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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____.
COMMISSION FILE NUMBER: 0-17442
MERITAGE HOSPITALITY GROUP INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2730460
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
40 PEARL STREET, N.W., SUITE 900
GRAND RAPIDS, MICHIGAN 49503
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (616) 776-2600
Securities registered pursuant to Section 12(b)
of the Act: COMMON SHARES, $0.01 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting shares held by non-affiliates as of
February 10, 1998 was $4,178,353 based on the average high and low bid price on
the OTC Bulletin Board on that date.
As of February 10, 1998, there were outstanding 4,992,182 Common Shares of the
Registrant.
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MERITAGE HOSPITALITY GROUP INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
<TABLE>
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PART I PAGE
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<S> <C> <C>
Item 1 - Business 3
Item 2 - Properties 11
Item 3 - Legal Proceedings 13
Item 4 - Submission of Matters to Vote of Security-Holders 13
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6 - Selected Financial Data 16
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 7A - Quantitative and Qualitative Disclosures About Market Risk 29
Item 8 - Financial Statements and Supplementary Data 30
Item 9 - Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 30
PART III
Item 10 - Directors and Executive Officers of the Registrant 31
Item 11 - Executive Compensation 33
Item 12 - Security Ownership of Certain Beneficial Owners and Management 34
Item 13 - Certain Relationships and Related Transactions 35
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 36
</TABLE>
Certain statements contained in this report that are not historical facts
constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. The Company
undertakes no obligation to update any forward-looking statements to reflect
events or circumstances after the date on which they are made.
Statements concerning expected financial performance, on-going business
strategies and possible future action which the Company intends to pursue in
order to achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors. Factors which could cause actual performance to differ materially from
these forward looking statements include, without limitation, factors discussed
in conjunction with a forward-looking statement, changes in general economic
conditions, competition, the ability to achieve cost reductions, the ability to
dispose of certain assets at favorable prices, increases in general interest
rates levels affecting the Company's interest costs (most of which are tied to
general interest rate levels), the ability to refinance outstanding debt on
favorable terms, and the ability to reduce or defer certain capital
expenditures.
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PART I
ITEM 1. BUSINESS
GENERAL
Meritage Hospitality Group Inc. ("Meritage" or "the Company") was
incorporated in 1986 and is engaged in the hospitality business through its
operation of two distinct business segments. The Company's Food Service Group
operates 25 "Wendy's Old Fashioned Hamburgers" restaurants throughout Western
and Southern Michigan. The Company's Lodging Group owns and operates two full
service hotels in Michigan. Meritage'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.
FOOD SERVICE GROUP
In the Food Service Group, the Company owns, through a wholly owned
subsidiary, a limited partnership known as Wendy's of Michigan which operates 25
"Wendy's Old Fashioned Hamburgers" restaurants throughout Western and Southern
Michigan pursuant to franchise agreements with Wendy's International, Inc.
Wendy's of Michigan is the successor to the Wendy's of West Michigan Limited
Partnership (whose assets were acquired by Wendy's of Michigan) which was
dissolved on January 30, 1998 (the "Dissolved Partnership"). MCC Food Service
Inc., a wholly-owed subsidiary of Meritage Capital Corp. ("MCC") (the largest
shareholder of Meritage), is the general partner of Wendy's of Michigan. Wendy's
of Michigan employs approximately 900 people and reported revenue of
approximately $27.1 million in fiscal 1997.
LODGING GROUP
In the Lodging Group, the Company owns and operates two full service
hotels: the 149-room Thomas Edison Inn located on the St. Clair River in Port
Huron, Michigan, and the 121-room Grand Harbor Resort 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. The Company also owned and operated the St. Clair Inn
which was sold (along with certain associated assets) for $3,800,000 on November
30, 1997.
FOOD SERVICE GROUP
The Company's 25 Wendy's restaurants are located in the Michigan counties
of Allegan, Calhoun, Kalamazoo, Kent, Muskegon, Ottawa and Van Buren. Wendy's of
Michigan (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 23 years. The ages of the
restaurants range from two to 24 years. The restaurants are subject to
encumbrances described in "Financing and Encumbrances".
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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 includes, among other things, baked and french fried potatoes, freshly
prepared salads, soft drinks and "Frosty" desserts. Wendy's International
maintains significant discretion over the menu items that may be offered in the
Company's 25 Wendy's restaurants.
Restaurants Layout and Operations
The Company's 25 Wendy's 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. until 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. These restaurants also feature drive-through
windows. Sales to drive-through customers accounted for approximately half of
Wendy's of Michigan's total sales in fiscal 1997.
A comprehensive reporting system provides restaurant sales and operating
data (including product sales mix, food usage and labor cost information) with
respect to each of the 25 Wendy's restaurants. Physical inventories of all food
items are taken weekly, and inventories of critical food items are taken twice a
day.
Marketing and Promotion
Wendy's International requires that at least 4% of restaurant sales be
contributed to an advertising and marketing fund, 2.5% of which is used to
benefit all restaurants owned and franchised by Wendy's International. The
Wendy's National Advertising Program uses these moneys to develop advertising
and sales promotion materials and concepts to be implemented nationally. The
remainder of the fund must be used on local advertising. Wendy's of Michigan
typically spends local advertising dollars in support of national television
advertising, local television and radio advertising, print media, local
promotions and community goodwill projects.
Raw Materials
The Company's 25 Wendy's restaurants comply with uniform recipe and
ingredient specifications provided by Wendy's International, and purchase their
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. Wendy's of Michigan purchases its
sandwich buns from local bakeries, and its soft drink products from the
Coca-Cola Company and its affiliates.
The Company has not experienced any significant shortages of food,
equipment, fixtures or other products which are necessary to restaurant
operations. While no such shortages are anticipated, the Company believes that
alternate suppliers are available if any shortage were to occur.
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Relationship with Wendy's International
Wendy's of Michigan operates pursuant to a consent agreement and 25
franchise agreements (one for each restaurant) with Wendy's International. These
agreements grant privileges such as the right to utilize Wendy's International's
trademarks, service marks, designs and other proprietary rights (such as
"Wendy's" and "Wendy's Old Fashioned Hamburgers") in connection with the
operation of its 25 Wendy's restaurants. These agreements also impose
requirements regarding the preparation and quality of food products, the level
of service, and general operating procedures. The franchise agreements currently
in place generally expire in 20 years. Subject to certain conditions, the
franchise agreements can be renewed for an additional 10 years.
The franchise agreements with Wendy's International provide, among other
things, that a change in the operational control of Wendy's of Michigan cannot
occur without the prior consent of Wendy's International. In addition, any
proposed sale of the Wendy's business, interests or franchise rights is subject
to the consent and right of first refusal of Wendy's International. These
agreements also grant Wendy's International wide discretion over many aspects of
restaurant operations, and often require the consent of Wendy's International to
carry out certain operational transactions. If Wendy's International's consent
is required and not obtained, Meritage will not be able to proceed with its
plans which, in turn, could adversely effect Meritage's growth strategy. If
Meritage were to proceed without Wendy's International's consent, Wendy's
International could terminate the franchise agreements or exercise its right to
purchase the Wendy's restaurants at fair market value.
Part of Meritage's business strategy is to expand its food service
operations through the acquisition and development of additional Wendy's
restaurants. In addition to paying monthly royalty fees, Meritage would be
required to pay Wendy's International technical assistance fees upon the opening
of new Wendy's restaurants. Meritage is permitted to develop new Wendy's
restaurants and convert competitive units located in its designated market area
(the Michigan counties of Allegan, Calhoun, Kalamazoo, Kent, Muskegon, Ottawa
and Van Buren) subject to the standard expandability criteria and site standards
of Wendy's International. Meritage is prohibited from acquiring or developing
new Wendy's restaurants outside of the designated market area unless the
prohibition is waived by Wendy's International in its 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 restaurants in Meritage's designated market area, and with any
quick-service restaurants outside of Meritage's designated 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.
The reputation of Meritage's 25 Wendy's restaurants 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, introduction of
new products, quality assurance and other operational systems.
Meritage cannot conduct its Wendy's operation without its affiliation with
Wendy's International. Any termination of the franchise agreements would have a
material adverse effect on Meritage's financial condition and results of
operations.
COMPETITION AND INDUSTRY CONDITIONS
The food service industry serves as the nation's largest retail employer,
providing jobs for over nine 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.
Historic changes in domestic lifestyles, favoring 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 Company's Wendy's restaurants are located in close proximity to
their principal quick-service restaurant competitors (e.g. McDonald's, Burger
King and Taco Bell)
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which compete on the basis of price, service, location, food quality and menu
variety. These competitors have attempted to draw customer traffic through a
strategy of deeply discounting the price of their products. However, neither
Wendy's International nor the Company believe this is a profitable long-term
strategy.
The following table compares the Company's average Wendy's restaurant same
store sales to the average same store sales of Wendy's International's
company-owned restaurants and to all Wendy's franchised restaurants.
<TABLE>
<CAPTION>
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YEAR MERITAGE OPERATED WENDY'S OPERATED ALL FRANCHISED
RESTAURANTS RESTAURANTS * RESTAURANTS *
-------------- ------------------------ ------------------------ ---------------------------
<S> <C> <C> <C>
1996 $1,052,000 $1,049,000 $978,000
-------------- ------------------------ ------------------------ ---------------------------
1997 $1,065,000 $1,110,000 $1,002,000
-------------- ------------------------ ------------------------ ---------------------------
</TABLE>
* Source: Wendy's International, Inc.
The Company intends to achieve growth by (i) developing new Wendy's
restaurants in its existing market, (ii) acquiring Wendy's restaurants in other
markets, and (iii) increasing sales at all Wendy's restaurants operated by the
Company. In addition, the Company is exploring other strategic acquisitions in
the chain restaurant industry that would significantly increase the size of its
Food Service Group.
The restaurant industry is subject to seasonal fluctuations. Like the rest
of the quick-service industry, traffic typically increases during the summer
months, which results in increased revenues during those months. During fiscal
1997, food service revenue generated by quarter was as follows: first quarter -
22%; second quarter - 26%; third quarter - 27%; and fourth quarter - 25%.
RISKS AND GOVERNMENTAL REGULATIONS
The Company's Food Service Group is subject to numerous risks inherent in
the food service industry. These include, among others, changes in local and
national economic conditions; changes in consumer tastes and concerns about the
nutritional quality of quick-service food; severe weather; changes in travel
patterns; increases in food, labor and energy costs; the availability and cost
of suitable restaurant sites; fluctuating insurance rates; the availability of
an adequate number of hourly-paid employees; the general reputation of Wendy's
restaurants; and the recurring need for renovation and capital improvements.
Also, the Wendy's restaurants are subject to extensive federal, state and local
government regulations relating to, among other things, zoning and the operation
of its restaurants. Congress recently passed the Minimum Wage Bill which revised
the minimum wage to $5.15 per hour as of September 1, 1997. Further changes
regarding minimum wage or other laws governing the relationship with employees
(e.g. overtime wage and health care coverage) could have an adverse effect on
the operations of the Food Service group.
The Wendy's restaurants are also subject to public health certification
regarding the preparation and sale of food. The Company believes its operations
would be adversely affected if these permits were terminated. The Company does
not anticipate, however, that its permits will be terminated.
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, a swimming pool and fitness facility. Approximately
340 employees are involved in the operation of the two 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:
<TABLE>
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Thomas Edison Inn Grand Harbor Resort
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<S> <C> <C>
Location in Michigan Port Huron Grand Haven/Spring Lake
Number of guest rooms 149 121
Year built 1987 1969
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<TABLE>
<CAPTION>
<S> <C> <C>
Date acquired by Meritage July 1987 October 1985
Capital improvements during
the year ended $67,000 $485,000
November 30, 1997
For the year ended November 30, 1997:
Average occupancy 63.4% 52.6%
Average daily rate $ 81.04 $ 75.46
Total room revenue/total
available rooms (RevPAR) $ 51.38 $ 39.72
</TABLE>
Thomas Edison Inn
The Thomas Edison Inn, which opened in 1987, is located on approximately 7
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 and 1997, the hotel
underwent a $717,000 renovation which included certain building improvements and
the installation of point-of-sale, property management and telephone systems.
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Grand Harbor Resort
The Grand Harbor Resort (formerly known as 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 hotel also derives substantial food and beverage revenue from local
clientele. In 1996 and 1997, the hotel underwent a $1,185,000 renovation
whereby, among other things, the exterior of the hotel was redesigned and
renovated to compliment and accentuate its nautical surroundings.
The hotels are subject to encumbrances described in "Financing and
Encumbrances."
COMPETITION AND INDUSTRY CONDITIONS
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. New hotel construction has increased rapidly
since the early 1990's. However, industry sources warn that while demand
continues to increase, supply (especially within the past two years) is
increasing quicker than overall demand resulting in occupancy rates that are
beginning to trend downward. Industry sources predict that demand will continue
an upward trend in 1998. But due to the rapid growth in supply, industry sources
forecast that occupancy rates and profits may experience a general decline in
1998.
The following table illustrates the percentages of occupancy for 1996 and
1997 as compared to the state and national occupancy rate for independent
hotels:
<TABLE>
<CAPTION>
--------------- ---------------------- ----------------------- ----------------------- ------------------------
FISCAL YEAR THOMAS EDISON INN GRAND HARBOR RESORT MICHIGAN AVERAGE* NATIONAL AVERAGE*
--------------- ---------------------- ----------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1996 65.5% 57.7% 53.4% 56.9%
--------------- ---------------------- ----------------------- ----------------------- ------------------------
1997 63.4% 52.6% 53.0% 57.0%
--------------- ---------------------- ----------------------- ----------------------- ------------------------
</TABLE>
* Source: Smith Travel Research
The following table illustrates the average daily room rates for the
Company's hotels during 1996 and 1997 as compared to the state and national
average for independent hotels:
<TABLE>
<CAPTION>
---------------- --------------------- ------------------------ ----------------------- -----------------------
FISCAL YEAR THOMAS EDISON INN GRAND HARBOR RESORT MICHIGAN AVERAGE* NATIONAL AVERAGE*
---------------- --------------------- ------------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1996 $ 80.48 $ 71.02 $ 61.05 $ 68.75
---------------- --------------------- ------------------------ ----------------------- -----------------------
1997 $ 81.04 $ 75.46 $ 63.66 $ 73.66
---------------- --------------------- ------------------------ ----------------------- -----------------------
</TABLE>
* Source: Smith Travel Research
The following table illustrates the revenue per available room (RevPAR) for
the Company's hotels during 1996 and 1997 as compared to the state and national
average for independent hotels:
<TABLE>
<CAPTION>
--------------- ---------------------- ----------------------- ----------------------- ------------------------
FISCAL YEAR THOMAS EDISON INN GRAND HARBOR RESORT MICHIGAN AVERAGE* NATIONAL AVERAGE*
--------------- ---------------------- ----------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1996 $ 52.75 $ 40.94 $ 32.60 $ 39.19
--------------- ---------------------- ----------------------- ----------------------- ------------------------
1997 $ 51.38 $ 39.72 $ 33.74 $ 41.99
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</TABLE>
* Source: Smith Travel Research
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
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well as independent hotels in each market segment. Business at the hotels varies
seasonally. Historically, demand has been greatest during the summer, resulting
in higher revenues during the Company's third fiscal quarter. During fiscal
1997, lodging revenue generated by quarter was as follows: first quarter - 21%;
second quarter - 22%; third quarter - 35%; and fourth quarter - 22%.
The Company operates the dominant full service hotels in its respective
markets. In an attempt 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.
RISKS AND GOVERNMENTAL REGULATIONS
The Company's Lodging Group is subject to all the risks inherent in the
lodging industry. These include, among others, changes in local and national
economic conditions; changes in federal, state and local government regulations
relating to the operation of the hotels and its restaurants; changes in travel
patterns, severe weather; changes in interest rates; fluctuating insurance
rates; the availability of an adequate number of hourly-paid employees; and the
recurring need for renovation and capital improvements. Because of the high
level of fixed costs required to operate full service hotels, certain
significant expenditures cannot generally be reduced when circumstances cause a
reduction in revenue. The Lodging Group is also sensitive to laws governing
relationships with its employees such as minimum and overtime wage laws,
insurance coverage requirements, and working conditions. Congress recently
passed the Minimum Wage Bill which revised the minimum wage to $5.15 per hour as
of September 1, 1997. Further changes regarding minimum wage or health care
coverage could have an adverse effect on the operations of the Company's hotels.
The hotel, restaurant and lounge operations within the Company's Lodging
Group are also subject to licensing requirements, including, but not limited to,
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.
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SALE OF HOTEL PROPERTIES
Market conditions in fiscal 1997 presented the Company with an opportune
time to explore the sale of one or more of its hotels. Also, any sale would be
consistent with the Company's desire to focus on the expansion and
diversification of its chain restaurant business. On November 30, 1997, the
Company's wholly-owned subsidiary sold the St. Clair Inn and certain associated
assets for $3,800,000. This sale resulted in a pre-tax gain for Meritage of
$1,479,095 and a reduction of long-term debt by approximately $3,200,000. In
addition, another of the Company's wholly-owned subsidiaries has entered into a
definitive agreement regarding the sale of the Thomas Edison Inn and certain
associated assets for $12,200,000. A non-refundable $500,000 deposit has been
paid by the prospective purchaser. If this sale is closed (and there are no
assurances that the sale will close), the Company will realize a pre-tax gain of
approximately $2,000,000 and a long-term debt reduction of approximately
$9,000,000. The Company is also exploring the sale of the Grand Harbor Resort
and the Grand Harbor Yacht Club.
FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
- --------------------------------- ---------------- ----------------- ------------------
1997 1996 1995
- --------------------------------- ---------------- ----------------- ------------------
<S> <C> <C> <C>
Revenue:
- --------------------------------- ---------------- ----------------- ------------------
Lodging Group $ 14,034,053 $ 14,762,822 $ 14,441,020
- --------------------------------- ---------------- ----------------- ------------------
Food Service Group 27,135,585 2,122,040 *
- --------------------------------- ---------------- ----------------- ------------------
Operating Profit or (Loss):
- --------------------------------- ---------------- ----------------- ------------------
Lodging Group (1,100,290) (966,885) (2,043,858)
- --------------------------------- ---------------- ----------------- ------------------
Food Service Group 1,062,644 (8,136) *
- --------------------------------- ---------------- ----------------- ------------------
- --------------------------------- ---------------- ----------------- ------------------
Identifiable Assets:
- --------------------------------- ---------------- ----------------- ------------------
Lodging Group 22,447,585 22,853,177 17,983,503
- --------------------------------- ---------------- ----------------- ------------------
Food Service Group 9,025,681 9,075,687 *
- --------------------------------- ---------------- ----------------- ------------------
</TABLE>
* The Company's Food Service Group commenced operations on November 1, 1996.
OTHER ASSETS
The Company has other 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) the Grand Harbor Yacht
Club, a 55-slip marina condominium development which borders the Grand River
adjacent to the Grand Harbor Resort, (iii) $5.1 million in life insurance
policies on the life of the Company's former President and Chief Executive
Officer, and (iv) 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 the Company's long-term indebtedness or fund acquisitions, capital
expenditures or other corporate purposes.
The undeveloped land adjacent to the Thomas Edison Inn is among the assets
to be sold in the agreement regarding the sale of the Thomas Edison Inn
described in "Sale of Hotel Properties" above.
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ITEM 2. PROPERTIES.
For a description of the properties that are owned and operated by the
Company and its subsidiaries, see Item 1.
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, the executive office of Wendy's of Michigan, and the
registered office of the Company and its subsidiaries. Wendy's of Michigan also
leases approximately 4,000 square feet of office space located at 4613 West
Main, Kalamazoo, Michigan 49006 as its operating headquarters.
The Company believes that its properties are adequately covered by
insurance.
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.
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 for the limited partnership units
of the Dissolved Partnership acquired in a tender offer conducted in the fall of
1996 and the costs associated therewith.
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 and a first priority security
interest in the hotel personal property. Loan I is guaranteed by the Company.
The loan terms were modified effective November 1, 1997, bearing a fixed
interest rate of 10.3% through October 31, 1997 and 11.25% thereafter, and
requiring equal monthly payments of principal and interest of $137,897 through
October 1997. Effective December 1, 1997, the required equal monthly payments of
principal and interest decreased to $118,724 (based upon a 20 year amortization
as calculated on the remaining balance of Loan I after the principal payment of
$3,050,000 following the sale of the St. Clair Inn) through December 1, 2003. At
that 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 3% if the sale
occurs before November 27, 1998; 2% if the sale is on or after November 27, 1998
but before November 27, 1999; and 1% if the sale is on or after November 27,
1999 but before November 27, 2000. If any sale occurs between November 27, 2000
and November 27, 2002, Loan I may be prepaid with a "make whole premium" as
defined in the loan agreement.
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 January 1, 1998 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, 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
Wendy's of Michigan. Both Loan I and II contain cross-default provisions.
11
<PAGE> 12
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 Harbor
Resort. The loan, as modified effective November 1, 1997, bears an interest rate
of prime plus 1%, fully floating through October 31, 1997 and 11.25% thereafter.
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. Any
remaining outstanding balance of principal and accrued interest is due September
1, 2000. Loan III is secured by the following: a mortgage on the real property
and marina facility owned by the Grand Harbor Yacht Club; third priority
mortgages on the real property owned by the 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 and Grand Harbor Resort; and an assignment of certain construction
agreements, management agreements, permits and contracts. Loan III also contains
cross-default provisions.
On September 30, 1997 the Company entered into Amendment No. 2 to the loan
agreement with GALIC and obtained a moratorium on payments due in the last three
months of 1997 on the mortgage loans (Loans I, II, and III). Also, interest
rates were adjusted on Loans I and III as discussed above. Based on the terms of
the loan agreement, the principal and interest payment moratorium extends to the
payments due on the note payable to the Company's Chairman of the Board.
Additionally, Amendment No. 2 grants a waiver of certain financial covenants
through December 31, 1998.
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.
Wendy's of Michigan has a revolving term loan agreement with First of
America Bank-Michigan, N.A. with permitted (amortized) borrowing of up to
$2,727,802. 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 Wendy's of Michigan to apply its excess cash against the loan balance to
reduce the interest charged on the loan. As of November 30, 1997, the loan was
paid down to a balance of $2,037,111. The loan is secured by substantially all
the assets of Wendy's of Michigan and guaranteed by Meritage.
ITEM 3. 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
vigorously contested the disallowance. In January 1998, Meritage and the IRS
reached a settlement whereby the IRS agreed to reduce its claim by 65% resulting
in a total tax liability for the Company of approximately $76,000. This tax
liability will be offset by the Company's net operating loss available for
carry-back and, therefore, should have no impact on the Company's financial
statements or cash flow.
On May 19, 1997, a majority limited interest of the Dissolved Partnership
(the former operator of the Company's 25 Wendy's restaurants) removed Wendy's
West Michigan, Inc. as general partner of the Dissolved Partnership and
appointed MCC Food Service, an affiliate of Meritage, as the substitute general
partner. This action was carried out in connection with Meritage's acquisition
of a controlling interest in the Dissolved Partnership, and in accordance
12
<PAGE> 13
with Meritage's representations during its tender offer in September 1996 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, MCC Food Service, Meritage Capital
Corp. and Meritage's principal officers (Case No. 97-05360-CB, Kent County
(Michigan) Circuit Court). The former general partner and its principal
shareholders sought, among other things, (i) a declaration that Wendy's West
Michigan, Inc. is the general partner of the Dissolved 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 Dissolved Partnership, (iii) unspecified damages for breach of
contract, and (iv) unspecified damages for various business torts and
misrepresentation. The former general partner attempted to assert claims on
behalf of the Dissolved Partnership as well. The former general partner's motion
for a temporary restraining order was denied on May 21, 1997. Three limited
partners and a former limited partner intervened into the lawsuit. In September
1997, the Dissolved 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. In January 1998, the former general partner filed a
motion to enjoin the dissolution of the Dissolved Partnership. The Court denied
this motion and the Dissolved Partnership was thereafter dissolved on January
30, 1998. Wendy's International has consented to MCC Food Service serving as the
general partner and to the dissolution of the Dissolved Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of fiscal 1997.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Meritage's Common Shares are quoted on the OTC Bulletin Board under the
symbol "MHGI" and listed on the Chicago Stock Exchange under the symbol "MHG."
Prior to October 18, 1995, there was no established public trading market for
the Company's Common Shares.
The following table sets forth the high and low bid prices for the
Company's Common Shares for the two most recent fiscal years as quoted on the
OTC Bulletin Board:
<TABLE>
<CAPTION>
---------------------------------------------- ----------- -----------
HIGH LOW
---------------------------------------------- ----------- -----------
FISCAL YEAR ENDED NOVEMBER 30, 1996
---------------------------------------------- ----------- -----------
<S> <C> <C>
First Quarter $ 7.13 $ 5.50
---------------------------------------------- ----------- -----------
Second Quarter $ 6.38 $ 5.63
---------------------------------------------- ----------- -----------
Third Quarter $ 6.38 $ 4.25
---------------------------------------------- ----------- -----------
Fourth Quarter $ 6.25 $ 4.25
---------------------------------------------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------- ----------- -----------
HIGH LOW
---------------------------------------------- ----------- -----------
FISCAL YEAR ENDED NOVEMBER 30, 1997
---------------------------------------------- ----------- -----------
<S> <C> <C>
First Quarter $ 6.25 $ 5.38
---------------------------------------------- ----------- -----------
Second Quarter $ 5.25 $ 4.00
---------------------------------------------- ----------- -----------
Third Quarter $ 4.00 $ 2.63
---------------------------------------------- ----------- -----------
Fourth Quarter $ 3.25 $ 2.63
---------------------------------------------- ----------- -----------
</TABLE>
The following table sets forth the high and low sales prices for the
Company's Common Shares beginning on October 22, 1996 (the first day of trading)
and ending on November 30, 1997 (the last day of fiscal 1997) as reported by the
Chicago Stock Exchange:
<TABLE>
<CAPTION>
---------------------------------------------- ----------- -----------
HIGH LOW
---------------------------------------------- ----------- -----------
FISCAL YEAR ENDED NOVEMBER 30, 1996
---------------------------------------------- ----------- -----------
<S> <C> <C>
October 22, 1996 - November 30, 1996 $ 6.25 $ 5.63
---------------------------------------------- ----------- -----------
FISCAL YEAR ENDED NOVEMBER 30, 1997
---------------------------------------------- ----------- -----------
First Quarter $ 5.63 $ 5.38
---------------------------------------------- ----------- -----------
Second Quarter $ 5.25 $ 4.50
---------------------------------------------- ----------- -----------
Third Quarter $ 4.00 $ 3.25
---------------------------------------------- ----------- -----------
Fourth Quarter $ 3.50 $ 3.50
---------------------------------------------- ----------- -----------
</TABLE>
HOLDERS
As of February 10, 1998, there were approximately 900 record holders of the
Company's Common Shares, which the Company believes represents approximately
1,700 beneficial holders.
DIVIDENDS
No dividends on Meritage's Common Shares were paid in fiscal 1997. Pursuant
to the Company's loan agreement with GALIC (see Item 2 "Financing and
Encumbrances"), the Company may not pay any further Common Share dividends
without GALIC's consent until Loan II has been paid in full. The Company does
not intend to pay any dividends on its Common Shares in 1998. Cash dividends on
Common Shares for the two most recent fiscal years are set forth below:
<TABLE>
<CAPTION>
- ---------------------------------------- ------------------------------------- ------------------------------------
DATE OF DIVIDEND PER SHARE TOTAL CASH DIVIDEND
- ---------------------------------------- ------------------------------------- ------------------------------------
<S> <C> <C> <C>
April 1996 $ 0.50 $ 1,510,075
- ---------------------------------------- ------------------------------------- ------------------------------------
</TABLE>
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth the selected financial information of the
Company.
(In thousands except for per share information)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Total revenue $ 41,170 $ 16,885 $ 14,441 $ 15,360 $14,245
Earnings (loss) from operations $ (195) $ (975) $ (2,044) $ 1,309 $ 1,064
Earnings (loss) before extraordinary
item and cumulative effect of
change in accounting principle $ (1,514) $ (1,926) $ (2,049) $ 90 $ 230
Net earnings (loss) $ (1,691) $ (1,926) $ (2,049) $ (27) $ 230
Preferred stock dividends $ 102 -- -- -- --
Net earnings (loss) on common shares $ (1,793) $ (1,926) $ (2,049) $ (27) $ 230
Earnings (loss) per common share
Before extraordinary item and cumulative
effect of change in accounting principle $ (0.50) $ (0.62) $ (1.13) $ 0.06 $ 0.15
After extraordinary item and cumulative
effect of change in accounting principle $ (0.56) $ (0.62) $ (1.13) $ (0.02) $ 0.15
Property & equipment $ 18,979 $ 21,757 $ 13,218 $ 13,645 $14,068
Total assets $ 31,473 $ 31,929 $ 17,984 $ 19,688 $20,004
Long-term obligations (1) $ 25,894 $ 24,293 $ 11,443 $ 12,647 $12,905
Cash dividends declared per common share $ 0.00 $ 0.50 $ 0.00 $ 0.00 $ 0.00
</TABLE>
(1) For comparative purposes, long-term obligations include current portions
of long-term obligations.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Comparison of Years Ended November 30, 1997 and 1996
LODGING GROUP
The following summarizes the results of operations for the Lodging Group
for the years ended November 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Statements of Operations
------------------------
$ in Thousands % of Revenue
-------------- -------------
1997 1996 1995 1997 1996 1995
------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Room revenue $ 6,096 $ 6,282 $ 5,999 43.5% 42.6% 41.5%
Food and beverage revenue 7,022 7,786 8,246 50.0 52.7 57.1
Telephone and sundry revenue 916 695 196 6.5 4.7 1.4
-------- -------- -------- ----- ----- -----
Total revenue 14,034 14,763 14,441 100.0 100.0 100.0
Costs and expenses
Cost of food and beverages 2,457 2,700 2,864 17.5 18.3 19.8
Operating expenses 8,546 8,166 7,215 60.9 55.3 50.0
General and administrative 2,964 3,854 4,980 21.1 26.1 34.5
Depreciation and amortization 1,167 1,010 1,427 8.3 6.8 9.9
-------- -------- -------- ----- ----- -----
Total costs and expenses 15,134 15,730 16,485 107.8 106.6 114.2
-------- -------- -------- ----- ----- -----
Loss from operations (1,100) (967) (2,044) (7.8) (6.6) (14.2)
Other income (expense)
Interest expense (2,499) (1,605) (1,355) (17.8) (10.9) (9.4)
Interest income 580 658 387 4.1 4.5 2.7
Gain (loss) on sale of assets 1,418 (7) 242 10.1 (0.0) 1.7
-------- -------- -------- ----- ----- -----
(501) (954) (727) (3.6) (6.4) (5.0)
-------- -------- -------- ----- ----- -----
Loss before federal income tax and
extraordinary item (1,601) (1,921) (2,771) (11.4) (13.0) (19.2)
Federal income tax benefit (15) (20) (721) (0.1) (0.1) (5.0)
-------- -------- -------- ----- ----- -----
Loss before extraordinary item (1,586) (1,901) (2,049) (11.3) (12.9) (14.2)
Extraordinary item - loss on early
extinguishment of debt - net of tax 177 -- -- 1.3 0.0 0.0
-------- -------- -------- ----- ----- -----
Net loss $ (1,763) $ (1,901) $ (2,049) (12.6%) (12.9%) (14.2%)
-------- -------- -------- ----- ----- -----
</TABLE>
REVENUE
Total revenue for the Lodging Group was $14,034,053 for fiscal 1997
compared to
16
<PAGE> 17
$14,762,822 for fiscal 1996, a decrease of 4.9%. The following table
outlines revenues (excluding sundry and telephone) by category:
<TABLE>
<CAPTION>
1997 1996 $ Decrease % Decrease
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Room revenue $ 6,095,723 $ 6,281,711 $(185,988) (3.0%)
Food and beverage revenue 7,021,466 7,786,154 (764,688) (9.8%)
----------- ----------- ---------
Total $13,117,189 $14,067,865 $(950,676) (6.5%)
----------- ----------- ---------
</TABLE>
The decrease in room revenue was attributable to a decrease in hotel
occupancy from 60.6% in fiscal 1996 to 58.7% in fiscal 1997. The decrease in
occupancy was partially offset by an increase in the overall average daily rate
of $4.36 (5.6%), from $77.40 in fiscal 1996 to $81.76 in fiscal 1997.
The decline in hotel occupancy was primarily attributable to increased
competition. Specifically, the hotels are experiencing the impact of new limited
service hotels which are targeting the price sensitive guest by offering lower
rates. In addition to the increased competition, the Grand Harbor Resort and the
adjacent Grand Harbor Yacht Club were under renovation during the past year
causing a negative impact on room revenue.
The decrease in food and beverage revenue of 9.8% from fiscal 1996 to
fiscal 1997 was also primarily attributable to increased competition in the
area. Catering sales 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 located a short distance from the St. Clair Inn was in operation
throughout fiscal 1997. While increased competition was the primary reason for
the decline in food and beverage revenue, certain changes in lounge
entertainment and menu offerings at the St. Clair Inn were not well received by
the local clientele, thus compounding the impact of increased competition.
The Company has addressed the effect of the increased competition by
implementing 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 1.3% during the last six months of
fiscal 1997 compared to an 18.5% decrease for the first six months of fiscal
1997, compared to the same periods in fiscal 1996.
Telephone and other revenue increased $221,908 (31.9%), from $694,957 in
fiscal 1996 to $916,865 in fiscal 1997. The increase in other revenue was
primarily attributable to the sale of four marina condominium units for $229,700
in fiscal 1997. Increased telephone revenue in fiscal 1997 was offset by a
reduction in other income from fiscal 1996 which included the recognition of
significant income from expired gift certificates.
COST OF FOOD AND BEVERAGES
Cost of food and beverages as a percentage of food and beverage revenue for
fiscal 1997 was 35.0% compared to 34.7% in fiscal 1996. The slight increase in
cost of food and beverages was attributable to the decline in catering functions
at the hotels, which have a relatively lower cost.
17
<PAGE> 18
OPERATING EXPENSES
Operating expenses for fiscal 1997 and fiscal 1996 were $8,546,219 and
$8,166,380, respectively, an increase of $379,839 (4.7%). As a percentage of
total revenue, operating expenses increased 5.6 percentage points, from 55.3% in
fiscal 1996 to 60.9% in fiscal 1997. The increase in fiscal 1997 compared to
fiscal 1996 is partially due to a one-time accounting adjustment of
approximately $171,000 which decreased property tax expenses in 1996. Cost of
marina condominium unit sales and an increase in property tax expenses in fiscal
1997 resulted in increased operating expenses of approximately $176,000 in
fiscal 1997 compared to fiscal 1996.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $889,614 (23.1%), from
$3,853,537 in fiscal 1996 to $2,963,923 in fiscal 1997. The decrease in fiscal
1997 compared to fiscal 1996 was partially due to approximately $375,000 of
non-recurring expenses including legal and professional fees and relocation
costs incurred in 1996 in connection with the replacement and restructuring of
management of the Company. Also contributing to the decrease was a reduction in
year-end bonuses. The remaining decrease was due to a significant reduction in
other legal and professional fees in fiscal 1997 compared to fiscal 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $157,218, from $1,009,771
in fiscal 1996 to $1,166,989 in fiscal 1997. The increase was attributable to
significant property, plant and equipment additions in the second half of 1996
which were depreciated for the full year in fiscal 1997.
INTEREST EXPENSE
Interest expense in fiscal 1997 and 1996 was $2,499,438 and $1,605,047
respectively. The increase of $894,391 from fiscal 1996 to fiscal 1997 was due
to additional borrowings. The additional debt included acquisition financing
relating to the acquisition of the units of the Dissolved Partnership in October
1996 and the development of the marina condominium project at the Grand Harbor
Yacht Club in 1997. See "Liquidity and Capital Resources," Item 2 "Financing and
Encumbrances," and Note G to the Meritage financial statements for details of
the Company's long-term debt.
INTEREST INCOME
Interest income decreased from $658,007 in fiscal 1996 to $580,095 in
fiscal 1997. The decrease in interest income was due to a decrease in cash and
cash equivalents during fiscal 1997. 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.
GAIN ON SALE OF ASSETS
The Company sold substantially all of the hotel assets of the St. Clair Inn
on November 30, 1997 for $3,800,000. The sale resulted in a pre-tax gain of
$1,479,095 before the extraordinary charge of $177,291 related to a prepayment
penalty and the write off of existing finance costs on the related long-term
debt. The Company ceased operating the hotel on November 30, 1997, which had
revenue of approximately $3,854,000 during fiscal 1997.
18
<PAGE> 19
FOOD SERVICE GROUP
On October 31, 1996, the Company acquired a majority interest in the
Dissolved Partnership. At November 30, 1997, the Company owned approximately 54%
of the Dissolved Partnership, all of which was acquired in fiscal 1996. Because
of this acquisition, the results of operations of the Wendy's business have been
included in the Company's Consolidated Statements of Operations beginning
November 1, 1996. Below is a summary of the results of the Food Service Group
(comprised of the Dissolved Partnership) for the year ended November 30, 1997
and unaudited pro forma results for comparative purposes for the year ended
November 30, 1996. Because the Dissolved Partnership was not a wholly owned
subsidiary during fiscal 1997 and because its daily operations are managed
separately, the Dissolved 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>
(Unaudited Pro Forma)
Year Ended Year Ended
November 30, 1997 November 30, 1996
----------------------------- ----------------------------
$ in Thousands % of Revenue $ in Thousands % of Revenue
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenue
Net revenue
Food and beverage revenue $ 26,860 99.0% $ 26,406 99.0%
Other revenue 276 1.0 263 1.0
-------- ----- -------- -----
Total revenue 27,136 100.0 26,669 100.0
Cost and expenses
Cost of food and beverages 7,673 28.3 7,803 29.3
Operating expenses 16,179 59.6 15,903 59.6
General and administrative 1,362 5.0 1,149 4.3
Depreciation and amortization 859 3.2 843 3.2
-------- ----- -------- -----
Total cost and expenses 26,073 96.1 25,698 96.4
-------- ----- -------- -----
Earnings from operations 1,063 3.9 971 3.6
Other income (expense)
Interest expense (432) (1.6) (442) (1.6)
Interest income 13 0.1 12 0.0
Loss on disposal of assets (219) (0.8) (25) (0.1)
-------- ----- -------- -----
Total other expense (638) (2.3) (455) (1.7)
-------- ----- -------- -----
Earnings before
federal income tax 425 1.6 516 1.9
-------- ----- -------- -----
Federal income tax -- 0.0 -- 0.0
-------- ----- -------- -----
Net earnings $ 425 1.6% $ 516 1.9%
-------- ----- -------- -----
</TABLE>
19
<PAGE> 20
REVENUE
Sales (excluding other income) increased 1.0% from $26,405,513 in fiscal
1996 to $26,860,546 in fiscal 1997. Excluding the store that was opened in March
1996 and the store that was closed in August 1997, sales on a per restaurant
basis for the Company's twenty-four restaurants in operation during the entire
twelve months of both fiscal 1997 and fiscal 1996 increased 1.2%, from an
average of $1,052,485 per restaurant in fiscal 1996 to $1,064,558 per restaurant
in fiscal 1997. Although sales increased only slightly for the year, they (i)
were comparable to the sales of Wendy's International's corporate owned
restaurants which had average sales of approximately $1,110,000 per restaurant
in 1997, and (ii) compared favorably with all Wendy's franchised restaurants
which had average sales of approximately $1,002,000 per restaurant in 1997.
COST OF FOOD AND BEVERAGES
Cost of food and beverages decreased $130,663 in fiscal 1997 compared to
fiscal 1996, while revenue increased $455,033 for the same period. This decrease
was the result of a 1.0 percentage point decrease in the Company's food and
beverage cost percentage (from 29.3% of revenue in fiscal 1996 to 28.3% of
revenue in fiscal 1997). The decrease in the Company's cost of food and beverage
percentage was primarily the result of relatively stable food costs throughout
fiscal 1997, and effective cost controls including the closing of the hot bar
portion of the restaurant "Superbars" which had a higher food cost than its
menu replacement - pita sandwiches.
RESTAURANT OPERATING EXPENSES
As a percentage of revenue, restaurant operating expenses remained at 59.6%
in fiscal 1997, the same as fiscal 1996. Increases in payroll costs of
approximately 0.7 percentage points and increased repair and maintenance costs
were offset by decreases in advertising and insurance expenses. On a per
restaurant basis, restaurant operating expenses increased from an average of
$620,000 per restaurant in fiscal 1996 to an average of $629,000 per restaurant
in fiscal 1997, an increase of 1.5% which is comparable to the 1.2% increase in
same store sales.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $212,881 in fiscal 1997
compared to fiscal 1996 (from $1,149,318 to $1,362,199). As a percentage of
revenue, general and administrative expenses increased from 4.3% of revenue in
fiscal 1996 to 5.0% of revenue in fiscal 1997. An increase in the Michigan
Single Business Tax of $117,218 (0.4 percentage points as a percentage of
revenue) was the primary reason for this increase. The Michigan Single Business
Tax for fiscal 1996 was abnormally low due to a partial refund of taxes paid in
four previous years. Increases in administrative salaries, recruiting costs and
a significant increase in professional fees accounted for the remaining
increase.
LOSS ON DISPOSAL OF ASSETS
The loss on disposal of assets was primarily attributable to the closing of
one of the Company's restaurants due to its continuing operating losses. As a
result of this restaurant closing, and the Company's decision not to exercise
the option to extend the lease of the restaurant building, the Company incurred
a loss on disposal of assets of $197,102.
20
<PAGE> 21
Comparison of Years Ended November 30, 1996 and 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 sundry and telephone) 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 hotels
during the second half of fiscal 1996.
Telephone and sundry 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 a change in revenue mix between room revenue and food and beverage
revenue (as a percentage of total revenue), cost of food and beverages 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 fiscal
1995.
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.
Increases in sales and marketing expenses, entertainment expense, and repairs
and maintenance also contributed to the increase in operating expenses.
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 resulting in the 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 hotels directly as compared to fiscal
1995 when the hotels were managed by a management company (owned by the former
majority
21
<PAGE> 22
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 Dissolved Partnership). The Company did not
receive any significant financial benefits in fiscal 1996 as a result of the
Dissolved Partnership acquisition which occurred on October 31, 1996.
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, certain property and equipment acquired in 1986 (the year of
incorporation) which had a ten year life became fully depreciated during fiscal
1995. As a result, depreciation expense for fiscal 1996 was lower compared to
fiscal 1995.
INTEREST EXPENSE
Interest expense for fiscal 1996 and 1995 was $1,605,047 and $1,355,389,
respectively. The increase of $249,658 from fiscal 1995 to fiscal 1996 was due
to additional borrowings in fiscal 1996. See Note G to the Company's Financial
Statements for details of the Company's long-term debt. Also see Item 2
"Financing and Encumbrances."
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 the
note receivable from the sale of stock which is described in Note K to the
Company's Financial Statements.
22
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows - Year Ended November 30, 1997
Cash and cash equivalents ("cash") decreased $1,204,022 from $2,265,497 as
of November 30, 1996 to $1,061,475 as of November 30, 1997. The decrease in cash
was the result of the following:
<TABLE>
<CAPTION>
<S> <C>
Net cash provided by operating activities $ 7,726
Net cash used in investing activities (1,348,766)
Net cash provided by financing activities 137,018
-----------
Net decrease in cash $(1,204,022)
===========
</TABLE>
Net cash provided by operating activities of $7,726 was a combination of
the net loss before depreciation, amortization and net gain on disposal of
assets of $531,005 which was offset by other non-cash effects on net income and
net cash provided by operating activities totaling $310,303. The net change in
non-cash current assets and liabilities accounted for the remaining $228,428 of
cash provided by operating activities. The net change in non-cash current assets
and liabilities included an increase in marina development costs of $352,773.
Net cash used in investing activities of $1,348,766 was the result of cash
purchases of property, plant and equipment of $1,127,537. Increases in other
assets accounted for the remaining $221,229.
Net cash provided by financing activities of $137,018 was the result of
proceeds of long term debt of $750,000, and proceeds from the issuance of
preferred and common shares of $313,519. These two items were offset by
principal payments of long term debt and payments of capital lease obligations
totaling $824,787. Preferred dividends paid during the year were $101,714,
making up the remaining portion of this item.
The Company incurred two new non-cash long-term debt borrowings during the
fiscal year. In addition to the $750,000 net proceeds from long term debt
discussed above, $244,637 was borrowed to finance an equipment purchase, and
$800,000 was borrowed to finance a portion of the marina development project at
the Grand Harbor Yacht Club.
Cash Flows - Year Ended November 30, 1996
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>
<CAPTION>
<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 Dissolved Partnership for $3,184,460
(net of cash acquired upon consolidation of the Dissolved 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 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. Total dividends paid were
23
<PAGE> 24
$1,510,075. 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. A dividend of
$775,000 was received by 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 November 30, 1997, the Company's current liabilities exceeded its
current assets by $2,183,568 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 0.73:1 and 1.03:1 respectively. The
discussion above of cash flows for the year ended November 30, 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 a
$932,000 increase in the current portion of long-term debt, representing the
principal payment requirements on Loan II which began January 1, 1998. Prior to
January 1, 1998, Loan II required payments of interest only. See point 2 below
for a description of the terms of Loan II.
As of November 30, 1997, the Company's long-term debt consists primarily of
the following:
1) $14,205,288 Loan I requiring monthly payments of $118,724, including
interest at 11.25% through December 1, 2003, at which time the
remaining unpaid principal will be due. (A)
2) $5,469,543 Loan II requiring monthly payments of interest only at 8%
over the prime rate through December 1, 1997. Beginning January 1,
1998, monthly principal payments of $50,000, plus interest at 8% over
the prime rate, are 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. (A)
3) $820,336 Loan III (marina) requiring monthly payments of interest only
at 11.25%. Principal payments of $35,000 are required at the time of
the sale of any of the marina condominium units. Any remaining
outstanding balance of principal and accrued interest is due September
1, 2000. As of November 30, 1997, the loan balance was $820,336 and
the Company had $75,000 of available borrowings under the loan. (A)
4) $2,037,111 revolving term loan requiring minimum monthly payments of
$43,313, including interest at 1% over the prime rate, through
February 2005 when any remaining unpaid principal will be due. The
required monthly payments may be offset by additional borrowings up to
the unused available borrowings. The Company had $690,691 of available
unused borrowings at November 30, 1997. The loan is secured by
substantially all of the assets of Wendy's of Michigan and guaranteed
by the Company.
5) $452,197 equipment note payable requiring monthly payments of $8,774,
including interest at 8.8%, through October 2000.
6) $770,767 note payable to the Company's Chairman of the Board of
Directors. 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 long-term debt with its primary lender. Unpaid
principal and accrued interest must be paid 91 days after Loans I, II
and III are paid off. (A)
(A) The loan agreement with the Company's primary lender was amended
September 30, 1997 (Amendment No. 2). This amendment addressed
three provisions of the loan agreement including (i) the waiver
of certain financial covenants, (ii) a principal and interest
payment moratorium, and (iii) interest rates charged on Loans I
and III. With regard to the first provision, a waiver was
obtained through December 31, 1998 for loan covenants regarding
the maintenance of a prescribed amount of net worth and certain
financial ratios. Second, Amendment No. 2 provided a moratorium
on principal and interest payments due in the last three months
of 1997 on Loans I, II and III. Finally, Amendment No. 2
increased the interest rates on Loans I and III effective
November 1, 1997 as described above.
Based on the terms of the loan agreement, the principal and
interest payment moratorium obtained in Amendment No. 2 extends
to the payments due on the note payable to the Company's Chairman
of the Board of Directors. As a result, the interest due on the
monthly payments that were waived was added to the principal
balances of the loans resulting in approximately $643,000 of
additional long-term debt as of December 31, 1997.
24
<PAGE> 25
A summary of the financial covenants as well as the Company's
compliance with them is as follows:
<TABLE>
<CAPTION>
COVENANT COVENANT 11/30/97 1/31/98 COVENANT
DESCRIPTION REQUIREMENT ACTUAL CONDITION ACTUAL CONDITION COMPLIANCE
<S> <C> <C> <C> <C> <C>
Waiver obtained
Minimum Net Worth through
$8,000,000 $29,961 ($814,699) 12/31/98
Coverage Ratio -
Earnings before
interest, taxes
depreciation and
amortization
("EBITDA") of Waiver obtained
hotels: through
Debt Service 1.20 : 1 .74 : 1 .65 : 1 12/31/98
Coverage Ratio -
EBITDA of hotels
less capital
expenditures :
Debt Service .40 : 1 .48 : 1 .49 : 1 In compliance
</TABLE>
The following schedule details the upcoming financial covenant requirements
as contained in the amended loan agreement:
FINANCIAL COVENANT - MINIMUM NET WORTH
<TABLE>
<CAPTION>
<S> <C>
January 1, 1998 - October 31, 1999 $ 9,250,000
November 30, 1999 - October 31, 2000 $10,750,000
November 30, 2000 - October 31, 2001 $12,500,000
November 30, 2001 - October 31, 2002 $14,500,000
November 30, 2002 - October 31, 2003 $16,500,000
</TABLE>
FINANCIAL COVENANT - COVERAGE RATIO - EBITDA OF HOTELS : DEBT SERVICE
<TABLE>
<CAPTION>
<S> <C>
February 28, 1999 - August 31, 2000 1.9 : 1
November 30, 2000 2.0 : 1
February 28, 2001 2.1 : 1
May 31, 2001 2.2 : 1
August 31, 2001 2.3 : 1
</TABLE>
FINANCIAL COVENANT - COVERAGE RATIO - EBITDA OF HOTELS LESS CAPITAL
EXPENDITURES : DEBT SERVICE
<TABLE>
<CAPTION>
<S> <C>
February 28, 1999 1.0 : 1
May 31, 1999 1.2 : 1
August 31, 1999 1.4 : 1
November 30, 1999 - February 28, 2001 1.6 : 1
May 31, 2001 - August 31, 2001 1.7 : 1
November 30, 2001 and thereafter 1.8 : 1
</TABLE>
25
<PAGE> 26
The Company faced significant cash flow and liquidity issues during the
second half of the fiscal year ended November 30, 1997. The Company completed
two transactions at or shortly after fiscal year end which provided cash flow
relief. The first transaction was the sale of the St. Clair Inn for $3,800,000
on November 30, 1997. Approximately $3,200,000 of the proceeds were used to pay
down long term debt, thereby reducing the Company's debt service requirements.
The sale of the St. Clair Inn also provided cash flow relief as the hotel had
historically operated with negative cash flow during the off-season. The other
transaction was the acquisition of the remaining 46% of the Dissolved
Partnership, thus giving the Company access to the cash flow provided by the
Wendy's operations. With the access to that cash flow and the reduced cash flow
needs resulting from the sale of the St. Clair Inn, the Company was able to
become current on its loan payments and its property taxes, and has the ability
to pay amounts that are past due to vendors. While the Company's cash flow
issues have been greatly relieved, had the Company not obtained the waiver from
its primary lender through December 31, 1998, it would not currently meet
certain financial performance covenants described above.
As the Company enters the current fiscal year, it faces the cash flow and
liquidity issues that are typical in a seasonal business. Due to the high level
of fixed costs required to operate the hotels, significant expenditures
necessary to the hotel operations cannot be reduced at the same rate that the
revenues decrease during the off-season. As such, the Company is in a cash flow
situation that requires it to manage relationships with vendors to allow for
extension of credit terms during the off-season, with the Company bringing its
accounts current during the high season (summer) months. In addition to the cash
flow and liquidity issues faced due to the seasonal nature of the business, the
Company is in a situation where it has been forced to carry the high interest
rate Loan II (prime plus 8% bridge loan) with its primary lender for a much
longer period of time than was originally contemplated. As a result, the
outstanding balance of Loan II is greater than anticipated and thus, carries
greater debt service than was planned. However, the Company anticipates that it
will be able to meet its current obligations over the next twelve months by:
Attempting to sell the vacant land held for expansion valued at
approximately $1,200,000.
Continuing its efforts to sell one or more of the Company's hotel
properties. See "Sale of Hotel Properties" included in Item 1 describing the
current agreement regarding the sale of the Thomas Edison Inn.
Borrowing on the available revolving term loan, which was approximately
$700,000 as of January 31, 1998.
Deferring the payment of the $160,000 annual general partner fee owed to
MCC Food Service.
Attempting to refinance the mortgage loan on the real estate owned by
Wendy's of Michigan which would net the Company approximately $2,000,000 from
the transaction after closing costs and retirement of the underlying mortgage
loans on the Wendy's properties. The $2,000,000 would be used to replace a
portion of the Company's high interest rate Loan II which would result in a
reduction in the Company's annual debt service.
Exploring the financing of certain of the planned capital expenditures as
opposed to a cash payment for the capital improvements, specifically with
respect to planned renovations at the Wendy's restaurants.
Managing relationships with vendors during the off-season to obtain an
extension of the credit terms.
Reducing or deferring capital expenditures described below.
There can be no assurances, however, that the Company will be able to
complete the above activities or that completion would yield the results
expected.
The Company estimates capital expenditures for the next twelve months to be
approximately $900,000 for building improvements and furniture, fixtures and
equipment purchases, at its hotels and existing Wendy's restaurants. The Company
has received various proposals to finance (through debt or lease) both the real
estate and furniture,
26
<PAGE> 27
fixtures and equipment of any new Wendy's restaurants. Of the total expected
amount of capital expenditures, the Company estimates expenditures at its full
service hotels to be approximately $300,000. This estimate does not include
approximately $80,000 of final expenditures on Grand Harbor Yacht Club.
On January 30, 1998, the Company issued 1,772,359 shares of Common Stock as
part of the acquisition of the remaining assets of the Dissolved Partnership.
INFLATION AND CHANGING PRICES
Both the lodging and food service industries have been affected by the
increase in the minimum wage and the availability of management and hourly
employees. Rising wage rates had a negative impact on the Company's operating
results for fiscal 1997. Increases 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
minimized the Company's ability to offset higher costs through price increases
to its customers.
COMPUTER SYSTEMS - YEAR 2000 IMPACT
The Company and its vendors have become increasingly reliant on computer
systems to process transactions and to provide relevant business information.
The majority of computer systems designed prior to the mid-1990's are
susceptible to a well publicized problem associated with an inability to process
date related information beyond the year 2000. Almost all of the Company's
computer hardware was acquired within the past two years. The Company is in the
process of reviewing its computer software with the assistance of the software
designers to insure that all significant software applications are year 2000
compliant, and anticipates completing its review during fiscal 1998. However,
the Company can make no assurance that all year 2000 risks to the Company and to
its critical vendor systems can be identified and successfully negated through
modification of existing programs. The Company does not expect to incur
significant costs to review its computer systems to determine what measures, if
any, are required to be year 2000 compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
27
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data included in the report
under this Item are set forth at the end of this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
28
<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors, Executive Officers and Significant Employees
The following is information concerning the current directors, executive
officers and significant employees of the Company as of February 10, 1998:
<TABLE>
<CAPTION>
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
COMMON SHARES PREFERRED SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
NAME AND AGE (1) POSITION AMOUNT (2) PERCENTAGE AMOUNT PERCENTAGE
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Robert E. Schermer, Sr. (3) (4) (5) Chairman of the Board 163,533 3.5% 20,000 14.5%
(6) (7) of Directors
62
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
Christopher B. Hewett (4) (5) (7) (8) President, Chief 1,623,629 32.1% 31,800 22.9%
(9) Executive Officer and
39 Director
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
Robert E. Schermer, Jr. (4) (7) (9) Executive Vice 48,972 1.0% 20,000 14.5%
(10) President and Director
39
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
Pauline M. Krywanski (9) Vice President, 2,000 * 0 --
37 Treasurer & Chief
Financial Officer
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
James R. Saalfeld (7) (9) Vice President, 7,334 * 1,067 *
30 Secretary and General
Counsel
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
Ray E. Quada Chief Operating 2,000 * 0 --
53 Officer of
Wendy's of Michigan
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
Gary R. Garrabrant (3) (5) (11) Director 6,395 * 0 --
40
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
David S. Lundeen (7) (11) Director 49,038 1.0% 12,500 9.0%
36
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
Joseph L. Maggini (3) (7) (12) Director 53,931 1.1% 10,000 7.2%
58
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
Jerry L. Ruyan (11) Director 208,288 4.2% 0 --
51
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
All Current Executive Officers and 2,165,120 41.6% 95,367 68.9%
Directors as a Group (10 persons)
- --------------------------------------- ----------------------- ----------------------------- ------------- ---------------
</TABLE>
(1) Unless otherwise indicated, the persons named have sole voting and
investment power and beneficial ownership of the securities.
(2) Includes options held by all non-employee directors to acquire 6,000 Common
Shares.
(3) Compensation Committee Member
(4) Executive Committee Member
(5) Nominating Committee Member
(6) Includes 2,000 shares held directly by Mr. Schermer, Sr.'s wife.
(7) Includes Common Shares issuable upon conversion of Series A Convertible
Preferred Stock which is immediately convertible.
(8) See description of Common Share ownership contained in "Principal
Shareholders" above.
(9) Includes options exercisable for Mr. Hewett of 20,000 shares, Mr. Schermer,
Jr. of 18,000 shares, and Mr. Saalfeld of 5,500 shares; and also includes
options exercisable within 60 days for Ms. Krywanski of 2,000 shares.
(10) Includes 600 shares held by Mr. Schermer, Jr. as a custodian for his minor
child.
(11) Audit Committee Member
(12) Includes 2,000 shares held by Mr. Maggini jointly with his wife, 1,100
shares held directly by his wife, and 1,000 shares held directly by his
son.
* Less than 1%
29
<PAGE> 30
Robert E. Schermer, Sr. has been a director of the Company since January
25, 1996. He is currently Senior Vice President, Regional Manager for the State
of Michigan and a member of the Board of Directors 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., an affiliate of
American Financial Group 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 is also a director of Frisch's Restaurants, Inc., which operates more
than 80 Big Boy Restaurants.
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 American Medical Response, a nationwide provider of healthcare
transportation and a wholly-owned subsidiary of Laidlaw, Inc. Her most recent
position with American Medical Response was Director of Financial Operations for
the Midwest Region. Ms. Krywanski is a Certified Public Accountant.
James R. Saalfeld has been Vice President, Secretary and General Counsel 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.
Ray E. Quada has been the Chief Operating Officer of Wendy's of Michigan
since its inception on January 30, 1998, and was the Chief Operating Officer of
its predecessor since March 1990. From 1994 through 1997, Mr. Quada was a
director of First Michigan Bank.
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 is also a director of Capital Trust, a
real estate finance company based in San Francisco.
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
30
<PAGE> 31
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). Mr. Ruyan is also a director of
Frisch's Restaurants, Inc.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons who own more than ten percent of the Company's
Common Shares to file reports of ownership with the SEC and to furnish the
Company with copies of these reports. Based solely upon its review of reports
received by it, or upon written representation from certain reporting persons
that no reports were required, the Company believes that during fiscal 1997 all
filing requirements were met, except for Mr. Maggini's late reporting of the
purchase of 1,000 Common Shares by his son, which transaction was reported on
his Form 5 upon discovery of this omission.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information regarding compensation paid by
the Company to its Chief Executive Officer and executive officers or significant
employees earning in excess of $100,000:
<TABLE>
<CAPTION>
==================================================================================================================
SUMMARY COMPENSATION TABLE
==================================================================================================================
ANNUAL COMPENSATION LONG-TERM COMPENSATION
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING COMPENSATION
OPTIONS
- -------------------------------- ---------- --------------- -------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Christopher B. Hewett (1) 1997 $157,500 $ 37,500 50,000 --
President and Chief Executive 1996 $127,735 $110,000(2) 50,000 --
Officer 1995 -- -- -- --
- -------------------------------- ---------- --------------- -------------- ------------------- -------------------
Robert E. Schermer, Jr. (1) 1997 $157,500 $ 17,500 45,000 --
Executive Vice President 1996 $114,961 $100,000(2) 45,000 --
1995 -- -- -- --
- -------------------------------- ---------- --------------- -------------- ------------------- -------------------
Ray E. Quada 1997 $105,666 $ 20,707(3) -- --
Chief Operating Officer 1996 -- -- -- --
Wendy's Of Michigan 1995 -- -- -- --
- -------------------------------- ---------- --------------- -------------- ------------------- -------------------
</TABLE>
(1) MCC acquired majority control of the Company on January 25, 1996 and
Messrs. Hewett and Schermer, Jr. assumed their positions as officers on
that date.
(2) Represents Series A Convertible Preferred Stock which Messrs. Hewett
and Schermer, Jr. elected to receive in lieu of a year-end cash bonus.
(3) Includes 2,000 shares of Meritage Common Stock valued at $10,000.
31
<PAGE> 32
STOCK OPTIONS
The following tables contain information concerning the grant of stock
options to the executives and employees identified in the Summary
Compensation Table and the appreciation of such options:
<TABLE>
<CAPTION>
===================================================================================================================
OPTION GRANTS IN FISCAL 1997
===================================================================================================================
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR OPTION
TERM
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE EXPIRATION
NAME OPTIONS GRANTED EMPLOYEES IN PRICE ($ DATE 5% 10%
FISCAL 1997 PER SHARE)
- -------------------------- ---------------- ---------------- -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Christopher B. Hewett 50,000 37.5 % $ 7.00 12/1/2006 $98,000 $363,500
- -------------------------- ---------------- ---------------- -------------- ----------- ------------ --------------
Robert E. Schermer, Jr. 45,000 33.7 % $ 7.00 12/1/2006 $88,200 $327,150
- -------------------------- ---------------- ---------------- -------------- ----------- ------------ --------------
</TABLE>
<TABLE>
<CAPTION>
===================================================================================================================
FISCAL 1997 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 FISCAL YEAR END
END
SHARES
ACQUIRED ON
NAME EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------- ---------------- ---------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C>
Christopher B. Hewett -- -- 10,000/90,000 $0/$0 (1)
- -------------------------- ---------------- ---------------- -------------------------- ---------------------------
Robert E. Schermer, Jr. -- -- 9,000/81,000 $0/$0 (1)
- -------------------------- ---------------- ---------------- -------------------------- ---------------------------
</TABLE>
(1) The Compensation Committee established the exercise price as $7.00 per
share. Because the stock at fiscal year end was trading for less than
$7.00 per share, no value for the options is shown.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following persons are the only shareholders known by the Company to
own beneficially 5% or more of its outstanding Common Shares as of
February 10, 1998:
<TABLE>
<CAPTION>
- --------------------------------------- ------------------------------------------------ -------------------------
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
- --------------------------------------- ------------------------------------------------ -------------------------
<S> <C> <C>
Christopher B. Hewett 1,623,629 32.1%
- --------------------------------------- ------------------------------------------------ -------------------------
</TABLE>
Mr. Hewett's beneficial ownership includes (i) 31,800 Series A
Convertible Preferred Shares which, if converted, would equal 45,429 Common
Shares, (ii) 20,000 vested stock options granted pursuant to the 1996 Management
Equity Incentive Plan, and (iii) 1,551,300 shares held by MCC of which Mr.
Hewett is the majority shareholder, an executive officer and a director. All of
MCC's Common Shares are pledged to GALIC as security for the loan between the
Company and GALIC described in Item 2 "Financing and Encumbrances." In the event
of a default by the Company under the loan agreement with GALIC, GALIC may
enforce its rights under the loan agreement, including the right to register the
pledged stock in its name and exercise all voting and corporate rights with
respect to the pledged stock.
32
<PAGE> 33
The business address of Mr. Hewett is 40 Pearl Street, N.W., Suite 900,
Grand Rapids, Michigan 49503.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Management believes that the following transactions were on terms no less
favorable to the Company than those that could be obtained from unaffiliated
parties.
At November 30, 1997, 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. The note was analyzed by Roney & Co., a nationally recognized
investment banking firm, as part of its review in delivering a fairness opinion
in 1995 regarding this transaction.
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 Loans I, II and III with
GALIC. Unpaid principal and accrued interest must be paid 91 days after Loans I,
II and III are paid off. Effective October 1, 1997 the Company obtained a
moratorium on payments due in the last three months of 1997 on Loans I, II and
III. Based on the terms of the loan agreement, the principal and interest
payment moratorium extends to the payments due on the note payable to Mr.
Schermer, and were added to the outstanding principal balance of the loan. The
loan had an outstanding principal balance of $770,767 as of November 30, 1997.
In January and May 1997, the Board of Directors authorized agreements
whereby MCC, its principals and its subsidiary, will be indemnified by the
Company and its applicable subsidiaries for any losses or expenses that they may
incur as guarantors of the Company's obligations to (i) its primary financing
institutions and (ii) its past and present franchisors.
In May 1997, the Company and its subsidiary indemnified MCC Food Service
upon its appointment as general partner of the Dissolved Partnership. MCC Food
Service and the Company agreed that MCC Food Service would be entitled to
receive the Partnership Administration Fee of $160,000 per year provided,
however, that the Company shall hold this fee and not remit it to MCC Food
Service until such time as Loan II is repaid or the Company's long-term lender
agrees that the fee should be released to MCC Food Service. Also, the Company's
subsidiary indemnified Ray E. Quada, the President of MCC Food Service,
regarding the removal and replacement of the former general partner of the
Dissolved Partnership.
While former Board of Director member Raymond A. Weigel, III served as a
director of the Company (until May 20, 1997), he was also a shareholder of the
former general partner of the Dissolved Partnership. During fiscal 1997, the
Dissolved Partnership paid management fees to the former general partner of
approximately $75,000. In addition, the former general partner also served as
general partner of a limited partnership that leased property to the Dissolved
Partnership for use in its restaurant operations. During the period in fiscal
1997 that Mr. Weigel served as a director of the Company, the Dissolved
Partnership made lease payments of approximately $205,000 to this entity
affiliated with Mr. Weigel.
34
<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) Financial Statements and Schedules.
All financial statements and schedules required to be filed by Item 8 of
this Form and included in this report are set forth at the end of this report
beginning on page F-1. No additional financial statements or schedules are being
filed since the requirements of paragraph (d) under Item 14 are not applicable
to the Company.
(a)(3) Exhibit List.
The following documents are exhibits to this Annual Report:
<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).
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).
10.1 First Amended & Restated Secured Promissory Note and Stock Pledge Agreement by
and between the Company and MCC (3).
10.2 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).
10.3 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).
10.4 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).
10.5 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).
</TABLE>
35
<PAGE> 35
<TABLE>
<CAPTION>
<S> <C>
10.6 Promissory Note dated May 23, 1997 by Grand Harbor Yacht Club Inc., as maker, and
Great American Life Insurance Company, as payee (1).
10.7 Waiver, Second Amendment and Modification Agreement dated September 30, 1997 to the
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 (4).
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. (5).
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 (5).
10.10 Consent Agreement dated May 16, 1997 between Wendy's International, Inc., Wendy's of
Michigan (as successor to 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).
10.11 Sample indemnification agreement for officers and directors of the Company (6).
</TABLE>
MANAGEMENT COMPENSATORY CONTRACTS
<TABLE>
<CAPTION>
<S> <C>
10.12 Amended 1996 Management Equity Incentive Plan (1).
10.13 Amended 1996 Directors' Share Option Plan (1).
10.14 Directors' Compensation Plan (7).
10.15 Employee Share Purchase Plan (7).
</TABLE>
----------------------------------
<TABLE>
<CAPTION>
<S> <C>
11 Statement re Computation of Per Share Earnings (6).
21 Subsidiaries of the Registrant (6).
23 Consent of Grant Thornton LLP (6).
27 Financial Data Schedule (6).
</TABLE>
36
<PAGE> 36
<TABLE>
<CAPTION>
Exhibits previously filed and incorporated by reference from:
<S> <C>
(1) The Quarterly Report on Form 10-Q for the Company's fiscal quarter ended May 31, 1997.
(2) The Annual Report on Form 10-K for the Company's fiscal year ended November 30, 1996.
(3) The Quarterly Report on Form 10-QSB for the Company's fiscal quarter ended May 31, 1996.
(4) Amendment No. 2 to the Registration Statement No. 333-33461 on Form S-4 filed with the Securities and
Exchange Commission by the Company on November 12, 1997.
(5) The Annual Report on Form 10-K for Wendy's of West Michigan Limited
Partnership for the fiscal year ended December 31, 1994.
(6) Filed herewith.
(7) Registration Statement No. 333-06657 on Form S-8 filed with the
Securities and Exchange Commission by the Company on June 24, 1996.
</TABLE>
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on December 15, 1997 to report the
sale of the real and personal property owned by its wholly-owned subsidiary, St.
Clair Inn, Inc., for $3,800,000.
The Company filed a report on Form 8-K on February 3, 1998 to report the
acquisition of the remaining 46% of the Wendy's of West Michigan Limited
Partnership in exchange for 1,772,359 Common Shares.
On February 10, 1998, the Company filed a report on Form 8-K to report that
a contract had been entered into regarding the sale of real and personal
property comprising, among other things, one of the Company's remaining hotel
assets. The sale price is $12,200,000, for which the Company received a $500,000
non-refundable deposit from the prospective purchaser.
On February 11, 1998, the Company filed Amendment No. 1 to the Form 8-K
filed on December 15, 1997 regarding the sale of the St. Clair Inn. This
amendment included unaudited pro forma consolidated financial statements
relating to the sale.
37
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERITAGE HOSPITALITY GROUP INC.
Dated: February 25, 1998 By /s/ Christopher B. Hewett
--------------------------------------
Christopher B. Hewett
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert E. Schermer, Sr. Chairman of the Board of Directors February 26, 1998
- ------------------------------------
Robert E. Schermer, Sr.
/s/ Christopher B. Hewett President, Chief Executive Officer and February 25, 1998
- ------------------------------------ Director (Principal Executive Officer)
Christopher B. Hewett
/s/ Robert E. Schermer, Jr. Executive Vice President and Director February 25, 1998
- ------------------------------------
Robert E. Schermer, Jr.
/s/ Pauline M. Krywanski Vice President, Treasurer and Chief February 25, 1998
- ------------------------------------ Financial Officer (Principal Financial
Pauline M. Krywanski & Accounting Officer)
/s/ Gary R. Garrabrant Director February 26, 1998
- ------------------------------------
Gary R. Garrabrant
/s/ David S. Lundeen Director February 26, 1998
- ------------------------------------
David S. Lundeen
/s/ Joseph L. Maggini Director February 26, 1998
- ------------------------------------
Joseph L. Maggini
/s/ Jerry L. Ruyan Director February 26, 1998
- ------------------------------------
Jerry L. Ruyan
</TABLE>
38
<PAGE> 38
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES Page
----
<S> <C>
Report of Independent Certified Public Accountants ..................M-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets..........................................M-2
Consolidated Statements of Operations................................M-4
Consolidated Statements of Stockholders' Equity......................M-5
Consolidated Statements of Cash Flows................................M-6
Notes to Consolidated Financial Statements ..........................M-9
SCHEDULES
Schedule I Condensed Financial Information of Registrant.............M-25
Schedule II Valuation and Qualifying Accounts........................M-28
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP Page
----
Independent Auditors' Report.........................................W-1
FINANCIAL STATEMENTS
Balance Sheets.......................................................W-2
Statements of Income.................................................W-4
Statements of Changes in Partners' Equity............................W-6
Statements of Cash Flows.............................................W-7
Notes to Financial Statements .......................................W-9
</TABLE>
F-1
<PAGE> 39
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, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended November 30, 1997. 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 did not audit the financial
statements of Wendy's of West Michigan Limited Partnership, a majority owned
subsidiary, which statements reflect total assets and revenues constituting 29
percent and 65 percent, respectively, of the related consolidated totals for
November 30, 1997. Those statements were audited by other auditors, whose report
thereon has been furnished to us and our opinion, insofar as it relates to the
amounts included for Wendy's of West Michigan Limited Partnership, is based
solely on the report of the other auditors.
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, based on our audit and the report of the other auditors, 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, 1997 and 1996 and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended November 30, 1997, in conformity with generally accepted
accounting principles.
We have also audited Schedule I of Meritage Hospitality Group Inc. and
Subsidiaries as of and for the year ended November 30, 1997 and Schedule II for
the years ended November 30, 1997, 1996 and 1995. In our opinion these schedules
present fairly, in all material respects, the information required to be set
forth therein.
Detroit, Michigan
January 12, 1998 (except for Note O
as to which the date is January 30, 1998
and Note P as to which the date is
February 9, 1998)
M-1
<PAGE> 40
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30,
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,061,475 $ 2,265,497
Trade accounts receivable, less allowance for doubtful
accounts of $65,000 and $54,000 respectively 631,732 938,448
Receivable from sale of hotel assets 3,601,063 --
Inventories 255,750 354,226
Deferred income taxes 22,000 14,000
Prepaid expenses and other current assets 282,243 487,295
----------- -----------
Total Current Assets 5,854,263 4,059,466
PROPERTY, PLANT AND EQUIPMENT, NET 18,979,313 21,757,068
DEFERRED INCOME TAXES 550,000 621,000
OTHER ASSETS
Goodwill, net of amortization of $2,278,454 and
$1,994,342, respectively 3,586,177 3,687,764
Land held for expansion 697,313 697,313
Financing costs, net of amortization of $108,014 and
$38,591, respectively 449,520 605,593
Cash surrender value of life insurance, net of policy
loans of $259,893 and $77,564, respectively 14,059 260,710
Marina development costs 1,152,772 --
Sundry, including franchise fees 189,849 239,950
----------- -----------
Total Other Assets 6,089,690 5,491,330
----------- -----------
Total Assets $31,473,266 $31,928,864
=========== ===========
</TABLE>
M-2
<PAGE> 41
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
NOVEMBER 30,
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 4,565,928 $ 395,120
Current portion of obligations under capital lease 264,372 232,442
Trade accounts payable 2,035,220 2,228,406
Accrued expenses 1,111,310 936,111
Other 61,001 164,275
------------ ------------
Total Current Liabilities 8,037,831 3,956,354
LONG-TERM DEBT 19,374,431 21,711,847
OBLIGATIONS UNDER CAPITAL LEASES 1,689,628 1,953,999
DEFERRED INCOME TAXES 740,000 818,000
DEFERRED COMPENSATION -- 61,444
COMMITMENTS AND CONTINGENCIES (NOTES I AND O) -- --
MINORITY INTEREST 1,601,415 1,405,777
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value; authorized 5,000,000 shares; 200,000
shares designated as Series A convertible cumulative preferred stock;
issued and outstanding, 138,387 shares in 1997 (liquidation
value - $1,383,870) and 108,387 shares in 1996 1,384 1,084
Common stock - $0.01 par value; authorized
30,000,000 shares; issued and outstanding
3,218,778 and 3,204,483 shares respectively 32,188 32,045
Additional paid in capital 12,982,295 12,616,727
Note receivable from sale of shares (5,700,645) (5,135,716)
Accumulated deficit (7,285,261) (5,492,697)
------------ ------------
Total Stockholders' Equity 29,961 2,021,443
------------ ------------
Total Liabilities and Stockholders' Equity $ 31,473,266 $ 31,928,864
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-3
<PAGE> 42
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30,
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net revenue
Room rents $ 6,095,723 $ 6,281,711 $ 5,999,024
Food and beverages 33,882,012 9,885,062 8,245,880
Sundry 940,920 555,049 149,321
Telephone 250,983 163,040 46,795
------------ ------------ ------------
Total revenue 41,169,638 16,884,862 14,441,020
Cost and expenses
Cost of food and beverages 10,129,824 3,334,434 2,863,554
Operating expenses 24,725,785 9,492,345 7,215,061
General and administrative expenses 4,326,123 3,951,400 4,979,621
Depreciation and amortization 2,183,256 1,081,704 1,426,642
------------ ------------ ------------
Total costs and expenses 41,364,988 17,859,883 16,484,878
------------ ------------ ------------
Loss from operations (195,350) (975,021) (2,043,858)
Other income (expense)
Interest expense (2,931,122) (1,642,735) (1,355,389)
Interest income 592,850 658,007 387,099
Gain (loss) on disposal of assets 1,200,702 (6,900) 241,646
Minority interest (195,639) 21,079 --
------------ ------------ ------------
(1,333,209) (970,549) (726,644)
Loss before federal income tax ------------ ------------ ------------
and extraordinary item (1,528,559) (1,945,570) (2,770,502)
Federal income tax benefit (15,000) (20,000) (721,400)
------------ ------------ ------------
Loss before extraordinary item (1,513,559) (1,925,570) (2,049,102)
Extraordinary item - loss on early extinguishment
of debt (no applicable federal income tax) 177,291 -- --
------------ ------------ ------------
Net loss (1,690,850) (1,925,570) (2,049,102)
Preferred stock dividends 101,714 -- --
------------ ------------ ------------
Net loss on common shares $ (1,792,564) $ (1,925,570) $ (2,049,102)
============ ============ ============
Loss per common share
Before extraordinary item $ (.50) $ (.62) $ (1.13)
Extraordinary item (.06) -- --
------------ ------------ ------------
Net loss $ (.56) $ (.62) $ (1.13)
============ ============ ============
Weighted average shares outstanding 3,214,836 3,081,885 1,815,984
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-4
<PAGE> 43
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
SERIES A NOTE
CONVERTIBLE ADDITIONAL RECEIVABLE
PREFERRED COMMON PAID-IN SALE OF
STOCK STOCK CAPITAL SHARES
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 1, 1994 $ $15,200 $ 5,217,820 $ --
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)
Net loss -- -- -- --
------- -------- ------------ ------------
Balance at November 30, 1995 -- 30,200 10,684,750 (5,602,532)
Issuance of 108,387 shares of preferred
stock 1,084 -- 1,082,786 --
Issuance of 184,333 shares of common
stock -- 1,845 1,139,281 --
Recognition of interest income on note
receivable from sale of shares -- -- -- (573,274)
Dividends paid ($.50 per common share) -- -- -- --
Payment and present value adjustment
on note receivable from sale of shares -- -- (290,090) 1,040,090
Net loss -- -- -- --
------- -------- ------------ ------------
Balance at November 30, 1996 1,084 32,045 12,616,727 (5,135,716)
Issuance of 14,295 shares of common
stock -- 143 65,868 --
Issuance of 30,000 shares of preferred
stock 300 -- 299,700 --
Dividends paid - preferred stock -- -- -- --
Recognition of interest income on note
receivable from sale of shares -- -- -- (564,929)
Net loss -- -- -- --
------- -------- ------------ ------------
Balance at November 30, 1997 $1,384 $32,188 $12,982,295 $(5,700,645)
======= ======== ============ ============
- -----------------------------------------------------------------------------
ACCUMULATED
DEFICIT TOTAL
------------ ------------
<S> <C> <C>
Balance at December 1, 1994 $ (7,950) $5,225,070
Issuance of common stock -- --
Recognition of interest income on
note receivable from sale of shares -- (120,602)
Net loss (2,049,102) (2,049,102)
------------ ------------
Balance at November 30, 1995 (2,057,052) 3,055,366
Issuance of 108,387 shares of preferred
stock -- 1,083,870
Issuance of 184,333 shares of common
stock -- 1,141,126
Recognition of interest income on note
receivable from sale of shares -- (573,274)
Dividends paid ($.50 per common share) (1,510,075) (1,510,075)
Payment and present value adjustment
on note receivable from sale of shares -- 750,000
Net loss (1,925,570) (1,925,570)
------------ ------------
Balance at November 30, 1996 (5,492,697) 2,021,443
Issuance of 14,295 shares of common
stock -- 66,011
Issuance of 30,000 shares of preferred
stock -- 300,000
Dividends paid - preferred stock (101,714) (101,714)
Recognition of interest income on note
receivable from sale of shares -- (564,929)
Net loss (1,690,850) (1,690,850)
------------ ------------
Balance at November 30, 1997 $(7,285,261) $ 29,961
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-5
<PAGE> 44
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30,
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,690,850) $(1,925,570) $(2,049,102)
Adjustments to reconcile net loss to net cash provided
by operating activities
Extraordinary item-loss on early extinguishment
of debt 177,291 -- --
Depreciation and amortization 2,183,256 1,081,704 1,426,642
Compensation paid by issuance of preferred and
common stock 52,492 310,099 --
Minority interest in earnings (loss) of consolidated
subsidiaries 195,639 (21,079) --
Deferred income tax benefit (15,000) (20,000) (431,900)
(Gain) loss on disposal of assets (1,200,702) 6,900 (241,646)
Bad debt expense 11,000 32,655 280,910
Interest income on note receivable from sale of
shares (564,929) (573,274) (120,602)
Interest expense refinanced as long-term debt 631,101 -- --
Decrease in cash value of life insurance 185,207 -- --
(Increase) decrease in assets
Accounts receivable 295,716 (201,742) 84,754
Inventories 44,389 41,198 (12,131)
Prepaid expenses and other current assets 202,150 104,707 (7,477)
Refundable income taxes -- 321,600 (318,705)
Increase in marina development costs (352,773) -- --
Increase (decrease) in liabilities
Accounts payable and accrued expenses (146,261) (653,617) 1,814,566
----------- ----------- -----------
Net cash provided by (used in) operating
activities 7,726 (1,496,419) 425,309
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,127,537) (2,211,392) (456,132)
Proceeds from sale of property, plant and equipment -- 40,146 616,646
Additions to amount due from related parties -- -- (682,248)
Payments on amount due from related parties -- 433,130 2,270,524
Acquisition of business, net of cash acquired -- (3,184,460) --
Increase in other assets (221,229) (679,214) (5,981)
----------- ----------- -----------
Net cash (used in) provided by investing
activities (1,348,766) (5,601,790) 1,742,809
</TABLE>
M-6
<PAGE> 45
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED NOVEMBER 30,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $ 750,000 $ 37,717,705 $ 46,887
Payments related to borrowings from
stockholders and related parties -- -- (248,163)
Principal payments of long-term debt (592,346) (29,446,007) (1,251,712)
Payments on obligations under capital leases (232,441) (29,808) --
Collection on note receivable from sale of shares -- 750,000 --
Proceeds from issuance of preferred and common shares 313,519 545,000 --
Dividends paid (101,714) (1,510,075) --
------------ ------------ ------------
Net cash provided by (used in) financing
activities 137,018 8,026,815 (1,452,988)
------------ ------------ ------------
Net increase (decrease) in cash (1,204,022) 928,606 715,130
Cash and cash equivalents - beginning of year 2,265,497 1,336,891 621,761
------------ ------------ ------------
Cash and cash equivalents - end of year $ 1,061,475 $ 2,265,497 $ 1,336,891
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest: $ 2,305,351 $ 1,709,312 $ 1,355,389
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of equipment
Cost of equipment $ 244,637
Equipment loan 244,637
------------
Cash down payment for equipment $ --
============
Marina development costs
Marina development costs $ 1,243,185
Marina condominium units sold 90,412
------------
1,152,773
Development mortgage loan 800,000
------------
Net increase in marina development costs $ 352,773
============
</TABLE>
M-7
<PAGE> 46
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED NOVEMBER 30,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------ ----------- -----------
Sale of hotel assets
<S> <C> <C> <C>
Net selling price after selling costs $ 3,664,663
Book value of property, plant and equipment sold 2,131,481
Current assets sold 54,087
------------
Net gain on sale before extraordinary item 1,479,095
Early extinguishment of debt 177,291
------------
$ 1,301,804
============
Increase in long term debt due to three month moratorium
on interest and principal payments $ 631,101
============
Acquisition of majority equity interest in Wendy's of
West Michigan Limited Partnership, including assets
acquired and liabilities assumed
Fair value of assets, net of cash acquired $10,532,850
Liabilities assumed 7,348,390
----------
$ 3,184,460
============
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.
Issuance of 1,500,000 shares of common stock in
exchange for a non-interest bearing note receivable $10,500,000
============
Discounted present value of note receivable $ 5,481,930
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-8
<PAGE> 47
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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, one which was sold on
November 30, 1997 (see Note C). The food service industry segment consists of a
limited partnership which operates twenty-five Wendy's Old Fashioned Hamburger
restaurants under franchise agreements with Wendy's International, Inc. All
operations of the Company are located in Michigan.
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 40 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.
FRANCHISE FEES
Franchise fees for one of the Company's hotels and the Company's restaurant
units are amortized using the straight-line method over the terms of the
individual franchise agreements. Effective October 15, 1997, the Company and its
hotel franchisor terminated their franchise agreement pursuant to the terms of a
voluntary termination agreement between the parties. As a result, $59,792 of
unamortized franchise fees were written off in October 1997.
M-9
<PAGE> 48
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCING COSTS
Financing costs are amortized using the straight-line method over the terms of
the various loan agreements.
GOODWILL AND LONG-LIVED ASSETS
Goodwill is amortized using the straight-line method over periods of up to
twenty years.
The Company performs a review for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Undiscounted future cash flows of an asset are compared with its
carrying value and if the cash flows are less than the carrying value, an
impairment loss is recognized. There is no impact on the financial statements
due to this review.
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.
LOSS PER SHARE
Loss per share is computed based upon the weighted average number of shares
outstanding during each year.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate their fair values.
M-10
<PAGE> 49
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share," which is effective for fiscal years beginning
after December 15, 1997. Early adoption of the standard is not permitted. The
new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this new
standard is not expected to have a significant impact on the disclosure of
earnings per share in the financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
financial statements. This statement also requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement is effective
for fiscal years beginning after December 15, 1997. Earlier application is
permitted. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The Company does not anticipate that
adoption of SFAS No. 130 will have a significant effect on its financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. This statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement requires the reporting of financial and descriptive information about
an enterprise's reportable operating segments. This statement is effective for
financial statements for fiscal years beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The Company does not anticipate that the adoption of SFAS No. 131 will
have a significant effect on its financial statements.
NOTE B - ACQUISITION
During 1996, the Company purchased 54% of the partnership interest in Wendy's of
West Michigan Limited Partnership (the "Wendy's Partnership") and at November
30, 1997 the Company had 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.
M-11
<PAGE> 50
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE B - ACQUISITION (CONTINUED)
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.
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.
<TABLE>
<CAPTION>
YEAR 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>
NOTE C - SALE OF HOTEL ASSETS
The Company sold substantially all of the hotel assets of the St. Clair Inn on
November 30, 1997 for $3,800,000. The sale resulted in a gain of $1,479,095
before the extraordinary charge of $177,291 related to a prepayment penalty and
the write off of existing finance costs on the related long-term debt. The
Company's equity increased $1,301,804 as a result of this transaction. The
Company ceased operating the hotel on November 30, 1997.
A portion of the receivable from the sale of the hotel assets, in the amount of
$3,329,282, is restricted for the payment of debt and related prepayment
penalties, which was paid in December 1997.
M-12
<PAGE> 51
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows at November 30,:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land and improvements $ 1,242,724 $ 2,014,914
Buildings and improvements 18,702,695 21,597,196
Furnishings and equipment 12,335,194 14,552,410
Leasehold improvements 2,144,520 2,192,253
Leased property/capital leases 2,825,338 2,825,338
------------ ------------
37,250,471 43,182,111
Less accumulated depreciation and amortization (18,271,158) (21,425,043)
------------ ------------
$ 18,979,313 $ 21,757,068
============ ============
</TABLE>
Depreciation and amortization expense was approximately $1,822,000, $1,012,000
and $883,000 for the years ended November 30, 1997, 1996 and 1995, respectively.
NOTE E - AMOUNTS DUE FROM RELATED PARTIES AND RELATED PARTY TRANSACTIONS
A Partnership administration fee is payable by the Wendy's Partnership 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 $160,000 in 1997 and $13,333 in 1996
(effective date of the Wendy's Partnership acquisition was November 1, 1996.)
The Company has entered into a note payable with the Chairman of the Board (see
Note G).
The Wendy's Partnership leases certain land and buildings from a partnership
related through common general partnership ownership with the former general
partner (see Note I).
NOTE F - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Payroll and related payroll taxes $ 525,716 $ 526,812
Property taxes 184,328 213,005
Professional fees 61,450 56,697
Interest and other expenses 339,816 139,597
---------- ----------
$1,111,310 $ 936,111
========== ==========
</TABLE>
M-13
<PAGE> 52
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following obligations at November 30,:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Mortgage note payable to insurance company, as
amended, due in monthly installments beginning
January 1, 1997 of $137,897 including interest at
10.3% through October 31, 1997 and $118,724
including interest at 11.25% thereafter through
December 1, 2003. (1) (5) $14,205,288 $14,000,000
Mortgage note payable to insurance company, as
amended, due in monthly installments of interest
at prime plus 8% beginning January 1, 1997
through December 1, 1997 and monthly installments
of principal of $50,000 beginning January 1, 1998
through March 1, 1998, $100,000 beginning April
1, 1998 through May 1, 2002 plus interest and
final principal payment plus interest due June 1,
2002. (2) (5) 5,469,543 5,250,000
Note payable to bank, due in monthly installments
of $14,693 including interest at 8.8% through
November 30, 1997 and $8,774 including interest
at 8.8% through October 8, 2000. (3) 452,197 582,359
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 $2,727,802 as of November
30, 1997. (4) 2,037,111 2,192,351
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. (5) 770,767 --
</TABLE>
M-14
<PAGE> 53
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE G - LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Mortgage note payable to insurance company, as
amended, due in monthly installments of interest
at prime plus 1% beginning June 1, 1997 through
October 30, 1997 and 11.25% thereafter. 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
November 30, 1997. (5) 820,336 --
Other notes and land contracts payable, requiring
monthly payments aggregating $11,610 and $4,100,
respectively, subject to interest at rates
ranging from 8.25% to 10.0% 185,117 82,257
----------- -----------
23,940,359 22,106,967
Less current portion 4,565,928 395,120
----------- -----------
$19,374,431 $21,711,847
=========== ===========
</TABLE>
The prime lending rate was 8.5% at November 30, 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.
(5) Effective October 1, 1997 the Company obtained a moratorium on payments due
in the last three months of 1997 on its mortgage notes payable. These
amounts were added to the principal of the related notes. Based on terms of
the loan agreement, the payment moratorium extends to the payments due on
the note payable to the Chairman of the Board.
M-15
<PAGE> 54
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE G - LONG TERM DEBT (CONTINUED)
Minimum principal payments on long-term debt to maturity as of November 30, 1997
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 4,565,928
1999 1,513,845
2000 2,559,799
2001 1,857,197
2002 1,612,287
Thereafter 11,831,303
-----------
$23,940,359
===========
</TABLE>
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, 1997 the Company failed
to meet certain of the financial covenants in its agreements with the insurance
company. A waiver has been obtained through December 31, 1998.
NOTE H - INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current benefit $ -- $ -- $(289,500)
Deferred benefit (15,000) (20,000) (431,900)
--------- --------- ---------
$ (15,000) $ (20,000) $(721,400)
========= ========= =========
</TABLE>
M-16
<PAGE> 55
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE H - INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at November 30, consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,358,000 $ 1,181,000
AMT credit carryforward 105,000 105,000
Allowance for doubtful accounts 14,000 8,500
Michigan Single Business Tax - Federal 57,000 63,000
Contribution carryforward 8,000 6,500
----------- -----------
1,542,000 1,364,000
Deferred tax liabilities
Depreciation (572,000) (635,000)
Michigan Single Business Tax - State (168,000) (183,000)
----------- -----------
(740,000) (818,000)
Less valuation allowance (970,000) (729,000)
----------- -----------
Net deferred tax liability $ (168,000) $ (183,000)
=========== ===========
</TABLE>
The net operating loss carryforwards expire in years 2010 - 2012.
The income tax provision reconciled to the tax computed at the statutory Federal
rate was as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax benefit at statutory rates applied to
income before federal income tax $(579,900) $(654,700) $(942,000)
Effect of nondeductible items 82,400 (51,000) 24,700
IRS adjustment to net operating loss 250,000
Difference in rates of net operating loss
carrybacks -- -- 151,300
Other (8,500) (4,000) 5,300
Valuation allowance 241,000 689,700 39,300
--------- --------- ---------
$ (15,000) $ (20,000) $(721,400)
========= ========= =========
</TABLE>
NOTE I - 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 thirteen years) ranging from one to twenty-three years. Included in the
leases are five with a real estate partnership related through common general
partnership ownership through May 19, 1997 when the former general partner was
removed (see Note O).
M-17
<PAGE> 56
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE I - LEASE COMMITMENTS (CONTINUED)
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>
YEAR ENDED NOVEMBER 30, 1997 1996
----------------------- ---------- ----------
<S> <C> <C>
Leases with related parties
Minimum rentals $ 143,127 $ 25,256
Percentage rentals 79,948 14,155
Other Leases
Minimum rentals 583,365 46,347
Percentage rentals 459,463 7,887
---------- ----------
$1,265,903 $ 93,645
========== ==========
</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:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED NOVEMBER 30, LEASES LEASES
------------------------ ----------- -----------
<S> <C> <C> <C>
1998 $ 465,323 $ 590,008
1998 465,323 445,516
2000 465,323 430,693
2001 449,365 409,622
2002 369,575 332,490
Thereafter 400,373 308,263
---------- ----------
Total minimum lease obligations 2,615,282 $2,516,592
==========
Less amount representing interest imputed at approximately 11% 661,282
----------
Present value of minimum lease obligations $1,954,000
==========
</TABLE>
The present value of minimum rental obligations is reflected in the balance
sheets as current and long-term obligations under capital leases.
M-18
<PAGE> 57
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE I - LEASE COMMITMENTS (CONTINUED)
Accumulated amortization of leased property under capital leases was $1,814,346
and $1,648,146, at November 30, 1997 and 1996, 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.
NOTE J - 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 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 K - NOTE RECEIVABLE FROM SALE OF SHARES
On September 19, 1995, a stock purchase and sale agreement (Agreement) was
executed by the Company, its then 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-19
<PAGE> 58
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE L - 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 the years ended
November 30, 1997, 1996 and 1995. The plan was terminated November 30, 1997. All
plan assets will be distributed to plan participants subsequent and subject to
various governmental regulations.
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 totaled $22,000
and $2,000 in 1997 and 1996, respectively.
The Wendy's Partnership had a deferred compensation agreement with a key
employee which provided for the payment of $150,000 upon the completion of the
five-year term of the agreement in December 1998. The agreement was funded by
the Wendy's Partnership through payment of premiums on a split dollar life
insurance contract. The agreement was terminated in April 1997.
In 1996, the Company established an Employee Stock Purchase Plan which provides
eligible employees the opportunity to purchase common shares of the Company.
Shares may be purchased through payroll deductions at a price equal to 85% of
the market value at the date of purchase.
NOTE M - 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. Amendments to the Incentive Plan and the Director's Plan which
increase the number of shares of common stock available for grant were approved
by stockholders on May 20, 1997.
The Incentive Plan, as amended, provides for 475,000 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, as amended, provides for the non-discretionary grant of
options to non-employee directors of the Company to purchase a combined maximum
of 120,000 shares. The plan provides that the option price is not less than the
greater of the fair
M-20
<PAGE> 59
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE M - STOCK OPTION PLANS (CONTINUED)
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.
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 DIRECTORS'
EQUITY INCENTIVE PLAN STOCK OPTION PLAN
--------------------------------- --------------------------------
AVERAGE OPTION AVERAGE OPTION
SHARES UNDER PRICE SHARES UNDER PRICE
OPTIONS PER SHARE OPTIONS PER SHARE
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at
December 1, 1995 - -
Granted during 1996 190,000 50,000
---------- ----------
Outstanding at
November 30, 1996 190,000 $7.00 50,000 $7.00
========== ==========
Granted during 1997 143,500 6,000
Canceled during 1997 (35,000) -
---------- ----------
Outstanding at
November 30, 1997 298,500 $7.00 56,000 $7.00
========== ========== ========== ==========
Exercisable at
November 30, 1996 - 50,000
========== ==========
Exercisable at
November 30, 1997 28,500 56,000
========== ==========
Available for grant at
November 30, 1996 110,000 10,000
========== ==========
Available for grant at
November 30, 1997 171,500 64,000
========== ==========
</TABLE>
M-21
<PAGE> 60
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
The Financial Accounting Standard Board has issued Statement No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"). The Statement
established a fair value method of accounting for employee stock options and
similar equity instruments such as warrants, and encourages all companies to
adopt that method of accounting for all of their stock compensation plans.
However, the statement allows companies to continue measuring compensation for
such plans using accounting guidance in place prior to SFAS No. 123. Companies
that elect to remain with the former method of accounting must make pro-forma
disclosures of net earnings and earnings per share as if the fair value method
provided for in SFAS No. 123 had been adopted.
The fair value of each grant is estimated on the date of grant using the
Black-Scholes option - pricing model with the following weighted average
assumptions for grants in 1997: dividend yield of 0%, expected volatility
ranging from 10.5%-63.4%, risk-free interest rates ranging from 6.2%-7% and
expected life of ten years.
The Company has not adopted the fair value accounting provisions of SFAS No.
123. Accordingly, SFAS No. 123 has no impact on the Company's financial position
or results of operations.
The Company accounts for the stock option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." No compensation costs have been
recognized. Had compensation cost for the plan been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS No.
123, the Company's net loss and loss per share would have been as follows:
<TABLE>
<S> <C>
Net Loss
As reported $ (1,792,564)
Pro Forma $ (2,196,009)
Loss per share
As reported $ (.56)
Pro Forma $ (.68)
</TABLE>
NOTE N - 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.
M-22
<PAGE> 61
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE N - BUSINESS SEGMENT INFORMATION (CONTINUED)
Data by business segment for the year ended November 30, 1997 is as follows:
<TABLE>
<CAPTION>
FOOD
LODGING SERVICE CONSOLIDATING CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 14,034,053 $ 27,135,585 $ -- $ 41,169,638
Earnings (loss) from operations $ (1,100,290) $ 1,062,644 $ (157,704) $ (195,350)
Identifiable assets $ 22,447,585 $ 9,025,681 $ -- $ 31,473,266
Depreciation and amortization
expense $ 1,166,989 $ 858,563 $ 157,704 $ 2,183,256
Capital additions $ 554,631 $ 817,543 $ -- $ 1,372,174
</TABLE>
NOTE O - 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 the 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. In January 1998,
the Company and IRS reached a settlement in principle whereby the IRS agreed to
reduce its claim by 65% resulting in a total tax liability for the Company of
approximately $76,000. This settlement will have no impact on the Company's net
earnings nor on its cash flow.
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 Inc., an affiliate of the Company, as the substitute
general partner. Approximately 180 unit holders (from whom the Company acquired
482.55 of its total partnership units) had previously consented to the removal
and substitution of the former general partner. This action was carried out in
connection with the Company's prior acquisition of a controlling interest in the
Wendy's Partnership. The former general partner subsequently commenced a lawsuit
against the Company and its affiliates seeking, 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. In
September 1997, the
M-23
<PAGE> 62
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE O - LEGAL PROCEEDINGS (CONTINUED)
Wendy's Partnership, the Company and certain of its affiliates 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. In January 1998,
the former general partner filed a motion to enjoin the dissolution of the
Wendy's Partnership. The court denied this motion and the Wendy's Partnership
was thereafter dissolved on January 30, 1998. Wendy's International has
consented to MCC Food Service Inc. serving as the general partner of the Wendy's
Partnership and to the dissolution of the Wendy's Partnership.
NOTE P - SUBSEQUENT EVENTS
The Company acquired the remaining 46% of the Wendy's Partnership in exchange
for 1,772,359 Common Shares on January 30, 1998.
The Company has entered into a contract for the sale of real and personal
property comprising, among other things, one of the Company's two remaining
hotel properties. A non-refundable deposit of $500,000 has been paid by the
prospective purchaser. If the sale is closed, the Company will receive
approximately $12,200,000 which will result in a pre-tax gain of approximately
$2,000,000 and long-term debt will be reduced by approximately $9,000,000. The
closing is scheduled for April 1, 1998, but there can be no assurances that the
sale will close.
M-24
<PAGE> 63
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERITAGE HOSPITALITY GROUP INC.
CONDENSED BALANCE SHEET
NOVEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 118,716
Receivable from sale of subsidiary's assets 3,187,782
Other current assets 29,025
------------
Total current assets 3,335,523
Property, plant and equipment, net 301,952
Investments in and advances to subsidiaries 17,455,533
Deferred income taxes 550,000
Other assets 402,281
------------
Total assets $ 22,045,289
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Current portion of long-term debt $ 4,438,776
Other current liabilities 377,532
------------
Total current liabilities 4,816,308
Deferred income taxes 740,000
Long-term debt 16,459,020
------------
Total liabilities 22,015,328
STOCKHOLDERS' EQUITY
Capital stock 7,315,222
Accumulated deficit (7,285,261)
------------
Total stockholders' equity 29,961
Total liabilities and stockholders' equity $ 22,045,289
============
</TABLE>
M-25
<PAGE> 64
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
MERITAGE HOSPITALITY GROUP INC.
CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1997
<TABLE>
<S> <C>
REVENUE
Equity in earnings of subsidiaries $ 2,595,397
Interest and dividend income 579,394
-----------
Total revenue 3,174,791
EXPENSES
General and administrative expenses 1,948,781
Depreciation and amortization 292,300
Interest expense 2,462,269
-----------
Total expenses 4,703,350
-----------
Loss before federal income tax (1,528,559)
Federal income tax benefit (15,000)
-----------
Loss before extraordinary item (1,513,559)
Extraordinary item - loss on early extinguishment
of debt (no applicable federal income tax) 177,291
-----------
Net loss (1,690,850)
Preferred stock dividends 101,714
-----------
Net loss on common shares $(1,792,564)
===========
</TABLE>
M-26
<PAGE> 65
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
MERITAGE HOSPITALITY GROUP INC.
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED NOVEMBER 30, 1997
<TABLE>
<S> <C>
NET CASH USED IN OPERATING ACTIVITIES $(2,429,935)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (35,166)
Decrease in other assets 149,136
-----------
Net cash provided by investing activities 113,970
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 750,000
Principal payments of long-term debt (295,328)
Proceeds from issuance of preferred and common shares 313,519
Dividends paid (101,714)
-----------
Net cash provided by financing activities 666,477
-----------
Net decrease in cash (1,649,488)
Cash and cash equivalents - beginning of year 1,768,204
-----------
Cash and cash equivalents - end of year $ 118,716
===========
</TABLE>
M-27
<PAGE> 66
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------------------------
Balance at (1) (2)
beginning Charged to Charged to other Deductions- Balance at
Description of period Cost & Expenses accounts-describe describe end of period
- ------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended November 30:
<S> <C> <C> <C> <C> <C> <C>
1997 $ 54,000 $ 22,977 -0- $ (11,977)* $ 65,000
1996 289,000 32,655 -0- (267,655)* 54,000
1995 24,000 275,910 -0- (10,910)* 289,000
</TABLE>
* Amount written off as uncollectible
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS:
Year ended November 30:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 $729,000 -0- $241,000** -0- $970,000
1996 39,300 -0- 689,700** -0- 729,000
1995 -0- -0- 39,300** -0- 39,300
**Increase to adjust allowance to the amount of net deferred taxes.
</TABLE>
M-28
<PAGE> 67
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, 1997 and 1996, and the related statements
of income, changes in partners' equity and cash flows for the year ended
November 30, 1997, eleven months ended November 30, 1996 and year ended December
31, 1995. 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, 1997 and 1996, and the results of its
operations and its cash flows for the year ended November 30, 1997, eleven
months ended November 30, 1996 and year ended December 31, 1995, in conformity
with generally accepted accounting principles.
January 9, 1998, except for Notes 6 and 7
which are as of January 30, 1998
W-1
<PAGE> 68
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 30, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Note 3)
CURRENT ASSETS
Cash $ 601,562 $ 394,066
Receivables, including amounts due from related parties 258,282 215,879
Inventories 156,746 180,250
Prepaid expenses 149,003 125,445
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,165,593 915,640
- --------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land 749,000 749,000
Leasehold improvements 2,144,520 2,192,253
Buildings and improvements 2,398,127 2,398,127
Furnishings and equipment 4,893,418 4,296,289
Vehicles 79,734 79,734
Leased property under capital leases (Note 4) 2,825,338 2,825,338
- --------------------------------------------------------------------------------------------------------------------
13,090,137 12,540,741
Less accumulated depreciation and amortization 7,236,594 6,643,697
- --------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 5,853,543 5,897,044
- --------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net of amortization of $2,179,320 and $1,981,200
1,782,967 1,981,087
Franchise fees, net of amortization of $406,552 and $395,488
153,448 154,512
Other 70,130 127,404
- --------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 2,006,545 2,263,003
- --------------------------------------------------------------------------------------------------------------------
$ 9,025,681 $ 9,075,687
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
W-2
<PAGE> 69
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 591,773 $ 770,770
Accruals:
Salaries and wages 368,611 349,320
Taxes 258,854 267,698
Percentage rent 88,086 107,257
Other current liabilities, including amounts due to related parties
51,492 38,546
Current maturities of long-term debt (Note 3) 126,294 -
Current maturities of obligations under capital leases (Note 4)
264,372 232,442
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,749,482 1,766,033
DEFERRED COMPENSATION (Note 2) - 61,444
OBLIGATIONS UNDER CAPITAL LEASES, less current maturities (Note 4)
1,689,628 1,953,999
LONG-TERM DEBT, less current maturities (Note 3) 2,059,411 2,192,351
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,498,521 5,973,827
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 4, 5, 6 and 7)
PARTNERS' EQUITY (Note 1)
Limited Partners 3,551,822 3,130,775
General Partner (24,662) (28,915)
- --------------------------------------------------------------------------------------------------------------------
TOTAL PARTNERS' EQUITY 3,527,160 3,101,860
- --------------------------------------------------------------------------------------------------------------------
$ 9,025,681 $ 9,075,687
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
W-3
<PAGE> 70
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Eleven
YEAR ENDED months ended Year ended
NOVEMBER 30, November 30, December 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 26,860,546 $ 24,438,338 $ 25,364,596
COST OF SALES 7,672,613 7,222,691 7,390,886
- --------------------------------------------------------------------------------------------------------------------
Gross profit 19,187,933 17,215,647 17,973,710
- --------------------------------------------------------------------------------------------------------------------
EXPENSES (INCOME)
Restaurant operating costs, including amounts to
related parties:
Labor 7,547,115 6,747,046 6,962,082
Occupancy 2,785,973 2,555,026 2,526,139
Advertising 1,638,409 1,535,930 1,519,903
Food service supplies 1,075,263 1,008,536 1,087,791
Royalties 1,074,427 977,508 1,014,569
Other 2,058,380 1,838,291 1,988,597
- --------------------------------------------------------------------------------------------------------------------
Total restaurant operating costs 16,179,567 14,662,337 15,099,081
General and administrative expenses, including
amounts to related parties 1,362,199 1,046,177 1,250,468
Depreciation and amortization 858,563 768,653 852,803
Interest expense 431,684 403,435 511,939
Loss on disposal of assets (Note 1) 218,601 25,453 1,097
Other income (287,981) (249,260) (236,309)
Insurance proceeds in excess of net book value of
fire damaged assets - - (32,377)
- --------------------------------------------------------------------------------------------------------------------
Net expenses 18,762,633 16,656,795 17,446,702
- --------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 425,300 558,852 527,008
EXTRAORDINARY ITEM - loss on extinguishment of debt - - (20,536)
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 425,300 $ 558,852 $ 506,472
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
W-4
<PAGE> 71
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Eleven
YEAR ENDED months ended Year ended
NOVEMBER 30, November 30, December 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income attributed to:
Limited Partners $ 421,047 $ 553,263 $ 501,407
General Partner 4,253 5,589 5,065
- --------------------------------------------------------------------------------------------------------------------
$ 425,300 $ 558,852 $ 506,472
- --------------------------------------------------------------------------------------------------------------------
Income before extraordinary item per unit of limited
partnership interest (1,256.8 units outstanding) $ 335.02 $ 440.22 $ 415.14
- --------------------------------------------------------------------------------------------------------------------
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) $ 335.02 $ 440.22 $ 398.96
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
W-5
<PAGE> 72
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, 1995 $ 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
Net income for the year 421,047 4,253 425,300
- --------------------------------------------------------------------------------------------------------------------
BALANCE, November 30, 1997 $ 3,551,822 $ (24,662) $ 3,527,160
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
W-6
<PAGE> 73
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Eleven
YEAR ENDED months ended Year ended
NOVEMBER 30, November 30, December 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 425,300 $ 558,852 $ 506,472
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 858,563 768,653 852,803
Loss on disposal of property and equipment 218,601 25,453 1,097
Undepreciated cost of equipment destroyed by fire
- - 1,194
Decrease (increase) in cash value of life insurance
61,444 (61,444) -
Increase (decrease) in deferred compensation (61,444) 61,444 -
Changes in operating assets and liabilities:
Receivables (42,403) (161,992) 13,681
Inventories 23,504 (34,443) 16,968
Prepaid expenses (23,558) 13,757 25,429
Accounts payable (178,997) (14,585) (8,681)
Accrued salaries and wages 19,291 44,276 21,391
Accrued taxes (8,844) (26,007) (35,821)
Accrued percentage rent (19,171) 27,441 (6,580)
Other current liabilities 12,946 (417) (11,234)
- --------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 1,285,232 1,200,988 1,365,778
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from disposal of property and equipment - 5,449 122,500
Additions to property and equipment (572,906) (427,872) (471,092)
Payment of franchise fees (10,000) - (50,000)
Purchase of other assets (11,106) (8,784) -
- --------------------------------------------------------------------------------------------------------------------
Net cash for investing activities (594,012) (431,207) (398,592)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
W-7
<PAGE> 74
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Eleven
YEAR ENDED months ended Year ended
NOVEMBER 30, November 30, December 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from long-term debt $ - $ - $ 2,022,499
Repayment of short-term notes payable - - (102,724)
Repayment of long-term debt (251,282) (307,989) (2,537,612)
Payments made on obligations under capital leases (232,442) (161,550) (142,920)
Distributions to partners - (317,374) (571,273)
- --------------------------------------------------------------------------------------------------------------------
Net cash for financing activities (483,724) (786,913) (1,332,030)
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 207,496 (17,132) (364,844)
CASH, beginning of period 394,066 411,198 776,042
- --------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 601,562 $ 394,066 $ 411,198
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense $ 437,014 $ 408,680 $ 499,673
- --------------------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING TRANSACTIONS
Long-term debt incurred for purchase of equipment $ 244,637 $ - $ -
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
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
W-8
<PAGE> 75
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 presently operates 25 Wendy's Old
Fashioned Hamburger restaurants in western
Michigan under franchise agreements with
Wendy's International, Inc. In August 1997,
the Partnership closed one of its restaurants
due to continuing operating losses. As a
result of this restaurant closing and the
Partnership not exercising its option to
extend its lease of the restaurant building,
the Partnership incurred a loss on disposal of
assets of $197,102.
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
financial statements do not reflect assets the
partners may have outside their interests in
the partnership, nor any personal obligations,
including income taxes, of the individual
partners.
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.
W-9
<PAGE> 76
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 $160,000, $146,667 and
$160,000 for 1997, 1996 and 1995,
respectively.
The Partnership shall exist until December 31,
2026, unless terminated sooner as provided in
the Partnership Agreement (see Note 7). A
Limited Partner may, in accordance with the
agreement, assign his/her interest in the
Partnership by a properly executed and
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, MHG
Food Service Inc. (MHG), a wholly owned
subsidiary of 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
changed its fiscal year-end to November 30 to
conform with Meritage's fiscal year-end.
CONCENTRATION OF CREDIT RISK
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. The General Partner believes that
the Partnership competes effectively in these
areas.
W-10
<PAGE> 77
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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
W-11
<PAGE> 78
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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 1997, 1996 and 1995 amounted to
$198,120, $181,610 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.
W-12
<PAGE> 79
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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.
2. DEFERRED The Partnership had a deferred compensation
COMPENSATION agreement with a key employee which provided
for the payment of $150,000 upon the
completion of the five-year term of the
agreement in December 1998. The agreement was
funded by the Partnership through payment of
premiums on a split dollar life insurance
contract. The agreement was terminated in
April 1997. Charges to operations related to
this agreement were $10,630, $27,913 and
$25,295 for 1997, 1996 and 1995, respectively.
W-13
<PAGE> 80
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. LONG-TERM DEBT Long-term debt at November 30, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
November 30, 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Revolving term note payable - bank $ 2,037,111 $ 2,192,351
Equipment note payable 148,594 -
-------------------------------------------------------------------------------
2,185,705 2,192,351
Less current maturities 126,294 -
-------------------------------------------------------------------------------
Long-term debt, less current maturities
$ 2,059,411 $ 2,192,351
-------------------------------------------------------------------------------
</TABLE>
The revolving term note payable - bank is
secured by substantially all assets of the
Partnership and by the unsecured corporate
guaranty of Meritage. The loan agreement
requires monthly payments of $43,313,
including interest at 1% over prime
(effectively 9.5% at November 30, 1997)
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
$2,727,802 as of November 30, 1997. 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 cash
availability, financial ratios and a minimum
tangible net worth, as defined in the loan
agreement, of approximately $968,000. The
Partnership was in compliance with these
covenants at November 30, 1997. The loan
agreement also requires that the Partnership
not exceed $400,000 of capital expenditures in
any one year. During 1997, the Partnership's
capital expenditures exceeded the covenant.
The bank agreed to waive the covenant for
1997.
W-14
<PAGE> 81
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The equipment note payable is unsecured and
requires monthly payments of $11,290,
including interest at 10% through January
1999.
The following is a schedule by year of annual
maturities under the loan agreements:
<TABLE>
<CAPTION>
Year ending November 30,
-------------------------------------------------------------------------------
<S> <C>
1998 $ 126,294
1999 22,300
2000 232,940
2001 375,677
2002 415,587
Later years 1,012,907
-------------------------------------------------------------------------------
$ 2,185,705
-------------------------------------------------------------------------------
</TABLE>
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 thirteen years) ranging from
WITH AFFILIATED one to twenty-three years. Included in the
PARTNERSHIP) leases are five leases with parties related
through common ownership with the former
general partner. (See Note 6.)
W-15
<PAGE> 82
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 1997 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Leases with related parties:
Minimum rentals $ 143,127 $ 266,358 $ 230,848
Percentage rentals 79,948 168,370 150,867
Other leases:
Minimum rentals 583,365 403,613 414,539
Percentage rentals 459,463 275,993 309,228
-------------------------------------------------------------------------------
$ 1,265,903 $ 1,114,334 $ 1,105,482
-------------------------------------------------------------------------------
</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
noncancelable operating leases in effect are
as follows:
<TABLE>
<CAPTION>
Capital Operating
Year ending November 30, leases leases
-------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 465,323 $ 590,008
1999 465,323 445,516
2000 465,323 430,693
2001 449,365 409,622
2002 369,575 332,490
Later years 400,373 308,263
-------------------------------------------------------------------------------
Total minimum lease obligations 2,615,282 $ 2,516,592
--------------
Less amount representing interest imputed
at approximately 11% 661,282
------------------------------------------------------------
Present value of minimum lease obligations
$ 1,954,000
------------------------------------------------------------
</TABLE>
W-16
<PAGE> 83
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 $1,814,346 and
$1,648,146 at November 30, 1997 and 1996,
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.
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 deductions. Contributions to
the plan by the Partnership for the periods
ended 1997, 1996 and 1995, totaled $22,000,
$30,721 and $12,000, respectively.
6. LEGAL PROCEEDINGS On May 19, 1997, a majority limited interest
of the Partnership removed Wendy's West
Michigan, Inc. as general partner of the
Partnership and appointed MCC Food Service
Inc. (MCC), an affiliate of Meritage, as the
substitute general partner. Approximately 180
unit holders (from whom MHG Food Service Inc.
(MHG) acquired 482.55 of its total partnership
units) had previously consented to the removal
and substitution of the former general
partner. This action was carried out in
connection with MHG's prior acquisition of a
controlling interest in the Partnership. The
former general partner subsequently commenced
a lawsuit against Meritage and its affiliates
seeking, among other things, (i) a declaration
that Wendy's West Michigan, Inc. is the
general partner of the Partnership, (ii)
injunctive relief in the form of a temporary
restraining order or a preliminary injunction
which
W-17
<PAGE> 84
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
would prohibit the defendants from
participating in the management of the
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. In September
1997, the Partnership, Meritage and certain of
its affiliates 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. In January 1998,
the former general partner filed a motion to
enjoin the dissolution of the Partnership. The
court denied this motion and the Partnership
was thereafter dissolved on January 30, 1998.
Wendy's International, the franchisor, has
consented to MCC serving as the general
partner of the Partnership and to the
dissolution of the Partnership. Management
believes there is no basis for the Plaintiffs'
claims but cannot at this time predict the
likely outcome of this litigation. It is
management's opinion that these proceedings
are not expected to have a material adverse
effect on the Partnership's operations or
financial position.
7. DISSOLUTION OF Through the filing of Form S-4 with the
PARTNERSHIP Securities and Exchange Commission, which was
effective on November 25, 1997, the holders of
limited partnership units of the Partnership
were notified of the sale of all the assets of
the Partnership to a limited partnership
affiliated with Meritage and the subsequent
dissolution of the Partnership. As a result of
the transaction, on January 30, 1998, the
newly formed limited partnership acquired all
the assets and assumed all the liabilities of
the Partnership and succeeded to all business
operations that had been conducted by the
Partnership. Upon dissolution, Meritage common
shares were distributed to non-affiliated
limited partners on the basis of that number
of Meritage common shares that had a value of
$7,500 per unit, based on the average high and
low bid price quoted on the OTC Bulletin Board
for the 10 trading days preceding the date of
dissolution ($2.4375 per share).
W-18
<PAGE> 1
Exhibit 10.11
OFFICER INDEMNIFICATION AGREEMENT
---------------------------------
This Agreement is made this_____day of_______, 19___ by MERITAGE
HOSPITALITY GROUP INC., a Michigan corporation (the "Company"), and (name) ,
the (title) of the Company (the "Officer").
A. It is essential to the Company to retain and attract as officers the
most capable persons available.
B. The substantial increase in corporate litigation subjects corporate
officers to the possibility of expensive litigation risks and it is therefore
reasonable, prudent and necessary for the Company contractually to obligate
itself to indemnify officers to the fullest extent permitted by law so that
capable persons will serve or continue to serve the Company.
C. The Officer is willing to serve, continue to serve and to take on
additional service for or on behalf of the Company on the condition that the
Officer be so indemnified.
NOW, THEREFORE, in consideration of the covenants contained herein and of
the Officer's continuing service to the Company, the Company and the Officer do
hereby agree as follows.
1. Definitions. The following terms as used in this Agreement shall have
the following respective meanings;
"Expenses" means all expenses, liabilities and losses, including
attorneys' fees, judgments, fines, penalties and amounts paid or to be paid in
settlement of a Proceeding.
"Proceeding" means any threatened, pending or completed action, suit,
deposition or proceeding (or part thereof), whether civil, criminal,
administrative or investigative and whether formal or informal.
2. Indemnification by the Company. Subject to the terms and conditions of
this Agreement, the Company shall, to the extent permitted by law, indemnify,
defend and hold harmless the Officer from and against all Expenses reasonably
incurred or suffered by the Officer in connection with any Proceeding in which
the Officer is or was a party, or is threatened to be made a party, by reason
of the fact that the Officer is or was an officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. This Agreement shall not
be construed as a contract or guaranty of employment between the Company and
the Officer for any specific duration.
3. Standard of Conduct. The Company shall be obligated under this
Agreement to indemnify the Officer only if the Officer acted in good faith and
in a manner the Officer reasonably believed to be in or not opposed to the best
interests of the Company or its shareholders. Indemnification under this
Agreement shall be made by the Company only upon a determination and evaluation,
made in the manner specified in Section 564a of the Michigan Business
Corporation Act, as amended, that the Officer met the standard of conduct
prescribed in the first sentence of this Paragraph.
1
<PAGE> 2
4. Indemnification Only to Extent Permitted by Law. In no event shall
this Agreement by construed to obligate the Company to do any act or thing not
permitted by applicable law.
5. Assumption of Claim. Subject to the terms and conditions of this
Agreement, the Company shall assume the defense of any Proceeding with respect
to which indemnification is sought, with counsel of its choice, upon written
notice to the Officer of the Company's election to do so. After delivery of
such notice, the Company will not be liable to the Officer under this Agreement
for any expenses (including legal expenses) subsequently incurred by the
Officer in defending such Proceeding. Notwithstanding the foregoing, the
Officer shall always have the right to employ his or her own counsel in any
Proceeding but the fees and expenses of such counsel incurred after delivery of
notice from the Company of its assumption of such defense shall be at the
Officer's expense.
6. Expenses. Subject to the foregoing, the right to indemnification
conferred hereunder shall include the right to be paid by the Company the
Expenses incurred in defending any such Proceeding as they become due in
advance of its final disposition, provided, however, that the payment of such
Expenses incurred by the Officer in advance of the final disposition of a
Proceeding shall be made only upon (i) delivery to the Company of a written
affirmation of the Officer's good faith belief that he or she has met all
applicable standard of conduct set forth in Paragraph 3 above, (ii) delivery to
the Company of a written undertaking, executed personally or on behalf of the
Officer, to repay all advances if it is ultimately determined that the Officer
did not meet the standard of conduct set forth in Paragraph 3 above, and (iii)
a determination that the facts then known to those making the determination
would not preclude indemnification by the Company.
7. Non-Exclusivity of Rights. The indemnification rights provided for
herein are not exclusive of any other rights to which the Officer may be
entitled under any statute, Bylaws of the Company, Articles of Incorporation of
the Company, agreement with the Company, vote of shareholders, or otherwise,
and such rights shall continue after the Officer ceases to serve the Company as
an officer.
8. Settlement. The Company shall have no obligation under this Agreement
with respect to any settlement or compromise entered into by the Officer
without the Company's prior written approval. If the Officer declines to accept
a bona fide offer of settlement or compromise that is recommended by the
Company, the maximum liability of the Company shall not exceed that amount that
the Company would have been liable for had the Officer accepted such settlement
or compromise. The Company shall not settle any claim in any manner which would
impose any obligation on the Officer without the Officer's written consent.
Neither the Company nor the Officer shall unreasonably withhold any consent to
any proposed settlement or as otherwise required herein.
9. Severability. If any provision of the Agreement is determined by a
court of competent jurisdiction to be in violation of applicable law, such
provision shall be limited or modified in its application to the minimum extent
necessary to avoid a violation of law, and, as so limited or modified, such
provision and the balance of this Agreement shall be enforceable in accordance
with their terms.
10. Successors and Assigns. This Agreement shall be (i) binding upon all
successors and assigns of the Company, including any transferee of all or
substantially all of its assets and any successor by merger or otherwise by
operation of law, and (ii) shall be binding on and inure to the benefit of the
heirs, personal representatives, executors and administrators of the Officer.
11. Choice of Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of Michigan.
12. Amendment. No amendment, modification, termination or cancellation of
this Agreement shall be effective unless made in writing and signed by each of
the parties hereto.
13. Notice. The Officer, as a condition precedent to his right to be
indemnified under this Agreement, shall give to the Company notice in writing
as soon as practicable of any claim or threatened claim made against him/her
for which indemnity will or could be sought under this Agreement. Notice and
all other communications to the Company shall be made in writing and shall be
deemed given if delivered personally or mailed by registered or certified
2
<PAGE> 3
mail, postage prepaid, return receipt requested, or mailed by a recognized air
courier service such as Federal Express or the like (such notice to be
effective on the date of giving such notice) as follows:
Meritage Hospitality Group Inc.
40 Pearl Street, N.W., Suite 900
Grand Rapids, MI 49503
Attention: President
or to such other address as the Company shall designate to the Officer.
IN WITNESS WHEREOF, the Company and the Officer have executed this
Agreement as of the date first written above.
MERITAGE HOSPITALITY GROUP INC.
- ---------------------------
- ---------------------------
Christopher B. Hewett
President and Chief Executive Officer
- ---------------------------
- ---------------------------
- ---------------------------
[Officer]
3
<PAGE> 1
Exhibit 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(FOR THE YEARS ENDED NOVEMBER 30, 1997 AND 1996).
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
Primary loss per share:
Net loss $ (1,690,850) $ (1,925,570)
Adjustments:
Dividends declared (and paid) on
preferred stock (101,714) --
-----------------------------
Net loss on common shares $ (1,792,564) $ (1,925,570)
=============================
Weighted average shares outstanding 3,214,836 3,081,885
=============================
Primary loss per share $ (0.56) $ (0.62)
=============================
Fully diluted loss per share:
Net loss $ (1,690,850) $ (1,925,570)
=============================
Weighted average shares outstanding 3,214,836 3,081,885
Preferred stock - conversion assumed 186,981 5,065
-----------------------------
3,401,817 3,086,950
=============================
Fully diluted loss per share - antidulutive $ (0.50) $ (0.62)
=============================
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Thomas Edison Inn, Incorporated, a Michigan corporation, d/b/a the Thomas
Edison Inn.
2. SC Inn Inc., a Michigan corporation
3. Grand Harbor Resort Inc., a Michigan corporation, d/b/a/ the Grand Harbor
Resort.
4. Grand Harbor Yacht Club Inc., a Michigan corporation, d/b/a/ the Grand
Harbor Yacht Club.
5. MHG Food Service Inc., a Michigan corporation.
6. WM Limited Partnership - 1998, a Michigan limited partnership
d/b/a Wendy's of Michigan, and
d/b/a Wendy's Food Service
(WM Limited Partnership - 1998 is owned 99.9% by MHG Food Service Inc.)
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in and incorporated by reference in this
Form 10-K, into the Company's previously filed Registration Statements File No.
333-06657 on Form S-8.
/s/ GRANT THORNTON LLP
----------------------
Grant Thornton LLP
Detroit, Michigan
February 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<CASH> 1,061,475
<SECURITIES> 0
<RECEIVABLES> 696,732
<ALLOWANCES> 65,000
<INVENTORY> 255,750
<CURRENT-ASSETS> 5,854,263
<PP&E> 37,250,471
<DEPRECIATION> 18,271,158
<TOTAL-ASSETS> 31,473,266
<CURRENT-LIABILITIES> 8,037,831
<BONDS> 21,064,059
0
1,384
<COMMON> 32,188
<OTHER-SE> (3,611)
<TOTAL-LIABILITY-AND-EQUITY> 31,473,266
<SALES> 41,169,638
<TOTAL-REVENUES> 41,169,638
<CGS> 10,129,824
<TOTAL-COSTS> 41,364,988
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 22,977
<INTEREST-EXPENSE> 2,931,122
<INCOME-PRETAX> (1,528,559)
<INCOME-TAX> (15,000)
<INCOME-CONTINUING> (1,513,559)
<DISCONTINUED> 0
<EXTRAORDINARY> 177,291
<CHANGES> 0
<NET-INCOME> (1,690,850)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
