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, 2000. The results of operations for the third quarter and year-to-date ended September 2, 2001 are not necessarily indicative of the results to be expected for the full year.
Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Balance Sheets
--------------------------------------------------------------------------------
ASSETS
September 2,
2001 November 30,
(Unaudited) 2000
----------- ------------
Current Assets
Cash and cash equivalents $ 1,321,101 $ 787,747
Receivables 85,856 59,605
Inventories 189,550 228,023
Prepaid expenses and other current assets 134,153 165,104
----------- -----------
Total current assets 1,730,660 1,240,479
Property, Plant and Equipment, net 23,322,880 19,092,780
Other Assets
Assets held for sale 427,139 704,350
Goodwill, net of amortization
of $652,963 and $516,816,
respectively 4,656,760 4,792,907
Franchise fees, net of
amortization of $86,348
and $65,375, respectively 788,652 734,625
Financing costs, net of
amortization of $55,532
and $47,379, respectively 362,963 355,180
Deferred charges and other assets 141,444 124,907
----------- -----------
Total other assets 6,376,958 6,711,969
----------- -----------
Total assets $31,430,498 $27,045,228
=========== ===========
See notes to unaudited financial statements.
Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Balance Sheets - continued
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
September 2,
2001 November 30,
(Unaudited) 2000
------------ -------------
Current Liabilities
Current portion of long-term
obligations $ 637,004 $ 682,242
Current portion of obligations
under capital lease 313,737 357,768
Trade accounts payable 1,358,655 1,376,342
Accrued liabilities 1,445,001 1,170,972
------------ -------------
Total current liabilities 3,754,397 3,587,324
Long-Term Obligations 16,423,290 16,475,202
Obligations Under Capital Lease 482,511 709,046
Deferred Revenue 4,318,378 1,742,483
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: 29,520
(liquidation value - $295,200) 295 295
Common stock - $0.01 par value
shares authorized: 30,000,000
shares issued: 5,875,005 and
5,862,702, respectively
shares outstanding: 5,390,391
and 4,454,884, respectively 53,903 44,548
Additional paid in capital 13,676,062 11,703,257
Note receivable from the sale of shares (538,900) --
Accumulated deficit (6,739,438) (7,216,927)
------------ -------------
Total stockholders' equity 6,451,922 4,531,173
------------ -------------
Total liabilities and stockholders'
equity $ 31,430,498 $ 27,045,228
============ ============
See notes to unaudited financial statements.
Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Statements of Operations
For Nine Months Ended September 2, 2001 and August 31, 2000
(Unaudited)
--------------------------------------------------------------------------------
2001 2000
------------ -------------
Food and beverage revenue $ 27,933,043 $ 24,201,286
Costs and expenses
Cost of food and beverages 7,744,433 7,064,979
Operating expenses 15,968,203 14,325,682
General and administrative expenses 2,045,685 1,518,682
Depreciation and amortization 1,382,351 1,139,808
Gain on sale of impaired assets (459,767) --
------------ -------------
Total costs and expenses 26,680,905 24,049,151
------------ -------------
Earnings from operations 1,252,138 152,135
Other income (expense)
Interest expense (1,132,260) (983,337)
Interest income 86,944 86,811
Gain on disposal of assets 267,083 142,167
Miscellaneous Income 23,510 66,000
------------ -------------
Total other expense (754,723) (688,359)
------------ -------------
Net earnings (loss) 497,415 (536,224)
Dividends on preferred stock 19,926 26,675
------------ -------------
Net earnings (loss) on common
shares $ 477,489 $ (562,899)
============ ============
Net earnings (loss) per common
share - basic and diluted $ 0.09 $ (0.10)
============ ============
Weighted average shares
outstanding - basic 5,201,032 5,754,089
============ ============
Weighted average shares
outstanding - diluted 5,246,780 5,754,089
============ ============
See notes to unaudited financial statements.
Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Statements of Operations
For Third Quarter Ended September 2, 2001 and August 31, 2000
(Unaudited)
--------------------------------------------------------------------------------
2001 2000
------------ ------------
Food and beverage revenue $ 10,325,627 $ 8,833,729
Costs and expenses
Cost of food and beverages 2,877,423 2,643,385
Operating expenses 5,766,435 5,226,460
General and administrative expenses 699,345 530,521
Depreciation and amortization 478,251 410,503
------------ ------------
Total costs and expenses 9,821,454 8,810,869
------------ ------------
Earnings from operations 504,173 22,860
Other income (expense)
Interest expense (370,120) (339,927)
Interest income 33,157 12,272
Gain on disposal of assets 216,153 95,000
Other income 12,783 --
------------ ------------
Total other expense (108,027) (232,655)
------------ ------------
Net earnings (loss) 396,146 (209,795)
Dividends on preferred stock 6,641 6,641
------------ ------------
Net earnings (loss) on common shares $ 389,505 $ (216,436)
============ ============
Net earnings (loss) per common
share - basic and diluted $ 0.07 $ (0.04)
============ ============
Weighted average shares
outstanding - basic 5,390,867 5,769,699
============ ============
Weighted average shares
outstanding - diluted 5,457,854 5,769,699
============ ============
See notes to unaudited financial statements.
Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the Year Ended November 30, 2000
and Nine Months Ended September 2, 2001 (Unaudited)
--------------------------------------------------------------------------------------------------------------------
Series A Note
Convertible Additional Receivable
Preferred Common Paid-In Sale of Accumulated
Stock Stock Capital Shares Deficit Total
--------- --------- ------------ ------------ ------------- ------------
Balance at December 1, 1999 $ 445 $ 57,519 $ 13,316,795 $ (1,660,962) $ (5,830,847) $ 5,882,950
Issuance of 30,464 shares
of common stock -- 304 67,437 -- -- 67,741
Transfer of 15,000 shares
of convertible preferred
shares for 80,001 common
shares (150) 800 (650) -- -- --
Preferred dividends paid -- -- -- -- (33,318) (33,318)
Surrender of 1,392,858
common shares for note
receivable -- (13,929) (1,647,033) 1,660,962 -- --
Purchase of 14,600 shares
of common stock -- (146) (33,292) -- -- (33,438)
Net loss -- -- -- -- (1,352,762) (1,352,762)
--------- --------- ------------ ------------ ------------- ------------
Balance at November 30, 2000 295 44,548 11,703,257 -- (7,216,927) 4,531,173
Issuance of 974,803 shares
of common stock -- 9,748 2,060,375 (538,900) -- 1,531,223
Preferred dividends paid -- -- -- -- (19,926) (19,926)
Purchase of 39,296
shares of common stock -- (393) (87,570) -- -- (87,963)
Net income -- -- -- -- 497,415 497,415
--------- --------- ------------ ------------ ------------- ------------
Balance at September 2, 2001 $ 295 $ 53,903 $ 13,676,062 $ (538,900) $ (6,739,438) $ 6,451,922
======== ========= ============ ============ ============ ============
See notes to unaudited financial statements.
Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For Nine Months Ended September 2, 2001 and August 31, 2000
(Unaudited)
--------------------------------------------------------------------------------
2001 2000
----------- ------------
Cash Flows from Operating Activities
Net earnings (loss) $ 497,415 $ (536,224)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities
Depreciation and amortization 1,382,351 1,139,808
Compensation and fees paid by
issuance of common stock 26,355 63,491
Gain on disposal of assets (267,083) (142,167)
Gain on sale of impaired assets (459,767) --
Increase in deferred revenue 2,575,895 46,152
Decrease (increase) in current assets 43,172 (25,369)
Increase in current liabilities 256,342 166,505
----------- ------------
Net cash provided by operating activities 4,054,680 712,196
Cash Flows from Investing Activities
Purchase of property, plant and equipment (5,465,068) (3,879,819)
Purchase of assets held for sale (697,816) --
Payment for franchise agreements (75,000) (50,000)
Proceeds from sale of assets 1,750,056 276,500
Collection on notes receivable -- 475,000
Increase in other assets (25,166) (53,200)
----------- ------------
Net cash used in investing activities (4,512,994) (3,231,519)
Cash Flows from Financing Activities
Proceeds from long-term obligations 898,781 3,181,887
Proceeds from borrowings on
line of credit 1,050,000 --
Payments on line of credit (1,367,500) --
Payment of financing costs (37,596) (63,865)
Principal payments on long-term
obligations (678,430) (353,799)
Payments on obligations under
capital lease (270,566) (242,819)
Payments on notes payable -- (475,000)
Proceeds from issuance of common shares 1,504,868 --
Purchase of common stock (87,963) (33,438)
Preferred dividends paid (19,926) (26,675)
----------- ------------
Net cash provided by financing
activities 991,668 1,986,291
----------- ------------
Net increase (decrease)
in cash 533,354 (533,032)
Cash and Cash Equivalents
- Beginning of Period 787,747 1,578,914
----------- ------------
Cash and Cash Equivalents
- End of Period $ 1,321,101 $ 1,045,882
=========== ===========
Supplemental Cash Flow Information - See Note A
See notes to unaudited financial statements.
Meritage Hospitality Group Inc. and Subsidiaries
Notes to Unaudited Financial Statements
For Nine Months Ended September 2, 2001 and August 31, 2000
Note A - Supplemental Cash Flow Information
2001 2001
----------- ----------
Cash paid for interest expense,
net of capitalized interest $1,132,000 $986,000
========== ========
Schedule of Non-Cash Investing and Financing Activities
Issuance of 250,000 shares of
common stock in exchange for
an 8% short-term note receivable $ 538,900
==========
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 third quarter and year-to-date ended September 2, 2001 and August 31, 2000:
Third Quarter Ended Year-To-Date Ended
------------------------ --------------------------
September 2, August 31, September 2, August 31,
2001 2000 2001 2000
------------ ---------- ------------ -----------
Numerators
Earnings (loss) from
continuing operations $ 396,146 $ (209,795) $ 497,415 $ (536,224)
Less preferred stock
dividends 6,641 6,641 19,926 26,675
------------ ---------- ------------ -----------
Earnings (loss) on
common shares -
basic and diluted $ 389,505 $ (216,436) $ 477,489 $ (562,899)
========== ========== ========== ==========
Denominators
Weighted average
common shares
outstanding - basic 5,390,867 5,769,699 5,201,032 5,754,089
Effect of dilutive
securities
Stock options 66,987 -- 45,748 --
------------ ---------- ------------ -----------
Weighted average
common shares
outstanding - diluted 5,457,854 5,769,699 5,246,780 5,754,089
========== ========== ========== ==========
For the third quarter and year-to-date ended August 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 third quarter and year-to-date ended September 2, 2001, convertible preferred stock was not included in the computation of diluted earnings per share because the conversion of preferred stock would be antidilutive.
Note C - Recently Issued Accounting Standards
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combination completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001, and the effective date of SFAS 142. Major provisions of these Statement and their effective dates for the Company are as follows:
- All businesses combinations initiated after June 30, 2001, must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001.
- Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights, or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability.
- Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Beginning in fiscal year 2003, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization.
- Beginning in fiscal year 2003, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator.
- All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.
The Company is in the process of determining the impact of these pronouncements on its financial statements.
Note D - Commitments and Contingencies
The Company is a 19% owner of a real estate development that is the lessor of one of the Company’s recently opened restaurants. As a 19% owner, the Company guaranteed 19% of a $2.95 million loan used to finance the acquisition and development of this real estate.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Results of continuing operations for the third quarter and year-to-date are summarized in the following tables:
Statements of Operations
----------------------------------------------------------------------------------
Third quarter ended Year-to-date ended
--------------------------------------- ------------------------------------
$ (000's) % of Revenue $ (000's) % of Revenue
---------------- ---------------- ---------------- --------------
9/2/01 8/31/00 9/2/01 8/31/00 9/2/01 8/31/00 9/2/01 8/31/00
------- ------- ------ -------- ------- ------- ------ -------
Food and beverage revenue $10,326 $ 8,834 100.0% 100.0% $27,933 $24,201 100.0% 100.0%
Costs and expenses
Cost of food and beverages 2,877 2,643 27.9 29.9 7,744 7,065 27.7 29.2
Operating expenses 5,767 5,226 55.9 59.2 15,968 14,326 57.1 59.2
General and administrative
Restaurant operations 331 329 3.2 3.7 961 849 3.4 3.5
Corporate level expenses 304 166 2.9 1.9 898 567 3.2 2.3
Michigan single business tax 64 36 0.6 0.4 188 102 0.7 0.4
Depreciation and amortization 433 366 4.2 4.1 1,246 1,004 4.5 4.2
Goodwill amortization 45 45 0.4 0.5 136 136 0.5 0.6
Gain on sale of impaired assets - - - - (460) - (1.6) -
------- ------- ------ -------- ------- ------- ------ -------
Total costs and expenses 9,821 8,811 95.1 99.7 26,681 24,049 95.5 99.4
Earnings from operations 505 23 4.9 0.3 1,252 152 4.5 0.6
Other income (expense)
Interest expense (370) (340) (3.6) (3.8) (1,132) (983) (4.1) (4.1)
Interest income 33 12 0.3 0.1 87 87 0.3 0.4
Other income 13 - 0.1 - 23 66 0.1 0.3
Gain on sale of assets 216 95 2.1 1.0 267 142 1.0 0.6
------- ------- ------ -------- ------- ------- ------ -------
Total other expense (108) (233) (1.1) (2.7) 755 (688) (2.7) (2.8)
Earnings (loss) from
continuing operations $ 397 $(210) 3.8% (2.4)% $ 497 $ (536) 1.8% (2.2)%
======== ======= ====== ======= ======== ======== ====== =======
Revenue
Food and beverage revenue increased 16.8% and 15.4%, respectively, for the third quarter and year-to-date ended September 2, 2001, compared to the similar periods last year. These increases were primarily due to (i) sales from new restaurants opened for less than twelve months which contributed $1,373,000 and $4,159,000 for the respective periods, (ii) favorable product mix including increased combo meal sales, and (iii) improved same store sales due to continued focus on key operating and productivity programs. These increases were partially offset by the loss of revenue due to a five-month closure of a new restaurant due to an unannounced road closure. The road and store reopened in late September 2001.
Same store sales increased as set forth below:
Average Net Sales Per Restaurant Unit
----------------------------------------------------------
2001 2000 Increase Increase
-------- --------- -------- --------
Third Quarter $322,958 $ 294,388 $28,570 9.7%
Second Quarter 296,698 287,533 9,165 3.2%
First Quarter 257,385 255,595 1,790 0.7%
-------- --------- -------
Year-To-Date $877,041 $ 837,516 $39,525 4.7%
======== ========= =======
The increase in same store sales compared to the similar periods in 2000 was primarily attributable to increased menu prices, improved customer service times and improved training. These increases were offset by a decline in customer traffic of approximately 1.8% and 3.7%, respectively.
Cost of Food and Beverages
The decreases in cost of food and beverages as a percentage of revenue resulted from improved inventory control measures and an increase in menu prices which were partially offset by an increase in the cost of beef for both the third quarter and year-to-date compared to the same periods last year. Cost of food and beverage percentages are generally consistent with guidelines established by Wendy’s International.
Operating Expenses
The following table illustrates operating expense categories with significant year-to-year fluctuations:
Third quarter ended: Year-to-date ended:
------------------------- -------------------------
Increase Increase
9/2/02 8/31/00 (Decrease) 9/2/02 8/31/00 (Decrease)
------ ------- ---------- ------ ------- ----------
As a percentage of revenue:
Labor and related costs 32.6 33.2 (0.6) 33.5 34.6 (1.1)
Occupancy expenses 8.4 9.4 (1.0) 9.2 9.1 0.1
Advertising expense 4.3 5.8 (1.5) 3.9 5.0 (1.1)
The decreases in labor and related costs as a percentage of revenue were primarily the result of reductions in crew and store management labor which occurred despite increases in the average hourly rates, and an increase in training costs. The increases in average hourly rates are comparable with increases experienced by Wendy’s International on a nationwide basis.
As a percentage of revenue, the decrease in occupancy expense for the third quarter of 2001 was primarily due to (i) lower rent expense as a result of purchasing two restaurants in January 2001 that were previously leased and the closing of an outdated leased restaurant in 2000, and (ii) reduced building repair and utility expenses in 2001. The increase in year-to date occupancy expense was due to increased property insurance premiums and increased property tax expense associated with the development of new restaurants.
The decreases in advertising expense as a percentage of revenue were primarily due to replacement of billboard advertising with less expensive highway signs, discontinuation of certain discount and coupon programs, and less use of promotional products compared to the prior year periods. Advertising expense was partially reduced by marketing rebates from Meritage’s beverage supplier.
General and Administrative
The increase in general and administrative expenses in the restaurant operations was primarily the result of (i) new store growth, (ii) office relocation and consolidation, (iii) the use of outside computer consultants, (iv) ongoing costs at a closed restaurant currently for sale, and (v) an increase in Michigan business tax expense. The increase at the corporate level was primarily due to the additional positions filled to facilitate Meritage’s restaurant development plan, and increased incentive pay based on improved financial results.
Depreciation and Amortization
Increases in depreciation and amortization expense were primarily due to (i) opening of new restaurants, (ii) the purchase in January 2001 of restaurants which were previously leased, (iii) capital expenditures to remodel existing stores, and (iv) amortization of loan costs and franchisee fees related to new restaurants. These increases were partially offset by reductions in depreciation associated with three closed restaurants (two closed in September 2000 and one closed in February 2001).
Gain on Sale of Impaired Assets
The gain on sale of impaired assets for the year-to-date period resulted from the sale of a closed restaurant in March 2001. An impairment loss had been recognized in 2000.
Interest Expense
The increase in interest expense was primarily related to additional long-term debt incurred to construct new restaurants. This was partially offset by a decrease in interest expense on capital leases which are nearing maturity, and the early retirement of certain equipment loans. Nearly all of the Company’s long-term debt is at fixed interest rates. As a percentage of revenue, there has been no significant change in interest expense.
Interest Income
The increase in interest income during the third quarter was due to interest earned on increased cash balances and a note receivable for the sale of shares issued in February 2001.
Other Income
The year-to-date decline in other income resulted from the absence of events that occurred in 2000 including income related to the extension of a note receivable (now retired) for the sale of a hotel.
Gain on Disposal of Assets
The gain on disposal of assets resulted from the sale of excess land at two restaurant sites in 2001. In 2000, the gain on disposal of assets resulted from the sale of excess land at one restaurant and insurance proceeds for replacement of fire damaged equipment. As Meritage continues to proceed with its development plan, it may from time to time acquire surplus real estate adjacent to a restaurant site that it is developing that it will attempt to sell following the development of such restaurant. While the goal is to realize a gain on the disposition of such surplus real estate, there are no assurances that this will occur.
Liquidity and Capital Resources
Cash Flows
Cash flows were favorably impacted by (i) a $691,000 increase in net earnings before depreciation expense and gains from the sale and disposal of assets, (ii) a $256,000 increase in current liabilities through September 2, 2001 compared to an increase of $166,500 during the similar period in 2000, and (iii) receipt of marketing funds from the Company’s beverage supplier.
The increase in net cash used in investing activities reflects a $2,358,000 increase in the purchase of property and equipment in 2001 compared to 2000. During 2001, Meritage purchased $6,238,000 of property and equipment in connection with (i) developing seven new restaurants ($4,122,000), (ii) purchasing of two restaurant properties which where previously leased ($800,000), (iii) making improvements to existing restaurants and offices ($559,000), and (iv) purchasing surplus land adjacent to new restaurant sites ($698,000). Partially offsetting these uses of cash were proceeds of $1,750,000 from the sale of assets including a closed restaurant, compared to $276,000 of proceeds for the similar period in 2000. A final payment of $475,000 was collected on a note receivable associated with the hotel sales during fiscal 2000 that further reduced the net cash used in investing activities in 2000.
Net cash provided by financing activities decreased $995,000. Cash provided by financing activities included an increase of $1,505,000 in proceeds from the sale of common shares and a $123,000 decrease in payments on long-term debt and capital leases. The decrease in long-term debt payments includes the final $475,000 payment made in 2000 relating to a note payable associated with a hotel sale. Excluding the impact of the $475,000 payment, payments on long-term debt and capital leases increased $352,000, of which $211,000 represented an early payoff of two equipment notes, and a $141,000 increase in scheduled principal payments due to the additional debt incurred in the development of new restaurants. These sources of cash provided by financing activities were offset by a decrease of $2,601,000 in net proceeds from long and short-term borrowings incurred to finance new restaurant development during both years.
Year-to-date, Meritage purchased 39,296 of its own common shares at current market prices at a cost of $88,000. In August 1999, Meritage’s Board authorized the purchase, from time to time, of up to 200,000 shares of outstanding common stock at the prevailing market prices. In total, Meritage has purchased 124,696 common shares pursuant to this authorization, including the purchase of 70,000 shares for $150,000 in September 2001.
Financial Condition
As of September 2, 2001, current liabilities exceeded current assets by $2,023,000, compared to November 30, 2000 when current liabilities exceeded current assets by $2,347,000. Excluding the current portion of occupancy related long-term obligations and capital leases, current liabilities exceeded current assets by $1,073,000 as of September 2, 2001 compared to November 30, 2000 when current liabilities exceeded current assets by $1,307,000. As of September 2, 2001 and November 30, 2000, the ratios of current assets to current liabilities were 0.5:1 and 0.3:1 respectively. The cash flows discussion explains the decrease in cash and the most significant reasons for the decrease in working capital.
Meritage is in an improved cash position due to cash proceeds generated from (i) improved operating results, (ii) the issuance of common stock, and (iii) receipt of marketing funds from its beverage supplier. This improved cash position will assist Meritage in meeting its current obligations over the next twelve months while executing its growth and expansion plan. On-going cash management activities include operations of the Wendy’s restaurants, investment in new Wendy’s restaurants, and the sale of surplus real estate.
To insure operations are being run effectively and efficiently, Meritage improved its restaurant management team and began a capital improvement program for existing operations. An incentive-based compensation plan was introduced for restaurant management personnel. Meritage also began implementing a $1.0 million capital improvement plan to renovate a number of older restaurants and install labor saving equipment at the restaurants. We anticipate that these capital investments will be paid for with internally generated cash, cash on hand, and financing that may be available under Wendy’s International preferred lender programs. Meritage is experiencing improved productivity and operating results as a result of these improvements.
Year-to-date Meritage opened three new restaurants, investing $1,852,000 of its equity. One restaurant is leased, and the other two restaurants required an investment of $2,659,000. A mortgage of approximately $900,000 was obtained for one property, and proceeds of approximately $800,000 from the sale of a closed restaurant were used to acquire and develop the remaining store. Meritage has five additional restaurants under construction that are expected to open before fiscal year end. For two restaurants, Meritage has an existing financing commitment for 15-year mortgages with fixed rates of 2.5% over the ten-year treasury rate (approximately 7.2% based on current interest rates) amortized over 20 years. Meritage is finalizing a new loan commitment with similar terms for the remaining new restaurants and to assist with future development. Meritage received various loan proposals for additional new store growth.
Meritage’s various loan agreements contain covenants requiring the maintenance of certain financial ratios including:
- Fixed Charge Coverage Ratio ("FCCR") of 1.2 : 1 for the Wendy's operation as a whole;
- FCCR of 1.2 : 1 for the Wendy's restaurants that are subject to a real estate mortgage;
- FCCR of 1.4 : 1 for the Wendy's restaurants that are subject to both a real estate mortgage and a business value loan;
- Leverage Ratio (Funded Debt : Earnings Before Interest, Taxes, Depreciation and Amortization) not to exceed 6.0:1; and
- 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 September 2, 2001, Meritage was in compliance with these covenants.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
PART II
OTHER INFORMATION
Item 5. Other Information.
On July 2, 2001, the Company’s Board of Directors appointed Stephen A. Rose as the Company’s Vice President, Treasurer and Chief Financial Officer, replacing Pauline M. Krywanski who left to pursue other opportunities. Prior to joining Meritage, Mr. Rose served as the Chief Financial Officer for a number of regional businesses.
The Company opened its 34th Wendy’s restaurant during the third fiscal quarter. The new restaurant is located at the Grand River Avenue on/off ramp of Interstate 96 in Portland, Michigan.
Item 6. Exhibits and Reports on Form 8-K.
| (a)
(b) | Exhibit List.
None.
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: October 11, 2001 | MERITAGE HOSPITALITY GROUP INC.
By /s/Robert E. Schermer, Jr.
Robert E. Schermer, Jr.
Chief Executive Officer
By /s/Stephen A. Rose
Stephen A. Rose
Vice President and Treasurer
(Chief Financial Officer) |
