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 August 31, 1998.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___________________
to ____________________
Commission File Number: 0-17442
MERITAGE HOSPITALITY GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-2730460
(State or Other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) No.)
40 PEARL STREET, N.W., SUITE 900
GRAND RAPIDS, MICHIGAN 49503
(Address of Principal Executive (Zip Code)
Offices)
(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 October 9, 1998 there were 5,741,153 outstanding Common Shares, $.01 par
value.
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2
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,
1997. The Company has restated its prior financial statements to present the
operating results of the lodging group business segment as a discontinued
operation. The assets and liabilities of these operations at August 31, 1998 and
November 30, 1997 are reflected on the balance sheet as a net current asset (see
Note D of the Company's financial statements). The results of operations for the
three and nine month periods ended August 31, 1998 are not necessarily
indicative of the results to be expected for the full year.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
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3
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1998 AND NOVEMBER 30, 1997
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ASSETS
AUGUST 31, NOVEMBER 30,
1998 1997
(UNAUDITED) (RESTATED)
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 1,436,651 $ 1,061,475
Receivables 80,039 258,282
Inventories 152,425 156,746
Deferred income taxes 22,000 22,000
Prepaid expenses and other current assets 48,085 156,028
Net assets of discontinued operations - Note D 179,181 938,388
----------- -----------
Total current assets 1,918,381 2,592,919
PROPERTY, PLANT AND EQUIPMENT, NET 8,615,276 7,518,007
OTHER ASSETS
Goodwill, net of amortization of $253,422 and
$2,278,454 respectively 5,140,050 3,586,177
Financing costs, net of amortization of $39,410
and $34,208 respectively 139,863 50,239
Franchise fees, net of amortization of $19,782
and $406,552 respectively 630,218 143,448
Sundry 86,525 46,950
----------- -----------
Total other assets 5,996,656 3,826,814
----------- -----------
Total assets $16,530,313 $13,937,740
=========== ===========
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
3
4
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
AUGUST 31, 1998 AND NOVEMBER 30, 1997
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LIABILITIES AND STOCKHOLDERS' EQUITY
AUGUST 31, NOVEMBER 30,
1998 1997
(UNAUDITED) (RESTATED)
------------ ------------
CURRENT LIABILITIES
Current portion of long-term debt $ 474,744 $ 1,077,552
Current portion of obligations under capital leases 284,716 264,372
Trade accounts payable 667,843 899,118
Amount due related party 205,260 85,263
Accrued liabilities 1,176,475 751,967
------------ ------------
Total current liabilities 2,809,038 3,078,272
LONG-TERM DEBT - NOTE E 7,185,957 7,348,464
OBLIGATIONS UNDER CAPITAL LEASES 1,473,709 1,689,628
DEFERRED INCOME TAXES 190,000 190,000
DEFERRED REVENUE 2,047,141 --
MINORITY INTEREST -- 1,601,415
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value; authorized 5,000,000 shares; 200,000
shares designated as Series A convertible cumulative preferred stock;
issued and outstanding 132,287 and 138,387 respectively (liquidation
value - $1,322,870) 1,323 1,384
Common stock - $0.01 par value; authorized 30,000,000
shares; issued and outstanding 5,259,894 and 3,218,778
respectively 52,599 32,188
Additional paid in capital 13,500,840 12,982,295
Note receivable from the sale of shares, net of
valuation allowance of $4,500,000 in 1998 (1,660,961) (5,700,645)
Accumulated deficit (9,069,333) (7,285,261)
------------ ------------
Total stockholders' equity 2,824,468 29,961
------------ ------------
Total liabilities and stockholders' equity $ 16,530,313 $ 13,937,740
============ ============
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
4
5
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
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1997
1998 (RESTATED)
------------ ------------
FOOD AND BEVERAGE REVENUE $ 20,041,338 $ 20,262,600
COSTS AND EXPENSES
Cost of food and beverages 5,753,689 5,837,745
Operating expenses 11,794,667 12,104,801
General and administrative expenses 2,166,414 2,015,367
Depreciation and amortization 892,878 848,333
------------ ------------
Total costs and expenses 20,607,648 20,806,246
OPERATING LOSS (566,310) (543,646)
OTHER INCOME (EXPENSE)
Interest expense (1,096,529) (1,056,057)
Interest income 47,734 438,732
Other income 519,739 --
Loss on sale of assets -- (190,453)
Minority interest 25,677 (101,030)
------------ ------------
(503,379) (908,808)
------------ ------------
Loss from continuing operations (1,069,689) (1,452,454)
LOSS FROM DISCONTINUED OPERATIONS - NOTE D (479,232) (221,390)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (1,548,921) (1,673,844)
EXTRAORDINARY ITEM - LOSS ON EARLY EXTINGUISHMENT OF DEBT (141,740) --
------------ ------------
NET LOSS (1,690,661) (1,673,844)
DIVIDENDS ON PREFERRED STOCK 93,411 70,577
------------ ------------
NET LOSS ON COMMON SHARES $ (1,784,072) $ (1,744,421)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
Continuing operations $ (0.25) $ (0.47)
Discontinued operations (0.10) (0.07)
Extraordinary item (0.03) --
------------ ------------
Net loss $ (0.38) $ (0.54)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 4,687,097 3,213,736
============ ============
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
5
6
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
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1997
1998 (RESTATED)
----------- -----------
FOOD AND BEVERAGE REVENUE $ 7,327,427 $ 7,312,861
COSTS AND EXPENSES
Cost of food and beverages 2,085,371 2,104,155
Operating expenses 4,163,240 4,264,537
General and administrative expenses 596,448 544,338
Depreciation and amortization 273,757 245,700
----------- -----------
Total costs and expenses 7,118,816 7,158,730
INCOME FROM OPERATIONS 208,611 154,131
OTHER INCOME (EXPENSE)
Interest expense (355,771) (351,682)
Interest income (267,710) 155,718
Loss on sale of assets -- (190,453)
Minority interest -- (65,084)
----------- -----------
(623,481) (451,501)
----------- -----------
Loss from continuing operations (414,870) (297,370)
INCOME FROM DISCONTINUED OPERATIONS - NOTE D -- 463,178
----------- -----------
Earnings (loss) before extraordinary item (414,870) 165,808
EXTRAORDINARY ITEM - LOSS ON EARLY EXTINGUISHMENT OF DEBT (141,740) --
----------- -----------
NET EARNINGS (LOSS) (556,610) 165,808
DIVIDENDS ON PREFERRED STOCK 31,137 31,137
----------- -----------
NET EARNINGS (LOSS) ON COMMON SHARES $ (587,747) $ 134,671
=========== ===========
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
Continuing operations $ (0.08) $ (0.10)
Discontinued operations -- 0.14
Extraordinary item (0.03) --
----------- -----------
Net earnings (loss) $ (0.11) $ 0.04
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 5,225,656 3,216,977
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SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
6
7
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED NOVEMBER 30, 1997 AND THE NINE MONTH PERIOD ENDED
AUGUST 31, 1998
(UNAUDITED)
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SERIES A NOTE
CONVERTIBLE ADDITIONAL RECEIVABLE
PREFERRED COMMON PAID-IN SALE OF ACCUMULATED
STOCK STOCK CAPITAL SHARES DEFICIT TOTAL
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BALANCE AT DECEMBER 1, 1996 $ 1,084 $ 32,045 $ 12,616,727 $ (5,135,716) $ (5,492,697) $ 2,021,443
Issuance of 14,295 shares of
common stock -- 143 65,868 -- -- 66,011
Issuance of 30,000 shares of
preferred stock 300 -- 299,700 -- -- 300,000
Dividends paid - preferred stock -- -- -- -- (101,714) (101,714)
Recognition of interest income
on note receivable from sale
of shares -- -- -- (564,929) -- (564,929)
Net loss -- -- -- -- (1,690,850) (1,690,850)
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BALANCE AT NOVEMBER 30, 1997 1,384 32,188 12,982,295 (5,700,645) (7,285,261) 29,961
Issuance of 1,997,855 shares of
common stock -- 19,979 4,558,600 -- -- 4,578,579
Conversion of 6,100 convertible
preferred shares into 43,261
common shares (61) 432 (371) -- -- --
Dividends paid - preferred stock -- -- -- -- (93,411) (93,411)
Recognition of interest income
on note receivable from sale
of shares -- -- 460,316 (460,316) -- --
Establishment of valuation
allowance on note receivable
from sale of shares -- -- (4,500,000) 4,500,000 -- --
Net loss -- -- -- -- (1,690,661) (1,690,661)
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BALANCE AT AUGUST 31, 1998 $ 1,323 $ 52,599 $ 13,500,840 $ (1,660,961) $ (9,069,333) $ 2,824,468
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SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
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8
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
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1997
1998 (RESTATED)
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,690,661) $(1,673,844)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 892,878 848,333
Compensation and fees paid by issuance of common stock 3,927 60,800
Loss on disposal of assets -- 190,453
Minority interest in net earnings of consolidated subsidiaries (25,677) 101,030
Interest income on note receivable from sale of shares -- (414,699)
Interest expense refinanced as long-term debt 5,547 --
Increase in deferred revenue 2,047,141 --
Decrease in current assets 290,509 109,240
Decrease (increase) in net assets of discontinued operations 759,207 (533,284)
Increase in current liabilities 313,230 139,011
-------------- ---------------
Net cash provided by (used in) operating activities 2,596,101 (1,172,960)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (276,405) (370,308)
Payment for acquisition of business (755,200) --
Increase in other assets (134,400) (185,765)
-------------- ---------------
Net cash used in investing activities (1,166,005) (556,073)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt -- 936,346
Principal payments of long-term debt (770,862) (533,325)
Payments on obligations under capital leases (195,575) (170,697)
Proceeds from issuance of stock 4,928 300,000
Preferred dividends paid (93,411) (70,577)
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Net cash (used in) provided by financing activities (1,054,920) 461,747
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Net increase (decrease) in cash 375,176 (1,267,286)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,061,475 2,265,497
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,436,651 $ 998,211
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION - SEE NOTE A
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
8
9
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
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NOTE A - SUPPLEMENTAL CASH FLOW INFORMATION
1998 1997
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Cash paid for interest expense $ 2,077,926 $ 1,978,230
Schedule of non-cash investing and financing transactions
Acquisition of remaining 46% of Wendy's of
West Michigan Limited Partnership, including assets
acquired and liabilities assumed
Fair value of tangible and intangible assets acquired $ 3,748,187
Reduction of minority interest 1,575,738
Amount of cash payment (755,200)
-------------
1,992,359 common shares issued $ 4,568,725
=============
Sale of hotel assets
Selling price, net of selling costs $ 4,334,643
Cash proceeds from sale of hotel assets 2,959,643
-------------
Note receivable from sale of hotel assets $ 1,375,000
=============
Acquisition of equipment
Cost of equipment $ 244,637
Equipment loan 244,637
--------------
Cash down payment for equipment $ --
==============
Increase in marina development costs
Increase in marina development costs $ 1,233,366
Long-term debt proceeds 800,000
--------------
Cash used in marina development costs $ 433,366
==============
NOTE B - EARNINGS PER SHARE
Beginning in fiscal 1998, the Company adopted Financial Accounting
Standards Number 128 - "Earnings Per Share". Prior year earnings per share
amounts reflect this new pronouncement.
Basic earnings per common share are computed by dividing net earnings
available to common shareholders 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 into common stock. As of August 31, 1998 and 1997, the Company had
132,287 and 138,387 shares of Series A Convertible Preferred Stock outstanding,
respectively. Each share of preferred stock was convertible into 7.09 shares of
common stock. The convertible preferred stock was not included in the
computation of diluted earnings (loss) per common share because the effect of
conversion would be antidilutive. After August 31, 1998, 67,767 shares of
preferred stock were converted into 480,612 shares of common stock.
9
10
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS - CONTINUED
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
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NOTE C - ACQUISITION
In fiscal 1998, the Company acquired the remaining 46% of the now
dissolved Wendy's of West Michigan Limited Partnership (including assets
acquired and liabilities assumed) for $755,200 in cash and 1,992,359 common
shares, which had a value of $4,568,725. As a result, assets were recorded at
their fair value (a $3,748,187 increase) and minority interest was eliminated (a
$1,575,738 reduction).
NOTE D - DISCONTINUED OPERATIONS
During the second quarter of 1998, the Company entered into agreements
to sell its two hotel properties resulting in the discontinuance of the
Company's lodging group business segment. The sale of the Grand Harbor Resort &
Yacht Club was effective on June 15, 1998, and the sale of the Thomas Edison Inn
was effective on September 1, 1998. As a result, effective May 31, 1998, the
Company's lodging group business segment is accounted for as discontinued
operations. Because the Company expects to realize a net gain of approximately
$3,500,000 from discontinued operations and the disposal of the lodging group
business segment, pursuant to generally accepted accounting principles, no
income or loss from discontinued operations was recognized from June 1, 1998
through the date of disposal of the business segment (September 1, 1998).
Instead, the anticipated net gain will be recognized upon disposal of the
business segment during the fourth quarter of 1998. Below is a schedule of the
payment terms of the hotel sales:
Grand
Harbor Resort Thomas Edison
& Yacht Club Inn
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Selling price (before selling costs) $ 4,500,000 $ 12,200,000
Promissory note held by Company 1,375,000 2,000,000
-------------- --------------
Cash portion of selling price $ 3,125,000 $ 10,200,000
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11
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS - CONTINUED
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
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NOTE D - DISCONTINUED OPERATIONS (CONTINUED)
As of August 31, 1998 and November 30, 1997, assets and liabilities of
the discontinued lodging group business segment included in the balance sheet
are summarized below:
August 31, November 30,
Assets 1998 1997
------------ ------------
Current assets $ 1,435,155 $ 4,199,733
Property, plant and equipment, net 8,248,567 11,461,306
Other assets 1,503,532 2,262,877
Liabilities
Current liabilities (1,079,354) (4,959,561)
Deferred gain on disposal of business segment (536,366) --
Long-term debt (9,392,353) (12,025,967)
------------ ------------
Net assets of discontinued operations $ 179,181 $ 938,388
============ ============
A summary of the results of operations of the discontinued operations
for the three and nine month periods ended August 31, 1998 and 1997 is as
follows:
For the nine months ended August 31, 1998 1997
------------ ------------
Revenues $ 6,350,989 $ 10,884,943
Costs and expenses 5,830,821 9,994,351
------------ ------------
Earnings from operations 520,168 890,592
Other income (expense), net (943,452) (1,111,982)
------------ ------------
Loss from operations of discontinued operations (423,284) (221,390)
Gain on sale of discontinued operations 480,418 --
------------ ------------
Net income (loss) from discontinued operations (1) $ 57,134 $ (221,390)
============ ============
For the three months ended August 31, 1998 1997(2)
------------ ------------
Revenues $ 2,126,018 $ 4,928,178
Costs and expenses 1,814,635 4,079,472
------------ ------------
Earnings from operations 311,383 848,706
Other income (expense), net (255,435) (385,528)
------------ ------------
Income from operations of discontinued operations 55,948 463,178
Gain on sale of discontinued operations 480,418 --
------------ ------------
Net income from discontinued operations(1) $ 536,366 $ 463,178
============ ============
<FN>
(1) The loss from discontinued operations included on the consolidated statement of operations for the nine months
ended August 31, 1998 of $479,232 includes only operations through May 31, 1998, the measurement date for
discontinued operations. As described above, the income from operations from the measurement date through August
31, 1998 of $536,366 is required to be deferred until the disposal of the business segment (September 1, 1998).
(2) The income from discontinued operations for the three months ended August 31, 1997 includes the effect of a change
in accounting estimate related to the treatment of certain general and administrative expenses as expenses of
discontinued operations. General and administrative expenses for the three month period include $171,000 of
expenses that relate to the six months ended May 31, 1997.
11
12
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS - CONTINUED
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
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NOTE E - SUBSEQUENT EVENTS (INCLUDING RELATED PARTY TRANSACTIONS)
The Company completed several transactions subsequent to August 31,
1998 all of which resulted in either the retirement of outstanding debt or
allowed for a restructure of existing debt. A description of the transactions
follows:
SALE OF HOTEL ASSETS
The Company sold all of its hotel assets associated with the Thomas
Edison Inn on September 1, 1998 for $12,200,000, which consisted of $10,200,000
cash and a $2,000,000 promissory note requiring monthly payments of interest
only at prime plus 8% through August 31, 1999, when the remaining unpaid
principal will be due. The sale resulted in a gain of $3,105,688 before the
extraordinary charge of $548,395 consisting of a prepayment penalty and the
write-off of unamortized finance costs on the related long-term debt. The
Company's equity increased $2,557,293 as a result of this transaction. The net
proceeds were used to (i) pay in full the remaining balance of the hotel and
marina mortgage notes payable (Loans I and III) to the Company's former primary
lender totaling $9,414,000, and (ii) pay down other long-term debt totaling
$186,000.
SALE OF PARTICIPATION INTERESTS IN $2,000,000 PROMISSORY NOTE
The Company sold $1,100,000 of undivided interests in the $2,000,000
promissory note received from the sale of the Thomas Edison Inn discussed above.
The participation agreements represent 59.6% of the outstanding note balance, of
which a 27.1% participation in the note ($500,000) was sold to a member of the
Company's Board of Directors. The net proceeds from these sales were used to pay
down the Company's mortgage note (Loan II) with the Company's former primary
lender. The Company indemnified each of the participants in the event of
nonpayment by the maker.
PURCHASE OF FIVE WENDY'S PROPERTIES
On September 1, 1998 the Company purchased the real estate (land and
buildings) comprising five Wendy's restaurants from Wendy's Real Estate Limited
Partnership I for $4,200,000. These properties are operated by the Company and
were previously leased via long-term lease agreements. The purchase was financed
with a $4,380,000 mortgage note and a $1,120,000 secured promissory note. The
$5,500,000 debt requires monthly payments of $47,715, including interest ranging
from 7.77% to 8.15% through September 1, 2018. The notes are secured by the real
estate, equipment and inventory of these five restaurants. These proceeds were
also used to pay down $700,000 on Loan II, which carried an interest rate of
prime plus 8%.
REFINANCE OF SIX WENDY'S PROPERTIES
On September 22, 1998, the Company completed a $4,300,000 refinancing
of the real estate of six Wendy's restaurants which included the land for five
sites and the buildings on all six sites. The $4,300,000 mortgage note requires
monthly payments of $35,459, including interest at 7.77% through October 1,
2018. The loan proceeds were used to (i) pay in full the remaining $1,974,000
balance of the revolving term note payable which was secured by the restaurant
real estate, and (ii) pay down $2,300,000 on the outstanding balance of Loan II.
12
13
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS - CONTINUED
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE E - SUBSEQUENT EVENTS (CONTINUED)
ASSIGNMENT OF $1,375,000 NOTE AND RESTRUCTURE OF LONG TERM DEBT
Effective October 6, 1998, the Company entered into an agreement with
the Company's Chairman of the Board whereby the company assigned the $1,375,000
(10.8%) one year note receivable from the sale of the Grand Harbor Resort &
Yacht Club to the Chairman in exchange for (i) payment in full of the 16.5%
business loan note payable to the Chairman ($776,000), (ii) cancellation of
$200,000 of the Company's preferred stock owned by the Chairman, and (iii) a
cash payment of $399,000. The Company indemnified the Chairman in the event of
nonpayment by the maker. The cash proceeds were used to make the final payment
on the remaining balance of Loan II. With this payment, the entire outstanding
long-term indebtedness with the Company's former primary lender was paid in
full.
NEW LONG TERM DEBT STRUCTURE
As a result of these transactions, the Company's long term debt consists of the
following:
Equipment notes payable, due in monthly installments aggregating $13,453
including interest ranging from 8.8% to 10% through October 8,2000.(1) $ 106,126
Mortgage notes payable, due in monthly installments of $32,226 including
interest at 8.15% through September 1, 2018.(2) 3,810,000
Notes payable, due in monthly installments of $10,802 including interest at
8.15% through September 1, 2018.(3) 1,120,000
Mortgage notes payable, due in monthly installments of $40,146 including
interest at 7.77% through October 1, 2018.(2) 4,870,000
----------
Total $9,906,126
==========
<FN>
(1) The notes are collateralized by certain equipment.
(2) The notes are collateralized by certain restaurant real estate.
(3) The notes are collateralized by certain restaurant equipment and inventory.
Minimum principal payments on this long-term debt to maturity as of August 31,
1998 are as follows:
1999 $ 274,744
2000 266,552
2001 266,667
2002 284,083
2003 307,575
Thereafter 8,506,505
----------
$9,906,126
==========
Loan covenants of the various loan agreements include requirements for
maintenance of certain financial ratios which are effective beginning November
30, 1998.
13
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
- ---------------------
FOOD SERVICE GROUP
The Company's Food Service Group consists of its operation of 25
"Wendy's Old Fashioned Hamburgers" restaurants (under franchise agreements with
Wendy's International) throughout Western and Southern Michigan. Due to the
discontinued Lodging Group operations, the Food Service Group's results of
operations for the three and nine month periods ended August 31, 1998 and August
31, 1997 (as restated), also include expenses related to the Company's corporate
office and are summarized in the following table:
Statements of Operations
--------------------------------------------------------------------------------------------
Three month periods ended August 31, Nine month periods ended August 31,
-------------------------------------------- ------------------------------------------
$ (000's) % of Revenue $ (000's) % of Revenue
----------------------- ----------------- --------------------- -----------------
1998 1997 1998 1997 1998 1997 1998 1997
----------------------- ----------------- --------------------- -----------------
Food and beverage revenue $ 7,327 $ 7,313 100.0% 100.0% $ 20,041 $ 20,263 100.0% 100.0%
Costs and expenses
Cost of food and beverages 2,085 2,104 28.5 28.8 5,754 5,838 28.7 28.8
Operating expenses 4,163 4,265 56.9 58.3 11,794 12,105 58.8 59.8
General and administrative
expenses 597 544 8.1 7.4 2,166 2,015 10.8 9.9
Depreciation and amortization 274 246 3.7 3.4 893 848 4.5 4.2
----------------------- ----------------- --------------------- -----------------
Total costs and expenses 7,119 7,159 97.2 97.9 20,607 20,806 102.8 102.7
Income (loss) from operations 208 154 2.8 2.1 (566) (543) (2.8) (2.7)
Other income (expense)
Interest expense (356) (351) (4.8) (4.8) (1,096) (1,056) (5.5) (5.2)
Interest income (267) 155 (3.7) 2.1 47 438 0.3 2.2
Other income -- -- -- -- 519 -- 2.6 --
Loss on sale of assets -- (190) -- (2.6) -- (190) -- (1.0)
Minority interest -- (65) -- (0.9) 26 (101) 0.1 (0.5)
----------------------- ----------------- --------------------- -----------------
(623) (451) (8.5) (6.2) (504) (909) (2.5) (4.5)
----------------------- ----------------- --------------------- -----------------
Loss from
continuing operations $ (415) $ (297) (5.7%) (4.1%) $ (1,070) $ (1,452) (5.3%) (7.2%)
======================= ================= ===================== ==================
REVENUE
Food and beverage revenue increased $14,000 or 0.2% for the three
months ended August 31, 1998 compared to the same period of 1997. For the nine
months ended August 31, 1998, food and beverage revenue decreased $222,000 or
1.1% compared to the same period of 1997. Food and beverage revenues in 1997
include revenue from an under-performing restaurant which was closed in August
1997. Food and beverage revenue on a per restaurant basis for restaurants in
operation during the three months ended February 28, 1998, May 31, 1998 and
August 31, 1998 and for the nine months ended August 31, 1998 are set forth in
the following table:
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Average Net Sales Per Restaurant Unit
-------------------------------------
Increase % Increase
1998 1997 (Decrease) (Decrease)
-------- -------- ---------- -----------
Three months ended August 31 $293,097 $289,583 $ 3,514 1.2%
Three months ended May 31 267,632 281,324 (13,692) (4.9%)
Three months ended February 28 240,925 230,797 10,128 4.4%
-------- -------- --------
Nine months ended August 31 $801,654 $801,704 $ (50) (0.0%)
======== ======== ========
The 1.2% increase in same store sales for the three months ended August
31, 1998 compared to the same period of 1997 was primarily due to the success of
two new promotions: (i) late night business - restaurants are now staying open
later on a year around basis which has resulted in sales growth during the late
night hour period, and (ii) increased "combo" sales and "upsizing" (the addition
of a larger beverage or larger french fry to the standard combo meal for an
additional 39 cents). The 1.2% sales increase for the third quarter of 1998
followed a 4.9% decrease in same store sales for the second quarter of 1998
compared to the same period of 1997. Nearly 3% of the sales decrease for the
second quarter was the result of a decrease in pita sandwich sales which were
introduced in April 1997. The introduction of the pita sandwich was extremely
successful and helped contribute to a record sales month in May 1997. Same store
sales for the first quarter of 1998 increased 4.4%. The increase in same store
sales in the first quarter of 1998 was primarily attributable to the relatively
mild winter weather conditions experienced in the first quarter of 1998 compared
to the first quarter of 1997. Sales during the first nine months of 1998 have
been negatively impacted by competitive intrusion which has affected several
restaurants in the Company's market area, combined with intense competition
throughout the quick-service industry including price discounting. The Company
and Wendy's International have continued to resist engaging in deep price
discounting, choosing instead to combat low prices of its competitors with the
Value Menu offerings and high quality, made-to-order products. Weighted average
price increases for the nine months ended August 31, 1998 were less than 1%
compared to the same period of 1997.
COST OF FOOD AND BEVERAGES
Cost of food and beverages as a percentage of food and beverage revenue
was 28.5% for the three months ended August 31, 1998 compared to 28.8% for the
three months ended August 31, 1997. Cost of food and beverages for the nine
months ended August 31, 1998 was 28.7% compared to 28.8% for the same period of
1997. The slight reduction in food and beverage costs was primarily the result
of the elimination of the SuperBars (a hot and cold all-you-can-eat food bar),
which operated with relatively higher food costs and waste. Continued and
consistent emphasis on food cost controls have also contributed to stable food
and beverage costs. Cost of food and beverage percentages of 28.5% and 28.7%
respectively, for the three and nine months ended August 31, 1998 are in line
with guidelines established by the Company and Wendy's International.
OPERATING EXPENSES
Operating expenses decreased 1.4 percentage points for the three months
ended August 31, 1998 compared to the same period of 1997 (from 58.3% of revenue
in 1997 to 56.9% in 1998). The decrease for the third quarter was due primarily
to a .6 percentage point decrease in payroll costs combined with slight
decreases in advertising, repairs and maintenance, and utility costs. For the
nine months ended August 31, 1998, operating expenses decreased 1.0 percentage
points (from 59.8% of revenue in 1997 to 58.8% in 1998). Again, slight decreases
in advertising, repairs and maintenance, and utility costs, along with a
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16
reduction in training costs, accounted for the reduction in operating costs for
the nine months ended August 31, 1998 compared to the same period of 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased approximately $53,000 for
the three months ended August 31, 1998 compared to the same period of 1997 (from
$544,000 to $597,000). As a percentage of revenue, general and administrative
expenses increased from 7.4% of revenue for the three months ended August 31,
1997 to 8.1% of revenue for the same period of 1998. For the nine months ended
August 31, 1998, general and administrative expenses increased approximately
$151,000 (from $2,015,000 to $2,166,000), from 9.9% of revenue to 10.8% of
revenue compared to the same period of 1997.
Actual general and administrative expenses incurred in the third
quarter of 1998 decreased by $45,000 resulting primarily from a $20,000 decrease
in public market costs, a $12,000 decrease in administrative salaries, and an
$8,000 decrease in travel and entertainment, compared to the same period of
1997. This decrease in actual expenses incurred was more than offset by a
decrease in the general and administrative expenses reported in the third
quarter of 1997 which was the impact of a change in accounting estimate. The
Company has revised its allocation of certain general and administrative
expenses between continuing and discontinued operations and, as a result,
recorded the cumulative change in that estimate during the third quarter of
1997. Therefore, general and administrative expenses from continuing operations
in the third quarter of 1997 were reduced resulting in an increase in the amount
of general and administrative expenses reported on the consolidated statement of
operations for the three months ended August 31, 1998 compared to the same
period of 1997.
However, the comparative year-to-date general and administrative
expenses are unaffected by this change in accounting estimate. The increase in
general and administrative expenses for the nine months ended August 31, 1998
was primarily due to increased legal fees of approximately $125,000. Significant
legal costs were incurred in the first quarter of 1998 in connection with the
litigation brought by the former general partner of the now dissolved Wendy's of
West Michigan Limited Partnership. The remaining increase was attributable to an
increase in life insurance expense and administrative salaries and wages.
INTEREST EXPENSE
Interest expense for the third quarter of 1998 and 1997 was $356,000
and $351,000, respectively. Interest expense for the nine months ended 1998 and
1997 was $1,096,000 and $1,056,000, respectively. The increases in interest
expense were due to additional borrowings in fiscal 1997 and an increase in
interest rates. See "Liquidity and Capital Resources" for details about the
Company's long-term debt.
INTEREST INCOME
Interest income decreased $422,000 for the third quarter of 1998
compared to the same period of 1997, and $391,000 for the nine months ended
August 31, 1998 compared to the nine months ended August 31, 1997. The decrease
was attributable to the reversal of $460,000 of interest income accrued through
August 31, 1998 on the note receivable from the sale of stock. This adjustment
to interest income was made as a result of the Company's determination that a
valuation allowance was appropriate due to the longer term price trend of the
stock, which serves as collateral for the note receivable. Because of the
decrease in the current trended value of the collateral securing the note
receivable, a valuation allowance of $4,500,000 has been made to adjust the note
receivable to its estimated realizable value if the shares of common stock
16
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securing the note were sold and the proceeds were applied to the note
receivable. As detailed in the Company's statement of stockholders' equity, the
valuation allowance has no net effect on the Company's total stockholders'
equity.
OTHER INCOME
Other income increased $519,000 for the nine months ended August 31,
1998 compared to 1997. The increase in other income was primarily due to the
forfeiture of an earnest deposit in the second quarter in the amount of $500,000
on a contract to sell one of the Company's hotel properties.
LODGING GROUP - DISCONTINUED OPERATIONS
During the second quarter of 1998, the Company entered into agreements
to sell its two hotel properties resulting in the discontinuance of the
Company's Lodging Group as of May 31, 1998. For details of the impact on the
Company's operating results see Note D of the Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash and cash equivalents ("cash") increased $375,000 from $1,061,000
as of November 30, 1997 to $1,436,000 as of August 31, 1998. The increase in
cash was the result of the following:
Net cash provided by operating activities $ 2,596,000
Net cash provided by investing activities (1,166,000)
Net cash used in financing activities (1,055,000)
------------
Net increase in cash $ 375,000
============
Net cash provided by operating activities of $2,596,000 was due to a
net loss before depreciation and amortization of $798,000 combined with the
receipt of $2,090,000 in marketing and conversion funds (deferred revenue) from
the Company's beverage supplier. Other non-cash effects on net income and net
cash provided by operating activities totaled $1,304,000 which included a
reduction in net assets of discontinued operations of $759,000.
Net cash used in investing activities of $1,166,000 was the result of
the purchase of property and equipment for $277,000 and the acquisition of the
remaining 46% of the now dissolved Wendy's of West Michigan Limited Partnership
for $755,000. The remaining use of cash increased other assets by $134,000.
Net cash used in financing activities of $1,055,000 was primarily the
result of payments of long-term debt of $771,000 and principal payments on
obligations under capital leases by $196,000. Dividend payments on preferred
stock of $93,000 for the nine months ended August 31, 1998 accounted for the
remaining cash used in financing activities. Proceeds from the sale of common
stock to employees through the Company's employee stock purchase plan totaled
$5,000.
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FINANCIAL CONDITION
As of August 31, 1998, the Company's current liabilities exceeded its
current assets by $891,000, compared to November 30, 1997 when current
liabilities exceeded current assets by $485,000. At these dates, the ratios of
current assets to current liabilities were 0.7:1 and 0.8:1 respectively. The
discussion above of cash flows for the nine months ended August 31, 1998
explains the increase in cash as well as the most significant reasons for the
decrease in working capital. The other significant items effecting working
capital include the receipt of $300,000 in earnest deposits on the sale of the
Company's hotel properties, and the sale of the assets associated with the Grand
Harbor Resort & Yacht Club on June 16, 1998.
As of August 31, 1998, the terms and balances of the Company's
long-term debt consisted primarily of the following (subsequent to August 31,
1998 the Company completed several transactions, all of which resulted in either
the retirement or restructuring of existing debt):
1) $8,635,000 Loan I required monthly payments of $92,874, including
interest at 11.25%, through December 31, 2003 when the remaining
unpaid principal was due.
2) $4,820,000 Loan II required monthly payments of $100,000, plus
interest at 8% over the prime rate through June 2002.
3) $791,000 Loan III (marina) required monthly payments of interest
only at 11.25%. Principal payments of $35,000 were required upon
the sale of any condominium units. Any remaining outstanding
balance of principal and accrued interest was due the earlier of
the receipt of full payment of the note receivable or September 1,
2000.
4) $1,974,000 revolving term loan required monthly payments of
$43,313, including interest at 1% over the prime rate, through
February 2005 when any remaining unpaid principal was due. Under
the revolving loan agreement, the required monthly payments could
be offset by additional borrowings up to the unused available
borrowings. The Company had $548,000 of available unused
borrowings at August 31, 1998. The loan was secured by
substantially all of the assets used in the Company's Wendy's
operation and was guaranteed by the Company.
5) $201,000 equipment note payable required monthly payments of
$8,524, including interest at 8.8%, through October 2000.
6) $776,000 note payable to the Company's Chairman of the Board of
Directors. The loan required the Company to make monthly payments
of interest only at the prime rate plus 8%. Unpaid principal and
accrued interest was due 91 days after Loans I, II and III were
paid off.
Subsequent to August 31, 1998 the Company completed several
transactions, resulting in either the retirement of outstanding debt or allowed
for a restructure of existing debt. The effect of these transactions on
long-term debt was:
- All long-term indebtedness owed to the Company's former primary
lender (Loans I, II, and III) was completely retired. The notes
payable carried interest rates ranging from 11.25% to prime plus
8% and had a weighted average interest rate of 12.7%.
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19
- The $776,000 (prime plus 8%) note payable to the Company's
Chairman of the Board was paid in full through the assignment of a
portion of the Company's $1,375,000 (10.8%) note receivable from
the sale of the Grand Harbor Resort & Yacht Club.
- $10 million of new long-term debt was obtained which carries a
weighted average interest rate of 7.97%. The loan proceeds were
used to retire the outstanding balance of the $1,974,000 revolving
term note and to reduce the outstanding balance of Loan II. The
new debt structure significantly reduces the Company's effective
borrowing rate from a 12.4% weighted average interest rate on $24
million of outstanding debt as of November 30, 1997, to a current
weighted average of 7.97% on $10 million of outstanding debt.
The Company has faced significant cash flow and liquidity issues in the
past. As described above, during the past several months the Company completed
several transactions which have significantly improved the Company's current
cash position, and the Company believes these actions will allow for improvement
in its cash flow condition in the future. A further description of these
transactions and their impact on cash flow follows:
- Conversion of 72,867 shares of preferred stock into 523,873 shares
of common stock in August and September 1998. The conversion will
reduce the Company's annual dividend payments by $65,580.
- Sale of the Grand Harbor Resort & Yacht Club effective June 15,
1998 for $4,500,000 ($3,125,000 of cash and a note receivable of
$1,375,000). The cash proceeds from the sale were used to retire
approximately $2.4 million of long-term debt. The $1,375,000
(10.8%) note receivable was assigned to the Company's Chairman of
the Board in exchange for (i) payment in full of the $776,000
(prime plus 8%) note payable to the Chairman, (ii) cancellation of
$200,000 of 9% preferred stock owned by the Chairman, and (iii) a
cash payment of $399,000 from the Chairman. The Company
indemnified the Chairman in the event of nonpayment by the maker.
The cash proceeds were used to retire the remaining balance of
Loan II (prime plus 8% mortgage note payable) to the Company's
former primary lender. This transaction results in an annual
interest and dividend savings (pre-tax) of $85,000.
- Sale of the Thomas Edison Inn effective September 1, 1998 for
$12,200,000 ($10,200,000 of cash and a note receivable of
$2,000,000). The cash proceeds were used to retire approximately
$9.6 million of long term debt (Loans I and III). $1,100,000 of
undivided interests in the $2 million note receivable have been
sold. The Company indemnified each of the participants in the
event of nonpayment by the maker. The cash proceeds from these
sales were used to reduce the balance of Loan II with the
Company's former primary lender.
- Purchase of real estate of five Wendy's restaurants, which were
previously rented via long-term lease arrangements, for $4.2
million on September 1, 1998. The real estate and business value
of these five restaurants was used as collateral to borrow $5.5
million of new long-term debt. The new debt, with a weighted
average interest rate of 8.1%, was used to purchase the properties
and to reduce the balance of Loan II (prime plus 8% mortgage note
payable) with the Company's former primary lender.
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- Refinance of the mortgage loan on the real estate associated with
the Wendy's operations and owned by the Company. This refinancing,
which was completed in September 1998, resulted in long-term debt
carrying an interest rate of approximately 8% to replace debt
which carried a weighted average interest rate of 13.5%. The
refinancing results in annual interest savings of approximately
$240,000.
Subsequent to these transactions, the Company's long term debt consisted
primarily of $9.8 million of long term debt requiring monthly payments of
$83,174, including interest ranging from 7.77% to 8.15% through October 2018.
The new loan documents contain certain covenants regarding the
maintenance of certain financial ratios which are effective November 30, 1998.
The annual debt service of this current debt structure is approximately
$1.2 million compared to an annual debt service of approximately $3.1 million on
the debt that was retired as a result of the sale of the hotel assets and the
new debt borrowings.
Based on the new debt structure, the Company plans to meet its current
obligations over the next twelve months by:
- Accessing working capital as needed from cash reserves of
approximately $1,000,0000.
- Reducing corporate overhead through a management restructuring in
connection with the sale of the hotels.
- Exploring financing options for certain of the planned capital
expenditures instead of using operating cash flow.
- Accessing $900,000 of unused business value loans through the
Company's new primary lender.
- Reducing or deferring capital expenditures.
- Managing relationships with vendors to utilize cash discounts or
to obtain extension of credit terms where appropriate.
- Generating additional cash flow by opening additional Wendy's
restaurants.
There can be no assurances, however, that the Company will be able
to complete any or all of the above activities or that completion would yield
the results expected.
The Company's planned capital expenditures for the next twelve
months are approximately $600,000 for building improvements and furniture,
fixture and equipment purchases at existing Wendy's restaurants and the
corporate office. The Company has signed a $6.25 million commitment to finance
both the real estate and the personal property for the development of five new
Wendy's restaurants.
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COMPUTER SYSTEMS - YEAR 2000 IMPACT
- -----------------------------------
The Company and its vendors have become increasingly reliant on
computer systems to process transactions and to provide relevant business
information. The majority of computer systems designed prior to the mid-1990's
are susceptible to a well publicized problem associated with an inability to
process date related information beginning with the year 2000. Almost all of the
Company's computer hardware was acquired within the past two years. The Company
is in the process of reviewing its computer hardware and software with the
assistance of the software designers to ensure that all significant software
applications are year 2000 compliant, and anticipates completing its review
during fiscal 1998. Based on the results of the review to date, the Company
believes that the point-of-sale system, which monitors all sales, inventory and
labor activity, is year 2000 compliant. However, the critical systems which are
used to (i) produce financial statements, (ii) process payroll, and (iii)
compare actual product usage with planned product usage are not year 2000
compliant. The Company has estimated that replacement or modification of those
systems will be necessary at a cost ranging from $200,000 to $300,000. However,
the Company can make no assurance that all year 2000 risks to the Company and to
its critical vendor systems can be identified and successfully negated through
modification or replacement of existing programs. The Company does not expect to
incur significant additional costs to complete its review of computer systems to
determine what measures are required to be year 2000 compliant. Pending the
final results of this review, the Company cannot determine the actual cost that
may be required to ensure that all the critical computer systems are year 2000
compliant.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
In August and September 1998, the Company issued 523,873 unregistered
common shares to nine individuals as part of the conversion of their 73,867
Series A Convertible Preferred Shares. The preferred shares had been purchased
in 1996 and 1997, and were convertible into common shares at a conversion price
of $1.41 per common share (based on the liquidation value of $10.00 per
preferred share). This issuance was exempt from registration pursuant to Section
3(a)(9) of the Securities Act of 1933.
ITEM 5. OTHER INFORMATION.
On July 16, 1998, the Board of Directors appointed James P. Bishop and
Christopher P. Hendy to fill vacancies on the Board of Directors.
On July 16, 1998, the Board approved an amendment to the Company's
Amended and Restated Articles of Incorporation to modify the conversion formula
on the Company's Series A Convertible Preferred Stock in order to encourage
conversion and thereby reduce the Company's annual dividend expense. The
amendment permitted conversion, until September 14, 1998, at a price
representing the average daily high and low bid prices of the Company's common
shares over a 10-day trading period. A one dollar increase in the conversion
price occurs each subsequent three month period (until the price reaches $7.00
per share). The Restated and Amended Articles of Incorporation were filed with
the Michigan Department of Consumer & Industry Services Corporation on July 31,
1998.
On August 7, 1998, the Company, through Wendy's of Michigan, entered
into an agreement with Wendy's International, Inc. (the franchisor of the 25
Wendy's restaurants operated by the Company) to clarify certain aspects of the
franchise rights granted to Wendy's of Michigan.
On September 2, 1998, the Board of Directors suspended the Company's
Employee Share Purchase Plan to eliminate the Company's annual administration
fee payable to the Company's transfer agent.
On September 2, 1998, to facilitate the conversion of the Series A
Convertible Preferred Stock, the Board amended the Company's Bylaws to opt out
of the Chapter 7B (being Sections 790 through 799) of the Michigan Business
Corporation Act, such that Chapter 7B would not apply to any "control share
acquisition" (as that term is defined by Chapter 7B) involving the Company's
common shares. On September 15, 1998, the Board amended the Company's Bylaws to
opt back into Chapter 7B such that Chapter 7B applies to any control share
acquisition that occurs thereafter.
On October 6, 1998, Christopher B. Hewett resigned as the Company's
President and Chief Executive Officer in order to pursue other business
opportunities. The Board of Directors appointed the Company's Executive Vice
President, Robert E. Schermer, Jr., as the new President and Chief Executive
Officer. Mr. Hewett remains a member of the Company's Board of Directors.
22
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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 of Meritage
Hospitality Group Inc.
3.2 Restated and Amended Bylaws of Meritage Hospitality Group Inc. (1)
10.16 Agreement and Consent dated August 7, 1998 between WM Limited
Partnership - 1998, Meritage Hospitality Group Inc., MHG Food
Service Inc., Meritage Capital Corp., MCC Food Service Inc.,
Robert E. Schermer, Jr., and Christopher B. Hewett.
10.17 Waiver, Third Amendment and Modification Agreement to Loan
Agreement dated November 26, 1996 among Meritage Hospitality Group
Inc., SC Inn Inc., GHR Inc., Thomas Edison Inn, Incorporated, MHG
Food Service Inc., GHYC Inc., as obligors, and Great American Life
Insurance Company, as lender.
10.18 Sample Construction Loan Agreement with Captec Financial Group,
Inc.
10.19 Sample Promissory Note with Captec Financial Group, Inc. regarding
real estate financing.
10.20 Sample Mortgage with Captec Financial Group, Inc. regarding real
estate financing.
10.21 Sample Promissory Note with Captec Financial Group, Inc. regarding
leasehold financing.
10.22 Sample Mortgage with Captec Financial Group, Inc. regarding
leasehold financing.
10.23 Sample Promissory Note with Captec Financial Group, Inc. regarding
business value financing.
10.24 Sample Security Agreement with Captec Financial Group, Inc.
regarding business value financing.
10.25 Agreement dated October 1, 1998 by and between Robert E. Schermer,
Sr. and the Company regarding sale of $1,375,000 promissory note.
27 Financial Data Schedule.
All Exhibits filed herewith except as noted:
(1) Filed in the Quarterly Report on Form 10-Q for the Company's fiscal quarter
ended May 31, 1998.
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(b) Reports on Form 8-K.
--------------------
On August 10, 1998, the Company filed Amendment No. 1 to the
Form 8-K originally filed on June 18, 1998 which reported that
the Company's wholly-owned subsidiary sold certain real and
personal property, including the Grand Harbor Resort & Yacht
Club located in Spring Lake, Michigan, for $4,500,000. The
Amendment included pro forma consolidated financial statements
regarding the sale.
On September 9, 1998, the Company filed a Form 8-K which
reported that the Company's wholly-owned subsidiary sold
certain real and personal property, including the Thomas
Edison Inn located in Port Huron, Michigan, for $12,200,000 of
which the Company received $10,200,000 in cash and a
$2,000,000 one-year secured promissory note bearing interest
at 8.0% over the prime lending rate. The Company reduced its
long-term indebtedness by approximately $9,600,000 as a result
of this sale.
The Company also reported that, through its Wendy's of
Michigan operations, it purchased the real estate comprising
five of the Wendy's restaurants currently operated by the
Company for $4,200,000.
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 9, 1998 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 of Meritage
Hospitality Group Inc.
3.2 Restated and Amended Bylaws of Meritage Hospitality Group Inc. (1)
10.16 Agreement and Consent dated August 7, 1998 between WM Limited
Partnership - 1998, Meritage Hospitality Group Inc., MHG Food
Service Inc., Meritage Capital Corp., MCC Food Service Inc.,
Robert E. Schermer, Jr., and Christopher B. Hewett.
10.17 Waiver, Third Amendment and Modification Agreement to Loan
Agreement dated November 26, 1996 among Meritage Hospitality Group
Inc., SC Inn Inc., GHR Inc., Thomas Edison Inn, Incorporated, MHG
Food Service Inc., GHYC Inc., as obligors, and Great American Life
Insurance Company, as lender.
10.18 Sample Construction Loan Agreement with Captec Financial Group,
Inc.
10.19 Sample Promissory Note with Captec Financial Group, Inc. regarding
real estate financing.
10.20 Sample Mortgage with Captec Financial Group, Inc. regarding real
estate financing.
10.21 Sample Promissory Note with Captec Financial Group, Inc. regarding
leasehold financing.
10.22 Sample Mortgage with Captec Financial Group, Inc. regarding
leasehold financing.
10.23 Sample Promissory Note with Captec Financial Group, Inc. regarding
business value financing.
10.24 Sample Security Agreement with Captec Financial Group, Inc.
regarding business value financing.
10.25 Agreement dated October 1, 1998 by and between Robert E. Schermer,
Sr. and the Company regarding sale of $1,375,000 promissory note.
27 Financial Data Schedule.
All Exhibits filed herewith except as noted:
(1) Filed in the Quarterly Report on Form 10-Q for the Company's fiscal quarter
ended May 31, 1998.
25