<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended February 29, 2000.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ___________________ to ____________________
Commission File Number: 0-17442
MERITAGE HOSPITALITY GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-2730460
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
40 PEARL STREET, N.W., SUITE 900
GRAND RAPIDS, MICHIGAN 49503
(Address of Principal Executive Offices) (Zip Code)
(616) 776-2600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
As of April 10, 2000 there were 5,742,334 outstanding Common Shares, $.01 par
value.
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<PAGE> 2
SAFE HARBOR STATEMENT
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 actions 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 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 quick-service food;
severe weather; changes in travel patterns; increases in food, labor and energy
costs; the availability and cost of suitable restaurant sites; the ability to
finance expansion; fluctuating interest rates; fluctuating insurance rates; the
availability of adequate employees; directives issued by the franchisor; the
general reputation of Wendy's restaurants; and the recurring need for renovation
and capital improvements. Also, the Company is subject to extensive government
regulations relating to, among other things, zoning, minimum wage, public health
certification, and the operation of its restaurants. Because the Company's
operations are concentrated in smaller urban areas of Michigan, a marked decline
in the Michigan economy could adversely affect its operations.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation of
the financial position, results of operations, stockholders' equity and cash
flows of the Company have been included. For further information, please refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1999. The results of operations for the three month period ended February 29,
2000 are not necessarily indicative of the results to be expected for the full
year.
2
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MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 29, 2000 AND NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 29,
2000 NOVEMBER 30,
(UNAUDITED) 1999
------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 941,384 $ 1,578,914
Receivables 93,607 81,239
Notes receivable, current portion 475,000 475,000
Inventories 184,510 207,563
Prepaid expenses and other current assets 256,856 157,413
------------- --------------
Total current assets 1,951,357 2,500,129
PROPERTY, PLANT AND EQUIPMENT, NET 17,354,918 16,683,959
OTHER ASSETS
Goodwill, net of amortization of $380,669 and
$335,287, respectively 4,929,054 4,974,436
Franchise costs, net of amortization of $46,059 and
$40,167, respectively 678,941 684,833
Financing costs, net of amortization of $21,692 and
$17,808, respectively 314,501 318,385
Deferred charges and other assets 36,453 39,657
------------- --------------
Total other assets 5,958,949 6,017,311
------------- --------------
Total assets $ 25,265,224 $ 25,201,399
============= ==============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
3
<PAGE> 4
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
FEBRUARY 29, 2000 AND NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FEBRUARY 29,
2000 NOVEMBER 30,
(UNAUDITED) 1999
------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term obligations $ 892,082 $ 874,051
Current portion of obligations under capital lease 337,234 328,236
Trade accounts payable 1,125,392 1,245,679
Income taxes payable 5,000 5,000
Accrued liabilities 1,049,707 1,145,756
------------- --------------
Total current liabilities 3,409,415 3,598,722
LONG-TERM OBLIGATIONS 13,567,350 12,822,125
OBLIGATIONS UNDER CAPITAL LEASE 979,053 1,066,814
DEFERRED REVENUE 1,735,864 1,830,788
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value
shares authorized: 5,000,000; 200,000 designated
as Series A convertible cumulative preferred stock
shares issued and outstanding: 44,520
(liquidation value - $445,200) 445 445
Common stock - $0.01 par value
shares authorized: 30,000,000
shares issued: 5,752,677
shares outstanding: 5,737,717 and 5,751,877 57,377 57,519
Additional paid in capital 13,284,493 13,316,795
Note receivable from sale of shares, net of valuation
allowance of $5,551,856 and $5,362,804 (1,660,962) (1,660,962)
Accumulated deficit (6,107,811) (5,830,847)
------------- --------------
Total stockholders' equity 5,573,542 5,882,950
------------- --------------
Total liabilities and stockholders' equity $ 25,265,224 $ 25,201,399
============= ==============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
4
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MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------- --------------
<S> <C> <C>
FOOD AND BEVERAGE REVENUE $ 7,036,668 $ 6,493,030
COSTS AND EXPENSES
Cost of food and beverages 2,024,458 1,891,113
Operating expenses 4,235,339 3,809,769
General and administrative expenses 518,326 510,107
Depreciation and amortization 346,271 297,996
------------- --------------
Total costs and expenses 7,124,394 6,508,985
------------- --------------
LOSS FROM OPERATIONS (87,726) (15,955)
OTHER INCOME (EXPENSE)
Interest expense (310,263) (330,347)
Interest income 38,042 130,168
Other Income 45,000 --
Gain on disposal of assets 48,000 156,635
------------- --------------
Total other expense (179,221) (43,544)
------------- --------------
Loss from continuing operations (266,947) (59,499)
INCOME FROM DISCONTINUED OPERATIONS -- 70,800
------------- --------------
NET EARNINGS (LOSS) (266,947) 11,301
DIVIDENDS ON PREFERRED STOCK 10,017 10,017
------------- --------------
NET EARNINGS (LOSS) ON COMMON SHARES $ (276,964) $ 1,284
============= ==============
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
Continuing operations $ (0.05) $ (0.01)
Discontinued operations -- 0.01
------------- --------------
Net earnings (loss) $ (0.05) $ 0.00
============= ==============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 5,747,841 5,742,586
============= ==============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
5
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MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED NOVEMBER 30, 1999
AND THE THREE MONTH PERIOD ENDED FEBRUARY 29, 2000 (UNAUDITED)
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<TABLE>
<CAPTION>
SERIES A NOTE
CONVERTIBLE ADDITIONAL RECEIVABLE
PREFERRED COMMON PAID-IN SALE OF ACCUMULATED
STOCK STOCK CAPITAL SHARES DEFICIT TOTAL
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 1, 1998 $ 445 $ 57,426 $13,299,467 $ (1,660,962) $(6,262,487) $5,433,889
Issuance of 10,091 shares of
common stock -- 101 19,403 -- -- 19,504
Dividends paid - preferred stock -- -- -- -- (40,068) (40,068)
Recognition of interest income
on note receivable from sale
of shares -- -- 696,049 (696,049) -- --
Increase in valuation allowance
on note receivable from sale
of shares -- -- (696,049) 696,049 -- --
Purchase of 800 shares of
common stock -- (8) (2,075) -- -- (2,083)
Net earnings -- -- -- -- 471,708 471,708
----------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 30, 1999 445 57,519 13,316,795 (1,660,962) (5,830,847) 5,882,950
Issuance of 440 shares of common
stock -- 4 990 -- -- 994
Dividends paid - preferred stock -- -- -- -- (10,017) (10,017)
Recognition of interest income
on note receivable from sale
of shares -- -- 189,052 (189,052) -- --
Increase in valuation
allowance on note receivable
from sale of shares -- -- (189,052) 189,052 -- --
Purchase of 14,600 shares of
common stock -- (146) (33,292) -- -- (33,438)
Net loss -- -- -- -- (266,947) (266,947)
----------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 29, 2000 $ 445 $ 57,377 $13,284,493 $ (1,660,962) $(6,107,811) $5,573,542
========================================================================================
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
6
<PAGE> 7
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (266,947) $ 11,301
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities
Depreciation and amortization 346,271 297,996
Compensation and fees paid by issuance of common stock 994 --
Gain on disposal of assets (48,000) --
Decrease in cash value of life insurance -- 9,656
Decrease in deferred revenue (94,924) (66,841)
(Increase) decrease in current assets (88,758) 18,774
Decrease in current liabilities (216,336) (358,994)
Decrease in net liabilities of discontinued operations -- (316,822)
------------- --------------
Net cash used in operating activities (367,700) (404,930)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (994,868) (1,841,879)
Payment for franchise agreement -- (25,000)
Proceeds from disposal of assets 84,000 --
Purchase of common stock (33,438) --
------------- --------------
Net cash used in investing activities (944,306) (1,866,879)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term obligations 1,141,606 1,489,499
Payment of financing costs -- (67,171)
Principal payments on long-term obligations (378,350) (96,037)
Payments on obligations under capital lease (78,763) (72,204)
Preferred dividends paid (10,017) (10,017)
------------- --------------
Net cash provided by financing activities 674,476 1,244,070
------------- --------------
Net decrease in cash (637,530) (1,027,739)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,578,914 2,109,358
------------- --------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 941,384 $ 1,081,619
============= ==============
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION - SEE NOTE A
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
7
<PAGE> 8
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
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NOTE A - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
2000 1999
------------- --------------
<S> <C> <C>
Cash paid for interest expense $ 311,268 $ 330,346
============= ==============
</TABLE>
NOTE B - EARNINGS (LOSS) 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
period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
For the three months ended February 29, 2000 and February 28, 1999, convertible
preferred stock and exercisable stock options were not included in the
computation of diluted earnings per share because the effect of conversion of
preferred stock and exercise of stock options would be antidilutive.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
Results of continuing operations for the three month periods ended
February 29, 2000 and February 28, 1999 are summarized in the following table:
<TABLE>
<CAPTION>
Statement of Operations
----------------------------------------------------------------------------
Three month periods ended
----------------------------------------------------------------------------
$ (000's) % of Revenue
------------------------------------ -----------------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Food and beverage revenue $ 7,037 $ 6,493 100.0% 100.0%
Costs and expenses
Cost of food and beverages 2,025 1,891 28.8 29.1
Operating expenses 4,236 3,810 60.2 58.7
General and administrative
Restaurant operations 324 277 4.6 4.3
Corporate level expenses 194 233 2.7 3.5
Depreciation and amortization 346 298 4.9 4.6
-------------- --------------- --------------- ---------------
Total costs and expenses 7,125 6,509 101.2 100.2
-------------- --------------- --------------- ---------------
Loss from operations (88) (16) (1.2) (0.2)
Other income (expense)
Interest expense (310) (330) (4.4) (5.1)
Interest income 38 130 .5 2.0
Other income 45 -- .6 --
Gain on disposal of assets 48 157 .7 2.4
-------------- --------------- --------------- ---------------
Total other expense (179) (43) (2.6) (0.7)
-------------- --------------- --------------- ---------------
Loss from continuing operations $ (267) $ (59) (3.8%) (0.9%)
============== =============== =============== ===============
</TABLE>
9
<PAGE> 10
REVENUE
Food and beverage revenue increased $544,000 or 8.4% for the three
months ended February 29, 2000 compared to the same period of 1999. Revenues in
2000 include $907,000 from four new restaurants which have been open for less
than one year, compared to $41,000 of revenue included in the three months ended
February 28, 1999 from one new restaurant opened February 18, 1999. Food and
beverage revenue on a per restaurant basis for restaurants in operation during
both the three months ended February 29, 2000 and February 28, 1999 ("same store
sales") are set forth in the following table:
<TABLE>
<CAPTION>
Average Net Sales Per Restaurant Unit
-------------------------------------
2000 1999 Decrease % Decrease
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Three months ended February 29 $ 251,915 $ 256,618 $ 4,703 1.8%
</TABLE>
The 1.8% decrease in same store sales for the three months ended
February 29, 2000 compared to the same period of 1999 was primarily due to (i) a
decrease in "late night" sales of $155,000 for the three months ended February
29, 2000 compared to the same period last year, due to the temporary closing
time of 11:00 p.m. compared to a closing time of midnight during the prior year,
and (ii) a decrease in same store customer count of 2.8%. Offsetting some of the
sales decline was (i) an extra day of sales due to 29 days in February 2000
compared to 28 days in February 1999, and (ii) a 5.7% increase in average ticket
price as a result of retail price increases of certain menu items. These price
increases resulted in $167,000 of sales increases for the three months ended
February 29, 2000 compared to the same period in the prior year. Sales during
the first three months of 2000 continued to be negatively impacted by intense
competition throughout the quick-service industry including price discounting
and the use of toy promotions by some of the Company's primary competitors. The
Company and Wendy's International have continued to resist engaging in deep
price discounting, choosing instead to combat the low prices of its competitors
with the "value menu" offerings and high quality, made-to-order products.
COST OF FOOD AND BEVERAGES
Cost of food and beverages as a percentage of food and beverage revenue
was 28.8% for the three months ended February 29, 2000 compared to 29.1% for the
three months ended February 28, 1999. The increased selling prices, discussed
above, caused a 0.8 percentage point decrease in the cost of food and beverages
as a percentage of revenue. This decrease was somewhat offset by product
purchase price increases, which caused a 0.5 percentage point increase in cost
of food as a percentage of sales. Significant product price changes were a 15.6%
increase in beef for the three months ended February 29, 2000 compared to the
same period in 1999, which was somewhat offset by a 13.6% decrease in the
average cost of Frosty mix for the three months ended February 29, 2000 compared
to the same period in 1999.
OPERATING EXPENSES
Operating expenses increased 1.5 percentage points for the three months
ended February 29, 2000 compared to the same period of 1999 (from 58.7% of
revenue in 1999 to 60.2% of revenue in 2000). The increase was due primarily to
increased labor and related costs. Payroll and related costs increased 2.1
percentage points from 34.0% of revenue ($2,211,000) for the first quarter of
1999 to 36.1% of revenue ($2,540,000) for the same period of 2000. Crew labor
increased 1.7 percentage points of revenue from 17.2% of sales for the three
months ended February 28, 1999 to 18.9% of sales for the same period of 2000.
This 9.5% increase in crew labor was due primarily to (i) a 7.4% increase in the
average hourly rate and (ii) the inability to reduce crew labor hours as sales
fluctuate in accordance with minimum staffing levels as
10
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recommended by Wendy's International's guidelines. Training cost increases
accounted for the majority of the remaining increase as they rose from 0.8% of
revenue in the first quarter of 1999 compared to 1.2% of revenue in 2000. The
increased training costs reflect costs due to recruiting and retention programs
being implemented as part of management's increased focus in this area.
GENERAL AND ADMINISTRATIVE
Restaurant Operations
General and administrative expenses increased $47,000 for the three
months ended February 29, 2000 compared to the same period of 1999 (from
$277,000 to $324,000). As a percentage of revenue, general and administrative
expenses increased from 4.3% of revenue for the three months ended February 28,
1999 to 4.6% of revenue for the same period of 2000. The increase was primarily
due to (i) an increase in administrative salaries due to new positions related
to the Company's new restaurant growth as well as market driven pay increases,
and (ii) an increase in recruiting costs resulting from the Company's new
recruiting and retention programs which have been a management focus for the
past six months. The Company is beginning to experience a reduction in
managerial turnover as a result of these new programs.
Corporate Level Expenses
Corporate level expenses decreased $39,000, from $233,000 in the first
quarter of 1999 to $194,000 for the same period of 2000. This 16% decrease was
primarily due to reductions in (i) life insurance premium costs due to the sale
of certain life insurance policies during the first quarter of 1999, (ii) the
cost of business insurance resulting from a change in insurance carriers, and
(iii) public market expenses due to the production of certain investor
publications in the first quarter of 1999, which was not repeated in the first
quarter of 2000.
INTEREST EXPENSE
Interest expense for the first quarter of 2000 and 1999 was $310,000
and $330,000, respectively. The reduction in interest expense was due to a
$70,000 decrease in interest expense on the notes issued by the Company related
to the notes receivable from the sale of hotel properties. The majority of these
notes were retired during the later part of 1999. This decrease was somewhat
offset by an increase of $50,000 in interest expense related to increased
long-term debt incurred to construct new restaurants.
INTEREST INCOME
Interest income decreased $92,000 for the first quarter of 2000 compared
to the same period of 1999, from $130,000 to $38,000. The decrease in interest
income was due to the reduction in the outstanding balance of the notes
receivable from the sale of the hotel properties from $3,119,000 as of February
28, 1999 to $475,000 as of February 29, 2000.
GAIN ON DISPOSAL OF ASSETS
The $48,000 gain on disposal of assets for the three months ended
February 29, 2000 represented the excess of insurance proceeds over the net book
value of fire damaged equipment. The Company recognized a gain on the sale of
assets of $157,000 for the three months ended February 28, 1999 as a result of
the sale of life insurance policies during the first quarter of 1999.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash and cash equivalents ("cash") decreased $637,530 from $1,578,914
as of November 30, 1999 to $941,384 as of February 29, 2000. The decrease in
cash was the result of the following:
<TABLE>
<S> <C>
Net cash used in operating activities $ (367,700)
Net cash used in investing activities (944,306)
Net cash provided by financing activities 674,476
-----------
Net decrease in cash $ (637,530)
===========
</TABLE>
Net cash used in operating activities decreased $37,000 (from $405,000
to $368,000) for the three months ended February 29, 2000 compared to the same
period of 1999. The decrease was due to a decrease in net income of $278,000,
offset primarily by the elimination of any impact from liabilities of
discontinued operations during 2000 compared to a $317,000 reduction in
liabilities of discontinued operations from November 30, 1998 to February 28,
1999.
Net cash used in investing activities decreased $923,000 (from
$1,867,000 to $944,000) for the three months ended February 29, 2000 compared to
the three months ended February 28, 1999. The decrease in cash used by investing
activities was primarily the result of an $847,000 reduction in the purchase of
property and equipment during the first quarter of 2000 compared to the first
quarter of 1999. During the three months ended February 29, 2000, the Company
purchased $995,000 of property and equipment in connection with the development
of new restaurants ($634,000), renovations on one restaurant due to fire damage
($166,000), and improvements to existing restaurants ($195,000). During the
three months ended February 28, 1999 the Company purchased $1,842,000 of
property and equipment primarily for the development of new restaurants. The
Company purchased 14,600 common shares in market transactions during the quarter
at a cost of $33,438. In August 1999, the Board authorized the purchase, from
time to time, of up to 200,000 shares of Meritage's outstanding common stock at
the prevailing market prices. In total, the Company has purchased 15,400 common
shares.
Net cash provided by financing activities decreased $570,000 (from
$1,244,000 to $674,000) for the three months ended February 29, 2000 compared to
the same period of 1999. The decrease in cash provided by financing activities
was primarily the result of (i) a decrease of $348,000 in proceeds from new long
term debt (which was incurred to finance new restaurant construction during both
years), (ii) an increase of $237,000 in scheduled long-term debt payments, and
(iii) a $45,000 payment on a note payable related to the sale of a hotel
property.
FINANCIAL CONDITION
As of February 29, 2000, the Company's current liabilities exceeded its
current assets by $1,458,000, compared to November 30, 1999 when current
liabilities exceeded current assets by $1,099,000. Excluding the current portion
of occupancy related long-term obligations and capital leases, the Company's
current liabilities exceeded its current assets by $659,000 as of February 29,
2000 and by $371,000 as of November 30, 1999. At these dates, the ratios of
current assets to current liabilities were 0.57:1 and 0.69:1, respectively. The
above discussion of cash flows for the three months ended February 29, 2000
explains the decrease in cash as well as the most significant reasons for the
decrease in working capital.
12
<PAGE> 13
The cash flow management issues currently facing the Company can be
broken down into three areas: (i) operations of the Wendy's restaurants, (ii)
investment in new restaurants, and (iii) corporate level expenses.
The Company utilized cash balances during the first quarter of fiscal
2000 to fund working capital needs resulting from (i) typical cash flow
tightening which occurs during the first and lowest sales quarter of the year,
(ii) semi-annual property tax payments which are due in February, and (iii)
working capital needs due to pre-opening expenses as well as those needs
experienced in the newer restaurants as their start-up operating costs are
higher than those of existing restaurants. The Company anticipates increasing
the level of cash balances as well as funding capital improvements into existing
restaurants during the upcoming fiscal quarters. 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 has invested approximately $1.4 million for two new
restaurants that opened in December 1999 and March 2000. $1.3 million of this
investment has been financed with mortgage and equipment financing. The 15 year
mortgage has a fixed interest rate of 2.2% over similar term treasury rates and
is amortized over a 20 year period. The seven year equipment notes have interest
rates ranging from 8 - 9%.
It is estimated that an investment of approximately $1,250,000 will be
made for the real estate and equipment of a third Wendy's restaurant expected to
open in June 2000. Additionally, the Company plans to open another six
restaurants during the remainder of the fiscal year, expecting that it will own
the real estate on half of these remaining restaurants and enter into operating
leases on the others. The Company has received forward commitments to finance
the new restaurant development at similar terms to those described above, and
anticipates financing 90% of the cost of the real estate and equipment through
the use of external financing.
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
operations in accordance with the loan covenants, as well as from cash proceeds
generated from non-operating activities. These activities include the sale of
assets and investment interest income. However, there can no assurance that the
Company will be able to realize non-operating proceeds either as to dollar
amount or timing.
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 February 29, 2000, the Company was in compliance with these covenants.
13
<PAGE> 14
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 balances of approximately $1,000,000.
o Using operating cash generated from existing Wendy's
restaurants, which was in excess of $900,000 in fiscal 1999.
o Finalizing a $4 million revolving line of credit. A proposal
has been received for a 36 month revolving line of credit with
a variable interest rate of 2.5% over 30 day Libor rates
(currently approximately 8.6%).
o Exploring the financing of certain of the planned capital
expenditures and improvements as opposed to paying cash,
specifically with respect to the planned renovations at
existing 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.
A note receivable totaling $475,000 was assigned with recourse in
October 1998. The note is currently in default and two months of interest
payments are in arrears. The Company is exploring options on how best to collect
the outstanding balance owed. To the extent this note is not paid by its maker,
the Company would be obligated to make the payments to the assignee upon
completion of its collection efforts. Collection efforts would include, but are
not limited to, foreclosure and pursuing any deficiency. Although the Company
believes that the collateral is sufficient to cover the remaining obligation on
this note, there is no assurance that the Company would be able to effect such a
realization when payments on the note would ultimately be due to the assignee,
and no assurances that the amounts recovered would be sufficient to cover
amounts due the assignee. In such circumstances, the Company would be required
to secure necessary funds through borrowings or other means.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
14
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 2, 2000, the Company issued 440 unregistered common shares
to 44 Wendy's managers, supervisors and other key employees as a bonus for their
dedicated service to the Company. No consideration was paid by the recipients.
The source of the common shares issued to the employees was common shares that
the Company purchased in market transactions in November 1999, and which were
held in treasury. This issuance was exempt from registration under the
Securities Act of 1933 since it did not involve a sale of stock. See Releases
Nos. 33-6188 and 33-6281.
ITEM 5. OTHER INFORMATION.
The Company opened its 29th Wendy's restaurant during the first
quarter. On December 16, 1999, the Company opened its first combination store
that was developed in combination with Meijer, Inc., a major retail operator
with more than 130 retail facilities throughout the Midwest. The combination
store, located along Alpine Avenue outside of Grand Rapids, combines a 3,400
square foot full service Wendy's restaurant and drive-through operated by
Meritage, with a 3,500 square foot Meijer convenience store and gas station
facility. The new restaurants employs approximately 60 people.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit List.
------------
Exhibit No. Description of Document
- ----------- --------------------------------------------------------------
27 Financial Data Schedule.
All Exhibits filed herewith.
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 10, 2000 MERITAGE HOSPITALITY GROUP INC.
By /s/ Robert E. Schermer, Jr.
---------------------------------------
Robert E. Schermer, Jr.
President and Chief Executive Officer
By /s/ Pauline M. Krywanski
---------------------------------------
Pauline M. Krywanski
Vice President and Treasurer
(Chief Financial Officer)
15
<PAGE> 16
EXHIBIT INDEX
Exhibit No. Description of Document
- ----------- --------------------------------------------------------------
27 Financial Data Schedule.
All Exhibits filed herewith.
16
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