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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, 1998
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
of incorporation or organization) Identification Number)
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:
Title of Each Class Name of Each Exchange on which Registered
Common Shares, $0.01 par value Chicago Stock Exchange
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. [ ]
As of February 19, 1999, there were 5,742,586 common shares of the Registrant
outstanding. The aggregate market value of the common shares held by
non-affiliates at that date was $5,624,210 based on the average high and low bid
price on the OTC Bulletin Board on that date.
Portions of the Registrant's Proxy Statement to be filed with the Commission for
its 1999 Annual Meeting are incorporated by reference in Part III as specified.
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<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
PART I PAGE
----
<S> <C> <C>
Item 1 - Business 3
Item 2 - Properties 7
Item 3 - Legal Proceedings 9
Item 4 - Submission of Matters to Vote of Security-Holders 9
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6 - Selected Financial Data 11
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 7A - Quantitative and Qualitative Disclosures About Market Risk 25
Item 8 - Financial Statements and Supplementary Data 25
Item 9 - Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 25
PART III
Item 10 - Directors and Executive Officers of the Registrant 25
Item 11 - Executive Compensation 25
Item 12 - Security Ownership of Certain Beneficial Owners and Management 25
Item 13 - Certain Relationships and Related Transactions 25
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26
</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 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, competition;
changes in local and national economic conditions; changes in consumer tastes
and views 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 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 government
regulations relating to, among other things, zoning, minimum wage, public health
certification, and the operation of its restaurants. Because Meritage's
restaurant operations are concentrated in smaller urban areas of Michigan, a
marked decline in the Michigan economy could adversely affect Meritage's
operations.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Meritage Hospitality Group Inc. was incorporated in 1986 and is engaged
in the quick-service restaurant business through its operation of 26 "Wendy's
Old Fashioned Hamburgers" restaurants in Western and Southern Michigan. Each
restaurant is operated pursuant to a franchise agreement with Wendy's
International, Inc., the franchisor of the nationally recognized quick-service
restaurant system that operates under the "Wendy's" brand name. Meritage opened
its 26th Wendy's restaurant on February 18, 1999, and currently has two
additional Wendy's restaurants under construction.
Meritage's growth strategy is to expand its Wendy's business through
the development of new restaurants within the Company's designated market area,
and through accretive acquisitions or joint ventures outside of the designated
market area. This plan includes developing and acquiring 20 to 30 additional
Wendy's restaurants over the next five years. At present, Meritage is the only
publicly-held "Wendy's Old Fashioned Hamburgers" restaurant franchisee in the
United States. In 1998, the Restaurant Finance Monitor ranked Meritage 157 in
its list of top restaurant franchises in the United States.
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. The Company's 26 Wendy's
restaurants are owed or operated by Wendy's of Michigan, a Michigan limited
partnership that is owed by MHG Food Service Inc., a wholly-owed subsidiary of
Meritage. S & Q Management, LLC, a Michigan limited liability company owned by
Robert E. Schermer, Jr. and Ray E. Quada, is the sole general partner of Wendy's
of Michigan. For convenience, Meritage and its subsidiaries are collectively
referred to as "Meritage" or "the Company" throughout this report.
OPERATIONS
Meritage's restaurants are located in the Michigan counties of Allegan,
Calhoun, Kalamazoo, Kent, Muskegon, Ottawa and Van Buren. This includes the
metropolitan areas encompassing the cities of Grand Rapids, Kalamazoo, Battle
Creek, Muskegon and Holland.
Menu
Each Wendy's restaurant offers a diverse menu containing a variety of
food items, featuring hamburgers, chicken sandwiches and pita sandwiches, all of
which are prepared to order with the customer's choice of condiments. The
Wendy's menu includes other items such as baked and french fried potatoes,
freshly prepared salads, soft drinks, "Frosty" desserts and children's meals.
Each Wendy's restaurant features soft drink products supplied by the Pepsi-Cola
Company and its affiliates. Wendy's International maintains significant
discretion over the menu items that are offered in the Company's restaurants.
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Restaurant Layout and Operations
The Company'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 10:00 a.m. until midnight. Generally, the dining areas are carpeted and
informal in design, with tables for two to four people. All restaurants also
feature a drive-through window. Sales to drive-through customers accounted for
over half of the total restaurant sales in fiscal 1998.
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 Company'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 the Company's
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. The
Company 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 restaurants comply with uniform recipe and ingredient
specifications provided by Wendy's International. Food and beverage inventories
and restaurant supplies are purchased from independent vendors that are approved
by Wendy's International. Wendy's International does not sell food or supplies
to the Company.
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.
Relationship with Wendy's International
Meritage operates its restaurants pursuant to consent and franchise
agreements (one franchise agreement 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 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 expire in approximately 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 (i) a change in the operational control of Wendy's of
Michigan, (ii) the removal or resignation of S & Q Management as the sole
general partner of Wendy's of Michigan, or (iii) the removal or resignation of
any guarantor of the Company's franchise agreements, cannot occur without the
prior consent of
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Wendy's International. In addition, any proposed sale of the Wendy's business,
interests or franchise rights is subject to the consent of, and a right of first
refusal by, Wendy's International. These agreements also grant Wendy's
International wide discretion over many aspects of the restaurant operations,
and often require the consent of Wendy's International to carry out certain
operational transactions. If Meritage requires the consent of Wendy's
International to proceed with its business plans but such consent is 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 restaurant
operations through the development and acquisition of additional Wendy's
restaurants. In addition to paying monthly royalty fees, Meritage is 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 its designated market area unless the prohibition
is waived by Wendy's International in its sole and absolute discretion. Wendy's
International also prohibited Meritage from acquiring or developing any other
types of quick-service restaurants within Meritage's designated market area, or
outside of Meritage's designated market area if the restaurant sells hamburgers,
chicken sandwiches or products similar to Wendy's International and is located
within a three mile radius of another Wendy's restaurant.
The reputation of Meritage's restaurants are largely dependent on the
entire Wendy's restaurant chain, which in turn is dependent upon the management
and financial condition of Wendy's International and the performance of 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.
Personnel
Meritage employs approximately 1,000 people of which approximately 175
are full-time employees. The Company believes that it has good relations with
its employees.
COMPETITION AND INDUSTRY CONDITIONS
The food service industry is one of the largest sectors of the nation's
economy, generating an estimated $320 billion of revenue in 1997, of which 31%
was attributable to the quick-service industry. As a whole, the quick-service
segment has consistently grown for more than 20 years, and indications are that
this growth will continue. Historic changes in domestic lifestyles, favoring
greater convenience, has significantly impacted this trend. In addition, a
burgeoning household income, brought about by a strong national economy, has
increased the spending on food away from home. Because of these trends,
competition in the quick-service restaurant segment is, and can be expected to
remain, intense.
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Most of the Wendy's restaurants operated by the Company are located in
close proximity to their principal quick-service restaurant competitors (e.g.
McDonald's, Burger King and Taco Bell) which compete on the basis of price,
service, location, food quality, menu variety and new product development. 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. Both Wendy's
International and the Company believe that the competitive position of a Wendy's
restaurant is enhanced by its use of fresh ground beef, a unique and diverse
menu, promotional products, a wide choice of condiments, and the atmosphere and
decor of its restaurants.
The following table compares the Company's average Wendy's restaurant
same store sales to (i) the average same store sales of Wendy's International's
company-owned restaurants and (ii) to all Wendy's franchised restaurants.
<TABLE>
<CAPTION>
=============================================================================
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 $1,074,000 $1,111,000 $1,017,000
-----------------------------------------------------------------------------
1998 $1,082,000 $1,174,000 $1,031,000
=============================================================================
</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 Wendy's restaurants currently operated by
the Company. The Company may also explore other restaurant acquisitions that
would complement its Wendy's business.
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 1998, food service revenue generated by quarter was as follows: first
quarter - 22%; second quarter - 25%; third quarter - 27%; and fourth quarter -
26%.
RISKS AND GOVERNMENTAL REGULATIONS
Meritage 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
Company is subject to extensive federal, state and local government regulations
relating to, among other things, zoning and the operation of its restaurants.
Congress increased the minimum wage to $5.15 per
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hour in 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 Company's operations.
The Company'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.
SALE OF HOTEL PROPERTIES
From its commencement until this past fiscal year, the Company was also
engaged in the lodging business through its ownership and operation of three
full service hotels in Michigan. All three hotels were recently sold so that the
Company could focus exclusively on expanding its restaurant business. On
November 30, 1997, the St. Clair Inn (St. Clair, Michigan) and certain
associated assets were sold for $3,800,000. On June 15, 1998, the Grand Harbor
Resort & Yacht Club (Spring Lake, Michigan) and certain associated assets were
sold for $4,500,000. On September 1, 1998, the Thomas Edison Inn (Port Huron,
Michigan) and certain associated assets were sold for $12,200,000. The proceeds
from these sales were primarily used to reduced the Company's long-term
indebtedness. As a result of these sales, the Company's began accounting for the
operations of the former lodging business as discontinued operations effective
May 31, 1998.
OTHER ASSETS
- ------------
During fiscal 1998, the Company owned other assets which did not
directly relate to its restaurant or its discontinued lodging business. Most of
these assets have since been disposed of including: (i) approximately 5.5 acres
of undeveloped land adjacent to the Thomas Edison Inn in Port Huron, (ii) a
55-slip marina condominium development which borders the Grand River in Spring
Lake Michigan, (iii) life insurance policies with a face value of $5.1 million
on the life of the Company's former President and Chief Executive Officer, (iv)
a note receivable from the sale of the Grand Harbor Resort & Yacht Club in the
outstanding principal amount of $1,375,000 (sold on a recourse basis), and (v) a
note receivable from the sale of the Thomas Edison Inn in the outstanding
principal amount of $1,844,617 (of which $1,100,000 was sold on a recourse
basis). The Company also holds a note receivable from the sale of shares in the
outstanding principal amount of $9,750,000.
ITEM 2. PROPERTIES.
Each Wendy's restaurant is built to specifications provided by Wendy's
International as to its exterior style and interior decor. The restaurants are
one-story brick buildings constructed on sites of approximately 40,000 square
feet, with parking for approximately 45 vehicles. The typical new free-standing
restaurant contains about 3,000 square feet and has a food preparation area, a
dining room with seating capacity for 95 persons, and a double pick-up window
for drive-through service.
Regarding its 26 Wendy's restaurants, the Company (i) owns the land and
buildings comprising 11 restaurants, (ii) leases the land and buildings
comprising 14 restaurants, and (iii) owns the building and leases the land
comprising one restaurant. The term of the leases (including options to renew)
range from 1 to 22 years. The structures range from being brand new to 25 years
old. The land and buildings owned by the Company are subject to encumbrances
described in "Financing and Encumbrances."
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The Company leases approximately 4,600 square feet of office space
located at 40 Pearl Street, N.W., Suite 900, Grand Rapids, Michigan which serves
as the corporate headquarters and the registered office of the Company and its
subsidiaries. The Company also leases approximately 3,000 square feet of office
space located at 4613 West Main, Kalamazoo, Michigan 49006 as its operating
office.
The Company believes that its properties are adequately covered by
insurance.
FINANCING AND ENCUMBRANCES
- --------------------------
During fiscal 1998, the Company completed a significant refinancing
program. The Company used proceeds from the sale of certain assets (see "Sale of
Hotel Properties") to pay down a substantial portion of its long-term
indebtedness. These sales, combined with the financing and refinancing described
below, allowed for the complete payment of all long-term indebtedness with the
Company's former primary lender, which totaled $20,495,000 as of November 30,
1997. The notes payable carried interest rates ranging from 11.25% to prime plus
8%, and had a weighted average interest rate of 12.7%. The debt retirement also
included the payment of a $2,000,000 (prime plus 1%) revolving term note payable
with National City Bank.
The Company entered into several loan agreements with Captec Financial
Group, Inc. ("Captec") as part of a $10,000,000 financing package which included
(i) the purchase of five restaurants which the Company previously leased, and
(ii) the refinancing of six restaurants of which the Company already owned the
real estate. The loans with Captec have terms ranging from fifteen to twenty
years, require monthly payments of $83,174 through October 2018, and carry
interest rates that range from 7.77% to 8.15%. The loans are secured by the real
estate of the Company-owed restaurants and the business value of certain
restaurants, and contain financial covenants which require the maintenance of
certain coverage ratios. In addition to the coverage ratio requirements, the
loan covenants limit the amount of currently generated operating cash flow that
can be utilized to fund corporate level expenses.
In the fourth quarter of fiscal 1998 and in the first quarter of fiscal
1999, the Company entered into additional loan agreements with Captec to finance
the real estate associated with two new Wendy's restaurants that were then under
construction. The loans, which total $1,940,000, have a 20-year term at a fixed
interest rate equal to 2.75% above the 10-year treasury rate on the date
construction on each respective restaurant is completed. Based on treasury rates
as of the date of this report, the rate would be approximately 7.75%. The loans
are secured by the real estate of the new restaurants and are subject to
financial covenants similar to those described in the preceding paragraph.
The Company also holds a forward commitment from Captec to provide
$3,750,000 in additional financing to fund the land purchase, building
construction, and equipment packages associated with the development of three
new Wendy's restaurants. The term of this indebtedness would be fifteen to
twenty years on the real estate, and seven years on the equipment packages. The
interest rate would be 4% over similar term treasury rates with a floor of 9% on
real estate, and 5% over similar term treasury rates with a floor of 10.5% on
equipment. The Company is under no obligation to utilize this commitment.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in certain routine legal proceedings which are
incidental to its business. 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 cover most legal actions brought against the Company.
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 1998.
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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." 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:
==================================================================
HIGH LOW
------------------------------------------------------------------
FISCAL YEAR ENDED NOVEMBER 30, 1997
------------------------------------------------------------------
First Quarter $6.25 $5.38
------------------------------------------------------------------
Second Quarter $5.25 $4.00
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Third Quarter $4.00 $2.63
------------------------------------------------------------------
Fourth Quarter $3.25 $2.63
==================================================================
==================================================================
HIGH LOW
------------------------------------------------------------------
FISCAL YEAR ENDED NOVEMBER 30, 1998
------------------------------------------------------------------
First Quarter $3.13 $1.00
------------------------------------------------------------------
Second Quarter $2.00 $1.03
------------------------------------------------------------------
Third Quarter $1.56 $1.06
------------------------------------------------------------------
Fourth Quarter $1.63 $1.00
==================================================================
The Company's common shares are also listed on the Chicago Stock
Exchange under the symbol "MHG." However, no meaningful trades were reported by
the Chicago Stock Exchange during the past fiscal year.
HOLDERS
- -------
As of February 19, 1999, there were approximately 775 record holders of
the Company's common shares, which the Company believes represents approximately
1,300 beneficial holders.
DIVIDENDS
- ---------
No dividends on Meritage's common shares were paid in the two most
recent fiscal years. Because the Company intends to reinvest any available cash
into the development of new Wendy's restaurants, it does not intend to pay any
dividends in fiscal 1999.
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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,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
(RESTATED)* (RESTATED)* (RESTATED)* (RESTATED)*
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
- ---------------------
Continuing Operations
Total revenue $27,044 $26,860 $ 2,099 $ -- $ --
Operating Expenses 27,590 27,534 2,368 -- --
Operating income (loss) (546) (674) (269) -- --
Earnings (loss) from continuing operations (1,374) (1,935) 268 -- --
Discontinued Operations
Loss from operations (479) (1,058) (2,193) (2,049) (27)
Gain on disposal of business segment 3,711 1,479 -- -- --
Net earnings (loss) 1,131 (1,691) (1,926) (2,049) (27)
Preferred stock dividends 108 102 -- -- --
Net earnings (loss) on common shares 1,023 (1,793) (1,926) (2,049) (27)
Earnings (loss) per common share
Earnings (loss) from continuing operations $ (0.30) $ (0.63) $ .09 $ -- $ --
Net earnings (loss) $ 0.21 $ (0.56) $ (0.62) $ (1.13) $(0.02)
BALANCE SHEET DATA
- ------------------
Property & equipment $13,183 $ 7,518 $ 7,652 $ -- $ --
Net assets of discontinued operations (594) 840 267 3,055 5,225
Total assets 24,964 13,814 14,891 3,055 5,225
Long-term obligations (1) 13,513 10,447 9,715 -- --
Stockholders' equity 5,434 30 2,021 3,055 5,225
Cash dividends declared per common share $ 0. 00 $ 0.00 $ 0.50 $ 0.00 $ 0.00
</TABLE>
(1) For comparative purposes, long-term obligations include current portions of
long-term obligations.
* Effective May 31, 1998, the Company began accounting for the operations of
the lodging industry segment as discontinued operations. The consolidated
financial statements beginning on page M-1 have been restated for all
periods presented to reflect the results of operations and net assets of
the lodging industry segment as discontinued operations. The selected
financial data above has also been restated to reflect the lodging industry
segment as a discontinued operation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
- ---------------------
CONTINUING OPERATIONS
The following summarizes the results of continuing operations for the
years ended November 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Statements of Operations
----------------------------------------------------------------------
$ in Thousands % of Revenue
------------------------------------ ------------------------------
(Pro forma) (Pro forma)
1998 1997 1996 1998 1997 1996
------------------------------------ ------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Food and beverage revenue $27,044 $ 26,860 $26,406 100.0% 100.0% 100.0%
Costs and expenses
Cost of food and beverages 7,752 7,720 7,848 28.7 28.7 29.6
Operating expenses 15,647 15,857 15,595 57.8 59.0 59.1
General and administrative
Restaurant operations 1,420 1,362 1,149 5.3 5.1 4.4
Corporate level expenses 1,692 1,525 1,429 6.2 5.7 5.4
Depreciation and amortization 1,079 1,070 919 4.0 4.0 3.5
------- -------- ------- ----- ----- -----
Total costs and expenses 27,590 27,534 26,940 102.0 102.5 102.0
------- -------- ------- ----- ----- -----
Loss from operations (546) (674) (534) (2.0) (2.5) (2.0)
Other income (expense)
Interest expense (1,473) (1,440) (467) (5.5) (5.4) (1.8)
Interest income 185 593 658 0.7 2.2 2.4
Other income 509 -- -- 1.9 -- --
Loss on disposal of assets (25) (218) (25) (0.1) (0.8) (0.1)
Minority interest 26 (196) 21 0.1) (0.7) 0.1
------- -------- ------- ---- ---- ----
Total other income (expense) (778) (1,261) 187 (2.9) (4.7) 0.6
------- -------- ------- ----- ----- -----
Loss from continuing operations
before income taxes (1,324) (1,935) (374) (4.9) (7.2) (1.4)
Income taxes - current 50 -- -- 0.2 --
------- -------- ------- ----- ----- -----
Loss from continuing operations $(1,374) $ (1,935) $ (374) (5.1%) (7.2) (1.4%)
======= ======== ======= ===== ===== =====
</TABLE>
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COMPARISON OF YEARS ENDED NOVEMBER 30, 1998 AND 1997
----------------------------------------------------
REVENUE
Sales increased 0.7% from $26,860,546 in fiscal 1997 to $27,043,954 in
fiscal 1998. Although sales increased only slightly for the year, sales on a per
restaurant basis of approximately $1,082,000 (i) approached sales levels of
Wendy's International's corporate owned restaurants which had average sales of
approximately $1,174,000 per restaurant in 1998, and (ii) compared favorably
with all Wendy's franchised restaurants which had average sales of approximately
$1,031,000 per restaurant in 1998.
Several product-related factors had a significant impact on the
Company's sales. In April 1997 the Company began phasing-out its hot SuperBar
offering, and in April 1998 the cold salad bars were removed from all the
restaurants. The termination of these two product offerings was carried out at
the direction of Wendy's International. Lost sales resulting from the closure of
these two all-you-can-eat food bar concepts totaled $959,000 in fiscal 1998
compared to fiscal 1997. This reduction in sales, however, was offset by a
number of actions taken by the Company including:
o The introduction of the "Pita" sandwich product in April 1997
which constituted 5.3% of total sales in 1998.
o The expansion of the Company's "Late Night" sales program from a
seasonal effort (typically beginning in April and ending in
September) to a year round sales program. Late night sales rose
nearly 100%, from approximately $473,000 in 1997 to approximately
$941,000 in 1998.
o Increased emphasis on Wendy's "Upsizing" program (the addition of
a larger beverage or french fried potatoes for an extra 39 cents)
which began in April 1997. Upsize sales rose in 1998 to
approximately $272,000 from approximately $185,000 in 1997, an
increase of 47%.
Sales in 1998 were also positively impacted by an overall increase in
"combo" sales (a specific menu offering which includes a sandwich, french fried
potatoes and a beverage) and relatively mild winter weather conditions during
the first quarter of fiscal 1998 and November 1998. Sales during fiscal 1998
were negatively impacted by intense competition throughout the quick-service
industry including price discounting. The Company and Wendy's International have
continued to resist engaging in deep price discounting, choosing instead to
combat low prices with "value menu" offerings and high quality, made-to-order
products. Weighted average price increases for fiscal 1998 were less than 1%
compared to fiscal 1997.
COST OF FOOD AND BEVERAGES
Cost of food and beverages increased $31,880 in fiscal 1998 compared to
fiscal 1997 (from $7,720,307 to $7,752,187), while revenue increased $183,408
for the same period. As a percentage of sales, cost of food and beverages was
28.7% for both fiscal 1998 and fiscal 1997. Beef prices have remained relatively
stable since late 1996 and poultry prices were relatively low during early and
mid- 1998. The elimination of the hot and cold SuperBar, which operated with
slightly higher than average food costs and waste, also contributed to steady
food costs. Stabilized management teams in the Company's restaurants, combined
with continued and consistent emphasis on food cost controls, contributed to
controlling waste and keeping the Company's cost of food and beverage percentage
in line with guidelines established by the Company and Wendy's International.
-13-
<PAGE> 14
OPERATING EXPENSES
Restaurant operating expenses decreased $209,395, from $15,856,833 in
fiscal 1997 to $15,647,438 in fiscal 1998. As a percentage of revenue,
restaurant operating expenses decreased 1.2 percentage points in fiscal 1998
compared to fiscal 1997 (from 59.0% of revenue in 1997 to 57.8% of revenue in
1998). Advertising expense declined 0.4 percentage points as a result of Wendy's
International entering into a national advertising contract with Coca-Cola USA,
which reduced the Company's mandatory advertising contribution to the Wendy's
International national advertising program during the fourth quarter of 1998.
Rent expense decreased 0.5 percentage points in fiscal 1998 compared to fiscal
1997. This decrease resulted from the elimination of rent expense during the
final four months of the year associated with five of the Company's restaurants
whose real estate was purchased by the Company on September 1, 1998. Slight
decreases in food serving supplies, utilities, and training costs also
contributed to the decline in restaurant operating expenses.
Payroll costs remained stable in fiscal 1998 compared to fiscal 1997
despite (i) the continued pressure to increase hourly rates caused by an
extremely tight labor market, and (ii) the additional store managers hired in
late fiscal 1998 in preparation of new restaurant openings in early fiscal 1999.
The stability in payroll expenses was primarily attributable to decreased store
management turnover. On a per restaurant basis, restaurant operating expenses
decreased from an average of approximately $634,000 per restaurant in fiscal
1997 to an average of approximately $626,000 per restaurant in fiscal 1998, a
decrease of 1.3% compared to the 0.7% increase in same store sales.
GENERAL AND ADMINISTRATIVE
Restaurant Operations
Restaurant general and administrative expenses increased $58,271 in
fiscal 1998 compared to fiscal 1997 (from $1,362,199 to $1,420,470). As a
percentage of revenue, general and administrative expenses increased from 5.1%
of revenue in fiscal 1997 to 5.3% of revenue in fiscal 1998. An increase in the
Michigan Single Business Tax of $80,000 (0.3 percentage points as a percentage
of revenue), recruiting costs (due to a shortage of managerial candidates), and
office expense were the primary reasons for this increase. These increases were
largely offset by a decrease in legal and professional fees of approximately
$115,000 (0.4 percentage points) in fiscal 1998 compared to fiscal 1997. Legal
and professional fees were unusually high in 1997 due to the former general
partner's attempts to sell, and the subsequent dissolution of, the former
Wendy's of West Michigan Limited Partnership.
Corporate Level Expenses
Corporate general and administrative expenses increased $166,747 in
fiscal 1998 compared to fiscal 1997 (from $1,524,693 to $1,691,440). The
increase in corporate general and administrative expenses was due to (i) an
increase in payroll costs of approximately $131,000 caused primarily by
severance costs associated with the discontinuance of the lodging business
segment which resulted in a reduction in executive level positions, and (ii) an
increase in legal fees of approximately $102,000 caused by the prolonged
litigation brought by the former general partner of the now dissolved Wendy's of
West Michigan Limited Partnership. These increases were offset by reductions in
accounting and other professional fees, office expense, public market expense,
promotional costs, and travel and entertainment.
-14-
<PAGE> 15
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased only slightly, from $1,070,017
in fiscal 1997 to $1,078,539 in fiscal 1998. As a percentage of sales,
depreciation was 4.0% in both fiscal 1998 and 1997.
INTEREST EXPENSE
Interest expense increased $32,827 in fiscal 1998 compared to fiscal
1997 (from $1,440,192 in fiscal 1997 to $1,473,019 in fiscal 1998). The increase
in interest expense was primarily due to interest expense incurred on additional
borrowings of $4,200,000 in September 1998 to acquire the real estate of five
restaurants which had previously been leased to the Company. See Item 7,
"Liquidity and Capital Resources" for a discussion of the Company's debt
restructuring.
INTEREST INCOME
Interest income decreased $408,236 in fiscal 1998 compared to fiscal
1997 (from $592,850 in fiscal 1997 to $184,614 in fiscal 1998). The decrease in
interest income was due to the non-recognition of any interest income in fiscal
1998 on the Company's note receivable from the sale of stock, compared to the
recognition of $564,929 of interest income in fiscal 1997. During the second
quarter of 1998, the Company determined that a valuation allowance was
appropriate due to the longer term price trend of the stock, which serves as
collateral for the note receivable. Because of the decrease in the value of the
collateral securing the note receivable, a valuation allowance of $4,666,755 has
been made to adjust the note receivable to its estimated realizable value if the
shares of common stock securing the note were sold and the proceeds were applied
to the note receivable. As detailed in the Company's Statement of Stockholders'
Equity, the valuation allowance has no net effect on the Company's total
stockholders' equity.
Interest income in fiscal 1998 includes interest income from the notes
receivable from the sale of the Company's hotel properties of $142,466, and
interest income from cash and cash equivalents of $42,148.
OTHER INCOME
Other income was $509,590 in fiscal 1998 compared to zero in fiscal
1997. Other income in 1998 consisted primarily of income from the forfeiture of
an earnest deposit in the amount of $500,000 on a contract to sell one of the
Company's hotel properties.
LOSS ON DISPOSAL OF ASSETS
In fiscal 1998, the Company incurred a loss on the disposal of assets
of $25,000 compared to a loss on disposal of assets of $197,102 in fiscal 1997.
The fiscal 1998 loss was the result of the write-off of the franchise fee
regarding a Wendy's restaurant that was closed in 1997 which was determined to
be non-transferable to a new store in fiscal 1998. The fiscal 1997 loss was due
to the closing of the same restaurant and the decision not to extend the lease
on the restaurant building.
-15-
<PAGE> 16
INCOME TAXES - CURRENT
In fiscal 1998, the Company incurred a current income tax expense and
current income tax liability of $50,000. Although no regular income tax
liability was incurred for fiscal 1998 because of the use of net operating loss
carryforwards, for alternative minimum tax purposes, the amount of alternative
tax net operating loss deduction is limited to 90% of alternative minimum
taxable income. This limitation resulted in fiscal year 1998 alternative minimum
tax of $50,000.
COMPARISON OF YEARS ENDED NOVEMBER 30, 1997 AND 1996
----------------------------------------------------
REVENUE
Sales increased 1.0% from $26,405,513 in fiscal 1996 to $26,860,546 in
fiscal 1997. Excluding the restaurant that was opened in March 1996 and the
restaurant 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 1.1%, 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, sales (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 $127,782 in fiscal 1997 compared
to fiscal 1996, while revenue increased $455,033 for the same period. This
decrease was the result of a 0.9 percentage point decrease in the Company's food
and beverage cost percentage (from 29.6% of revenue in fiscal 1996 to 28.7% 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 combined with the closing of the hot
SuperBars which had a higher food cost than its menu replacement (i.e. Pita
sandwiches).
OPERATING EXPENSES
As a percentage of revenue, restaurant operating expenses were 59.0% in
fiscal 1997, and 59.1% in 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
approximately $624,000 per restaurant in fiscal 1996 to an average of
approximately $634,000 per restaurant in fiscal 1997, an increase of 1.6% which
is comparable to the 1.1% increase in same store sales.
-16-
<PAGE> 17
GENERAL AND ADMINISTRATIVE
Restaurant Operations
Restaurant 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 4.4%
of revenue in fiscal 1996 to 5.1% 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.
Corporate Level Expenses
General and administrative expenses increased $96,493 (6.8%), from
$1,428,200 in fiscal 1996 to $1,524,693 in fiscal 1997. The increase in general
and administrative expenses in fiscal 1997 compared to fiscal 1996 was partially
due to approximately $372,000 of personnel costs in fiscal 1997 associated with
adding executive level positions and making market related salary adjustments.
This increase was offset by a decrease of approximately $272,000 in
non-recurring legal fees, professional fees and travel related costs which were
incurred in 1996 in connection with the replacement and restructuring of the
Company's management.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $151,361 (16.5%), from
$918,656 in fiscal 1996 to $1,070,017 in fiscal 1997. The increase in
depreciation and amortization expense was primarily due to the adjustment to
fair value of the property and equipment acquired in connection with the
acquisition of a majority of the former Wendy's of West Michigan Limited
Partnership on October 31, 1996, and the resulting goodwill from the excess of
the acquisition cost over the fair value of the net assets acquired.
INTEREST EXPENSE
Interest expense increased from approximately $467,000 in fiscal 1996
to approximately $1,440,000 in fiscal 1997. The significant increase in interest
expense was primarily due to interest expense incurred on $6,000,000 of
acquisition related financing.
INTEREST INCOME
Interest income decreased from $658,007 in fiscal 1996 to $592,850 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 due to the reduction in the note
receivable as a result of a $750,000 principal prepayment received in May 1996.
-17-
<PAGE> 18
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.
DISCONTINUED OPERATIONS - LODGING GROUP
During the second quarter of 1998, the Company entered into agreements
to sell its remaining two hotel properties (see Item 1, "Sale of Hotel
Properties"). This resulted in the Company accounting for its lodging business
segment as a discontinued operation as of May 31, 1998. Below is a summary of
the lodging group's operating results for the years ended November 30, 1998,
1997 and 1996, as well as a summary of the sale transactions for all three of
the Company's hotel properties:
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
---------------------
FOR THE YEARS ENDED NOVEMBER 30,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $6,358,126 $14,034,053 $ 14,762,822
Costs and expenses 6,206,192 13,555,900 15,469,298
---------- ----------- ------------
Earnings (loss) from operations 151,934 478,153 (706,476)
Other expense (791,166) (1,550,721) (1,506,778)
---------- ----------- ------------
Loss from discontinued operations
before federal income taxes $ (639,232) $(1,072,568) $(2,213,254)
========== =========== ===========
</TABLE>
A summary of the three sale transactions is as follows:
<TABLE>
<CAPTION>
Grand Harbor
Resort
Thomas Edison Inn & Yacht Club St. Clair Inn
----------------- ------------ -------------
<S> <C> <C> <C>
Date of sale September 1, 1998 June 15, 1998 November 30, 1997
Selling price (before selling costs) $12,200,000 $4,500,000 $3,800,000
Promissory note held by Company 2,000,000 1,375,000 --
----------- ---------- ----------
Cash portion of selling price $10,200,000 $3,125,000 $3,800,000
=========== ========== ==========
Gain on sale of assets $ 3,273,893 $ 583,164 $1,479,095
Loss from operations from measure-
ment date (May 31, 1998) to date
of disposal 109,800 35,893 --
----------- ---------- ----------
Gain on disposal of discontinued
operations 3,164,093 547,271 1,479,095
Extraordinary charges (includes
loan prepayment penalty and
write-off of deferred finance costs) 548,395 178,777 177,291
----------- ---------- ----------
Impact on equity $ 2,615,698 $ 368,494 $1,301,804
=========== ========== ==========
</TABLE>
-18-
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash Flows - Year Ended November 30, 1998
Cash and cash equivalents ("cash") increased $1,047,883, from
$1,061,475 as of November 30, 1997 to $2,109,358 as of November 30, 1998. The
increase in cash was the result of the following:
Net cash provided by operating activities $ 3,296,484
Net cash used in investing activities (5,847,106)
Net cash provided by financing activities 3,598,505
-----------
Net increase in cash $ 1,047,883
===========
Net cash provided by operating activities of $3,296,484 was comprised
of $687,355 net cash used in continuing operations, and $3,983,839 net cash
provided by discontinued operations. The cash used in continuing operations was
a combination of (i) the net loss from continuing operations before
depreciation, amortization, extraordinary item and non-cash portion of income
taxes totaling $271,396, and (ii) a $3,219,617 increase in the note receivable
from sale of assets. These cash effects were offset by (i) $1,992,026 of
marketing and conversion funds received from the Company's beverage supplier
upon the Company entering into a long-term agreement to purchase its beverage
products solely from this supplier (the advance has been accounted for as
deferred revenue - see Note K of the Company's Financial Statements), and (ii)
other non-cash effects on net income and net cash provided by operating
activities (primarily a net increase in current assets and liabilities) totaling
$811,632. The net cash provided by discontinued operations is comprised of net
income from discontinued operations net of the extraordinary item of $2,549,998,
combined with a decrease in net assets of $1,433,841.
Net cash used in investing activities of $5,847,106 was the result of
cash purchases of property, plant and equipment of $5,029,283, which includes a
$4,200,000 purchase of the real estate associated with five Wendy's restaurants
previously leased, and a payment of $758,632 in the acquisition of the general
partner interest of the former Wendy's of West Michigan Limited Partnership.
Increases in other assets accounted for the remaining $59,191.
Net cash provided by financing activities of $3,598,505 was the result
of proceeds of long-term debt and notes payable of $11,907,151. This was offset
by principal payments of long-term debt and payments of capital lease
obligations totaling $7,940,733, of which approximately $6.6 million represented
payments related to debt restructure (discussed below), and approximately $1.3
million represented scheduled debt payments. The long-term debt proceeds were
also offset by the payment of financing costs of $265,129, and preferred
dividend payments less proceeds from the issuance of common shares totaling
$102,784.
The Company was involved in two non-cash investing and financing
activities during the year. The transactions included (i) the issuance of
1,992,359 common shares in connection with the acquisition of the Wendy's
operations, and (ii) the assignment of the $1,375,000 note receivable described
in Note E of the Financial Statements in exchange for, among other things, the
cancellation of a $776,000 note payable and the cancellation of 20,000
convertible preferred shares. The $1,375,000 note was assigned with recourse
and, therefore, the Company would be required to pay, upon completion of its
collection efforts, the amounts due the assignee to the extent payments are not
made on the note by the original maker.
-19-
<PAGE> 20
Cash Flows - Year Ended November 30, 1997 (Restated)
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:
Net cash used in operating activities $ (851,216)
Net cash used in investing activities (811,703)
Net cash provided by financing activities 458,897
-----------
Net decrease in cash $(1,204,022)
===========
Net cash used in operating activities of $851,216 was comprised of
$522,177 from continuing operations and $329,039 from discontinued operations.
The $522,177 net cash used in continuing operations was primarily due to the net
loss before depreciation and amortization of $669,430, which was offset by (i)
other non-cash effects on net income and net cash used in operating activities
totaling $131,682, and (ii) the net change in current assets and current
liabilities of $15,571. The net cash used in discontinued operations of $329,039
was the result of net income after extraordinary item of $244,236 offset by an
increase in net assets of $573,275.
Net cash used in investing activities of $811,703 was primarily the
result of purchases of property, plant and equipment of $608,071, and the
investment of $182,526 in acquisition of the Wendy's operations. The remaining
$21,106 was the result of an increase in other assets.
Net cash provided by financing activities of $458,897 was primarily the
result of net proceeds from long-term borrowings of $750,000 and the issuance of
preferred and common shares totaling $313,519. These two items were offset by
the payment of long-term debt, including capital leases, of $502,908. The
remaining $101,714 represented dividends paid on preferred stock.
Financial Condition
At November 30, 1998, the Company's current assets exceeded its current
liabilities by $230,420 compared to November 30, 1997 when current liabilities
exceeded current assets by $1,466,684. At these dates, the ratios of current
assets to current liabilities were 1.05:1 and .53:1, respectively. The
discussion above regarding cash flows for the year ended November 30, 1998
explains the increase in cash as well as the most significant reasons for the
increase in working capital. The other primary reason for the improvement in
working capital was the $1,619,617 net increase in the current portion of the
notes receivable from the sale of assets.
As of November 30, 1998, the Company's long-term debt consisted
primarily of the following:
o $8,658,644 mortgage notes payable requiring monthly payments of
$72,372, including interest at rates ranging from 7.77% to 8.15%
through September and October 2018.
o $1,113,588 notes payable requiring monthly payments of $10,802
including interest at 8.15% through September 1, 2018.
o $310,717 construction note payable requiring monthly payments of
interest only at 7.27% through the completion of the building
construction, at which time a permanent mortgage note will be
secured.
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<PAGE> 21
o $1,375,000 obligation arising from the $1,375,000 note receivable
from the sale of the Grand Harbor Resort & Yacht Club, which note
receivable was assigned with recourse to the Chairman of the
Board as part of separate transaction. (See Item 1, "Other
Assets" and Item 7, "Liquidity and Capital Resources" at page
19). Due to the recourse nature of the obligation, it is
accounted for as long-term debt in the Financial Statements, and
is described as an "amount payable" in Note H of the Financial
Statements. The note receivable is described in Note E to the
Financial Statements. Because the obligation was assigned with
recourse, to the extent the note receivable is not paid by the
maker, the Company would be required to make payment to the
assignee upon completion of its collection efforts.
o $365,455 equipment notes payable requiring monthly payments of
$19,416, including interest at rates ranging from 7.5% to 10%.
The various loan agreements contain loan covenants requiring the
maintenance of certain financial ratios including:
o Fixed Charge Coverage Ratio ("FCCR") of 1.2 : 1 for the Wendy's
operation as a whole;
o FCCR of 1.2 : 1 for the Wendy's restaurants that are subject to a
real estate mortgage;
o FCCR of 1.4 : 1 for the Wendy's restaurants that are subject to
both a real estate mortgage and a business value loan; and
o a restriction against using operating cash flow from the Wendy's
business to fund corporate level expenses if such funding would
cause the FCCR to be less than 1.2 : 1.
At November 30, 1998, the Company was in compliance with these covenants.
During the past fiscal year the Company completed several significant
transactions resulting in improved cash flow. These include:
1) the sale of three hotel properties which operated at a $372,000
negative cash flow after debt service and normal capital
expenditures in fiscal 1997;
2) the retirement or restructuring of high interest rate long-term
debt, resulting in:
o the reduction in the current weighted average interest rate
on long-term debt from 12.4% as of November 30, 1997 to
8.2%, and
o the reduction in annualized interest expense by
approximately $385,000;
3) the conversion of preferred stock to common stock, thereby reducing
the annual dividend payments by $66,500; and
4) the acquisition of the remaining Wendy's operations which generated
cash flow after debt service and normal capital expenditures (net
of debt acquired) of approximately $908,000 in fiscal 1998.
-21-
<PAGE> 22
The completion of these transactions significantly strengthened the Company's
cash flow position.
The cash flow management issues currently facing the Company can be
broken down into three areas: (i) operations of the Wendy's restaurants, (ii)
corporate level expenses, and (iii) investment in new restaurants.
The key issues involved in cash flow management for the Wendy's
operations include a seasonal cash flow tightening during the first quarter of
the fiscal year. The Company typically experiences negative operating cash flow
during this quarter due to lower sales volume and the payment of the real estate
and equipment property taxes in February. Fiscal 1999 presents a particularly
difficult challenge as the Company is funding certain pre-opening costs
associated with the opening of two new restaurants in February and March 1999.
The Company also anticipates needing short-term working capital to fund
pre-opening costs for three other restaurants during the year. The Company
estimates capital expenditures for the next twelve months at its existing
Wendy's restaurants to be approximately $500,000 for building improvements and
furniture, fixtures and equipment purchases.
The Company's loan agreements restrict the amount of currently
generated operating cash flow from the Wendy's restaurants that may be utilized
to fund corporate level expenses. The Company anticipates that the corporate
level expenses will be funded primarily with cash flow from the Wendy's
operation in accordance with the loan covenants, as well as from cash proceeds
generated from non-operating activities. These activities include the sale of
life insurance policies, investment interest income, and the collection of
certain notes receivable. Corporate level expense in fiscal 1999 is expected to
be significantly lower than in fiscal 1998. The Company began implementing a
number of significant general and administrative cost cutting measures to
achieve these cost reductions. However, there can no assurance that the Company
will be able to fully achieve its planned cost reductions, either as to dollar
amount or timing of the cost cutting measures.
The Company estimates that an investment of approximately $3,025,000
will be made into the real estate of three new Wendy's restaurants, and that
operating leases will be secured on the real estate for two other new
restaurants during the upcoming fiscal year. The Company has received a forward
commitment and other proposals to fund the real estate at interest rates
currently ranging from 7% - 9%. The Company anticipates financing 90 - 100% of
the cost of the real estate through the use of external financing. Additionally,
the Company estimates that an investment of $1,375,000 will be required for
equipment packages and franchise fees associated with opening five new Wendy's
restaurants during the upcoming fiscal year. It is anticipated that $500,000 of
this equipment investment will be funded through the use of external financing.
The Company has received multiple equipment leasing proposals at terms of five
to seven years with interest rates of approximately 8%.
Currently, the Company has committed to financing two new Wendy's
restaurants with mortgage notes that total $1,940,000, of which $1,250,215 has
been borrowed as of February 1999. The 20-year mortgages will carry a fixed
interest rate equal to 2.75% over the then current 10-year treasury rate on the
date of completion of construction on the restaurants (expected to occur in
February and March 1999). Based on current treasury rates, the rate would be
approximately 7.75%.
In light of these operational and investment cash flow management
challenges, the Company plans to meet its current obligations over the next
twelve months by:
o Utilizing cash reserves in excess of $1,000,000.
-22-
<PAGE> 23
o Using $900,000 of projected operating cash generated from
existing Wendy's restaurants.
o Selling life insurance policies for net proceeds of approximately
$200,000.
o Exploring the acquisition of a working capital line of credit.
o Collecting on the Company's notes receivable which are expected
to produce net proceeds of approximately $740,000.
o Exploring the financing of certain of the planned capital
expenditures and improvement as opposed to paying cash,
specifically with respect to planned renovations at the Wendy's
restaurants.
o Exploring the financing of equipment packages for certain of the
new restaurants as opposed to making a cash investment.
o Reducing or deferring the capital expenditures described above.
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. Also, notes receivable described in Note E of the Financial Statements
totaling $3,219,617 have been assigned with recourse. To the extent those notes
are not paid by their makers, the Company would be obligated to make the
payments to the assignees upon completion of its collection efforts. Collection
efforts would include attempts to foreclose on collateral that is described in
Note E. Although the Company believes that the collateral is sufficient to cover
the remaining obligations on those notes, there is no assurance that the Company
would be able to effect such a realization when payments on the notes would
ultimately be due to the assignees, and no assurances that the amounts recovered
would be sufficient to cover amounts due those assignees. In such circumstances,
the Company would be required to secure necessary funds through borrowings or
other means.
INFLATION AND CHANGING PRICES
- -----------------------------
The food service industry has been affected by the increase in the
minimum wage and the shortage of management and hourly employees. Rising wage
rates had a negative impact on the Company's operating results in fiscal 1998.
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.
-23-
<PAGE> 24
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 beginning with the year 2000. Almost all of the
Company's computer hardware was acquired within the past three years. The
Company is completing its review of its computer hardware and software with the
assistance of the software designers to ensure that all significant software
applications are year 2000 compliant. Based on the results of the review to
date, the Company believes that the point-of-sale system, which monitors all
sales, inventory and labor activity, is year 2000 compliant. The critical
systems which are used to produce financial statements (general ledger module)
and process purchases and cash disbursements (accounts payable module) have also
been tested and are year 2000 compliant. However, the Company's software used to
process payroll and compare actual product usage with planned product usage are
not yet year 2000 compliant. The Company software vendor has assured the Company
that the payroll software will be year 2000 compliant by the end of the first
calendar quarter of 1999. The Company plans to replace its product usage
software with software that is year 2000 compliant.
The Company has estimated that necessary replacement or modification of
its hardware and software could cost from $75,000 to $150,000. 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 or replacement of existing programs. The Company does not expect to
incur significant additional costs to complete the review of its computer
systems to determine what measures are required to be year 2000 compliant.
Pending the final results of this review, the Company cannot determine the exact
cost that may be required to ensure that all the critical computer systems are
year 2000 compliant.
Despite assurances from its various software vendors, the Company could
find that its critical computer systems are not year 2000 compliant or that it
experiences computer equipment failures. In such event, the Company's
contingency plan includes the following:
1) Point-of-Sale System - The Company would immediately begin to
manually (i) process its sales, (ii) monitor its inventory, and
(iii) record its labor expense. This manual system would remain
in effect until such time as the year 2000 issues are corrected
or a substitute computerized system is installed. It is
possible, however, that if the year 2000 issues can not be
corrected, or a substitute system cannot be installed within a
short period of time, the Company's operations could be adversely
affected.
2) Financial Statements, Cash Disbursements and Payroll Systems -
The Company would initiate one or more of the following
contingency plans until the year 2000 issue can be corrected: (i)
manual processing, (ii) utilization of an alternative software
program on a "stop-gap" basis until the system can be corrected,
or (iii) contract with a third party vendor to process payments,
payroll and financial statements.
NEW PRONOUNCEMENTS
- ------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
FSAS 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. 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 any effect on its financial
statements.
-24-
<PAGE> 25
MANAGEMENT'S OUTLOOK
- --------------------
The Company began implementation of an aggressive new store development
plan for fiscal 1999. Two restaurants that are currently under construction are
scheduled to open in February and March 1999. The Company plans to open or have
under construction an additional three to five restaurants by the end of fiscal
1999. This rapid new store development will challenge the Company to maintain
its profit margins as new restaurants require higher than normal training and
development of personnel. Food usage may also be higher than normal during the
early stages of a new restaurant opening as store management teams tend to
over-estimate product needs to ensure customer satisfaction. The Company has
increased the number of restaurant supervisory personnel in anticipation of the
planned new store openings in fiscal 1999. Included in the new restaurant
development plans is the expectation that one or two of the new restaurants will
be a combination restaurant/gas and convenience store unit. This concept, known
as co-branding, is becoming common in the quick-service restaurant industry.
Wendy's International estimates that approximately 20% of their system-wide new
restaurants in 1999 will be combination restaurant/gas and convenience store
units. The Company is presently involved in negotiations with a number of gas
and convenience store operators concerning its own co-branding project.
The Company is projecting same-store sales increases for fiscal 1999 of
3% over fiscal 1998. Sales for the fourth quarter of fiscal 1998 through the
week ended February 14, 1999 are up approximately 6% over the same period of the
prior year. In an effort to improve customer service and sales volumes, Wendy's
International is embarking on a program throughout the Wendy's system called
"Service Excellence." This program is designed to speed pick-up window service
and to enhance the customer's dining experience. The Company will engage in this
program which, depending on the identified requirements of the program, may
require capital expenditures ranging from $1,000 to $15,000 per restaurant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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.
PART III
Items 10, 11, 12 and 13 of Part III are incorporated by reference to
the Registrant's Proxy Statement for its 1999 Annual Shareholders' Meeting to be
filed with the Commission pursuant to Regulation 14A.
-25-
<PAGE> 26
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:
Exhibit No. Description of Document
- ----------- --------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation (1).
3.2 Restated and Amended Bylaws (10).
4.1 Certificate of Designation of Series A Convertible Preferred
Shares (3).
4.2 Subscription Agreement relating to issuance of Series A
Convertible Preferred Shares (3).
10.1 First Amended & Restated Secured Promissory Note and Stock
Pledge Agreement by and between the Company and CBH Capital
Corp. (4).
10.2 Second Amended & Restated Secured Promissory Note and Stock
Pledge Agreement by and between the Company and CBH Capital
Corp. (2).
10.3 Loan Agreement dated November 26, 1996 among Meritage
Hospitality Group Inc., St. Clair Inn, Inc., Grand Harbor
Resort Inc., Thomas Edison Inn, Incorporated, MHG Food Service
Inc. and Grand Harbor Yacht Club Inc., as obligors, and Great
American Life Insurance Company, as lender (3).
10.4 Promissory Note dated November 26, 1996 by St. Clair Inn,
Inc., Grand Harbor Resort Inc., and Thomas Edison Inn,
Incorporated, as makers, and Great American Life Insurance
Company, as payee (paid in full on 10/4/98) (3).
10.5 Promissory Note dated November 26, 1996 by Meritage
Hospitality Group Inc., MHG Food Service Inc. and Grand Harbor
Yacht Club Inc., as makers, and Great American Life Insurance
Company, as payee (paid in full on 10/6/98) (3).
10.6 Amendment No. 1 to Loan Agreement dated November 26, 1996
among Meritage Hospitality Group Inc., St. Clair Inn, Inc.,
Grand Harbor Resort Inc., Thomas Edison Inn, Incorporated, MHG
Food Service Inc. and Grand Harbor Yacht Club Inc., as
obligors, and Great American Life Insurance Company, as lender
(5).
-26-
<PAGE> 27
10.7 Promissory Note dated May 23, 1997 by Grand Harbor Yacht Club
Inc., as maker, and Great American Life Insurance Company, as
payee (paid in full on 10/4/98) (5).
10.8 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 (6).
10.9 Waiver, Third Amendment and Modification Agreement to Loan
Agreement dated November 26, 1996 among Meritage Hospitality
Group Inc., SC Inn Inc., GHR Inc., Thomas Edison Inn,
Incorporated, MHG Food Service Inc., GHYC Inc., as obligors,
and Great American Life Insurance Company, as lender (1).
10.10 Business Loan Agreement dated February 22, 1995 between
Wendy's of West Michigan Limited Partnership and First of
America Bank-Michigan, N.A. (paid in full on 9/1/98) (7).
10.11 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 (paid in full on 9/1/98) (7).
10.12 Sample Construction Loan Agreement with Captec Financial
Group, Inc. (1).
10.13 Sample Promissory Note with Captec Financial Group, Inc.
regarding real estate financing (1).
10.14 Sample Mortgage with Captec Financial Group, Inc. regarding
real estate financing (1).
10.15 Sample Promissory Note with Captec Financial Group, Inc.
regarding leasehold financing (1).
10.16 Sample Mortgage with Captec Financial Group, Inc. regarding
leasehold financing (1).
10.17 Sample Promissory Note with Captec Financial Group, Inc.
regarding business value financing (1).
10.18 Sample Security Agreement with Captec Financial Group, Inc.
regarding business value financing (1).
10.19 Promissory Note dated June 16, 1998 among Meritage Hospitality
Group Inc., as lender, and S.C. Land Acquisitions, L.L.C., as
borrower (8).
10.20 Promissory Note dated September 1, 1998 among Meritage
Hospitality Group Inc., as lender, and Reynolds/Ehinger
Enterprises, LLC, as borrower (9).
-27-
<PAGE> 28
10.21 Consent Agreement dated May 16, 1997 between Wendy's
International, Inc., Wendy's of Michigan, 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 (5).
10.22 Agreement and Consent dated August 7, 1998 between WM Limited
Partnership - 1998, Meritage Hospitality Group Inc., MHG Food
Service Inc., Meritage Capital Corp., MCC Food Service Inc.,
Robert E. Schermer, Jr., and Christopher B. Hewett. (1).
10.23 Agreement and Consent dated December 16, 1998 between WM
Limited Partnership - 1998, Meritage Hospitality Group Inc.,
MHG Food Service Inc., Meritage Capital Corp., MCC Food
Service Inc., S & Q Management, LLC, Robert E. Schermer, Jr.,
Christopher B. Hewett, and Ray E. Quada. (10).
10.24 Agreement dated October 1, 1998 by and between Robert E.
Schermer, Sr. and the Company regarding sale of $1,375,000
promissory note (1).
10.25 Sample Loan Participation and Agency Agreement regarding sale
of participation interests in the Promissory Note dated
September 1, 1998 among Meritage Hospitality Group Inc., as
lender, and Reynolds/Ehinger Enterprises, LLC, as borrower.
(10).
10.26 Sample indemnification agreement for officers and directors of
the Company (11).
10.27 Settlement Agreement dated February 8, 1998 among Meritage
Hospitality Group Inc., CBH Capital Corp. and Christopher B.
Hewett with Option Agreement, Voting Agreement and Irrevocable
Proxy attached as exhibits (2).
MANAGEMENT COMPENSATORY CONTRACTS
10.28 Amended 1996 Management Equity Incentive Plan (12).
10.29 Amended 1996 Directors' Share Option Plan (5).
10.30 1999 Directors' Share Option Plan (10).
10.31 Directors' Compensation Plan (13).
10.32 Employee Share Purchase Plan (13).
----------------------------------
21 Subsidiaries of the Registrant (10).
23 Consent of Grant Thornton LLP (10).
27.1 Financial Data Schedule - Fiscal Year 1998 (10).
-28-
<PAGE> 29
27.2 Financial Data Schedule - Fiscal Year 1997 (Restated) (10).
27.3 Financial Data Schedule - Fiscal Year 1996 (Restated) (10).
Exhibits previously filed and incorporated by reference from:
(1) The Quarterly Report on Form 10-Q for the Company's fiscal quarter
ended August 31, 1998.
(2) Amendment No. 12 to Schedule 13-D filed by Christopher B. Hewett and
CBH Capital Corp. on February 17, 1999.
(3) The Annual Report on Form 10-K for the Company's fiscal year ended
November 30, 1996.
(4) The Quarterly Report on Form 10-QSB for the Company's fiscal quarter
ended May 31, 1996.
(5) The Quarterly Report on Form 10-Q for the Company's fiscal year ended
May 31, 1997.
(6) 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.
(7) The Annual Report on Form 10-K for Wendy's of West Michigan Limited
Partnership for the fiscal year ended December 31, 1994.
(8) The Report on Form 8-K for the Company filed on June 18, 1998.
(9) The Report on Form 8-K for the Company filed on September 9, 1998.
(10) Filed herewith.
(11) The Annual Report on Form 10-K for the Company's fiscal year ended
November 30, 1997.
(12) The Quarterly Report on Form 10-Q for the Company's fiscal year ended
May 31, 1998.
(13) Registration Statement No. 333-06657 on Form S-8 filed with the
Securities and Exchange Commission by the Company on June 24, 1996.
(b) Reports on Form 8-K.
--------------------
On November 12, 1998, the Company filed Amendment No. 1 to the Form 8-K
originally filed on September 9, 1998 which reported that the Company's
wholly-owned subsidiary sold certain real and personal property, including the
Thomas Edison Inn located in Port Huron, Michigan, for $12,200,000. The
Amendment included pro forma consolidated financial statements regarding the
sale.
After its acquisition of the Wendy's business, the Company used two
accounting firms to perform the annual audit of financial statements. Grant
Thornton LLP had been the retained to perform the annual audit of the financial
statements for the Company and its wholly-owned subsidiaries since 1993. BDO
Seidman, LLP had been previously retained to perform the annual audit of the
financial statements for Wendy's business which the Company fully acquired in
January 1998. On November 12, 1998, the Company filed a report on Form 8-K which
reported that the Company determined it was most efficient to use one accounting
firm to perform the annual audit. Accordingly, on November 4, 1998, BDO Seidman,
LLP was dismissed (effective August 31, 1998), and the Company formally retained
Grant Thornton LLP to perform all aspects of the annual audit of the financial
statements for the Company and its subsidiaries.
On November 20, 1998, the Company filed Amendment No. 1 to the Form 8-K
originally filed on November 12, 1998 which reported that on November 4, 1998,
BDO Seidman, LLP was dismissed (effective August 31, 1998), and the Company
formally retained Grant Thornton LLP to perform all aspects of the annual audit
of the financial statements for the Company and its subsidiaries. The amendment
was filed to clarify that during the fiscal years ended November 30, 1996 and
1997, and through November 4, 1998, there were no disagreements with BDO
Seidman, LLP on any matter of accounting principles or practices, financial
statement disclosure, auditing scope or procedure, or any reportable events. BDO
Seidman, LLP's reports on the financial statements of the Wendy's business for
fiscal years ended November 30, 1996 and 1997 contained no adverse opinion or
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
-29-
<PAGE> 30
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 16, 1999 By /s/ Robert E. Schermer, Jr.
----------------------------
Robert E. Schermer, Jr.
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 16, 1999
- ------------------------------------
Robert E. Schermer, Sr.
/s/ Robert E. Schermer, Jr. President, Chief Executive Officer and February 16, 1999
- ------------------------------------ Director (Principal Executive Officer)
Robert E. Schermer, Jr.
/s/ Pauline M. Krywanski Vice President, Treasurer and Chief February 16, 1999
- ------------------------------------ Financial Officer (Principal Financial
Pauline M. Krywanski & Accounting Officer)
/s/ James P. Bishop Director February 16, 1999
- ------------------------------------
James P. Bishop
/s/ Christopher P. Hendy Director February 16, 1999
- ------------------------------------
Christopher P. Hendy
/s/ Joseph L. Maggini Director February 16, 1999
- ------------------------------------
Joseph L. Maggini
/s/ Jerry L. Ruyan Director February 16, 1999
- ------------------------------------
Jerry L. Ruyan
</TABLE>
-30-
<PAGE> 31
INDEX TO FINANCIAL STATEMENTS
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES Page
----
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-6
Consolidated Statements of Cash Flows........................................M-8
Notes to Consolidated Financial Statements .................................M-11
SCHEDULES
Schedule I Condensed Financial Information of Registrant....................M-28
Schedule II Valuation and Qualifying Accounts ..............................M-31
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
F-1
<PAGE> 32
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, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended November 30, 1998. 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 audits 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, 1998 and 1997 and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended November 30, 1998, in conformity with generally accepted
accounting principles.
We 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, 1998, 1997 and 1996. In our opinion these schedules present
fairly, in all material respects, the information required to be set forth
therein.
Southfield, Michigan
December 19, 1998
M-1
<PAGE> 33
<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30,
===========================================================================================
1997
ASSETS 1998 (RESTATED)
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,109,358 $ 1,061,475
Receivables 70,974 258,282
Notes receivable, current portion 2,719,617 --
Inventories 165,156 156,746
Prepaid expenses and other current assets 90,796 156,028
----------- -----------
Total Current Assets 5,155,901 1,632,531
PROPERTY, PLANT AND EQUIPMENT, NET 13,182,940 7,518,007
NET ASSETS OF DISCONTINUED OPERATIONS -- 839,986
OTHER ASSETS
Note receivable, net of current portion 500,000 --
Goodwill, net of amortization of $153,758 and
$2,278,454, respectively 5,155,965 3,586,177
Franchise costs, net of amortization of $17,806 and
$406,552, respectively 632,194 143,448
Financing costs, net of amortization of $3,314 and
$34,208, respectively 261,815 50,239
Deferred charges and other assets 75,431 43,949
----------- -----------
Total Other Assets 6,625,405 3,823,813
----------- -----------
Total Assets $24,964,246 $13,814,337
=========== ===========
</TABLE>
M-2
<PAGE> 34
<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
NOVEMBER 30,
=================================================================================================
1997
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 (RESTATED)
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 1,199,458 $ 1,098,495
Current portion of obligations under capital lease 294,577 264,372
Short-term borrowings 1,100,000 --
Trade accounts payable 727,199 813,855
Amount due related party 245,260 85,263
Income taxes payable 50,000 --
Accrued liabilities 1,308,987 837,230
----------- -----------
Total Current Liabilities 4,925,481 3,099,215
LONG-TERM DEBT 10,623,946 7,394,118
OBLIGATIONS UNDER CAPITAL LEASES 1,395,049 1,689,628
DEFERRED REVENUE 1,992,026 --
NET LIABILITIES OF DISCONTINUED OPERATIONS 593,855 --
COMMITMENTS AND CONTINGENCIES (NOTES J, K, Q AND R) -- --
MINORITY INTEREST -- 1,601,415
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, 44,520 shares in 1998 (liquidation
value - $445,200) and 138,387 shares in 1997 445 1,384
Common stock - $0.01 par value; authorized
30,000,000 shares; issued and outstanding
5,742,586 and 3,218,778 shares, respectively 57,426 32,188
Additional paid in capital 13,299,467 12,982,295
Note receivable from sale of shares, net of
valuation allowance of $4,666,755 in 1998 (1,660,962) (5,700,645)
Accumulated deficit (6,262,487) (7,285,261)
----------- -----------
Total Stockholders' Equity 5,433,889 29,961
----------- -----------
Total Liabilities and Stockholders' Equity $24,964,246 $13,814,337
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-3
<PAGE> 35
<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30,
==================================================================================================================
1997 1996
1998 (RESTATED) (RESTATED)
----------- ----------- -----------
<S> <C> <C> <C>
Food and beverage revenue $27,043,954 $26,860,546 $ 2,098,908
Cost and expenses
Cost of food and beverages 7,752,187 7,720,307 639,437
Operating expenses 15,647,438 15,856,833 1,316,348
General and administrative expenses 3,111,910 2,886,892 299,929
Depreciation and amortization 1,078,539 1,070,017 111,739
----------- ----------- -----------
Total costs and expenses 27,590,074 27,534,049 2,367,453
----------- ----------- -----------
Loss from operations (546,120) (673,503) (268,545)
Other income (expense)
Interest expense (1,473,019) (1,440,192) (142,857)
Interest income 184,614 592,850 658,007
Other income 509,590 -- --
Loss on disposal of assets (25,000) (218,602) --
Minority interest 25,677 (195,639) 21,079
----------- ----------- -----------
Total other income (expense) (778,138) (1,261,583) 536,229
----------- ----------- -----------
Earnings (loss) from continuing
operations before income taxes (1,324,258) (1,935,086) 267,684
Income taxes - current 50,000 -- --
----------- ----------- -----------
Earnings (loss) from continuing operations (1,374,258) (1,935,086) 267,684
Discontinued operations
Loss from operations (including
income tax benefit of $160,000, $15,000
and $20,000, respectively) (479,232) (1,057,568) (2,193,254)
Gain on disposal of discontinued operations 3,711,364 1,479,095 --
----------- ----------- -----------
Earnings (loss) from discontinued operations 3,232,132 421,527 (2,193,254)
----------- ----------- -----------
Earnings (loss) before extraordinary item 1,857,874 (1,513,559) (1,925,570)
Extraordinary item - loss on early extinguishment
of debt (no applicable federal income tax) 727,172 177,291 --
----------- ----------- -----------
Net earnings (loss) 1,130,702 (1,690,850) (1,925,570)
Preferred stock dividends 107,928 101,714 --
----------- ----------- -----------
Net earnings (loss) on common shares $ 1,022,774 $(1,792,564) $(1,925,570)
=========== =========== ===========
</TABLE>
M-4
<PAGE> 36
<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
YEARS ENDED NOVEMBER 30,
===============================================================================================================
1997 1996
1998 (RESTATED) (RESTATED)
---------- ----------- ----------
<S> <C> <C> <C>
Earnings (loss) per common share - basic and diluted
Continuing operations $ (.30) $ (.63) $ .09
Discontinued operations .66 .13 (.71)
Extraordinary item (.15) (.06) --
---------- ---------- ----------
Net earnings (loss) $ .21 $ (.56) $ (.62)
========== ========== ==========
Weighted average shares outstanding 4,932,738 3,214,836 3,081,885
========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-5
<PAGE> 37
<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
==================================================================================================================================
SERIES A NOTE
CONVERTIBLE ADDITIONAL RECEIVABLE
PREFERRED COMMON PAID-IN SALE OF ACCUMULATED
STOCK STOCK CAPITAL SHARES DEFICIT TOTAL
------ ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 1, 1996 $ -- $30,200 $10,684,750 $(5,602,532) $(2,057,052) $ 3,055,366
Issuance of 108,387 shares of preferred
stock 1,084 -- 1,082,786 -- -- 1,083,870
Issuance of 184,333 shares of common
stock -- 1,845 1,139,281 -- -- 1,141,126
Recognition of interest income on note
receivable from sale of shares -- -- -- (573,274) -- (573,274)
Dividends paid ($.50 per common share) -- -- -- -- (1,510,075) (1,510,075)
Payment and present value adjustment
on note receivable from sale of shares -- -- (290,090) 1,040,090 -- 750,000
Net loss -- -- -- -- (1,925,570) (1,925,570)
------ ------- ----------- ----------- ----------- -----------
Balance at November 30, 1996 1,084 32,045 12,616,727 (5,135,716) (5,492,697) 2,021,443
Issuance of 14,295 shares of common
stock -- 143 65,868 -- -- 66,011
Issuance of 30,000 shares of preferred
stock 300 -- 299,700 -- -- 300,000
Dividends paid - preferred stock -- -- -- -- (101,714) (101,714)
Recognition of interest income on note
receivable from sale of shares -- -- -- (564,929) -- (564,929)
Net loss -- -- -- -- (1,690,850) (1,690,850)
------ ------- ----------- ----------- ----------- -----------
Balance at November 30, 1997 1,384 32,188 12,982,295 (5,700,645) (7,285,261) 29,961
</TABLE>
M-6
<PAGE> 38
<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
==================================================================================================================================
SERIES A NOTE
CONVERTIBLE ADDITIONAL RECEIVABLE
PREFERRED COMMON PAID-IN SALE OF ACCUMULATED
STOCK STOCK CAPITAL SHARES DEFICIT TOTAL
-------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 1, 1997 $ 1,384 $ 32,188 $12,982,295 $(5,700,645) $(7,285,261) $ 29,961
Issuance of 1,999,935 shares of common
stock -- 19,999 4,561,155 -- -- 4,581,154
Conversion of 73,867 shares of
convertible preferred shares into
523,873 common shares (739) 5,239 (4,500) -- -- --
Cancellation of 20,000 shares of
convertible preferred stock (200) -- (199,800) -- -- (200,000)
Dividends paid - preferred stock -- -- -- -- (107,928) (107,928)
Recognition of interest income on note
receivable from sale of shares 627,072 (627,072) -- --
Establishment of valuation allowance
on note receivable from sale
of shares -- -- (4,666,755) 4,666,755 -- --
Net earnings -- -- -- -- 1,130,702 1,130,702
-------- --------- ----------- ----------- ----------- -----------
Balance at November 30, 1998 $ 445 $ 57,426 $13,299,467 $(1,660,962) $(6,262,487) $ 5,433,889
======== ========= =========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-7
<PAGE> 39
<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30,
======================================================================================================================
1997 1996
1998 (RESTATED) (RESTATED)
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 1,130,702 $(1,690,850) $(1,925,570)
Adjustments to reconcile net loss to net cash provided
by operating activities
Extraordinary item-loss on early extinguishment
of debt from continuing operations 45,038 -- --
Depreciation and amortization 1,078,539 1,070,017 111,739
Compensation paid by issuance of preferred and
common stock 6,288 52,492 310,099
Minority interest in (loss) earnings of consolidated
subsidiaries (25,677) 195,639 (21,079)
Loss on disposal of assets 25,000 218,602 --
Interest income on note receivable from sale of
shares -- (564,929) (573,274)
Interest expense refinanced as long-term debt -- 240,310 --
Increase in note receivable from sale of assets (3,219,617) -- --
(Increase) decrease in cash value of life insurance (8,884) 185,207 (10,391)
Increase in deferred revenue 1,992,026 -- --
Decrease (increase) in current assets
Receivables 187,308 (42,403) (16,946)
Inventories (8,410) 23,504 6,283
Prepaid expenses and other current assets 65,232 (14,159) (6,539)
(Decrease) increase in current liabilities
Trade accounts payable (86,656) (27,057) 61,032
Amount due related party 159,997 85,263 --
Income taxes payable 50,000 --
Accrued liabilities 471,757 (9,577) 2,830,480
Decrease (increase) in net assets (liabilities)
of discontinued operations 1,433,841 (573,275) (1,392,563)
----------- ----------- -----------
Net cash provided by (used in) operating
activities 3,296,484 (851,216) (626,729)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (5,029,283) (608,071) (252,183)
Payment for franchise agreement (25,000) -- --
Acquisition of business, net of cash acquired (758,632) (182,526) (3,184,460)
Increase in other assets (34,191) (21,106) (99,088)
----------- ----------- -----------
Net cash used in investing activities (5,847,106) (811,703) (3,535,731)
</TABLE>
M-8
<PAGE> 40
<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED NOVEMBER 30,
===================================================================================================================
1997 1996
1998 (RESTATED) (RESTATED)
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $10,408,217 $ 750,000 $ 8,337,306
Payment of financing costs (265,129) -- --
Proceeds from note payable 1,498,934 -- --
Principal payments of long-term debt (7,676,361) (270,467) (3,001,357)
Payments on obligations under capital lease (264,372) (232,441) (29,808)
Collection on note receivable from sale of shares -- -- 750,000
Proceeds from issuance of preferred and common
shares 5,144 313,519 545,000
Dividends paid (107,928) (101,714) (1,510,075)
----------- ----------- -----------
Net cash provided by financing activities 3,598,505 458,897 5,091,066
----------- ----------- -----------
Net increase (decrease) in cash 1,047,883 (1,204,022) 928,606
Cash and cash equivalents - beginning of year 1,061,475 2,265,497 1,336,891
----------- ----------- -----------
Cash and cash equivalents - end of year $ 2,109,358 $ 1,061,475 $ 2,265,497
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 1,341,384 $ 1,370,969 $ 448,283
Cash paid for income taxes -- -- --
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of remaining 46% of Wendy's of
West Michigan Limited Partnership, including
assets acquired and liabilities assumed
Fair value of tangible and intangible assets
acquired $ 3,751,619
Reduction of minority interest 1,575,738
Amount of cash payment (758,632)
------------
1,992,359 common shares issued $ 4,568,725
============
Assignment of note receivable
Amount of note receivable assigned $ 1,375,000
Cancellation of note payable (776,066)
Cancellation of 20,000 convertible preferred shares (200,000)
------------
Proceeds from note payable $ 398,934
============
</TABLE>
M-9
<PAGE> 41
<TABLE>
<CAPTION>
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED NOVEMBER 30,
==========================================================================================================================
1997 1996
1998 (RESTATED) (RESTATED)
----------- --------- ----------
<S> <C> <C> <C>
Conversion of 73,867 shares of convertible preferred
stock into 523,873 shares of common stock $ --
===========
Acquisition of equipment
Cost of equipment $244,637
Equipment loan 244,637
--------
Cash down payment for equipment $ --
========
Increase in long term debt due to three month moratorium
on interest and principal payments $240,310
========
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 $ --
===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
M-10
<PAGE> 42
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company currently conducts its business in the quick-service restaurant
industry operating 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. The Company formerly conducted business in its
discontinued lodging industry segment which consisted of three full service
hotels. The hotels were sold during 1997 and 1998 (see Notes C and E).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
the following wholly-owned subsidiaries:
Continuing operations:
MHG Food Service Inc.
Discontinued operations:
SC Inn Inc., TE Inn Inc., GHR Inc., and GHYC Inc.
All significant intercompany balances and transactions have been eliminated in
consolidation.
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 paper 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 30 years. Amortization of leasehold improvements is provided
over the terms of the various leases.
INCOME TAXES
Income taxes are accounted for by using an asset and liability approach.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial basis and tax basis
of assets and liabilities. Assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
M-11
<PAGE> 43
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FRANCHISE FEES
Franchise fees for the Company's restaurant units are amortized using the
straight-line method over the terms of the individual franchise agreements
including options to renew.
FINANCING COSTS
Financing costs are amortized using the straight-line method over the terms of
the various loan agreements.
GOODWILL AND LONG-LIVED ASSETS
The cost in excess of net assets acquired (goodwill) is amortized using the
straight-line method over thirty years (the term of the franchise agreements
including options to renew). 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 estimated 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 advertising costs are based primarily on a percentage of monthly
sales. These costs and other advertising costs are charged to operations as
incurred. Advertising expense from continuing operations totaled $1,553,193,
$1,638,409 and $124,867 for the years ended November 30, 1998, 1997 and 1996,
respectively.
USE OF ESTIMATES
The preparation of financial statements in accordance 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.
M-12
<PAGE> 44
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," issued by the Financial
Accounting Standards Board (FASB) effective for fiscal years ending after
December 15, 1997. This new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings per
share. Basic earnings per share is computed by dividing earnings on common
shares by the weighted average number of common shares outstanding during each
year. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
All prior period earnings per share data has been restated accordingly.
The following table reconciles the numerators and denominators used to calculate
basic and diluted earnings per share for the years ended November 30, 1998, 1997
and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Numerators
Earnings (loss) from continuing
operations $(1,374,258) $(1,935,086) $ 267,684
Less preferred stock dividends 107,928 101,714 --
----------- ----------- -----------
Earnings (loss) on common shares -
basic and diluted $(1,482,186) $(2,036,800) $ 267,684
=========== =========== ===========
Denominators
Weighted average common shares
outstanding - basic and diluted 4,932,738 3,214,836 3,081,885
=========== =========== ===========
</TABLE>
Convertible preferred stock was not included in the computation of diluted
earnings per common share because the effect of conversion would be
antidilutive. Exercisable stock options were not included in the computation of
diluted earnings per share because the option prices were greater than average
quarterly market prices.
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 the Company's financial instruments which include cash
and cash equivalents, receivables, notes receivable, accounts payable and
short-term and long-term debt, approximate their fair values.
M-13
<PAGE> 45
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL STATEMENT PRESENTATION
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 presentation.
NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued FSAS 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. 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 any effect on its financial
statements.
NOTE B - ACQUISITION
In fiscal 1996, the Company purchased 54% of the partnership interest in the now
dissolved Wendy's of West Michigan Limited Partnership (the "Wendy's
Partnership"). 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 unitholders. The Company then transferred this interest to its
wholly-owned subsidiary, MHG Food Service Inc. The remaining 46% of the Wendy's
Partnership was acquired by the Company in January 1998. The acquisition has
been accounted for as a purchase and the total acquisition cost of $10,384,753,
($4,446,453 cash, 2,164,259 shares of common stock and 29,520 shares of
preferred stock with a total value of $5,938,300), has been allocated to assets
acquired and liabilities assumed based upon estimates of their fair values. A
total of $5,309,723, representing the excess of the acquisition cost over the
fair value of net 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 100%
of 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>
YEARS ENDED NOVEMBER 30, (UNAUDITED)
-------------------------------------------------
1997 1996
1988 (RESTATED) (RESTATED)
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $27,044,000 $26,860,000 $26,406,000
Net loss from continuing operations $(1,350,000) $(1,739,000) $ (368,000)
Loss per share $ (.30) $ (.57) $ (.12)
</TABLE>
M-14
<PAGE> 46
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE C - DISCONTINUED OPERATIONS - SALE OF HOTEL ASSETS
The Company sold substantially all the assets of its three full service hotels,
which were previously included in the lodging segment. As such, the Company
began reporting the lodging segment as discontinued operations effective May 31,
1998. The consolidated financial statements have been restated for all prior
periods presented to reflect the results of operations and net assets of the
lodging segment as discontinued operations.
A summary of the three sale transactions is as follows:
<TABLE>
<CAPTION>
Grand Harbor
Resort
Thomas Edison Inn & Yacht Club St. Clair Inn
----------------- ------------ -------------
<S> <C> <C> <C>
Date of sale September 1, 1998 June 15, 1998 November 30, 1997
Selling price (before selling costs) $12,200,000 $4,500,000 $3,800,000
Promissory note held by Company 2,000,000 1,375,000 --
----------- ---------- ----------
Cash portion of selling price $10,200,000 $3,125,000 $3,800,000
=========== ========== ==========
Gain on sale of assets $ 3,273,893 $ 583,164 $1,479,095
Loss from operations from
measurement date (May 31, 1998)
to date of disposal 109,800 35,893 --
----------- ---------- ----------
Gain on disposal of
discontinued operations $ 3,164,093 $ 547,271 $1,479,095
=========== ========== ==========
</TABLE>
As of November 30, 1998 and 1997, assets and liabilities of the discontinued
lodging group business segment included in the balance sheet are summarized
below:
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------------
1997
1998 (RESTATED)
---------- ------------
<S> <C> <C>
Assets
Current assets $ 13,264 $ 4,221,735
Property, plant and equipment, net -- 11,461,306
Other assets 16,511 2,815,877
Liabilities
Current liabilities (623,630) (4,938,619)
Long-term debt -- (11,980,313)
Other liabilities -- (740,000)
---------- ------------
Net assets (liabilities) of
discontinued operations $ (593,855) $ 839,986
========== ============
</TABLE>
M-15
<PAGE> 47
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE C - DISCONTINUED OPERATIONS - SALE OF HOTEL ASSETS (CONTINUED)
The results of operations of the discontinued operations for the years ended
November 30, 1998, 1997 and 1996 is summarized below:
<TABLE>
<CAPTION>
For years ended November 30, 1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Revenues $6,358,126 $14,034,053 $14,762,822
Earnings (loss) from operations $ 151,934 $ 478,153 $ (706,476)
Earnings (loss) from discontinued operations $3,232,132 $ 421,527 $(2,193,254)
</TABLE>
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows at November 30:
<TABLE>
<CAPTION>
1997
1998 (RESTATED)
----------- -----------
<S> <C> <C>
Land and improvements $ 2,861,000 $ 749,000
Buildings and improvements 5,515,359 3,832,351
Furnishings and equipment 3,547,990 5,346,438
Leasehold improvements 1,009,191 2,153,600
Leased property/capital leases 983,292 2,825,338
Construction in progress 75,390 --
----------- -----------
13,992,222 14,906,727
Less accumulated depreciation and amortization (809,282) (7,388,720)
----------- -----------
$13,182,940 $ 7,518,007
=========== ===========
</TABLE>
Depreciation and amortization expense was approximately $853,000, $768,000 and
$79,000 for the years ended November 30, 1998, 1997 and 1996, respectively.
M-16
<PAGE> 48
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE E - NOTES RECEIVABLE
The Company received a note receivable as partial consideration in the sale of
both the Grand Harbor Resort & Yacht Club and the Thomas Edison Inn. Notes
receivable consisted of the following at November 30:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Mortgage note receivable (from sale of Grand Harbor
Resort & Yacht Club), collateralized by marina real
estate, requiring monthly payments of interest only at
10.8% through June 16, 1999, when any remaining
balance is due, unless the balance is $500,000 or less,
which allows the terms of the note to be extended
through December 16, 1999, when any remaining
balance is due. $1,375,000 $ --
Mortgage note receivable (from sale of Thomas
Edison Inn), collateralized by land and the pledge of
stock of an affiliate of the borrower, requiring
monthly payments of interest only at prime plus 8%
through August 31, 1999, when any remaining
balance is due. 1,844,617
---------- ----------
3,219,617 --
Less current portion 2,719,617 --
---------- ----------
$ 500,000 $ --
========== ==========
</TABLE>
NOTE F - AMOUNTS DUE RELATED PARTIES AND RELATED PARTY TRANSACTIONS
The Company sold $1,100,000 of undivided interests in the $2,000,000 mortgage
note received from the sale of the Thomas Edison Inn (see Notes C and E). The
participation agreements represent 59.6% of the outstanding note balance, of
which a 27.1% participation ($500,000) was sold to a member of the Company's
Board of Directors. The participation agreements require monthly payments of
interest only at prime plus 8% through August 31, 1999 when any remaining
balance is due. The Company indemnified each of the participants in the event of
nonpayment by the maker.
Effective October 6, 1998, the Company entered into an agreement with the
Company's Chairman of the Board whereby the company assigned the $1,375,000
(10.8%) one year mortgage note receivable from the sale of the Grand Harbor
Resort & Yacht Club (see Note C and E) to the Chairman in exchange for (i)
payment in full of the prime plus 8% business loan note payable to the Chairman
($776,000), (ii) cancellation of $200,000 of preferred stock owned by the
Chairman, and (iii) a cash payment of $399,000. The payment terms, interest
rate, and related security are the same as the assigned note receivable (see
Note E). The Company indemnified the Chairman in the event of nonpayment by the
maker.
M-17
<PAGE> 49
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE F - AMOUNTS DUE RELATED PARTIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
The Wendy's Partnership incurred a management fee to the General Partner in the
amount of $160,000 in 1998 and 1997 and $13,333 in 1996 (effective date of the
Wendy's Partnership acquisition was November 1, 1996.)
NOTE G - ACCRUED LIABILITIES
Accrued liabilities consist of the following at November 30:
<TABLE>
<CAPTION>
1997
1998 (RESTATED)
---------- --------
<S> <C> <C>
Payroll and related payroll taxes $ 787,394 $434,891
Property taxes 238,953 221,180
Professional fees 69,125 61,450
Interest and other expenses 213,515 119,709
---------- --------
$1,308,987 $837,230
========== ========
</TABLE>
M-18
<PAGE> 50
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE H - LONG-TERM DEBT
Long-term debt consists of the following obligations at November 30:
<TABLE>
<CAPTION>
1997
1998 (RESTATED)
---------- ----------
<S> <C> <C>
Mortgage notes payable, due in
monthly installments of $40,146
including interest at 7.77% through
October 1, 2018. (1) $4,861,387 --
Mortgage notes payable, due in
monthly installments of $32,226
including interest at 8.15% through
September 1, 2018. (1) 3,797,257 --
Notes payable, due in monthly
installments of $10,802 including
interest at 8.15% through September
1, 2013. (1) 1,113,588 --
Construction note payable, due in
monthly installments of interest
only at 7.27%, through completion
of the building construction. (1) 310,717 --
Amount payable to the Chairman of the
Board and shareholder, due in
monthly installments of interest
only at 10.8% through December 16,
1999 when any remaining principal
will be due. (1) 1,375,000 --
Other notes payable, requiring
monthly payments aggregating
$19,416 and $13,454, respectively,
subject to interest at rates
ranging from 7.5% to 10.0%. (2) 365,455 215,192
Mortgage note payable, as amended,
due in monthly installments of
interest at prime plus 8%. The note
was paid in full in October 1998. -- 5,469,543
Term note payable, due in monthly
installments of $43,313, including
interest at 1% over prime. The note
was paid in full in September 1998. -- 2,037,111
Note payable to Chairman of the
Board and shareholder, unsecured,
interest due monthly at prime plus
8%. The note was retired as part of
the assignment of the $1,375,000
note receivable from the sale of
the Grand Harbor Resort & Yacht
Club. -- 770,767
---------- ----------
11,823,404 8,492,613
Less current portion 1,199,458 1,098,495
----------- ----------
$10,623,946 $7,394,118
=========== ==========
</TABLE>
(1) The debt is collateralized by certain real estate.
(2) The note is collateralized by certain equipment.
M-19
<PAGE> 51
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE H - LONG-TERM DEBT (CONTINUED)
Minimum principal payments on long-term debt to maturity as of November 30, 1998
are as follows:
<TABLE>
<S> <C>
1999 $ 1,199,458
2000 824,692
2001 326,818
2002 353,544
2003 382,458
Thereafter 8,736,434
-----------
$11,823,404
===========
</TABLE>
Loan covenants of the various loan agreements include requirements for
maintenance of certain financial ratios. At November 30, 1998 the Company was in
compliance.
NOTE I - INCOME TAXES
Deferred tax assets and liabilities at November 30, consist of the following:
<TABLE>
<CAPTION>
1997
1998 (RESTATED)
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 288,000 $ 857,000
AMT credit carryforward 155,000 105,000
Allowance for doubtful accounts 213,000 --
Depreciation 16,000 --
Goodwill 11,000 --
Accrued Compensation 15,000 --
Contribution carryforward -- 8,000
--------- ---------
698,000 970,000
Deferred tax liabilities
Depreciation (26,000) --
Amortization (54,000) --
Capital leases (10,000) --
--------- ---------
(90,000) --
Less valuation allowance (608,000) (970,000)
--------- ---------
Net deferred tax liability $ -- $ --
========= =========
</TABLE>
The net operating loss carryforwards expire in 2011 - 2012.
M-20
<PAGE> 52
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE I - INCOME TAXES (CONTINUED)
The income tax provision reconciled to the tax computed at the statutory federal
rate for continuing operations was as follows:
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------------------
1997 1996
1998 (RESTATED) (RESTATED)
--------- --------- ---------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rates
applied to income before federal
income tax $(450,000) $(657,600) $ 91,000
Effect of nondeductible items 44,400 82,400 (51,000)
IRS adjustment to net operating loss -- 250,000 --
Other 21,600 (8,500) (4,000)
Valuation allowance 434,000 333,700 (36,000)
--------- --------- ---------
$ 50,000 $ -- $ --
========= ========= =========
</TABLE>
NOTE J - LEASE COMMITMENTS
The Company leases land and buildings used in operations under operating
agreements, with remaining lease terms (including renewal options of up to
twelve years) ranging from one to twenty-two years. Included in the leases were
five with a real estate partnership related through common general partnership
ownership through May 19, 1997 when the former general partner was removed.
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>
YEARS ENDED NOVEMBER 30,
-------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Leases with related parties
Minimum rentals $ -- $ 143,127 $25,256
Percentage rentals -- 79,948 14,155
Other Leases
Minimum rentals 631,178 583,365 46,347
Percentage rentals 523,033 459,463 7,887
---------- ---------- -------
$1,154,211 $1,265,903 $93,645
========== ========== =======
</TABLE>
M-21
<PAGE> 53
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE J - LEASE COMMITMENTS (CONTINUED)
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
YEARS ENDED NOVEMBER 30, LEASES LEASES
------------------------ ---------- ----------
<S> <C> <C>
1999 $ 465,323 $ 403,321
2000 465,323 372,422
2001 449,365 254,440
2002 369,575 225,273
2003 369,575 214,440
Thereafter 30,798 182,370
---------- ----------
Total minimum lease obligations 2,149,959 $1,652,266
==========
Less amount representing interest imputed at
approximately 11% 460,333
----------
Present value of minimum lease obligations $1,689,626
==========
</TABLE>
The present value of minimum rental obligations is reflected in the balance
sheets as current and long-term obligations under capital leases.
Accumulated amortization of leased property under capital leases was $138,500,
and $1,814,346, at November 30, 1998 and 1997, 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 K - DEFERRED REVENUE
In April 1998, the Company entered into a long-term agreement with its beverage
supplier. The agreement requires the Company to purchase 1,800,000 gallons of
fountain beverage syrup from the supplier. In exchange, the Company received
$2,090,000 in marketing and conversion funds which, in accordance with the terms
of the agreement, will be recognized as revenue as the gallons of fountain
beverage syrup are purchased.
M-22
<PAGE> 54
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE L - 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 were also convertible into common shares at the
conversion price of $7.00 per share through July 31, 1998, when a new conversion
pricing formula was adopted. For the period of August 1, 1998 through September
14, 1998, the shares were convertible into common shares at the conversion price
of $1.41 per share. The conversion price increased by $1.00 on September 15,
1998 and will continue to increase by $1.00 on the 15th of each December, March,
June and September thereafter until the conversion price reaches $7.00 per
share, at which time no further increases will occur. 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.
In August and September 1998, the Company issued 523,873 unregistered common
shares in connection with the conversion 73,867 convertible preferred shares.
The preferred shares had been purchased in 1996 and 1997, and were convertible
into common shares at a conversion price of $1.41 per common share in accordance
with the conversion program described above (based on the liquidation value of
$10.00 per preferred share). Preferred dividends paid will be reduced by $66,480
annually due to this conversion.
NOTE M - 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 CBH Capital Corp.
("CBHCC") (formerly Meritage Capital Corp.). Under the agreement, the Company
sold 1,500,000 shares of previously authorized newly issued common stock to
CBHCC at a total price of $10,500,000. Upon execution of the agreement, CBHCC
gave the Company a non-interest bearing promissory note in the amount of
$10,500,000. The Note provides that CBHCC 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, CBHCC is required to make six
annual payments of $1,625,000.
The Note is collateralized by the shares issued to CBHCC under the Agreement.
The Note was discounted at 11% and is recorded as a reduction of stockholders'
equity. Due to the change in market value of the shares collateralizing the
loan, a valuation allowance of $4,666,755 was recorded as of November 30, 1998.
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-23
<PAGE> 55
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE N - EMPLOYEE BENEFIT PLANS
The Company maintained a defined contribution 401(k) plan that covered
substantially all employees of the discontinued lodging industry segment. The
plan was terminated November 30, 1997 and all plan assets will be distributed to
plan participants subsequent and subject to compliance with various governmental
regulations.
The Company maintains a 401(k) profit sharing plan that covers substantially all
of its employees in the quick-service restaurant business. Contributions to the
plan may be made by the Company (which are discretionary) or by plan
participants through elective salary reductions. Contributions to the plan by
the Company totaled $27,720, $27,765 and $2,000 in 1998, 1997 and 1996,
respectively.
NOTE O - OTHER INCOME
Other income of $509,590 in 1998 consisted primarily of income from the
forfeiture of an earnest deposit in the amount of $500,000 on a contract to sell
one of the Company's hotel properties.
NOTE P - STOCK OPTION PLANS
The 1996 Management Equity Incentive Plan, as amended, authorized 725,000 shares
of common stock to be granted 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 sixth years after the date of grant. Options granted
under the plan may have a term of from one to ten years.
The 1996 Directors' Share Option 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 the fair market value of the common stock on the date of grant. The
plan provides that each non-employee director, on the date such person becomes a
non-employee director, will be granted options to purchase 5,000 shares of
stock. Provided that such person is still serving as a non-employee director,
they will automatically be granted options to purchase 1,000 additional shares
each year thereafter on the date of the Annual Shareholders' Meeting. Options
granted under the plan have a term of ten years.
M-24
<PAGE> 56
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE P - STOCK OPTION PLANS (CONTINUED)
The following table summarizes the changes in the number of common shares under
stock options granted pursuant to the preceding plans:
<TABLE>
<CAPTION>
1996 MANAGEMENT 1996 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
Forfeited during 1997 (35,000) --
------- ------
Outstanding at
November 30, 1997 298,500 $7.00 56,000 $4.00
===== =====
Granted during 1998 147,500 18,000
Forfeited during 1998 (178,500) --
------- ------
Outstanding at
November 30, 1998 267,500 $3.50 74,000 $1.40
======= ===== ====== =====
Exercisable at:
November 30, 1996 -- 50,000
======= ======
November 30, 1997 28,500 56,000
======= ======
November 30, 1998 48,500 74,000
======= ======
Available for grant at:
November 30, 1996 110,000 10,000
======= ======
November 30, 1997 171,500 64,000
======= ======
November 30, 1998 457,500 46,000
======= ======
</TABLE>
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.
M-25
<PAGE> 57
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE P - STOCK OPTION PLANS (CONTINUED)
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 1998: dividend yield of 0%, expected volatility
ranging from 81.6% - 83.6% in 1998 and 10.5% - 63.4% in 1997, risk-free interest
rates ranging from 4.8% - 5.8% in 1998 and 6.2% - 7.0% in 1997 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>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1998 1997
---------- -----------
<S> <C> <C>
Net earnings (loss)
As reported $1,130,702 $(1,690,850)
Pro forma $ 955,272 $(2,196,909)
Earnings (loss) per share
As reported $ .21 $ (0.56)
Pro forma $ .17 $ (0.72)
</TABLE>
NOTE Q - COMMITMENTS AND CONTINGENCIES
The Company has entered into mortgage note agreements in the amount of
$1,940,000 to finance the land and building for two new Wendy's restaurants. The
mortgage notes carry a 20 year term with an interest rate equal to 2.75% over
the then current 10 year treasury rate. The interest rate will be fixed as of
the date that construction is completed, which is expected in February and March
1999. As of November 30, 1998, the Company had borrowed $310,717 on these loans.
The available construction draws will be sufficient to fund the remaining
construction costs.
The Company has also received a forward commitment in the amount of $3,750,000
to finance the land, building and equipment for three additional restaurants.
This commitment is for 20 year mortgages and 7 year equipment loans at an
interest rate equal to 4% and 5% over the then current same term treasury rate
subject to a minimum interest rate of 9% and 10.5% for real estate and equipment
financing, respectively. The Company has no obligation to utilize this
financing.
M-26
<PAGE> 58
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1998, 1997 AND 1996
================================================================================
NOTE Q - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Uncertainty due to Year 2000 Issue - The Year 2000 Issue arises because many
computerized systems use two digits rather than four to identify a year.
Date-sensitive systems may recognize the year 2000 as 1900 or some other date,
resulting in errors when information using year 2000 dates is processed. In
addition, similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year 2000
issue may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from minor
errors to significant systems failure which could affect an entity's ability to
conduct normal business operations. It is not possible to be certain that all
aspects of the year 2000 issue affecting the entity, including those related to
the efforts of customers, suppliers, or other third parties, will be fully
resolved.
NOTE R - LEGAL PROCEEDINGS
The Company is involved in certain routine legal proceedings which are
incidental to its business. 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.
M-27
<PAGE> 59
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERITAGE HOSPITALITY GROUP INC.
CONDENSED BALANCE SHEET
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
<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-28
<PAGE> 60
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
MERITAGE HOSPITALITY GROUP INC.
CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
<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-29
<PAGE> 61
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
MERITAGE HOSPITALITY GROUP INC.
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
<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-30
<PAGE> 62
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
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS:
Year ended November 30:
1998 $970,000 -0- $(362,000)* -0- $608,000
1997 729,000 -0- 241,000* -0- 970,000
1996 39,300 -0- 689,700* -0- 729,000
</TABLE>
* Increase (decrease) to adjust allowance to the amount of net deferred taxes.
M-31
<PAGE> 63
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> 64
<TABLE>
<CAPTION>
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
BALANCE SHEETS
===================================================================================================================
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> 65
<TABLE>
<CAPTION>
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
BALANCE SHEETS
===================================================================================================================
November 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
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
===================================================================================================================
See accompanying notes to financial statements.
</TABLE>
W-3
<PAGE> 66
<TABLE>
<CAPTION>
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF INCOME
==============================================================================================================================
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> 67
<TABLE>
<CAPTION>
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF INCOME
==============================================================================================================================
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>
W-5
<PAGE> 68
<TABLE>
<CAPTION>
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
==============================================================================================================
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
==============================================================================================================
See accompanying notes to financial statements.
</TABLE>
W-6
<PAGE> 69
<TABLE>
<CAPTION>
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
=================================================================================================================
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> 70
<TABLE>
<CAPTION>
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
=================================================================================================================
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
=================================================================================================================
See accompanying notes to financial statements.
</TABLE>
W-8
<PAGE> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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
LEASING used in operations under operating
ARRANGEMENTS agreements, with remaining lease terms
(INCLUDING THOSE (including renewal options of up to thirteen
WITH AFFILIATED years) ranging from one to twenty-three
PARTNERSHIP) years. Included in the leases are five leases
with parties related through common ownership
with the former general partner. (See Note
6.)
W-15
<PAGE> 78
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> 79
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 would prohibit the
defendants from participating in the
W-17
<PAGE> 80
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
================================================================================
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 3.2
RESTATED AND AMENDED
BYLAWS
OF
MERITAGE HOSPITALITY GROUP INC.
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be in the
City of Grand Rapids, County of Kent, State of Michigan.
Section 2. Other Offices. The corporation may also have offices at such
other places both within and without the State of Michigan as the board of
directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
SHAREHOLDERS
Section 1. Place of Meeting. All meetings of the shareholders of this
corporation shall be held at the registered office or such other place, either
within or without the State of Michigan, as may be determined from time to time
by the board of directors.
Section 2. Annual Meeting of Shareholders. The annual meeting of
shareholders for election of directors and for such other business as may
properly come before the meeting, commencing with the year 1987, shall be held
on the third Tuesday of May, if not a legal holiday, and if a legal holiday,
then on the next business day following, at 10:00 am., local time, or at such
other date and time as shall be determined from time to time by the board of
directors. If the annual meeting is not held on the date designated therefor,
the board shall cause the meeting to be held as soon thereafter as convenient.
Section 3. Order of Business at Annual Meeting. The order of business
at the annual meeting of the shareholders shall be as follows:
-1-
<PAGE> 2
(a) Reading of notice and proof of mailing,
(b) Reports of Officers,
(c) Election of Directors,
(d) Transaction of other business mentioned in the
notice,
(e) Adjournment,
provided that, in the absence of any objection, the presiding officer may vary
the order of business at his discretion.
Section 4. Notice of Meeting of Shareholders. Except as otherwise
provided in the Michigan Business Corporation Act (herein called the "Act"),
written notice of the time, place, and purpose of a meeting of shareholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting, either personally or by mail, to each shareholder of record
entitled to vote at the meeting. When a meeting is adjourned to another time or
place, it is not necessary to give notice of the adjourned meeting if the time
and place to which the meeting is adjourned are announced at the meeting at
which the adjournment is taken and at the adjourned meeting only such business
is transacted as might have been transacted at the original meeting. However, if
after the adjournment the board of directors fix a new record date for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record on the new record date entitled to vote at the meeting.
Section 5. List of Shareholders Entitled to Vote. The officer or agent
having charge of the stock transfer books for shares of the corporation shall
make and certify a complete list of the shareholders entitled to vote at a
shareholders' meeting or any adjournment thereof. The list shall:
(a) Be arranged alphabetically within each class and series,
with the address of, and the number of shares held by, each
shareholder.
(b) Be produced at the time and place of the meeting.
(c) Be subject to inspection by any shareholder during the
whole time of the meeting.
(d) Be prima facie evidence as to who are the shareholders
entitled to examine the list or to vote at the meeting.
Section 6. Special Meeting of Shareholders. A special meeting of
shareholders may be called at any time by the chief executive officer of the
corporation (See Article V, Section 4) or by a majority of the members of the
board of directors then in office, or by shareholders owning, in the aggregate,
not less than forty-five percent (45%) of all the shares entitled to vote at
such special meeting. The method by which such meeting may be called is as
follows: Upon receipt of a specification in writing
-2-
<PAGE> 3
setting forth the date and objects of such proposed special meeting, signed by
the chief executive officer, or by a majority of the members of the board of
directors then in office, or by shareholders as above provided, the secretary of
this corporation shall prepare, sign, and mail the notices requisite to such
meeting.
Section 7. Quorum of Shareholders. Unless a greater or lesser quorum is
provided in the articles of incorporation, in a bylaw adopted by the
shareholders, or in the Act, shares entitled to cast a majority of the votes at
a meeting constitute a quorum at the meeting. The shareholders present in person
or by proxy at such meeting may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum. Whether or not a quorum is present, the meeting may be adjourned by a
vote of the shares present.
Section 8. Vote of Shareholders. Each outstanding share is entitled to
one (1) vote on each matter submitted to a vote, unless otherwise provided in
the articles of incorporation. A vote may be cast either orally or in writing.
When an action, other than the election of directors, is to be taken by vote of
the shareholders, it shall be authorized by a majority of the votes cast by the
holders of shares entitled to vote thereon, unless a greater plurality is
required by the articles of incorporation or the Act. Directors shall be elected
by a plurality of the votes cast at an election.
Section 9. Record Date for Determination of Shareholders. For the
purpose of determining shareholders entitled to notice of and to vote at a
meeting of shareholders or an adjournment thereof, or to express consent or to
dissent from a proposal without a meeting, or for the purpose of determining
shareholders entitled to receive payment of a dividend or allotment of a right,
or for the purpose of any other action, the board may fix, in advance, a date as
the record date for any such determination of shareholders. The date shall not
be more than sixty (60) nor less than ten (10) days before the date of the
meeting, nor more than sixty (60) days before any other action. If a record date
is not fixed (a) the record date for determination of shareholders entitled to
notice of or to vote at a meeting of shareholders shall be the close of business
on the day next preceding the day on which notice is given, or, if no notice is
given, the day next preceding the day on which the meeting is held, and (b) the
record date for determining shareholders for any purpose other than that
specified in subdivision (a) shall be the close of business on the day on which
the resolution of the board relating thereto is adopted. When a determination of
shareholders of record entitled to notice of or to vote at a meeting of
shareholders has been made as provided in this Section, the determination
applies to any adjournment of the meeting, unless the board fixes a new record
date under this Section for the adjourned meeting.
Section 10. Proxies. A shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent without a meeting may authorize
one or more other persons to act for him by proxy. A proxy shall be signed by
the shareholder or his authorized agent or representative. A proxy is not valid
after the expiration of three (3) years from its date unless otherwise provided
in the proxy.
Section 11. Inspectors of Election. The board of directors, in advance
of a shareholders' meeting, may appoint one (1) or more inspectors of election
to act at the meeting or any adjournment thereof. If inspectors are not so
appointed, the person presiding at a shareholders' meeting may, and
-3-
<PAGE> 4
on request of a shareholder entitled to vote thereat shall, appoint one (1) or
more inspectors. In case a person appointed fails to appear or act, the vacancy
may be filled by appointment made by the board of directors in advance of the
meeting or at the meeting by the person presiding thereat. The inspectors shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the validity and
effect of proxies, and shall receive votes, ballots or consents, hear and
determine challenges and questions arising in connection with the right to vote,
count and tabulate votes, ballots or consents, determine the result, and do such
acts as are proper to conduct the election or vote with fairness to all
shareholders. On request of the person presiding at the meeting or a shareholder
entitled to vote thereat, the inspectors shall make and execute a written report
to the person presiding at the meeting of any of the facts found by them and
matters determined by them. The report is prima facie evidence of the facts
stated and of the vote as certified by the inspectors.
Section 12. Repealed.
Section 13. Repealed.
Section 14. Nominations and Other Business.
(a) Annual Meeting of Shareholders. (1) Nominations of persons for
election to the Board of Directors of the corporation and proposals of business
to be considered by the shareholders may be made at an annual meeting of
shareholders (i) pursuant to the corporation's notice of meeting, (ii) by or at
the direction of the Board of Directors or (iii) by a shareholder of the
corporation who was a shareholder of record at the time of giving of notice
provided for in this bylaw, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this bylaw.
(2) For nominations or other business to be properly brought
before an annual meeting by a shareholder pursuant to clause (iii) of paragraph
(a) (1) of this bylaw, the shareholder must have given timely notice thereof in
writing to the Secretary of the corporation. To be timely, a shareholder's
notice shall be delivered to the Secretary at the principal executive offices of
the corporation not less than 60 days prior to the annual meeting. Such
shareholder's notice shall set forth (i) as to each person whom the shareholder
proposes to nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (ii)
as to any other business that the shareholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting, and any
material interest in such business of such shareholder and the beneficial owner,
if any, on whose behalf the proposal is made; (iii) as to the shareholder giving
the notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (A) the name and address of such shareholder, as it appears on
the corporation's books, and of such beneficial owner, and (B) the class and
number of shares of the corporation owned beneficially and of record by such
shareholder and such beneficial owner.
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(3) Notwithstanding anything in the second sentence of
paragraph (a) (2) of this bylaw to the contrary, if the number of directors to
be elected to the Board of Directors of the corporation is increased and there
is no public announcement naming all of the nominees for director or specifying
the size of the increased Board of Directors made by the corporation at least 70
days prior to the annual meeting, a shareholder's notice required by this bylaw
shall also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the Secretary at
the principal executive offices of the corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the corporation.
(b) Special Meetings of Shareholders. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of shareholders at which directors are to be elected pursuant to the
corporation's notice of meeting (i) by or at the direction of the Board of
Directors or (ii) by any shareholder of the corporation who is a shareholder of
record at the time of giving of notice provided for in this bylaw, who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in this bylaw. Nominations by shareholders of persons for election to the
Board of Directors may be made at such a special meeting of shareholders if the
shareholder's notice required by paragraph (a) (2) of this bylaw shall be
delivered to the Secretary at the principal executive offices of the corporation
not later than the close of business on the later of the 60th day prior to such
special meeting or the 10th day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting.
(c) General. (1) Only such persons who are nominated in accordance with
the procedures set forth in this bylaw shall be eligible to serve as directors
and only such shareholder proposals shall be considered at a meeting of
shareholders as shall have been brought before the meeting in accordance with
the procedures set forth in this bylaw. The chairman of the meeting shall have
the power and duty to determine whether a nomination or any business proposed to
be brought before the meeting was made in accordance with the procedures set
forth in this bylaw and, if any proposed nomination or business is not in
compliance with this bylaw, to declare that such defective proposal shall be
disregarded.
(2) For purposes of this bylaw, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national new service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Sections 13, 14, or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this bylaw, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this bylaw. Nothing in this bylaw shall be deemed to affect any rights
of a shareholder to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 of the Exchange Act.
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ARTICLE III
DIRECTORS
Section 1. Number and Term. The business and affairs of the corporation
shall be managed by a Board of Directors comprised of not less than 5 nor more
than 15 directors, as shall be fixed from time to time by the Board of
Directors. The directors shall be elected at each annual meeting of
shareholders. A director shall hold office until the director's successor is
elected and qualified, or until the director's resignation or removal.
Section 2. Vacancies. Vacancies in the Board of Directors occurring by
reason of death, resignation, removal, increase in the number of directors or
otherwise, shall be filled by the affirmative vote of a majority of the
remaining directors though less than a quorum of the Board of Directors, unless
otherwise filled by proper action of the shareholders of the corporation. Each
person so elected shall be a director for a term of office continuing only until
the next election of directors by the shareholders.
Section 3. Removal. A director may be removed, with or without cause,
by vote of the holders of a majority of the shares entitled to vote an election
of directors.
Section 4. Resignation. A director may resign by written notice to the
corporation. The resignation is effective upon its receipt by the corporation or
a subsequent time as set forth in the notice of resignation.
Section 5. Powers. The business and affairs of the corporation shall be
managed by its board of directors except as otherwise provided in the Act or in
the articles of incorporation.
Section 6. Location of Meetings. Regular or special meetings of the
board of directors may be held either within or without the State of Michigan.
Section 7. Organization Meeting of Board. The first meeting of each
newly elected board of directors shall be held at the place of holding the
annual meeting of shareholders, and immediately following the same, for the
purpose of electing officers and transacting any other business properly brought
before it, provided that the organization meeting in any year may be held at a
different time and place than that herein provided by a consent of a majority of
the directors of such new board. No notice of such meeting shall be necessary to
the newly elected directors in order legally to constitute the meeting, provided
a quorum shall be present, unless said meeting is not held at the place of
holding and immediately following the annual meeting of shareholders.
Section 8. Regular Meeting of Board. Regular meetings of the board of
directors may be held without notice at such time and at such place as shall
from time to time be determined by the board.
Section 9. Special Meeting of Board. Special meetings of the board of
directors may be called by the chief executive officer, or by a majority of the
persons then comprising the board of directors, at
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any time by means of notice of the time and place thereof to each director,
given not less than twenty-four (24) hours before the time such special meeting
is to be held.
Section 10. Committees of Directors. The board of directors may
designate one (1) or more committees, each committee to consist of one or more
of the directors of the corporation. The board may designate one or more
directors as alternate members of any committee, who may replace an absent or
disqualified member at a meeting of the committee. In the absence or
disqualification of a member of a committee, the members thereof present at a
meeting and not disqualified from voting, whether or not they constitute a
quorum, may unanimously appoint another member of the board of directors to act
at the meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the board of directors
creating such committee, may exercise all the powers and authority of the board
of directors in the management of the business and affairs of the corporation.
However, such a committee does not have the power or authority to amend the
articles of incorporation, adopt an agreement of merger or consolidation,
recommend to the shareholders the sale, lease, or exchange of all or
substantially all of the corporation's property and assets, recommend to the
shareholders a dissolution of the corporation or a revocation of a dissolution,
amend the bylaws of the corporation, fill vacancies in the board of directors,
or fix compensation of the directors serving on the board or on a committee;
and, unless the resolution of the board of directors creating such committee or
the articles of incorporation expressly so provides, such a committee does not
have the power or authority to declare a dividend or to authorize the issuance
of stock. Any such committee, and each member thereof, shall serve at the
pleasure of the board of directors.
Section 11. Quorum and Required Vote of Board and Committees. At all
meetings of the board of directors, or of a committee thereof, a majority of the
members of the board then in office, or of the members of a committee thereof,
constitutes a quorum for transaction of business. The vote of the majority of
members present at a meeting at which a quorum is present constitutes the action
of the board or of the committee unless the vote of a larger number is required
by the Act. Amendment of these bylaws by the board requires the vote of not less
than a majority of the members of the board then in office. If a quorum shall
not be present at any meeting of the board of directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 12. Action by Written Consent. Action required or permitted to
be taken pursuant to authorization voted at a meeting of the board of directors
or a committee thereof, may be taken without a meeting if, before or after the
action, all members of the board or of the committee consent thereto in writing.
The written consents shall be filed with the minutes of the proceedings of the
board or committee. The consent has the same effect as a vote of the board or
committee for all purposes.
Section 13. Compensation of Directors. The board of directors, by
affirmative vote of a majority of directors in office and irrespective of any
personal interest of any of them, may establish reasonable compensation of
directors for services to the corporation as directors or officers, but approval
of the shareholders is required if the articles of incorporation, these bylaws
or any provisions of the Act so provide.
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Section 14. Participation in Meeting by Telephone. By oral or written
permission of a majority of the board of directors, a member of the board of
directors or of a committee designated by the board may participate in a meeting
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section constitutes presence in
person at the meeting.
ARTICLE IV
NOTICES
Section 1. Notice. Whenever any notice or communication is required to
be given by mail to any director or shareholder under any provision of the Act,
or of the articles of incorporation or of these bylaws, it shall be given in
writing, except as otherwise provided in the Act, to such director or
shareholder at the address designated by him for that purpose or, if none is
designated, at his last known address. The notice or communication is given when
deposited, with postage thereon prepaid, in a post office or official depository
under the exclusive care and custody of the United States postal service. The
mailing shall be registered, certified, or other first class mail except where
otherwise provided in the Act. Written notice may also be given in person or by
telegram, telex, radiogram, cablegram, or mailgram, and such notice shall be
deemed to be given when the recipient receives the notice personally, or when
the notice, addressed as provided above, has been delivered to the company, or
to the equipment transmitting such notice. Neither the business to be transacted
at, nor the purpose of, a regular or special meeting of the board of directors
need be specified in the notice of the meeting.
Section 2. Waiver of Notice. When, under the Act or the articles of
incorporation or these bylaws, or by the terms of an agreement or instrument, a
corporation or the board or any committee thereof may take action after notice
to any person or after lapse of a prescribed period of time, the action may be
taken without notice and without lapse of the period of time, if at any time
before or after the action is completed the person entitled to notice or to
participate in the action to be taken or, in case of a shareholder, by his
attorney-in-fact, submits a signed waiver of such requirements. Neither the
business to be transacted at, nor the purpose of, a regular or special meeting
of the board of directors need be specified in the waiver of notice of the
meeting. Attendance of a person at a meeting of shareholders, in person or by
proxy, or of a director at a meeting constitutes a waiver of notice of such
meeting, except when the person or director attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
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ARTICLE V
OFFICERS
Section 1. Selection. The board of directors, at its first meeting and
at each meeting following the annual meeting of shareholders, shall elect or
appoint a president, a secretary, and a treasurer. The board of directors may
also elect or appoint a chairman of the board, one (1) or more vice presidents
and such other officers, employees, and agents as it shall deem necessary who
shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the board. Two
(2) or more offices may be held by the same person but an officer shall not
execute, acknowledge, or verify an instrument in more than one (1) capacity.
Section 2. Compensation. The salaries of all officers, employees, and
agents of the corporation shall be fixed by the board of directors; provided,
however, that the board may delegate to the officers the fixing of compensation
of assistant officers, employees, and agents.
Section 3. Term, Removal, and Vacancies. Each officer of the
corporation shall hold office for the term for which he is elected or appointed
and until his successor is elected or appointed and qualified, or until his
resignation or removal. An officer elected or appointed by the board of
directors may be removed by the board with or without cause at any time. An
officer may resign by written notice to the corporation. The resignation is
effective upon its receipt by the corporation or at a subsequent time specified
in the notice of resignation. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
Section 4. Chief Executive Officer. At the first meeting of each
newly-elected board of directors, the board shall designate the chairman of the
board or president as the chief executive officer of the corporation; provided,
however, that if a motion is not made and carried to change the designation, the
designation shall be the same as the designation for the preceding year;
provided, further, that the designation of the chief executive officer may be
changed at any special meeting of the board of directors. The president shall be
the chief executive officer whenever the office of chairman of the board is
vacant. The chief executive officer shall be responsible to the board of
directors for the general supervision and management of the business and affairs
of the corporation and shall see that all orders and resolutions of the board
are carried into effect. The chairman of the board or president who is not the
chief executive officer shall be subject to the authority of the chief executive
officer, but shall exercise all of the powers and discharge all of the duties of
the chief executive officer, during the absence or disability of the chief
executive officer.
Section 5. Chairman of the Board of Directors. If the board of
directors elects or appoints a chairman of the board, he shall be elected or
appointed by, and from among, the membership of, the board of directors. He
shall preside at all meetings of the shareholders, of the board of directors and
of any executive committee. He shall perform such other duties and functions as
shall be assigned to him from time to time by the board of directors. He shall
be, ex officio, a member of all standing committees. Except where by law the
signature of the president of the corporation is required, the chairman of the
board of directors shall possess the same power and authority to sign all
certificates,
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contracts, instruments, papers, and documents of every conceivable kind and
character whatsoever in the name of and on behalf of the corporation which may
be authorized by the board of directors. During the absence or disability of the
president, or while that office is vacant, the chairman of the board of
directors shall exercise all of the powers and discharge all of the duties of
the president.
Section 6. President. The president shall be elected or appointed by,
and from among the membership of, the board of directors. During the absence or
disability of the chairman of the board, or while that office is vacant, the
president shall preside over all meetings of the board of directors, of the
shareholders and of any executive committee, and shall perform all of the duties
and functions, and when so acting shall have all powers and authority, of the
chairman of the board. He shall be, ex officio, a member of all standing
committees. The president shall, in general, perform all duties incident to the
office of president and such other duties as may be prescribed by the board of
directors.
Section 7. Vice Presidents. The board of directors may elect or appoint
one or more vice presidents. The board of directors may designate one or more
vice presidents as executive or senior vice presidents. Unless the board of
directors shall otherwise provide by resolution duly adopted by it, such of the
vice presidents as shall have been designated executive or senior vice
presidents and are members of the board of directors in the order specified by
the board of directors (or if no vice president who is a member of the board of
directors shall have been designated as executive or senior vice president, then
such vice presidents as are members of the board of directors in the order
specified by the board of directors) shall perform the duties and exercise the
powers of the president during the absence or disability of the president. The
vice presidents shall perform such other duties as may be delegated to them by
the board of directors, any executive committee, or the president.
Section 8. Secretary. The secretary shall attend all meetings of the
stockholders, and of the board of directors and of any executive committee, and
shall preserve in the books of the corporation true minutes of the proceedings
of all such meetings. He shall safely keep in his custody the seal of the
corporation and shall have authority to affix the same to all instruments where
its use is required or permitted. He shall give all notice required by the Act,
these bylaws or resolution. He shall perform such other duties as may be
delegated to him by the board of directors, any executive committee, or the
president.
Section 9. Treasurer. The treasurer shall have custody of all corporate
funds and securities and shall keep in books belonging to the corporation full
and accurate accounts of all receipts and disbursements; he shall deposit all
moneys, securities, and other valuable effects in the name of the corporation in
such depositories as may be designated for that purpose by the board of
directors. He shall disburse the funds of the corporation as may be ordered by
the board of directors, taking proper vouchers for such disbursements, and shall
render to the president and the board of directors whenever requested an account
of all his transactions as treasurer and of the financial condition of the
corporation. If required by the board of directors he shall keep in force a bond
in form, amount, and with a surety or sureties satisfactory to the board of
directors, conditioned for faithful performance of the duties of his office, and
for restoration to the corporation in case of his death, resignation,
retirement, or removal from office, of all books, papers, vouchers, money, and
property of whatever
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kind in his possession or under his control belonging to the corporation. He
shall perform such other duties as may be delegated to him by the board of
directors, any executive committee, or the president.
Section 10. Assistant Secretaries and Assistant Treasurers. The
assistant secretary or assistant secretaries, in the absence or disability of
the secretary, shall perform the duties and exercise the powers of the
secretary. The assistant treasurer or assistant treasurers, in the absence or
disability of the treasurer, shall perform the duties and exercise the powers of
the treasurer. Any assistant treasurer, if required by the board of directors,
shall keep in force a bond as provided in Section 9, Article V. The assistant
secretaries and assistant treasurers, in general, shall perform such duties as
shall be assigned to them by the secretary or by the treasurer, respectively, or
by the board of directors, any executive committee, or the president.
Section 11. Delegation of Authority and Duties by Board of Directors.
All officers, employees, and agents shall, in addition to the authority
conferred, or duties imposed, on them by these bylaws, have such authority and
perform such duties in the management of the corporation as may be determined by
resolution of the board of directors not inconsistent with these bylaws.
ARTICLE VI
INDEMNIFICATION
Section 1. Third Party Actions. The corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholders, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation or its shareholders, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
Section 2. Actions in the Right of the Corporation. The corporation
shall indemnify any person who was or is a party to or is threatened to be made
a party to any threatened, pending, or completed action or suit by or in the
right of the corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another
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corporation, partnership, joint venture, trust, or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation or its shareholders and except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
Section 3. Mandatory and Permissive Payments.
(a) To the extent that a director, officer, employee, or agent
of a corporation has been successful on the merits or otherwise in
defense of any action, suit, or proceeding referred to in Sections 1 or
2 of this Article VI, or in defense of any claim, issue, or matter
therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
(b) Any indemnification under Sections 1 or 2 of this Article
VI (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that
indemnification of the director, officer, employee, or agent is proper
in the circumstances because he has met the applicable standard of
conduct set forth in Sections 1 and 2 of this Article VI. Such
determination shall be made in either of the following ways:
(1) By the board of a majority vote of a quorum
consisting of directors who were not parties to such action,
suit, or proceeding.
(2) If such quorum is not obtainable, or, even if
obtainable, a quorum of disinterested directors, so directs,
by independent legal counsel who may be the regular counsel of
the corporation in a written opinion.
(3) By the shareholders.
Section 4. Expense Advances. Expenses incurred in defending a civil or
criminal action, suit, or proceeding described in Sections 1 or 2 of this
Article VI may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding as authorized in the manner provided in
subsection (b) of Section 3 of this Article VI upon receipt of an undertaking by
or on behalf of the director, officer, employee, or agent to repay such amount
unless it shall ultimately be determined that he is entitled to be indemnified
by the corporation.
Section 5. Validity of Provisions. A provision made to indemnify
directors or officers of any action, suit, or proceeding referred to in Sections
1 or 2 of this Article VI whether contained in the articles of incorporation,
these bylaws, a resolution of shareholders or directors, an agreement or
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otherwise, shall be invalid only insofar as it is in conflict with Sections 1 to
5 of this Article VI. Nothing contained in Sections 1 to 5 of this Article VI
shall affect any rights to indemnification to which persons other than directors
and officers may be entitled by contract or otherwise by law. The
indemnification provided in Sections 1 to 5 of this Article VI continues as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors, and administrators of such person.
Section 6. Insurance. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the corporation would have power to indemnify
him against such liability under Sections 1 to 5 of this Article VI.
Section 7. Constituent Corporation. For the purposes of this Article
VI, references to the corporation include all constituent corporations absorbed
in a consolidation or merger and the resulting or surviving corporation, so that
a person who is or was a director, officer, employee, or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise shall stand in the same
position under the provisions of this Article VI with respect to the resulting
or surviving corporation as he would if he had served the resulting or surviving
corporation in the same capacity.
ARTICLE VII
STOCK AND TRANSFERS
Section 1. Share Certificates: Required Signatures. The shares of the
corporation shall be represented by certificates signed by the chairman of the
board of directors, vice chairman of the board of directors, president or a vice
president and which also may be signed by another officer of the corporation.
The certificates may be sealed with the seal of the corporation or a facsimile
of the seal. The signatures of the officers may be facsimiles if the certificate
is countersigned by a transfer agent or registered by a registrar other than the
corporation itself or its employee. If an officer who has signed or whose
facsimile signature has been placed upon a certificate ceases to be an officer
before the certificate is issued, it may be issued by the corporation with the
same effect as if he were the officer at the date of issue.
Section 2. Share Certificates: Required Provisions. A certificate
representing shares of the corporation shall state upon its face:
(a) That the corporation is formed under the laws of this
state.
(b) The name of the person to whom issued.
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(c) The number and class of shares, and the designation of the
series, if any, which the certificate represents.
(d) The par value of each share represented by the
certificate, or a statement that the shares are without par value.
A certificate representing shares issued by a corporation which is authorized to
issue shares of more than one class shall set forth on its face or back or state
that the corporation will furnish to a shareholder upon request and without
charge a full statement of the designation, relative rights, preferences, and
limitations of the shares of each class authorized to be issued, and if the
corporation is authorized to issue any class of shares in series, the
designation, relative rights, preferences, and limitations of each series so far
as the same have been prescribed and the authority of the board to designate and
prescribe the relative rights, preferences, and limitations of other series.
Section 3. Replacement of Lost or Destroyed Share Certificates. The
corporation may issue a new certificate for shares or fractional shares in place
of a certificate theretofore issued by it, alleged to have been lost or
destroyed, and the board of directors may require the owner of the lost or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify the corporation against any claim that may be made
against it on account of the alleged lost or destroyed certificate or the
issuance of such new certificate.
Section 4. Registered Shareholders. The corporation shall have the
right to treat the registered holder of any share as the absolute owner thereof,
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share on the part of any other person, whether or not the corporation
shall have express or other notice thereof, save as may be otherwise provided by
the statutes of Michigan.
Section 5. Transfer Agent and Registrar. The board of directors may
appoint a transfer agent and a registrar in the registration of transfers of its
securities.
Section 6. Regulations. The board of directors shall have power and
authority to make all such rules and regulations as the board shall deem
expedient regulating the issue, transfer, and registration of certificates for
shares in this corporation.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends or other Distributions in Cash or Property. By
action of the board of directors, the corporation may declare and pay dividends
or make other distributions in cash, bonds, or property, including the shares or
bonds of other corporations, on its outstanding shares, except when currently
the corporation is insolvent or would thereby be made insolvent, or when the
declaration, payment, or distribution would be contrary to any restriction
contained in the articles of incorporation.
-14-
<PAGE> 15
Dividends may be declared or paid and other distributions may be made out of
surplus only. A dividend paid or any other distribution made, in any part, from
sources other than earned surplus, shall be accompanied by a written notice (a)
disclosing the amounts by which the dividend or distribution affects stated
capital, capital surplus, and earned surplus, or (b) if such amounts are not
determinable at the time of the notice, disclosing the approximate effect of the
dividend or distribution upon stated capital, capital surplus and earned surplus
and stating that the amounts are not yet determinable.
Section 2. Reserves. The board of directors shall have power and
authority to set apart, out of any funds available for dividends, such reserve
or reserves, for any proper purpose, as the board in its discretion shall
approve, and the board shall have the power and authority to abolish any reserve
created by the board.
Section 3. Voting Securities. Unless otherwise directed by the board,
the chairman of the board or president, or in the case of their absence or
inability to act, the vice presidents, in order of their seniority, shall have
full power and authority on behalf of the corporation to attend and to act and
to vote, or to execute in the name or on behalf of the corporation a consent in
writing in lieu of a meeting of shareholders or a proxy authorizing an agent or
attorney-in-fact for the corporation to attend and vote at any meetings of
security holders of corporations in which the corporation may hold securities,
and at such meetings he or his duly authorized agent or attorney-in-fact shall
possess and may exercise any and all rights and powers incident to the ownership
of such securities and which, as the owner thereof, the corporation might have
possessed and exercised if present. The board by resolution from time to time
may confer like power upon any other person or persons.
Section 4. Checks. All checks, drafts, and orders for the payment of
money shall be signed in the name of the corporation in such manner and by such
officer or officers or such other person or persons as the board of directors
shall from time to time designate for that purpose.
Section 5. Contracts, Conveyances, Etc. When the execution of any
contract, conveyance, or other instrument has been authorized without
specification of the executing officers, the chairman of the board, president or
any vice president, and the secretary or assistant secretary, may execute the
same in the name and on behalf of this corporation and may affix the corporate
seal thereto. The board of directors shall have power to designate the officers
and agents who shall have authority to execute any instrument in behalf of this
corporation.
Section 6. Corporate Books and Records. The corporation shall keep
books and records of account and minutes of the proceedings of its shareholders,
board of directors and executive committees, if any. The books, records, and
minutes may be kept outside this state. The corporation shall keep at its
registered office, or at the office of its transfer agent within or without this
state, records containing the names and addresses of all shareholders, the
number, class, and series of shares held by each and the dates when they
respectively became holders of record thereof. Any of such books, records, or
minutes may be in written form or in any other form capable of being converted
into written form within a reasonable time. The corporation shall convert into
written form without charge any such record not in such form, upon written
request of a person entitled to inspect them.
-15-
<PAGE> 16
Section 7. Fiscal Year. The fiscal year of the corporation shall be
fixed by resolution of the board of directors.
Section 8. Seal. If the corporation has a corporate seal, it shall have
inscribed thereon the name of the corporation and the words "Corporate Seal" and
"Michigan." The seal may be used by causing it or a facsimile to be affixed,
impressed, or reproduced in any other manner.
ARTICLE IX
AMENDMENTS
Section 1. A majority of shareholders or the board of directors may
amend or repeal the bylaws or adopt new bylaws unless the power to do so is
reserved exclusively to the shareholders by the articles of incorporation. If
such action is being taken by the shareholders, it must be taken only at a duly
called meeting of shareholders; provided that if notice of any such meeting is
required by these bylaws, the notice of the meeting shall contain notice of the
proposed amendment, repeal, or new bylaws. Any bylaw hereafter made by the
shareholders shall not be altered or repealed by the board.
-16-
<PAGE> 1
Exhibit 10.23
AGREEMENT AND CONSENT
---------------------
This AGREEMENT AND CONSENT (hereinafter the "Consent") is made in
Dublin, Ohio, as of the date set forth below, by and among WENDY'S
INTERNATIONAL, INC., an Ohio corporation (hereinafter "Wendy's"); WM LIMITED
PARTNERSHIP-1998, a Michigan limited partnership ("Franchisee"); and S&Q
MANAGEMENT, LLC, a Michigan limited liability company ("S&Q"); MERITAGE
HOSPITALITY GROUP INC., a Michigan corporation ("Meritage"); MHG FOOD SERVICE
INC., a Michigan corporation ("MHG"); ROBERT SCHERMER, JR. ("Schermer"); RAY E.
QUADA ("Quada"); MERITAGE CAPITAL CORP., a Florida corporation ("MCC"); MCC FOOD
SERVICE INC., a Michigan corporation ("Food Service") and CHRISTOPHER HEWETT
("Hewett"). Meritage, MHG, MCC, Food Service, Schermer and Hewett are
hereinafter collectively referred to as the "Guarantor Group." Meritage, MHG and
Schermer are hereinafter collectively referred to as the "Continuing
Guarantors." S&Q and Quada are hereinafter together referred to as the "New
Guarantors." MCC, Food Service and Hewett are hereinafter collectively referred
to as the "Released Guarantors."
WHEREAS, the Franchisee is the sole franchisee under the various
Wendy's Unit Franchise Agreements for the Wendy's Old Fashioned Hamburgers
Restaurants set forth on Exhibit A attached hereto and made a part hereof; and
WHEREAS, the Wendy's Unit Franchise Agreements set forth on Exhibit A,
and any and all amendments and modifications thereto, including, without
limitation, a Consent Agreement dated May 16, 1997 ("Original Consent"), and an
Agreement and Consent dated August 7, 1998 ("August, 1998 Consent") are
hereinafter collectively referred to as the "Franchise Agreements"; and
WHEREAS, under the August, 1998 Consent, Meritage, MHG, MCC, Food
Service, Hewett and Schermer guaranteed the obligations of Franchisee under the
Franchise Agreements, and are jointly and severally liable with Franchisee
thereunder; and
WHEREAS, as the result of an overall reorganization in connection with
the Franchisee and the Guarantor Group, and in accordance with a letter to
Wendy's dated October 19, 1998, the Articles of Organization and Operating
Agreement of S&Q and the Resolution of Meritage dated October 12, 1998
(collectively, the "Purchase Agreement"), the parties desire to obtain Wendy's
consent and agreement to (i) the replacement of Food Service with S&Q as the
general partner of the Franchisee, (ii) the clarification of the ownership
structure of the Franchisee, the Continuing Guarantors and the New Guarantors,
and Wendy's restrictions with respect to those entities and individuals, (iii)
the release, discharge and acquittal of the Released Guarantors from further
obligations under the Franchise Agreements, (iv) the addition of S&Q and Quada
as guarantors under the Franchise Agreements, and (v) the reaffirmation and
continuation of the obligations of the Continuing Guarantors, as guarantors
under the Franchise Agreements; and
<PAGE> 2
WHEREAS, all Wendy's Old Fashioned Hamburgers Restaurants referenced
above are hereinafter collectively referred to as the "Restaurants"; and
WHEREAS, Wendy's is willing to grant its consent and waive its right of
first refusal in the aforementioned transfers subject to certain terms and
conditions contained herein.
NOW, THEREFORE, in consideration of the premises and the mutual
promises contained herein, the parties, intending to be legally bound, mutually
agree as follows:
1. Upon the effective date of this Consent, Wendy's hereby consents and
agrees to (i) the replacement of Food Service by S&Q as the general
partner of the Franchisee, (ii) the clarification of the ownership
structure of Franchisee, the Continuing Guarantors and the New
Guarantors, as set forth herein, (iii) except as specifically set forth
herein, the release, discharge and acquittal of the Released Guarantors
from further obligation under the Franchise Agreements, (iv) the
addition of S&Q and Quada as guarantors of the Franchise Agreements,
and (v) the reaffirmation and continuation of the guarantees of
Meritage, MHG and Schermer, as guarantors of the Franchise Agreements.
Wendy's consent and agreement are subject to, and in reliance upon, the
following terms, conditions, representations and warranties:
A. The Franchisee, the Continuing Guarantors and the New
Guarantors warrant, represent and agree that:
(1) The Franchisee is and shall remain the sole
franchisee under the Franchise Agreements. The
Franchisee is owned as follows:
<TABLE>
<CAPTION>
Limited Partnership
-------------------
Units
-----
<S> <C>
(a) The sole General Partner is S&Q 00.1%
(b) MHG 99.9%
------
Total: 100.0%
</TABLE>
(2) S&Q is a duly organized Michigan limited liability
company, and all legal actions necessary have been
taken to replace Food Service as the sole general
partner of the Franchisee. S&Q is owned free and
clear of liens and encumbrances as follows:
<TABLE>
<CAPTION>
Members Percentage of Interest
------- ----------------------
<S> <C>
Robert E. Schermer, Jr. 50%
Ray E. Quada 50%
---
Total: 100%
</TABLE>
-2-
<PAGE> 3
(3) MHG currently owns 99.9% of the limited partnership
units in the Franchisee, and MHG is a wholly-owned
subsidiary of Meritage.
(4) The Franchisee, S&Q, Meritage and MHG are
duly-organized entities, in good standing, and are
either registered or authorized to do business in the
State of Michigan. The activities of the Franchisee
and of S&Q are currently, and shall remain, limited
solely to the ownership and operation of Wendy's Old
Fashioned Hamburgers Restaurants.
(5) All of the Continuing Guarantors shall guarantee all
obligations under the Franchise Agreements, as
specifically defined herein, and except as otherwise
provided herein, in accordance with the provisions of
Paragraph 1(C) of the August, 1998 Consent. The New
Guarantors hereby agree to execute Wendy's Guaranty,
in the form attached hereto and made a part hereof as
Exhibit B, such that the New Guarantors shall be
liable under the terms of such Guaranty and under the
Franchise Agreements. Specifically, the New
Guarantors shall individually comply with the
noncompetition and confidentiality provisions of the
Franchise Agreements, and acknowledge and agree that
their failure to do so shall constitute a default
under the Franchise Agreements.
(6) Wendy's hereby releases, discharges and acquits the
Released Guarantors from further obligation under the
Franchise Agreements, provided, however, that the
Released Guarantors shall have continuing obligations
under Paragraph 1(C) of this Consent.
B. Franchisee, the Continuing Guarantors, the New Guarantors and
the Released Guarantors acknowledge and agree that the
obligations referenced on Exhibit C attached hereto and made a
part hereof must be paid or otherwise resolved to Wendy's
satisfaction or Wendy's may elect not to execute this Consent.
However, execution of this Consent by Wendy's shall not
constitute and is not intended as a waiver of any amounts
outstanding. Franchisee, the Continuing Guarantors and the New
Guarantors jointly and severally assume responsibility for all
obligations of the Released Guarantors to Wendy's, its
subsidiaries and any advertising cooperatives under the
Franchise Agreements which arose or have accrued up to the
effective date of this Consent. Franchisee, the Continuing
Guarantors, the New Guarantors and the Released
-3-
<PAGE> 4
Guarantors further agree that it shall be the responsibility
of the Franchisee, the Continuing Guarantors and the New
Guarantors to structure with the Released Guarantors
provisions (such as indemnities and set-offs) as may be
necessary to ensure full performance by Franchisee, the
Continuing Guarantors and the New Guarantors under the
Franchise Agreements and this Consent. Without limiting the
generality of this provision, the Franchisee, Continuing
Guarantors and New Guarantors jointly and severally agree to
assume direct and primary responsibility for royalties and
advertising fees for the entire month of October, 1998, and
thereafter.
C. The Released Guarantors agree that as to the Released
Guarantors the following provisions of the Franchise
Agreements shall continue in full force and effect and shall
survive beyond the effective date of this Consent. In this
regard, the Released Guarantors shall continue to be jointly
and severally liable under the following provisions of the
Franchise Agreements:
(1) The terms of the noncompetition provision of the
Franchise Agreements shall apply to the Released
Guarantors for a period of two (2) years from the
date of this Consent. In addition, the Released
Guarantors shall remain liable to Wendy's under the
confidentiality provision of the Franchise
Agreements.
(2) The Released Guarantors hereby jointly and severally
agree to indemnify, defend and hold Wendy's, its
successors, assigns, subsidiaries, officers,
directors, employees and agents, harmless from any
and all claims, judgments, actions or expenses
(including reasonable attorney fees), arising out of
or otherwise connected with the past operation of the
Restaurants, the interest of any party comprising the
Released Guarantors or the Franchise Agreements, or
otherwise connected with the transactions referenced
herein, to which transactions Wendy's consents but
assumes no responsibility for effectuating. This
indemnity shall be binding upon the respective heirs
or successors of the Released Guarantors as a
contingent claim.
(3) The Released Guarantors acknowledge and agree that
the Released Guarantors are in compliance with all
provisions of the Franchise Agreements up to the
effective date of this Consent.
-4-
<PAGE> 5
D. Franchisee warrants, represents and agrees that the
Restaurants shall be operated only by the Franchisee, and that
Franchisee has the contractual right to possession of the
premises associated with the Restaurants.
E. Franchisee, the Continuing Guarantors and the New Guarantors
warrant and represent that as of the effective date of this
Consent, Franchisee, the Continuing Guarantors and the New
Guarantors will have in full force and effect and will have
delivered to Wendy's a certificate of insurance specifically
covering each of the Restaurants under the Franchise
Agreements and which complies with the insurance provisions of
the Franchise Agreements, and includes the street locations on
the front or back of the certificate or attached to it as an
exhibit, naming Franchisee, the Continuing Guarantors and the
New Guarantors (or any of them) as the insured and naming
Wendy's as additional insured.
F. Franchisee, the Continuing Guarantors and the New Guarantors
acknowledge and agree that Assignor has voted in favor of the
1998/'99 WNAP increase and that they have reviewed the
memorandum and ballot related to such increase. Franchisee,
the Continuing Guarantors and the New Guarantors hereby agree
to comply with the terms of such memorandum and ballot.
G. Franchisee, the Continuing Guarantors and the New Guarantors
acknowledge and agree that they have received and reviewed a
copy of Wendy's transaction policy dated April 1, 1994, as
amended November 4, 1994, and will comply with the provisions
therein.
H. All parties represent that to the best of their respective
knowledge, information and belief, the facts as set forth in
the WHEREAS clauses of this Consent accurately reflect their
understanding and intent.
I. All parties acknowledge and agree that unless specifically
modified herein, all provisions of the Franchise Agreements,
including, without limitation, the Original Consent and the
August, 1998 Consent, remain unchanged and continue in full
force and effect.
2. Franchisee, the Continuing Guarantors and the New Guarantors agree that
except with respect to Meritage, which is a publicly-owned entity,
there shall be no change in the structure or ownership of the
Franchisee, the Continuing Guarantors and the New Guarantors or the
Franchise Agreements, and no interest in the Franchisee, the Continuing
Guarantors (except Meritage) and the New Guarantors or the Franchise
Agreements shall be pledged, hypothecated, assigned or otherwise
transferred voluntarily, by operation of law or otherwise, without in
each instance Wendy's prior written consent and waiver of its right of
first refusal, PROVIDED, HOWEVER, that this restriction shall
specifically not apply to any interests the Franchisee, the Continuing
Guarantors and the New Guarantors may have in any real estate,
equipment, personal property or
-5-
<PAGE> 6
business value pertaining to the Restaurants. Franchisee, the
Continuing Guarantors and the New Guarantors acknowledge and agree that
in connection with the transactions described herein, Wendy's has not
consented to the collateral assignment of the Franchise Agreements or
any interest in Franchisee, the Continuing Guarantors and the New
Guarantors, and Franchisee, the Continuing Guarantors and the New
Guarantors warrant and represent that no security interest in the
Franchise Agreements or in Franchisee, the Continuing Guarantors and
the New Guarantors exists, PROVIDED, HOWEVER, that this restriction
shall specifically not apply to any interests the Franchisee, the
Continuing Guarantors and the New Guarantors may have in any real
estate, equipment, personal property or business value pertaining to
the Restaurants. Franchisee, the Continuing Guarantors and the New
Guarantors further acknowledge and agree that any future collateral
assignment of the Franchise Agreements or any franchise or licensed
rights to any third party under any promissory note, loan agreement or
other documentation shall be specifically subject to the terms of the
Franchise Agreements, and shall require Wendy's prior written consent.
Notwithstanding anything contained in this paragraph, the Franchisee,
the Continuing Guarantors and the New Guarantors shall not at any time
in the future enter into a collateral assignment of the Franchise
Agreements or the franchise and licensed rights pertaining to any of
the Restaurants, without obtaining Wendy's prior written consent.
3. Franchisee, the Released Guarantors, the Continuing Guarantors and the
New Guarantors hereby agree to execute and date a General Release of
All Claims in the form attached hereto as Exhibit D contemporaneously
with the execution of this Consent. The parties further agree that if
the General Release of All Claims is returned to Wendy's undated, the
effective date of this Consent shall be the effective date of the
General Release of All Claims.
4. Franchisee, the Continuing Guarantors and the New Guarantors
acknowledge that they are aware of the obligation to become a member of
the local advertising cooperative, have investigated the structure and
requirements of that cooperative, and understand and agree to the
obligations of cooperative members.
5. Franchisee, the Continuing Guarantors and the New Guarantors warrant,
represent and agree that the terms and conditions of this Consent
modify the Franchise Agreements and are hereby incorporated therein;
any breach of the terms or conditions of this Consent shall constitute
a material default under the Franchise Agreements.
6. All parties understand that Wendy's may in the future approve offerings
and transfers under different terms, conditions and policies existing
at that time. Wendy's consent and waiver here shall not be relied upon
in future transactions as limiting Wendy's position or the conditions
associated with Wendy's consent and/or waiver of its right of first
refusal.
7. Franchisee, the Released Guarantors, the Continuing Guarantors and the
New Guarantors acknowledge and agree that Wendy's has no knowledge of,
and makes no
-6-
<PAGE> 7
warranties with respect to, the accuracy of any representations or
warranties made by said parties to each other in connection with these
transactions, and Wendy's assumes no obligation in this regard.
8. Wendy's and Franchisee agrees that the official mailing address of
Franchisee shall be as follows:
40 Pearl Street, N.W., Suite 900
Grand Rapids, MI 49503
All parties agree that notice to Franchisee shall constitute notice to
the Continuing Guarantors and the New Guarantors.
9. In addition to the indemnity provision of the Franchise Agreements,
Franchisee, the Continuing Guarantors and the New Guarantors hereby
jointly and severally agree to indemnify, defend and hold Wendy's, its
successors, assigns, subsidiaries, officers, directors, employees and
agents, harmless from any and all claims, judgments, actions or
expenses (including reasonable attorney fees), arising out of or
otherwise connected with the past operation of the Restaurants, the
interest of any other party in Franchisee, the Continuing Guarantors
and the New Guarantors or the Franchise Agreements, or otherwise
connected with the transactions as referenced herein, to which
transactions Wendy's consents but assumes no responsibility for
effectuating. This indemnity shall be binding upon the respective heirs
or successors of Franchisee, the Continuing Guarantors and the New
Guarantors as a contingent claim and shall survive any termination of
the Franchise Agreements.
10. All parties acknowledge and agree that Wendy's consent in this Consent
is not intended to provide, and shall not be construed as providing,
Wendy's consent (or the consent of any subsidiary of Wendy's) with
regard to any other right or interest other than Wendy's consent to the
transactions described herein. Any other consent must be separately
obtained.
11. Franchisee, the Continuing Guarantors and the New Guarantors hereby
warrant and represent that the financial and other information which
has been provided by Franchisee, the Continuing Guarantors and the New
Guarantors to Wendy's in connection with this transaction is true and
accurate. Wendy's is relying upon the accuracy of that information in
consenting to this transaction. Any material misrepresentation as to
the capitalization, financial structure, credit worthiness, background
or ownership interest of Franchisee, the Continuing Guarantors or the
New Guarantors may be deemed by Wendy's to be a default of the
Franchise Agreements, in addition to any other rights or remedies
Wendy's may have.
12. The parties understand and acknowledge that Wendy's consent in no way
constitutes an acknowledgment, undertaking or representation by Wendy's
as to the financial viability of these transactions, any approval of
the monetary terms of these transactions or the earnings potential of
the Restaurants. The parties acknowledge that they have sepa-
-7-
<PAGE> 8
rately reviewed and evaluated this transaction and obtained independent
professional assistance and have in no way relied upon Wendy's consent
as an appraisal of these transactions.
13. Franchisee hereby acknowledges the receipt of Wendy's Uniform Franchise
Offering Circular at the earlier of the first personal meeting with
Wendy's regarding this Consent or ten (10) business days prior to the
execution of this Agreement. Franchisee further acknowledges the
receipt of a final copy of this Consent at least five (5) business days
prior to the execution hereof.
14. The parties agree that if they fail to execute and return this Consent
to Wendy's within twenty-one (21) days of the receipt hereof, this
Consent may not be executed by Wendy's and the terms and conditions
contained herein shall not otherwise be binding upon Wendy's without
such execution.
15. Nothing contained in the Purchase Agreement or any collateral
documentation between the Franchisee, the Released Guarantors, the
Continuing Guarantors and the New Guarantors, and affiliated parties,
is intended to conflict with the terms and conditions of this Consent
or the Franchise Agreements as defined herein or to impose additional
requirements or restrictions on Wendy's except as may be specifically
set forth herein. In the event of a conflict, the terms and conditions
of the Franchise Agreements and the Consent will control over said
documents. In the event of a conflict between the Franchise Agreements
and this Consent, the Consent will control, provided every reasonable
effort is made to read the Consent as supplementing the Franchise
Agreements, except as specifically stated to the contrary. The parties
further agree to the following:
A. ALL PARTIES ACKNOWLEDGE AND AGREE THAT AS TO WENDY'S AND THE
RIGHTS OF WENDY'S, THE FRANCHISE AGREEMENTS AND THIS CONSENT
SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF OHIO.
16. If any material provision or restriction contained herein is void under
federal, state or local law, or held unenforceable and against public
policy, the parties shall negotiate in good faith to give each party
the benefit of its bargain consistent with the intent and rights of the
parties.
17. This Consent sets forth the entire understanding between the parties
concerning the subject matter of this Consent and incorporates all
prior negotiations and understandings. There are no covenants,
promises, agreements, conditions or understandings, either oral or
written, between the parties relating to the subject matter of this
Consent other than those set forth herein. No representation or
warranty has been made by or on behalf of any party to this Consent (or
any officer, director, employee or agent thereof) to induce the other
party to enter into this Consent or to abide by or consummate any
transactions contemplated by any terms of this Consent, except
-8-
<PAGE> 9
representations and warranties, if any, expressly set forth herein. No
alteration, amendment, change or addition to this Consent shall be
binding upon either party unless in writing and signed by the party to
be charged. The submission of any unexecuted copy of this Consent shall
not constitute an offer to be legally bound by any provision of the
document submitted, either currently or in the future; and no party
shall be bound by this Consent until it is fully executed and delivered
by all parties.
IN WITNESS WHEREOF, this Agreement and Consent is effective as of the
date it is executed by Wendy's International, Inc.
WENDY'S INTERNATIONAL, INC.
BY: /s/ W. Stephen Wirt
------------------------------------------
TITLE: Vice President
---------------------------------
DATE: 12/16/98
------------------------
FRANCHISEE:
WM LIMITED PARTNERSHIP-1998
BY S&Q MANAGEMENT, LLC,
ITS GENERAL PARTNER
BY: /s/ Robert Schermer, Jr.
------------------------------------------
TITLE: Member
---------------------------------
RELEASED GUARANTORS:
MERITAGE CAPITAL CORP.
BY: /s/ Christopher Hewett
------------------------------------------
TITLE: President
---------------------------------
MCC FOOD SERVICE INC.
BY: /s/ Christopher Hewett
------------------------------------------
TITLE: Chairman & CEO
---------------------------------
(SIGNATURES CONTINUED ON NEXT PAGE.)
-9-
<PAGE> 10
/s/ Christopher Hewett
---------------------------------------------
CHRISTOPHER HEWETT, INDIVIDUALLY
CONTINUING GUARANTORS:
MERITAGE HOSPITALITY GROUP INC.
BY: /s/ Robert Schermer, Jr.
------------------------------------------
TITLE: President
---------------------------------
MHG FOOD SERVICE INC.
BY: /s/ Robert Schermer, Jr.
------------------------------------------
TITLE: President
---------------------------------
/s/ Robert Schermer, Jr.
---------------------------------------------
ROBERT SCHERMER, JR., INDIVIDUALLY
NEW GUARANTORS:
S&Q MANAGEMENT, LLC
BY: /s/ Robert Schermer, Jr.
------------------------------------------
TITLE: Member
---------------------------------
/s/ Ray E. Quada
---------------------------------------------
RAY E. QUADA, INDIVIDUALLY
Franchise:__________
-10-
<PAGE> 1
Exhibit 10.25
LOAN PARTICIPATION
AND AGENCY AGREEMENT
--------------------
This Agreement is entered into as of October ____, 1998, by and among
MERITAGE HOSPITALITY GROUP INC., a Michigan corporation ("Meritage"), and each
Participant who is identified as such in a fully executed Signature Page to this
Agreement.
RECITALS
--------
A. Meritage is the payee of a Mortgage Note in the stated principal
amount of $2 million (the "Mortgage Note") made by Reynolds/Ehinger Enterprises,
LLC, a Michigan limited liability company (the "Borrower"), a copy of which is
attached hereto as Exhibit A.
B. The Borrower's obligations under the Mortgage Note are guaranteed by
Donald W. Reynolds, Betty J. Reynolds, and William F. Ehinger (each a
"Guarantor" and collectively the "Guarantors"), pursuant to a Continuing
Guaranty (the "Guaranty"), and are secured by a subordinate pledge of certain
cash deposit accounts pursuant to a Pledge Agreement (Deposit Accounts) from
Donald W. Reynolds (the "CD Pledge Agreement"), a pledge of certain capital
stock in Grand Rapids Innkeepers Management, Inc. ("GRIMI") pursuant to a Pledge
Agreement from Donald W. Reynolds and Betty J. Reynolds (the "Reynolds Stock
Pledge Agreement"), a pledge of certain capital stock in GRIMI pursuant to a
Pledge Agreement from William F. Ehinger (the "Ehinger Stock Pledge Agreement"),
and a First Mortgage from the Borrower covering certain real property located in
the City of Port Huron, County of St. Clair, State of Michigan (the "Mortgage").
Copies of the Guaranty, the CD Pledge Agreement, the Reynolds Stock Pledge
Agreement, the Ehinger Stock Pledge Agreement and the Mortgage are attached
hereto as Exhibits B, C, D, E and F, respectively, and such documents are
referred to collectively as the "Security Documents".
C. The Participants have agreed to purchase undivided interests in the
Mortgage Note and Security Documents from Meritage, and Meritage has agreed to
sell undivided interests in the Mortgage Note and Security Documents to the
Participants, on the terms and conditions hereinafter set forth. The percentage
interest in the Mortgage Note and Security Documents that each Participant has
acquired pursuant to this Agreement is set forth opposite such Participant's
signature on a Signature Page to this Agreement.
Meritage and each Participant agree that the terms and conditions of
their relationships with respect to the Mortgage Note and the Security Documents
shall be as follows:
SECTION 1
PARTICIPATION INTERESTS
-----------------------
1.1 PARTICIPANT'S PARTICIPATION INTEREST. Concurrently with the
execution and delivery of this Agreement, each Participant has paid to Meritage,
in exchange for an undivided interest in the
<PAGE> 2
Mortgage Note and Security Documents, cash in an amount equal to the product
obtained by multiplying (a) the present outstanding principal balance of the
Mortgage Note by (b) the participation percentage in the Mortgage Note and
Security Documents acquired by such Participant. The participation percentage in
the Mortgage Note and Security Documents acquired by each Participant pursuant
to this Agreement is set forth opposite such Participant's signature on a
Signature Page to this Agreement (such interest is referred to as the
Participant's "Participation Interest").
1.2 MERITAGE'S PARTICIPATION INTEREST. Meritage represents and warrants
to the Participants that the present outstanding principal balance of the
Mortgage Note is $1,844,617.06, and that Meritage owns an undivided percentage
interest in the Mortgage Note and Security Documents that is equal to 100 minus
the sum of the Participation Interests now or hereafter held by the Participants
as a group (the undivided interest in the Mortgage Note and Security Documents
owned by Meritage from time to time is referred to as Meritage's "Participation
Interest").
1.3 SALE OR DISPOSITION OF MERITAGE'S PARTICIPATION INTEREST. Meritage
shall have the right, at any time and from time to time, to sell or otherwise
dispose of any interest in the Mortgage Note and Security Documents that
Meritage now owns or hereafter acquires. No such sale or disposition shall
abridge, impair or otherwise alter Meritage's rights or obligations under this
Agreement, including its rights and obligations as Agent or as holder of
Meritage's Participation Interest. If Meritage sells or otherwise disposes of
all or any portion of its Participation Interest, Meritage shall, promptly after
concluding such transaction, deliver to all Participants completed supplemental
Signature Pages, duly executed by Meritage and such transferee.
SECTION 2
AGENCY; REQUISITE PARTICIPATION INTERESTS
-----------------------------------------
2.1 APPOINTMENT OF MERITAGE AS AGENT. Each Participant designates and
appoints Meritage the limited administrative agent ("Agent") for all
Participants under the Mortgage Note and the Security Documents, and irrevocably
authorizes Meritage, on behalf of such Participant, to take or refrain from
taking any action, and to exercise or refrain from exercising any power, that is
required or permitted to be taken or exercised by the holder of the Mortgage
Note and the Security Documents, subject only to the express limitations set
forth in this Agreement. Without limiting the foregoing, each Participant
authorizes Meritage, as Agent, to collect principal and interest payments on the
Mortgage Note on behalf of the Participant and, after obtaining written consent
from the holders of the Requisite Participation Interests, to accelerate the
indebtedness evidenced by the Mortgage Note and undertake enforcement and
collection activities on behalf of the Participant (including without limitation
the filing of suit or commencement of other collection, foreclosure or
enforcement proceedings as permitted by law) with respect to the Mortgage Note
and Security Documents. With respect to any material decisions regarding
enforcement or collection activities (including, without limitation, decisions
to sell collateral or to bid at the foreclosure sale of collateral and to
commence or settle collection, foreclosure or enforcement proceedings), Meritage
shall comply with written instructions from the holders of the Requisite
Participation Interests.
2
<PAGE> 3
2.2 OTHER ACTIONS REQUIRING CONSENT FROM HOLDERS OF PARTICIPATION
INTERESTS. Without written consent from the holders of the Requisite
Participation Interests, the Agent shall not agree to any amendment,
modification, supplement, termination, consent or waiver of or to any provision
of the Mortgage Note or any of the Security Document. Further, without the
written consent from the holders of 100% of the Participation Interests, the
Agent shall not consent to any change in any interest rate set forth in the
Mortgage Note or to the date upon which interest or principal payments are
required to be made under the Mortgage Note. When the Agent requests the consent
of the holders of Participation Interests and does not receive a written denial
thereof from a Participant within five (5) Business Days (a "Business Day" is
any day other than a Saturday, Sunday or other day on which banks in Grand
Rapids, Michigan, are permitted or required by law to be closed) after making
such request, such Participant will be deemed to have granted the consent
requested by the Agent.
2.3 REQUESTS FOR INSTRUCTIONS, ETC. The Agent may at any time and from
time to time request written instructions from the holders of the Requisite
Participation Interests with respect to any action, inaction, failure or
approval which, by the terms of this Agreement, the Mortgage Note or any
Security Document the Agent is permitted or required to take or to grant, and if
such instructions are promptly requested, the Agent may refrain from taking any
action or withhold any approval and may refrain from any action or withhold any
approval until it has received such instructions from the holders of the
Requisite Participation Interests. No Participant shall have any right of action
whatever against the Agent as a result of the Agent acting or refraining from
acting in accordance with instructions of the holders of the Requisite
Participation Interests.
2.4 RELIANCE ON WRITINGS, CONSULTANTS, ETC. The Agent may rely upon any
written notices, statements, certificates, orders or other documents or any
telephone message or other communication believed by it in good faith to be
genuine and correct and to have been signed, sent or made by the proper person,
and with respect to all matters pertaining to this Agreement, the Mortgage Note
or the Security Documents, upon advice of legal counsel as to legal matters,
independent accountants as to audit and accounting matters, and other experts
selected by it, and when doing so will not be liable to any Participant for any
action taken or omitted by the Agent in good faith.
2.5 AGENT'S RESIGNATION. Meritage or any successor Agent may resign as
Agent at any time upon at least 30 days' prior notice to all Participants. Upon
such resignation, the Agent shall be discharged from all duties and obligations
as Agent arising under this Agreement after the date upon which its resignation
became effective. The holders of the Requisite Participation Interests shall
have the right to appoint a successor Agent, who shall have all rights, powers
and obligations that Meritage has as Agent under this Agreement.
2.6 NO FIDUCIARY DUTY; SCOPE OF AGENT'S DUTIES AND LIABILITY. No
provision of this Agreement shall be deemed to impose fiduciary duties or
obligations upon the Agent or its officers, directors, employees or agents, and
all Participants acknowledge and agree that neither Meritage nor any successor
Agent shall have any fiduciary duties or obligations of any type under this
Agreement or otherwise with respect to any Participation Interest. The Agent and
its officers, directors, employees, and agents shall have no duties under this
Agreement other than as expressly set forth
3
<PAGE> 4
in this Agreement. Without limiting the generality of the foregoing, the Agent
and its officers, directors, employees and agents shall have no duty or
responsibility at any time to provide any Participant with credit or other
information with respect to the Borrower or any Guarantor, whether coming into
the Agent's possession before or after the date of this Agreement; provided,
however, that the Agent shall, upon written request by a Participant, deliver to
the Participants copies of any written materials relating to the Borrower or the
Guarantors that are specifically requested by a Participant and that are within
the Agent's possession or control. The Agent and its officers, directors,
employees and agents shall be liable for their acts or omissions under this
Agreement only if such acts or omissions constitute gross negligence or willful
misconduct.
2.7 MERITAGE'S RIGHTS AS PARTICIPANT. Meritage, in its capacity as
holder of its Participation Interest, shall have the same rights, powers, duties
and liabilities with respect to such Participation Interest as any Participant
has with respect to his Participation Interest, and Meritage may exercise the
same as if it were not the Agent. Unless otherwise required by the context, the
terms "Participant" and "Participants", or any similar terms, will include the
Agent when not acting as agent.
2.8 REQUISITE PARTICIPATION INTERESTS. The "Requisite Participation
Interests" means 50.01% or more of the Participation Interests held by all
Participants.
SECTION 3
COLLECTION AND REMITTANCE OF PAYMENTS
-------------------------------------
3.1 ALLOCATION OF PAYMENTS. All payments of principal and interest made
pursuant to the Mortgage Note shall be paid by the Borrower to the Agent, and
shall be allocated by the Agent among the Participants in accordance with their
respective Participation Interests. Within three (3) Business Days after receipt
by the Agent of a principal or interest payment under the Mortgage Note, the
Agent shall calculate and remit to all Participants his or its allocable share
thereof, based upon such Participant's Participation Percentage. Unless
otherwise instructed in writing by a Participant, the Agent shall make all
remittances required under this Agreement by mailing a check drawn on an account
maintained by the Agent to the Participants at their respective addresses shown
on a Signature Page to this Agreement.
3.2 RETURN OF PAYMENTS. If the Agent determines at any time that an
amount received by the Agent under this Agreement must be returned to the
Borrower or paid to any other person pursuant to any solvency law or otherwise,
then, notwithstanding any other term or condition of this Agreement, the Agent
will not be required to distribute any portion thereof to any Participant.
However, if the Agent has previously distributed such amount, each Participant
shall repay to the Agent on demand any portion of such amount that the Agent has
distributed to such Participant, without set-off, counterclaim or deduction of
any kind.
3.3 RETURN OF ERRONEOUS PAYMENTS. If the Agent makes a payment to a
Participant under this Agreement in the belief or expectation that a related
payment has been or will be received by
4
<PAGE> 5
the Agent from the Borrower, which related payment in fact is not received by
the Agent, each Participant shall repay such payment to the Agent on demand,
without set-off, counterclaim or deduction of any kind.
SECTION 4
PROHIBITED CONDUCT BY PARTICIPANTS
----------------------------------
4.1 SALE OR TRANSFER OF PARTICIPATION INTERESTS. Except as set forth in
Section 1.3 above, no Participant may assign or transfer any of its rights under
this Agreement or the Mortgage Note or any of the Security Documents, or sell
any participation under this Agreement or the Mortgage Note or any of the
Security Documents.
4.2 COLLECTION ACTIVITIES. No Participant shall, without written
consent from the Agent and the holders of the Requisite Participation Interests,
undertake any collection activities or commence enforcement of the Mortgage Note
or any of the Security Documents. All amounts received by a Participant in
respect of the indebtedness evidenced by the Mortgage Note or the Security
Documents shall be shared among the Participants in proportion to their
respective Participation Interests, whether received by voluntary payment, by
the exercise of the right of set-off or lien, by counterclaim or cross action or
by the enforcement of the Mortgage Note or any of the Security Documents.
4.3 COMMUNICATIONS WITH BORROWER AND GUARANTORS. No Participant shall
communicate directly with the Borrower or any Guarantor concerning the Mortgage
Note or any of the Security Documents. Any Participant who wishes to obtain
information from the Borrower or a Guarantor concerning the Mortgage Note or any
of the Security Documents, or who wishes to communicate with the Borrower or a
Guarantor concerning the Mortgage Note or Security Documents, shall direct such
requests and communications through Meritage.
SECTION 5
REPURCHASE OBLIGATION
---------------------
5.1 REPURCHASE OBLIGATION. Within ten (10) Business Days after the
later of: (a) receipt of written request from a Participant; (b) the foreclosure
or disposition of all collateral covered by the Security Documents; and (c)
conclusion of all efforts to collect or realize upon any judgment(s) entered
against any Guarantor(s) pursuant to the Guaranty, Meritage shall repurchase the
Participation Interest held by such Participant for a price equal to the product
obtained by multiplying (a) the then outstanding principal balance of the
Mortgage Note plus any accrued interest thereon by (b) the participation
percentage in the Mortgage Note and Security Documents acquired by such
Participant (the "Repurchase Price"). The Repurchase Price shall be paid in
cash.
5.2 SATISFACTION OF REPURCHASE OBLIGATION. Upon tendering the
Repurchase Price to the Participant, Meritage shall be relieved of all further
liability under this Section 5 as to such
5
<PAGE> 6
Participant, and such Participant shall be divested of all right, title and
interest in his Participation Interest. The Participant nevertheless shall
return to Meritage all documents and things then in the Participant's possession
or control evidencing or otherwise relating to his former ownership of the
Participation Interest, and shall execute such documents as Meritage may
reasonably request to confirm that such Participant no longer has or claims any
interest in the Participation Interest.
SECTION 6
ACKNOWLEDGMENTS RE: CERTAIN MATTERS
-----------------------------------
6.1 SECURITIES LAWS AND OTHER MATTERS. The Participant:
(a) Acknowledges that he has purchased his Participation
Interest for his own account, and not as a nominee or agent, and not
with a view to the sale or distribution of any part thereof, and that
he has no intention of selling, granting participations in, or
otherwise distributing the same, and agrees that he will not do so. The
Participant has entered into no contract, undertaking, agreement or
arrangement with any person to sell, transfer, or grant participations
to such person, or to any third person, with respect to his
Participation Interest, and the Participant will not do so.
(b) Acknowledges that neither the Participation Interests nor
this Agreement have been registered under applicable federal and state
securities laws. The Participant acknowledges that, unless re-purchased
by Meritage pursuant to this Agreement, the Participant must hold the
Participation Interest, and bear the economic risks of his investment
in the Participation Interest, indefinitely.
(c) Represents that he is experienced in investment matters,
has such knowledge and experience in financial and business matters as
to be capable of evaluating the merits and risks of his investment in
the Participation Interest, understands the risks associated with his
investment in the Participation Interest, and has the financial ability
and resources necessary to bear the economic risks of his investment in
the Participation Interest, including the total loss of such
investment.
(d) Represents and warrants that he is an "accredited
investor" as that term is defined in Rule 501 of Regulation D under the
Securities Act of 1933.
(e) Understands that in the event of a default under the
Mortgage Note, the Participant shall have recourse only to the
Borrower, the Guarantors to the extent provided in the Guaranty, the
collateral covered by the Security Documents, and Meritage to the
extent provided in this Agreement, and that no other person or entity
has any liability whatever under the Mortgage Note, the Security
Documents or this Agreement.
(f) Acknowledges that neither Meritage nor any of its
officers, directors, employees, agents or attorneys has made any
representation or warranty to the Participant
6
<PAGE> 7
concerning the validity or enforceability of the Mortgage Note or the
Security Documents, or the ability of the Borrower to pay the
indebtedness evidenced by the Mortgage Note, or the ability of the
Guarantors to observe and perform their obligations under the Guaranty,
or the adequacy of the collateral for the Mortgage Note, or the ability
of Meritage to re-purchase the Participation Interest in accordance
with this Agreement, and that the Participant has decided to invest in
the Participation Interest solely on the basis of its own investigation
of all factors upon which its investment decision was based, which was
not dependent in any respect upon information furnished or statements
made by Meritage or its officers, directors, employees, agents or
attorneys.
(g) Acknowledges receipt of copies of Meritage's most recent
annual report to its shareholders and the following reports filed by
Meritage with the United States Securities and Exchange Commission:
Report on Form 10-K for the year ended 11/30/97, Reports on Form 10-Q
for the quarters ended 2/28/98 and 5/31/98, and Form 8-K dated 9/9/98,
and that the Participant or his advisors have reviewed such reports and
have asked such questions of Meritage management as they deemed
relevant and necessary to their evaluation of the risks of an
investment in the Participation Interest, and that the Participant is
satisfied in all respects with the results of such review and
inquiries.
SECTION 7
MISCELLANEOUS
-------------
7.1 INCORPORATION OF RECITALS. The Recitals set forth above are
incorporated into and form a part of this Agreement.
7.2 NO THIRD-PARTY BENEFICIARIES. The provisions of this Agreement are
solely for the benefit of the Agent and the Participants, and neither the
Borrower, nor any Guarantor, or any other person shall have rights as a third
party beneficiary of any of the provisions hereof.
7.3 HEADINGS AND CAPTIONS. Section headings and paragraph sections used
in this Agreement are for convenience of reference only and will not constitute
a part of this Agreement for any other purpose or affect the construction of
this Agreement.
7.4 COUNTERPARTS. This Agreement may be executed in counterparts and by
different parties on separate counterparts, each of which counterparts, when so
executed and delivered, will be deemed to be an original and each of which
counterparts, taken together, will constitute but one and the same agreement.
This Agreement will become effective upon the execution of a counterpart hereof
by each of the parties hereto.
7.5 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon, and
inure to the benefit of, the Agent, the Participants, and their respective
permitted successors and assigns.
7
<PAGE> 8
7.6 RULE OF CONSTRUCTION. Neither this Agreement nor any uncertainty or
ambiguity herein will be construed or resolved against the Agent or any
Participant, whether under any rule of construction or otherwise. On the
contrary, this Agreement has been reviewed by each of the parties and their
counsel and will be construed and interpreted according to the ordinary meaning
of the words used so as to fairly accomplish the purposes and intentions of all
parties hereto.
7.7 NO OTHER AGREEMENTS. This Agreement is intended by the parties as a
final expression of their agreement and is intended as a complete statement of
the terms and conditions of their agreement.
7.8 CONTROLLING LAW. The validity of this Agreement, its construction,
interpretation and enforcement and the rights of the parties hereto will be
determined under, governed by and construed in accordance with the internal laws
of the State of Michigan, without regard to principles of conflicts of law.
7.9 WAIVER OF JURY TRIAL. The parties acknowledge and agree that there
may be a constitutional right to a jury trial in connection with any claim,
dispute or lawsuit arising between them, and that such right may be waived.
Accordingly, the parties agree that notwithstanding such constitutional right,
in this commercial matter the parties believe and agree that it will be in their
best interest to waive such right, and accordingly, hereby waive such right to
jury trial, and further agree that the best forum for hearing any claim, dispute
or lawsuit, if any, arising in connection with this Agreement or the
relationship among the Participants will be a court of competent jurisdiction
sitting without a jury.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first hereinabove set forth.
[SIGNATURES APPEAR ON FOLLOWING PAGE(S)]
8
<PAGE> 9
SIGNATURE PAGE TO LOAN PARTICIPATION
AND AGENCY AGREEMENT DATED OCTOBER ____, 1998
---------------------------------------------
PARTICIPANT MERITAGE HOSPITALITY GROUP INC.
____________________________________ By: ________________________________
Its: ___________________________
PARTICIPANT'S PARTICIPATION
PERCENTAGE: _____%
PARTICIPANT'S ADDRESS FOR REMITTANCES MERITAGE'S ADDRESS FOR REMITTANCES
AND COMMUNICATIONS: AND COMMUNICATIONS:
______________________________________ 40 Pearl Street, N.W., Suite 900
______________________________________ Grand Rapids, MI 49503
______________________________________ Attention: President
9
<PAGE> 1
EXHIBIT 10.30
MERITAGE HOSPITALITY GROUP INC.
1999 DIRECTORS' COMPENSATION PLAN
This 1999 Directors' Compensation Plan has been adopted by the Board of
Directors of Meritage Hospitality Group Inc. in order to align further the
interests of the Company's non-employee Directors with the interests of
shareholders by providing that their compensation be paid through the issuance
of Common Shares of the Company.
1. COMPENSATION OF NON-EMPLOYEE DIRECTORS
All Directors who are not employees of the Company shall be paid the
following fees as provided in Section 2 below:
1.1 a retainer of $1,000 for each meeting of the Board of
Directors attended;
1.2 a retainer of $500 for each committee meeting attended; and
1.3 such fees shall be reduced to 50% of the amount stated above
if the meetings are by telephone.
2. PAYMENT TERMS
The meeting fees set forth in Section 1 above shall be paid by the
Company quarterly, in arrears, as soon as practicable following the end of each
quarter in the form of Company Common Shares.
The number of Common Shares to be issued shall be determined by
dividing the dollar amount of the fee by the average of the per share Fair
Market Value of the Common Shares as defined in Section 3, for the five trading
days prior to the end of each quarter. The resulting number shall then be
rounded up to the nearest share.
3. FAIR MARKET VALUE OF COMPANY COMMON SHARES
"Fair Market Value" means the last sale price reported on any stock
exchange or over-the-counter trading system on which the Common Shares are
trading on the last trading day prior to a specified date or, if no last sales
price is reported, the average of the closing bid and asked prices for a Common
Share on a specified date. If no sale has been made on any date, prices on the
last preceding day on which any such sale shall have been made will be used
determining Fair Market Value under either method prescribed in the previous
sentence.
4. RESTRICTIVE LEGEND; HOLDING PERIOD FOR COMMON SHARES
In order to comply with Federal securities laws, all certificates for
Common Shares issued pursuant to this Plan shall be the following restrictive
legend which will prevent the recipient from disposing of such shares for six
months from the date of issuance:
<PAGE> 2
THE COMMONS SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED,
SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED UNTIL
THE EXPIRATION OF THE SIX MONTH PERIOD BEGINNING ON THE DATE OF
ORIGINAL ISSUANCE BY MERITAGE HOSPITALITY GROUP INC. AS PROVIDED BY THE
COMPANY'S DIRECTORS' COMPENSATION PLAN, A COPY OF WHICH WILL BE
FURNISHED BY THE ISSUER TO THE HOLDER HEREOF UPON REQUEST.
When the legend requirement imposed by this Section 4 shall terminate,
the holder of Common Shares for which such legend requirements have terminated
may request that the Company issue replacement certificates representing such
shares without such legend.
5. NO RIGHT TO CONTINUANCE AS A DIRECTOR
Neither the action of the Company in establishing this Plan, nor the
issuance of Common Shares shall be deemed to create any obligation on the part
of the Board of Directors to nominate any non-employee Director for reelection
by the Company's shareholders or to be evidence of any agreement or
understanding, express or implied, that the non-employee Director has a right to
continue as a Director for any period of time or at any particular rate of
compensation.
6. SHARES SUBJECT TO THE PLAN
Common Shares are authorized for issuance under this Plan in accordance
with the provisions hereof. The Company shall at all times during the term of
the Plan retain as authorized and unissued Common Shares at least the number of
shares from time to time required under the provisions of the Plan, or otherwise
assure itself of its ability to perform its obligations hereunder.
7. AMENDMENT
The amount, pricing and timing of Common Share issuances pursuant to
this Plan shall not be amended more than once every six months, other than to
comport with changes in the Internal Revenue Code of 1986, as amended, the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder.
8. EFFECTIVE DATE AND EXPIRATION OF PLAN
The Plan is effective as of November 30, 1998, subject to approval by
the Board of Directors of the Company. Unless earlier terminated by the Board
pursuant to Section 10, this Plan shall terminate on the tenth anniversary of
the Effective Date. No Common Shares shall be issued pursuant to this Plan after
its termination.
9. PAYMENT IN EVENT OF DEATH
Upon the death of a non-employee Director, any portion of the
compensation pursuant to this Plan then unpaid shall be paid to the
beneficiaries named in the most recent beneficiary designation filed with the
Secretary of the Company. In the absence of such a designation, such
compensation shall be paid to, or as directed by, the decedent's personal
representative, in one or more installments as the non-employee Director may
have elected in writing.
10. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN
The Board of Directors may suspend or terminate this Plan or any
portion of it at any time, and, subject to Section 7, may amend it from time to
time in such respects as the Board of Directors may deem advisable so that any
awards hereunder shall conform to any change in applicable laws or regulations
or in any other respect the Board of Directors may deem to be in the best
interests of the Company.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. TE Inn Inc., a Michigan corporation.
2. SC Inn Inc., a Michigan corporation.
3. GHR Inc., a Michigan corporation.
4. GHYC Inc., a Michigan corporation.
5. MHG Food Service Inc., a Michigan corporation.
6. MHG West Inc., a Michigan corporation.
7. WM Limited Partnership - 1998, a Michigan limited partnership, d/b/a Wendy's
of Michigan.*
* 99.9% owned 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
Southfield, Michigan
February 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<CASH> 2,109,358
<SECURITIES> 0
<RECEIVABLES> 70,974
<ALLOWANCES> 0
<INVENTORY> 165,156
<CURRENT-ASSETS> 5,155,901
<PP&E> 13,992,222
<DEPRECIATION> 809,282
<TOTAL-ASSETS> 24,964,246
<CURRENT-LIABILITIES> 4,925,481
<BONDS> 12,018,995
0
445
<COMMON> 57,426
<OTHER-SE> 5,376,018
<TOTAL-LIABILITY-AND-EQUITY> 24,964,246
<SALES> 27,043,954
<TOTAL-REVENUES> 27,043,954
<CGS> 7,752,187
<TOTAL-COSTS> 27,590,074
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,473,019
<INCOME-PRETAX> (1,324,258)
<INCOME-TAX> (50,000)
<INCOME-CONTINUING> (1,374,258)
<DISCONTINUED> 3,232,132
<EXTRAORDINARY> (727,172)
<CHANGES> 0
<NET-INCOME> 1,130,702
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
<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> 258,282
<ALLOWANCES> 0
<INVENTORY> 156,746
<CURRENT-ASSETS> 1,632,531
<PP&E> 14,906,727
<DEPRECIATION> 7,388,720
<TOTAL-ASSETS> 13,814,337
<CURRENT-LIABILITIES> 3,099,215
<BONDS> 9,083,746
0
1,384
<COMMON> 32,188
<OTHER-SE> (3,611)
<TOTAL-LIABILITY-AND-EQUITY> 13,814,337
<SALES> 26,860,546
<TOTAL-REVENUES> 26,860,546
<CGS> 7,720,307
<TOTAL-COSTS> 27,534,049
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,440,192
<INCOME-PRETAX> (1,935,086)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,935,086)
<DISCONTINUED> 421,527
<EXTRAORDINARY> (177,291)
<CHANGES> 0
<NET-INCOME> (1,690,850)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<CASH> 2,265,496
<SECURITIES> 0
<RECEIVABLES> 215,879
<ALLOWANCES> 0
<INVENTORY> 180,250
<CURRENT-ASSETS> 2,803,494
<PP&E> 14,322,164
<DEPRECIATION> 6,670,361
<TOTAL-ASSETS> 14,890,953
<CURRENT-LIABILITIES> 2,292,692
<BONDS> 9,109,598
0
1,084
<COMMON> 32,045
<OTHER-SE> 1,988,313
<TOTAL-LIABILITY-AND-EQUITY> 14,890,953
<SALES> 2,098,908
<TOTAL-REVENUES> 2,098,908
<CGS> 639,437
<TOTAL-COSTS> 2,367,453
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142,857
<INCOME-PRETAX> 267,684
<INCOME-TAX> 0
<INCOME-CONTINUING> 267,684
<DISCONTINUED> (2,193,254)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,925,850)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
