<PAGE> 1
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended May 31, 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
of Incorporation or Organization) No.)
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 July 10, 2000 there were 5,765,531 outstanding Common Shares, $.01 par
value.
--------------------------------------------------------------------------------
<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
solely 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 and six month
periods ended May 31, 2000 are not necessarily indicative of the results to be
expected for the full year.
2
<PAGE> 3
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2000 AND NOVEMBER 30, 1999
--------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
MAY 31,
2000 NOVEMBER 30,
(UNAUDITED) 1999
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,229,953 $ 1,578,914
Receivables 146,315 81,239
Notes receivable, current portion -- 475,000
Inventories 222,501 207,563
Prepaid expenses and other current assets 79,693 157,413
----------- -----------
Total current assets 1,678,462 2,500,129
PROPERTY, PLANT AND EQUIPMENT, NET 18,178,659 16,683,959
OTHER ASSETS
Goodwill, net of amortization of $426,052 and
$335,287, respectively 4,883,672 4,974,436
Franchise costs, net of amortization of $52,587 and
and $40,167, respectively 697,413 684,833
Financing costs, net of amortization of $25,549 and
$17,808, respectively 326,039 318,385
Deferred charges and other assets 33,249 39,657
----------- -----------
Total other assets 5,940,373 6,017,311
----------- -----------
Total assets $25,797,494 $25,201,399
=========== ===========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
3
<PAGE> 4
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
MAY 31, 2000 AND NOVEMBER 30, 1999
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MAY 31,
2000 NOVEMBER 30,
(UNAUDITED) 1999
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term obligations $ 484,366 $ 874,051
Current portion of obligations under capital lease 345,899 328,236
Trade accounts payable 1,037,001 1,245,679
Income taxes payable 5,000 5,000
Accrued liabilities 1,052,491 1,145,756
----------- -----------
Total current liabilities 2,924,757 3,598,722
LONG-TERM OBLIGATIONS 14,433,214 12,822,125
OBLIGATIONS UNDER CAPITAL LEASE 889,470 1,066,814
DEFERRED REVENUE 1,990,510 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: 5,777,294 and 5,752,677, respectively
shares outstanding: 5,762,334 and 5,751,877, respectively 57,623 57,519
Additional paid in capital 13,339,747 13,316,795
Note receivable from the sale of shares, net of valuation
allowance of $5,740,908 and $5,362,804, respectively (1,660,962) (1,660,962)
Accumulated deficit (6,177,310) (5,830,847)
----------- -----------
Total stockholders' equity 5,559,543 5,882,950
----------- -----------
Total liabilities and stockholders' equity $25,797,494 $25,201,399
=========== ===========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
4
<PAGE> 5
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED MAY 31,
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 31, MAY 31,
2000 1999
----------- -----------
<S> <C> <C>
FOOD AND BEVERAGE REVENUE $15,367,557 $14,020,536
COSTS AND EXPENSES
Cost of food and beverages 4,421,594 4,070,017
Operating expenses 9,077,049 8,194,421
General and administrative expenses 1,010,334 846,511
Depreciation and amortization 729,305 622,849
----------- -----------
Total costs and expenses 15,238,282 13,733,798
----------- -----------
EARNINGS FROM OPERATIONS 129,275 286,738
OTHER INCOME (EXPENSE)
Interest expense (643,410) (669,348)
Interest income 74,539 249,590
Other income 66,000 --
Gain on disposal of assets 47,167 297,227
----------- -----------
Total other expense (455,704) (122,531)
----------- -----------
Earnings (loss) from continuing operations (326,429) 164,207
EARNINGS FROM DISCONTINUED OPERATIONS -- 70,800
----------- -----------
Net earnings (loss) (326,429) 235,007
DIVIDENDS ON PREFERRED STOCK 20,034 20,034
----------- -----------
NET EARNINGS (LOSS) ON COMMON SHARES $ (346,463) $ 214,973
=========== ===========
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
Continuing operations $ (0.06) $ 0.03
Discontinued operations -- 0.01
----------- -----------
Net earnings (loss) $ (0.06) $ 0.04
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 5,746,241 5,745,021
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 5,746,241 5,943,546
=========== ===========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
5
<PAGE> 6
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MAY 31,
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 31, MAY 31,
2000 1999
---------- ----------
<S> <C> <C>
FOOD AND BEVERAGE REVENUE $8,330,889 $7,527,506
COSTS AND EXPENSES
Cost of food and beverages 2,397,136 2,178,904
Operating expenses 4,841,710 4,384,652
General and administrative expenses 492,007 336,404
Depreciation and amortization 383,034 324,853
---------- ----------
Total costs and expenses 8,113,887 7,224,813
---------- ----------
EARNINGS FROM OPERATIONS 217,002 302,693
OTHER INCOME (EXPENSE)
Interest expense (333,147) (339,001)
Interest income 36,497 119,422
Other income 21,000 --
Gain (loss) on disposal of assets (834) 140,592
---------- ----------
Total other expense (276,484) (78,987)
---------- ----------
Net earnings (loss) (59,482) 223,706
DIVIDENDS ON PREFERRED STOCK 10,017 10,017
---------- ----------
NET EARNINGS (LOSS) ON COMMON SHARES $ (69,499) $ 213,689
========== ==========
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED $ (0.01) $ 0.04
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 5,744,658 5,747,404
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 5,744,658 5,900,365
========== ==========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
6
<PAGE> 7
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED NOVEMBER 30, 1999
AND THE SIX MONTH PERIOD ENDED MAY 31, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A NOTE
CONVERTIBLE ADDITIONAL RECEIVABLE
PREFERRED COMMON PAID-IN SALE OF ACCUMULATED
STOCK STOCK CAPITAL SHARES DEFICIT TOTAL
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT 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 25,057 shares of
common stock -- 250 56,244 -- -- 56,494
Dividends paid - preferred stock -- -- -- -- (20,034) (20,034)
Recognition of interest income
on note receivable from sale
of shares -- -- 378,104 (378,104) -- --
Increase in valuation allowance
on note receivable from sale
of shares -- -- (378,104) 378,104 -- --
Purchase of 14,600 shares of
common stock -- (146) (33,292) -- -- (33,438)
Net loss -- -- -- -- (326,429) (326,429)
-----------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2000 $445 $57,623 $13,339,747 $(1,660,962) $(6,177,310) $5,559,543
=========================================================================================
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
7
<PAGE> 8
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED MAY 31,
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 31, MAY 31,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (326,429) $ 235,007
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities
Depreciation and amortization 729,305 622,849
Compensation and fees paid by issuance of common stock 27,744 10,500
Gain on disposal of assets (47,167) (297,227)
Decrease in cash value of life insurance -- 222,903
Increase (decrease) in deferred revenue 159,722 (105,278)
Increase in current assets (2,294) (47,695)
Decrease in net liabilities of discontinued operations -- (396,790)
(Decrease) increase in current liabilities (301,943) 17,028
----------- -----------
Net cash provided by operating activities 238,938 261,297
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (2,146,004) (3,016,618)
Payment for franchise agreement (25,000) (25,000)
Proceeds from disposal of assets 86,500 200,000
Collection on note receivable 475,000 53,110
Purchase of common stock (33,438) --
----------- -----------
Net cash used in investing activities (1,642,942) (2,788,508)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term obligations 1,920,634 2,185,713
Payment of financing costs (15,396) (68,106)
Principal payments on long-term obligations (699,230) (223,630)
Payments on obligations under capital lease (159,681) (143,305)
Proceeds from issuance of stock 28,750 --
Preferred dividends paid (20,034) (20,034)
----------- -----------
Net cash provided by financing activities 1,055,043 1,730,638
----------- -----------
Net decrease in cash (348,961) (796,573)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,578,914 2,109,358
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,229,953 $ 1,312,785
=========== ===========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION - SEE NOTE A
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
8
<PAGE> 9
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED MAY 31, 2000 AND 1999
--------------------------------------------------------------------------------
NOTE A - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Cash paid for interest, net of capitalized interest $641,895 $670,731
======== ========
</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.
The following table reconciles the numerators and denominators used to calculate
basic and diluted earnings per share for the three and six month periods ended
May 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, SIX MONTHS ENDED MAY 31,
------------------------------- -------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerators
Earnings (loss) from continuing
operations $ (59,482) $ 223,706 $ (326,429) $ 164,207
Less preferred stock dividends 10,017 10,017 20,034 20,034
---------- ---------- ---------- ----------
Earnings (loss) on common shares - basic (69,499) 213,689 (346,463) 144,173
Effect of dilutive securities
Convertible preferred stock -- 10,017 -- 20,034
Stock options -- -- -- --
---------- ---------- ---------- ----------
Earnings (loss) on common shares - diluted $ (69,499) $ 223,706 $ (346,463) $ 164,207
========== ========== ========== ==========
Denominators
Weighted average common shares
outstanding - basic 5,744,658 5,747,404 5,746,241 5,745,021
Effect of dilutive securities
Convertible preferred stock -- 130,557 -- 184,730
Stock options -- 22,404 -- 13,795
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - diluted 5,744,658 5,900,365 5,746,241 5,943,546
========== ========== ========== ==========
</TABLE>
For the three and six months ended May 31, 2000, 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. For the three and six months
ended May 31, 1999, exercisable stock options were not included in the
computation of diluted earnings per share because the exercise of stock options
would be antidilutive.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Results of continuing operations for the three and six month periods
ended May 31, 2000 and May 31, 1999 are summarized in the following tables:
<TABLE>
<CAPTION>
Statements of Operations
---------------------------------------------------------------------------------------
Three month periods ended May 31, Six month periods ended May 31,
----------------------------------------- -------------------------------------------
$ (000's) % of Revenue $ (000's) % of Revenue
------------------ ----------------- -------------------- -----------------
2000 1999 2000 1999 2000 1999 2000 1999
------------------ ----------------- -------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Food and beverage revenue $8,331 $7,528 100.0% 100.0% $15,367 $14,021 100.0% 100.0%
Costs and expenses
Cost of food and beverages 2,397 2,179 28.8 28.9 4,422 4,070 28.8 29.0
Operating expenses 4,842 4,385 58.1 58.3 9,077 8,194 59.1 58.4
General and administrative
Restaurant operations 285 245 3.4 3.3 609 550 4.0 4.0
Corporate level expenses 207 91 2.5 1.2 401 297 2.6 2.1
Depreciation and amortization 383 325 4.6 4.3 729 623 4.7 4.4
----------------- ----------------- ------------------- -----------------
Total costs and expenses 8,114 7,225 97.4 96.0 15,238 13,734 99.2 97.9
------------------ ----------------- -------------------- -----------------
Earnings from operations 217 303 2.6 4.0 129 287 0.8 2.1
Other income (expense)
Interest expense (333) (339) (4.0) (4.5) (643) (669) (4.1) (4.8)
Interest income 37 119 0.4 1.6 75 249 0.5 1.8
Other income 21 -- 0.3 -- 66 -- 0.4 --
Gain (loss) on disposal of assets (1) 141 (0.0) 1.9 47 297 0.3 2.1
----------------- ----------------- ------------------- -----------------
Total other expense (276) (79) (3.3) (1.0) (455) (123) (2.9) (0.9)
------------------ ----------------- -------------------- -----------------
Earnings (loss) from
continuing operations $ (59) $ 224 (0.7)% 3.0% $ (326) $ 164 (2.1)% 1.2%
================== ================= ==================== =================
</TABLE>
REVENUE
Food and beverage revenue increased $803,000 or 10.7% for the three
months ended May 31, 2000 compared to the same period of 1999. For the six
months ended May 31, 2000 food and beverage revenue increased $1,346,000 or 9.6%
compared to the same period of 1999. The increase in revenue was due primarily
to sales from new restaurants. New restaurants contributed $835,000 and
$1,701,000 in new sales for the three and six months ended May 31, 2000,
respectively. Revenue for the second quarter was positively impacted by a net
increase in sales of $173,000 from a restaurant that was closed for a portion of
the second quarter of 1999 due to fire damage. Food and beverage revenue
decreased for restaurants in operation during both the three and six months
ended May 31, 2000 and 1999 ("same store sales") as set forth in the following
table:
10
<PAGE> 11
<TABLE>
<CAPTION>
Average Net Sales Per Restaurant Unit
-------------------------------------
2000 1999 Decrease % Decrease
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Three months ended May 31 $278,485 $286,385 $ 7,900 2.8%
Three months ended February 29 251,915 256,618 4,703 1.8%
-------- -------- -------
Six months ended May 31 $530,400 $543,003 $12,603 2.3%
======== ======== =======
</TABLE>
The decrease in same store sales was primarily attributable to
decreased customer traffic of approximately 12% and 11% for the three and six
months ended May 31, 2000, respectively, compared to the same periods of 1999.
The following factors have had an impact on the decrease in customer traffic:
(i) temporary discontinuance of late night hours from December 1999 through
March 2000, (ii) negative impact on "same-store" sales in certain market areas
caused by the Company's new restaurant development, (iii) selective increased
menu pricing, (iv) the scheduled discontinuance of participation in a discount
card program, and (v) heavy 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. Offsetting a majority of the decrease in
sales volume were increased sales resulting from retail price increases and the
continued trend of increased "combo" meal sales, which resulted in an increase
in the average ticket amount of approximately 6% for both the three and six
months ended May 31, 2000 compared to the same periods of 1999.
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 May 31, 2000 compared to 28.9% for the
three months ended May 31, 1999. Cost of food and beverages for the six months
ended May 31, 2000 was 28.8% compared to 29.0% for the same period of 1999. The
slight decrease in cost of food and beverages for the three and six months ended
May 31, 2000 was the result of the combination of the following two factors (i)
increased selling prices which caused a decrease in the cost of food and
beverages as a percentage of revenue, which was somewhat offset by (ii) product
cost increases and increased waste costs which caused an increase in the cost of
food and beverages as a percentage of revenue. The primary reason for the
increase in product costs was a 14% and 13% increase in beef prices, which is
based on a Wendy's International purchase agreement, for the three and six
months ended May 31, 2000, respectively, compared to the same periods in 1999.
Cost of food and beverages percentages of 28.8% for the three and six months
ended May 31, 2000 are in line with the Company's and Wendy's International's
guidelines.
OPERATING EXPENSES
Operating expenses as a percentage of revenue decreased .2 percentage
points for the three months ended May 31, 2000 compared to the same period of
1999 (from 58.3% to 58.1%). For the six months ended May 31, 2000, operating
expenses increased .7 percentage points (from 58.4% of revenue in 1999 to 59.1%
in 2000). The following table illustrates operating expense categories with
significant year-to-year fluctuations:
11
<PAGE> 12
<TABLE>
<CAPTION>
Three months ended May 31, Six months ended May 31,
-------------------------------- --------------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
As a percentage of revenue:
Labor and related costs 34.7 32.9 1.8 35.3 33.4 1.9
Occupancy expenses 8.4 9.2 (0.8) 8.8 9.4 (0.6)
Advertising expense 4.6 5.3 (0.7) 4.6 4.9 (0.3)
</TABLE>
The increase in labor and related costs was primarily the result of an
increase in average hourly rate of 6.5% and 6.9%, respectively, for the three
and six months ended May 31, 2000 compared to the same periods in the prior
year. The decrease in occupancy expense for the three and six months ended May
31, 2000 compared to the same periods in 1999, was due to an increase in the
number of restaurants owned by the Company compared to those rented, thereby
resulting in a shift from occupancy expense (rent expense) to depreciation and
interest expense. The decrease in advertising expense for the three and six
months ended May 31, 2000 compared to the same periods in 1999 was due to an
increase in the recognition of marketing funds provided by the Company's
beverage supplier.
GENERAL AND ADMINISTRATIVE
Restaurant Operations
General and administrative expenses for the restaurant operations
increased $40,000 for the three months ended May 31, 2000 compared to the same
period of 1999 (from $245,000 to $285,000), from 3.3% of revenue to 3.4% of
revenue. For the six months ended May 31, 2000, general and administrative
expenses increased $59,000 (from $550,000 to $609,000) compared to the same
period in the prior year, and represented 4.0% of revenue for both six month
periods. The increase in general and administrative expenses for the three and
six months ended May 31, 2000 was primarily the result of increased labor costs
related to new restaurants, specifically additional supervisory and marketing
personnel.
Corporate Level Expenses
General and administrative expenses for corporate level expenses
increased $116,000 (from $91,000 to $207,000), from 1.2% of revenue to 2.5% of
revenue for the three months ended May 31, 2000 compared to the same period of
1999. For the six months ended May 31, 2000, general and administrative expenses
increased approximately $104,000 (from $297,000 to $401,000), from 2.1% of
revenue to 2.6% of revenue compared to the same period in the prior year. The
increase for both the three and six month periods ended May 31, 2000 was
primarily due to a non-recurring reduction in legal expense of $192,000 in 1999
resulting primarily from the receipt of insurance proceeds to cover legal fees
incurred in previous litigation. This was partially offset by decreased business
insurance premiums due primarily to a change in carriers and a decrease in
executive incentive compensation expense.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $58,000 for the three
months ended May 31, 2000 compared to the same period of 1999 (from $325,000 to
$383,000). For the six months ended May 31, 2000, depreciation and amortization
expense increased $106,000 (from $623,000 to $729,000) compared to the same
period of 1999. The increase in depreciation and amortization expense for the
three and six months ended May 31, 2000 was attributable to depreciation expense
related to new restaurants.
12
<PAGE> 13
INTEREST EXPENSE
Interest expense for the second quarter of 2000 and 1999 was $333,000
and $339,000, respectively. Interest expense for the six month period ended May
31, 2000 and 1999 was $643,000 and $669,000, respectively. The reduction in
interest expense was due to a $70,000 and $134,000 decrease in interest expense
for the three and six months ended May 31, 2000, respectively, related to the
notes payable issued by the Company in connection with the notes receivable from
the sale of hotel properties. The majority of these notes were retired during
the latter part of 1999, and the entire amount was retired in April 2000. This
decrease was somewhat offset by a net increase of $55,000 and $104,000 for the
three and six months ended May 31, 2000, respectively, in interest expense
related to increased long-term debt incurred to construct new restaurants.
Nearly all of the Company's long-term debt is at fixed interest rates.
INTEREST INCOME
Interest income decreased $82,000 for the second quarter of fiscal 2000
(from $119,000 in 1999 to $37,000 in 2000), and $174,000 for the six months
ended May 31, 2000 (from $249,000 in 1999 to $75,000 in 2000). Interest income
in fiscal 1999 was primarily earned on the notes receivable obtained in the sale
of hotel properties, which were paid in full in August 1999 and April 2000,
resulting in a significant decrease in interest income for both the three and
six months ended May 31, 2000.
OTHER INCOME
Other income of $21,000 for the three months ended May 31, 2000
represented insurance proceeds related to a loss from storm damage incurred
during 1998, which loss had previously been written off. Other income of $66,000
for the six months ended May 31, 2000 also included $45,000 of income related to
the extension of a note receivable related to the prior sale of one of the
Company's hotel properties.
GAIN (LOSS) ON DISPOSAL OF ASSETS
A loss of $1,000 was recognized for the three months ended May 31, 2000
compared to a gain of $141,000 for the three months ended May 31,1999. The loss
in the second quarter of 2000 resulted from the sale of a vehicle compared to
the gain in the second quarter of 1999 from the sale of life insurance policies
and the excess of insurance proceeds over the net book value of fire damaged
equipment. A gain of $47,000 was recognized for the six months ended May 31,
2000 compared to a gain of $297,000 recognized for the six months ended May 31,
1999. The gain for the six months ended May 31, 2000 was primarily due to the
excess of insurance proceeds over the net book value of fire damaged equipment
compared to the gain in 1999 from both the sale of life insurance policies
($200,000) and from the excess of insurance proceeds over the net book value of
fire damaged equipment ($97,000).
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash and cash equivalents ("cash") decreased $349,000, from $1,579,000
as of November 30, 1999, to $1,230,000 as of May 31, 2000. The decrease in cash
was the result of the following:
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<TABLE>
<S> <C>
Net cash provided by operating activities $ 239,000
Net cash used in investing activities (1,643,000)
Net cash provided by financing activities 1,055,000
-----------
Net decrease in cash $ (349,000)
===========
</TABLE>
Net cash provided by operating activities decreased $22,000 for the six
months ended May 31, 2000 compared to the same period of 1999. This decrease was
primarily due to a $455,000 decrease in net earnings before depreciation
expense, which was offset primarily by (i) an increase in deferred revenue
($265,000) due to the timing of receipt of marketing funds from the Company's
beverage supplier, and (ii) a decrease in cash paid to satisfy current
liabilities of both continuing and discontinued operations ($78,000).
Net cash used in investing activities decreased $1,146,000 for the six
months ended May 31, 2000 compared to the same period of 1999. The decrease was
primarily the result of an $871,000 reduction in the purchase of property and
equipment during the first six months of fiscal 2000 compared to the first six
months of fiscal 1999. During the six months ended May 31, 2000, the Company
purchased $2,146,000 of property and equipment in connection with (i) the
development of new restaurants ($1,715,000), (ii) renovations on one restaurant
due to fire damage ($185,000), and (iii) improvements to existing restaurants
($246,000). Additionally, $475,000 was collected on the note receivable during
fiscal 2000 further reducing the net cash used in investing activities. During
the first quarter of 2000, the Company purchased 14,600 common shares in market
transactions 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 $676,000 for the
six months ended May 31, 2000 compared to the same period of 1999. The decrease
is primarily the result of the payoff of the note payable related to the sale of
a hotel property. The decrease in net cash provided by financing activities was
further impacted by a reduction of $265,000 (from $2,186,000 in 1999 to
$1,921,000 in 2000) in proceeds from long-term debt, which was incurred to
finance new restaurant construction during both years.
FINANCIAL CONDITION
As of May 31, 2000, the Company's current liabilities exceeded its
current assets by $1,246,000, 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 $416,000 as of May 31, 2000
and by $371,000 as of November 30, 1999. As of May 31, 2000 and November 30,
1999, 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 six months
ended May 31, 2000 explains the decrease in cash as well as the most significant
reasons for the decrease in working capital.
The cash management issues currently facing the Company can be
described in three areas: (i) operations of the Wendy's restaurants, (ii)
investment in new Wendy's restaurants, and (iii) continued control of corporate
level expenses.
The Company continued to utilize cash during the second quarter of
fiscal 2000 to fund pre-opening expenses at new restaurants as well as higher
than normal operating costs during the early months of new store operation
compared to those of mature restaurants. Operating cash flow for the first six
months of fiscal 2000 has been less than anticipated, and less than has been
experienced in the past, due to (i) the continued increase in the cost of labor
at higher than anticipated rates because of a tight labor market and
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<PAGE> 15
(ii) increased product costs due primarily to significant increases in beef
prices. The Company anticipates increasing the level of cash balances as well as
funding capital improvements at existing restaurants during the remainder of the
fiscal 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 has invested approximately $3.2 million for the development
of three new restaurants that opened in December 1999, March 2000 and June 2000,
and land for a fourth new restaurant. $2.8 million of this investment has been
financed with mortgage and equipment financing. The 15 year mortgages have fixed
interest rates of 2.2% over ten year treasury rates (approximately 8.3% based on
current interest rates) and are amortized over 20 years. The seven year
equipment notes have interest rates ranging from 8.25% to 9.25%.
The Company has entered into a financing agreement to provide
approximately $1.35 million for the real estate and equipment of the fourth new
Wendy's restaurant to open in the fall of 2000, for which land was purchased on
June 1, 2000. The Company plans to open up to three additional restaurants
during the remainder of the fiscal year. The Company has entered into numerous
contracts to acquire real estate for new restaurants that will be owned by the
Company, and operating leases covering restaurants that will be leased. 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 anticipates closing two restaurants during the fourth
quarter of this fiscal year due to the planned opening of new Wendy's
restaurants in the same trade areas. One restaurant is leased and will be closed
at the end of its lease term. The furniture, fixtures and equipment of this
restaurant were written down to net realizable value in the fourth quarter of
1999. The second restaurant is owned by the Company and is currently listed for
sale. It is anticipated that this unit can be sold for a price near the
outstanding mortgage loan balance ($724,000 as of May 31, 2000). The property
and equipment of this restaurant had a net book value of approximately $680,000
as of May 31, 2000. In the event this unit is not sold prior to the closing of
the restaurant, or if it is sold for less than its related outstanding debt, the
Company would have to fund any debt service shortfall and other occupancy
related costs out of current operating funds.
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 May 31, 2000, the Company was in compliance with these covenants.
The FCCR covenants require that the Company (as a whole) meet the ratio
requirement, and that 80% of the individual subject restaurants meet the
requirement. At May 31, 2000, the Company, and eleven of thirteen (or 85%) of
the subject individual restaurants, met the FCCR requirement. The Company's loan
agreements restrict the amount of currently generated operating cash flow from
the Wendy's operation that may be utilized to fund corporate level expenses. The
Company anticipates that the corporate level expenses will be funded
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<PAGE> 16
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. However, there can no assurance that the Company will be able to
realize non-operating proceeds either as to dollar amount or timing.
Approximately $66,000 of such non-operating proceeds were received during the
first six months of the year.
A Wendy's International related restaurant financing program also
requires that the Company meet an additional loan covenant effective November
30, 2000, which is described as follows:
o Leverage Ratio (Funded Debt : Earnings Before Interest, Taxes,
Depreciation and Amortization) not to exceed 6.0 : 1.
In light of these operational and investment cash management issues,
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 $3.5 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
9.2%).
o Exploring the financing of certain capital expenditures at existing
Wendy's restaurants.
o Participating in vendor financing programs for capital expenditures
required under the Service Excellence program.
o Exploring the use of equipment financing for certain of the Company's
new restaurants.
o Evaluating the timing of investing in 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.
INFLATION AND CHANGING PRICES
As discussed above, the Company has been affected by increased payroll
costs due to a tight labor market and its effect on the availability and cost of
management and hourly employees along with increased product purchase costs
(primarily beef costs). 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The legal proceedings brought against the Company in January 2000 by
the owners of six condominium units at the Grand Harbor Yacht Club (T.E.
Beckering Enterprises et al. v. GHYC Inc. et al., Ottawa County (Michigan)
Circuit Court) was voluntarily dismissed on May 25, 2000. The Company sold all
its interest in the Grand Harbor Yacht Club in June 1998. The Company assumed no
liability and paid no damages in this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On May 16, 2000, the Company issued 20,000 unregistered common shares
to CTC, Inc. and its affiliate as compensation under its agreement with the
Company to perform investor relations services. This issuance was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) of the
Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2000 Annual Meeting of Shareholders was held at the Peninsular
Club, 120 Ottawa N.W., Grand Rapids, Michigan, at 9:00 a.m. on Tuesday, May 16,
2000, in accordance with the Company's Bylaws. The Company solicited proxies for
the matters brought before the shareholders pursuant to a definitive proxy
statement that was filed with the Securities and Exchange Commission on April
14, 2000. 5,079,317 Common Shares were present in person or by proxy at the
meeting, representing 88.5% of the total shares outstanding.
The shareholders elected the following six members to the Company's
Board of Directors to serve until the 2000 Annual Meeting: James P. Bishop
(4,893,270 shares in favor), Christopher P. Hendy (4,893,270 shares in favor),
Joseph L. Maggini (4,893,270 shares in favor), Jerry L. Ruyan (4,893,270 shares
in favor), Robert E. Schermer, Sr. (4,857,220 shares in favor) and Robert E.
Schermer, Jr. (4,893,270 shares in favor). Each director received at least 95.6%
of the total shares voted.
The shareholders approved an amendment to the Articles of Incorporation
to repeal Article VII which allowed shareholder action by written consent. The
following are the results of the shares that voted: In Favor: 3,598,546;
Opposed: 434,634; Abstentions: 32,813; Broker Non-Votes: 1,013,324.
The shareholders also approved an amendment to the Articles of
Incorporation to enact Article IX concerning limitations on the personal
liability of directors. The following are the results of the shares that voted:
In Favor: 4,630,691; Opposed: 408,828; Abstentions: 39,798; Broker Non-Votes: 0.
The shareholders also approved an amendment to the Articles of
Incorporation to enact Article X providing that shareholders can remove
directors only for cause. The following are the results of the shares that
voted: In Favor: 3,412,887; Opposed: 627,347; Abstentions: 25,759; Broker
Non-Votes: 1,013,324.
The shareholders also ratified the appointment of Grant Thornton LLP as
the Company's independent certified public accountants for the fiscal year
ending November 30, 2000. The following are the results of the shares that
voted: In Favor: 4,917,515; Opposed: 136,531; Abstentions: 25,271.
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ITEM 5. OTHER INFORMATION.
On May 16, 2000, the Board of Directors appointed the following
officers of the Company: Robert E. Schermer, Jr. - President and Chief Executive
Officer; Ray E. Quada - Senior Vice President and Chief Operating Officer,
Pauline M. Krywanski - Vice President, Treasurer and Chief Financial Officer;
and James R. Saalfeld - Vice President, General Counsel and Secretary. Robert E.
Schermer, Sr. was reappointed Chairman of the Board of Directors. The Board also
reestablished the Executive, Audit, and Compensation Committees as standing
committees of the Board of Directors.
As reported in Part II, Item 4, on May 16, 2000, the Company's
shareholders approved amendments to the Company's Articles of Incorporation.
These Amendments to the Articles of Incorporation were filed with the Michigan
Department of Consumer & Industry Services Corporation, Securities & Land
Development Bureau. That same day, the Company's Board of Directors adopted
Restated Articles of Incorporation for the Company. These Restated Articles of
Incorporation only restate and integrate, and do not further amend, the
provisions of the Company's Articles of Incorporation. The Restated Articles of
Incorporation were filed with the Michigan Department of Consumer & Industry
Services Corporation, Securities & Land Development Bureau.
On May 16, 2000, the Board of Directors approved amendments to the
Company's Bylaws to (i) reconcile provisions of the Bylaws with the newly
adopted amendments to the Articles of Incorporation that were approved by the
shareholders earlier in the day, and (ii) conform certain provisions with
current laws or current practices of the Board of Directors.
Chairman of the Board, Robert E. Schermer, Sr., is currently the
beneficial owner of approximately 9% of the voting power of the Company's
outstanding common shares. Mr. Schermer, Sr. is considering purchases of
additional stock, privately or in the market, that would increase his total
ownership beyond 10% of the voting power of the Company's outstanding voting
common shares. The Board of Directors does not intend that Chapter 7A of the
Michigan Business Corporation Act (re: business combinations) apply to Mr.
Schermer, Sr., or his identified or unidentified existing or future affiliates.
Therefore, on May 16, 2000, the Board adopted a resolution, in accordance with
the Michigan Business Corporation Act, that the provisions of Chapter 7A shall
not apply to any present or future business combination with Mr. Schermer, Sr.
or his identified or unidentified existing or future affiliates.
The Company opened its 30th Wendy's restaurant during the second fiscal
quarter. The new restaurant is located at the intersection of M-37 and M-82 in
Newaygo, Michigan. The 3,400 square feet restaurant employs approximately 50
people.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit List.
------------
Exhibit No. Description of Document
----------- --------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation for Meritage
Hospitality Group Inc.
3.2 Amended and Restated Bylaws of Meritage Hospitality Group Inc.
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: July 11, 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)
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EXHIBIT INDEX
Exhibit No. Description of Document
----------- --------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation for Meritage
Hospitality Group Inc.
3.2 Amended and Restated Bylaws of Meritage Hospitality Group Inc.
27 Financial Data Schedule.
All Exhibits filed herewith.
20
