28.1) 0.16 7.4% 11.2%
EINSTEIN/NOAH BAGEL CORP $482.8 0.99% $71.0 5.97 7.4% 17.1%
KOO KOO ROO, INC. $74.3 -20.89% $9.4 4.64 -30.2% -18.4%
MCDONALD'S CORPORATION $17,562.0 15.39% ($1,400.9) 0.44 24.0% 30.9%
MORGAN'S FOODS, INC. $19.9 2.30% ($1.6) 0.68 1.0% 5.5%
NATHAN'S FAMOUS $28.0 4.68% $5.0 1.92 4.9% 10.5%
NPC INTERNATIONAL, INC. $378.7 9.48% ($28.1) 0.39 10.9% 16.5%
PJ AMERICA, INC. $23.5 8.65% $14.6 7.72 10.1% 13.1%
PAPA JOHN'S INT'L, INC. $226.6 13.35% $14.2 1.61 7.4% 10.2%
QUALITY DINING, INC. $262.0 4.66% ($20.3) 0.57 4.2% 10.2%
RALLY'S HAMBURGERS, INC. $111.3 7.22% ($9.6) 0.53 5.4% 12.6%
SBARRO, INC. $251.0 35.72% $74.4 3.69 17.0% 23.9%
SHOWBIZ PIZZA TIME, INC. $227.6 23.31% $2.3 1.06 15.7% 23.7%
TACO CABANA, INC. $143.2 4.82% ($5.7) 0.53 5.3% 12.8%
WENDY'S INTERNATIONAL $1,867.4 17.81% $184.0 1.93 14.4% 17.8%
- ---------------------------------------------------------------------------------------------------
MEDIAN: $157.9 8.08% $2.3 1.06 7.4% 12.8%
MEAN: $1,075.9 8.57% ($41.9) 2.02 7.4% 13.5%
MEAN (excluding
high and low) $341.5 8.68% $12.1 1.84 8.0% 13.6%
- ---------------------------------------------------------------------------------------------------
<FN>
All Financials taken from Strategic Investor data service except as noted
NOTES: (1)Closing prices as of 9/15/97
(2)Aggregate value equals market value of equity plus total debt and
preferred stock net of cash and marketable securities
(3)Based on median I/B/E/S estimates as of 9/16/97
(4)Financials taken from Bloomberg System
(5)Debt/Equity consists of Total Funded Debt to Total Balance Sheet
Equity
(6)Current Ratio consists of latest quarter Current Assets to latest
quarter Current Liabilities
</TABLE>
E-3
<PAGE> 42
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
COMPARABLE COMPANIES
- --------------------------------------------------------------------------------
Au Bon Pain Company, Inc. Au Bon Pain Company, Inc. is a chain
of 289 bakery cafes, 231 of which
are company-owned and operated. The
Company, which does business under
the names "Au Bon Pain" and "Saint
Louis Bread Company," positions its
bakery cafes to serve customers
where they work and shop. Au Bon
Pain has bakery cafes throughout the
United States and in Santiago,
Chile.
Back Yard Burgers, Inc. Back Yard Burgers, Inc. operates and
franchises quick-service restaurants
in 15 states. The Company's menu is
diverse, emphasizing made-to-order
charbroiled burgers, chicken
sandwiches, name-brand condiments
and other items. Back Yard operates
or franchises approximately 44
stores.
Blimpie International, Inc. Blimpie International, Inc.
franchises, subfranchises and master
licenses a chain of non-cooking,
quick service sandwich outlets know
as "Blimpie" outlets. The main
products sold in a Blimpie outlet
are sub sandwiches and salads. The
Company has outlets across the
United States and worldwide.
Boston Chicken, Inc. Boston Chicken, Inc. operates and
franchises food service stores. The
stores specialize in complete meals
which include rotisserie roasted
chicken and fresh vegetables, salads
and other side dishes. Boston
Chicken operates 1,087 stores in 38
states and the District of Columbia
under the name "Boston Market."
Checkers Drive-In Restaurants, Inc. Checkers Drive-In Restaurants, Inc.,
based in Clearwater, Florida,
operates and franchises Checkers
"double drive-through" quick service
hamburger restaurants. These
Restaurants provide
automobile-oriented service,
featuring hamburgers, french fries,
hot dogs, chicken and fish
sandwiches, soft drinks and
milkshakes. The Restaurants are
located throughout the United
States.
CKE Restaurants, Inc. CKE Restaurants, Inc. is the parent
company of Carl Karcher Enterprises,
Inc., Casa Bonita Incorporated and
Summit Family Restaurants Inc. The
Company operates "Rally's" quick-
service restaurants, "Taco Bueno"
quick-service restaurants, "JB's
Restaurants," "HomeTown Buffet"
restaurants and "Galaxy Diner"
restaurants.
E-4
<PAGE> 43
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
COMPARABLE COMPANIES
- --------------------------------------------------------------------------------
Consolidated Products, Inc. Consolidated Products, Inc. operates
208 company-owned and franchised
restaurants throughout Southern and
Midwestern states. The restaurants
operate under the name of "Steak n
Shake," which offer steakburgers,
french fries, milkshakes and
breakfast. The Company also operates
casual, sports, Mexican and western
restaurants as well as coffee shops
throughout the South.
Davco Restaurants, Inc. Davco Restaurants, Inc. operates
approximately 228 fast food
restaurants under the trade name
"Wendy's Old Fashioned Hamburgers".
The Company maintains these
franchises primarily throughout the
Mid-Atlantic states.
Einstein/Noah Bagel Corp. Einstein/Noah Bagel Corp. operates
and franchises specialty retail
stores that feature fresh-baked
bagels, cream cheeses, specialty
coffee drinks, soups, sandwiches and
salads. The Company operates its
stores in the United States under
the names "Einstein Bros. Bagels"
and "Noah's New York Bagels."
Koo Koo Roo, Inc. Koo Koo Roo, Inc. operates and
franchises fast-food restaurants
featuring flame broiled skinless
chicken under the names "Koo Koo
Roo" and "Color Me Mine." The
company owns and operates 28
restaurants, 24 in California, two
in Florida, one in Colorado and one
in New York.
McDonald's Corporation McDonald's Corporation develops,
operates, franchises and services
a worldwide system of restaurants.
These restaurants prepare,
assemble, package and sell a
limited menu of quickly-prepared,
moderately-priced foods. There are
over 21,000 restaurants in the
United States and 102 countries
worldwide. Food items include
hamburgers, chicken, salads,
breakfast foods and beverages.
Morgan's Foods, Inc. Morgan's Foods, Inc. operates 40
"Kentucky Fried Chicken" restaurants
in five states. The Company also
operates six "East Side Mario's"
restaurants in Cleveland/Akron and
Columbus, Ohio.
E-5
<PAGE> 44
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
COMPARABLE COMPANIES
- --------------------------------------------------------------------------------
Nathan's Famous Inc. Nathan's Famous Inc. operates and
franchises fast food outlets
featuring its famous all beef hot
dogs, fresh french fries and other
items. The Company's outlets are
placed in airports, travel plazas,
stadiums, military facilities and
schools. Nathan's also licenses the
"Nathan's Famous" trademark to
Morrell for the manufacture of its
hot dogs for sale to supermarkets.
NPC International, Inc. NPC International, Inc. is a "Pizza
Hut" franchisee operating over 600
restaurants and delivery kitchens in
20 states. Through its subsidiary,
Romacorp, Inc., the Company is
owner/franchiser of "Tony
Roma's-Famous for Ribs." Romacorp
operates 40 "Tony Roma's" units and,
through its affiliates, franchises
another 140 including 49
international facilities.
Papa John's International, Inc. Papa John's International, Inc.
operates franchise pizza delivery
and carry-out restaurants under the
"Papa John's" trademark. The Company
operates 1,160 restaurants, 303
company-owned and 857 franchised
restaurants, operating in 32 states
and the District of Columbia.
PJ America Inc. PJ America Inc. is a franchise of
Papa John's pizza restaurants. The
Company currently operates 46 Papa
John's restaurants in Alabama,
Virginia and Texas and has the
rights to develop restaurants in
Vancouver, Canada and certain parts
of California and the commonwealth
of Puerto Rico.
Quality Dining, Inc. Quality Dining, Inc. owns and
operates quick-service and casual
dining restaurants. The Company owns
the Bruegger's Bagel Bakery,"
"Grady's American Grill,"
"Spageddies Italian Kitchen" and
"Papa Vino's Italian Kitchen"
concepts. The Company also operates
"Burger King" restaurants and
"Chili's Grill & Bar" restaurants as
a franchisee.
Rally's Hamburgers, Inc. Rally's Hamburgers, Inc. operates
and franchises double drive-through
quick-service hamburger restaurants.
These restaurants offer a limited
menu of food service hamburger
restaurants. These restaurants offer
a limited menu of food items at
prices comparably lower than their
competitors. There are approximately
474 company-owned and franchised
restaurants located in 19 states.
E-6
<PAGE> 45
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
COMPARABLE COMPANIES
- --------------------------------------------------------------------------------
Sbarro, Inc. Sbarro, Inc. develops and operates a
chain of family-style,
cafeteria-type Italian restaurants
under the "Sbarro" and "Sbarro The
Italian Eatery" names. The Company
currently owns 820 and franchises
214 restaurants in the United States
and abroad.
Schlotzsky's, Inc. Schlotzsky's, Inc. franchises quick
service restaurants that offer
made-to-order sandwiches served on
distinctive sourdough bread, pizzas,
salads and soups. The Company
currently operates over 600
"Schlotzsky's" restaurants
worldwide.
Showbiz Pizza Time, Inc. Showbiz Pizza Time, Inc. operates a
system of 314 "Chuck E. Cheese's"
restaurants in 44 states, of which
244 are Company operated. The
Company's restaurants offer pizza,
sandwiches and other menu items and
feature entertainment by life-size
computer controlled robotic
characters, rides and arcade games.
Taco Cabana Taco Cabana operates a chain of 121
Mexican food restaurants which are
operated directly or through
franchises. The Company's
restaurants are currently located in
eight states.
Wendy's International, Inc. Wendy's International, Inc.
operates, develops and franchises a
system of fast food restaurants. The
Restaurants offer hamburgers, salads
and chicken sandwiches. The Company
operates or franchises over 4,933
"Wendy's" and "Tim Hortons"
restaurants in the United States and
33 countries and territories.
E-7
