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 May 31, 1999.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to ____________________
Commission File Number: 0-17442
MERITAGE HOSPITALITY GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-2730460
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
40 PEARL STREET, N.W., SUITE 900
GRAND RAPIDS, MICHIGAN 49503
(Address of Principal Executive (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 July 12, 1999 there were 5,750,706 outstanding Common Shares, $.01 par
value.
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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 possible future action which the Company intends to pursue to
achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors. Factors which could cause actual performance to differ materially from
these forward looking statements include, without limitation, competition;
changes in local and national economic conditions; changes in consumer tastes
and views about the nutritional quality of quick-service food; severe weather;
changes in travel patterns; increases in food, labor and energy costs; the
availability and cost of suitable restaurant sites; fluctuating insurance rates;
the availability of an adequate number of employees; the general reputation of
Wendy's restaurants; and the recurring need for renovation and capital
improvements. Also, the Wendy's restaurants are subject to extensive government
regulations relating to, among other things, zoning, minimum wage, public health
certification and food safety, and the operation of its restaurants. Because
Meritage's restaurant operations are concentrated in smaller urban areas of
Michigan, a marked decline in the Michigan economy could adversely affect
Meritage's operations.
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, 1998. The Company has restated its prior year consolidated
statement of cash flows to present the lodging group business segment as a
discontinued operation. The results of operations for the three and six month
periods ended May 31, 1999 are not necessarily indicative of the results to be
expected for the full year.
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3
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1999 AND NOVEMBER 30, 1998
==============================================================================================================
ASSETS
MAY 31,
1999 NOVEMBER 30,
(UNAUDITED) 1998
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 1,312,785 $ 2,109,358
Receivables 57,445 70,974
Notes receivable, current portion 3,166,507 2,719,617
Inventories 167,910 165,156
Prepaid expenses and other current assets 149,266 90,796
----------- -----------
Total current assets 4,853,913 5,155,901
PROPERTY, PLANT AND EQUIPMENT, NET 15,595,505 13,182,940
OTHER ASSETS
Note receivable, net of current portion -- 500,000
Goodwill, net of amortization of $244,523 and
$153,758, respectively 5,065,201 5,155,965
Franchise costs, net of amortization of $28,766 and
and $17,806, respectively 646,234 632,194
Financing costs, net of amortization of $10,263 and
and $3,314, respectively 322,972 261,815
Deferred charges and other assets 39,631 75,431
----------- -----------
Total other assets 6,074,038 6,625,405
----------- -----------
Total assets $26,523,456 $24,964,246
=========== ===========
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
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4
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
MAY 31, 1999 AND NOVEMBER 30, 1998
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
MAY 31,
1999 NOVEMBER 30,
(UNAUDITED) 1998
------------ ------------
CURRENT LIABILITIES
Current portion of long-term debt $ 1,647,001 $ 1,199,458
Current portion of obligations under capital leases 310,952 294,577
Short-term borrowings 1,100,000 1,100,000
Trade accounts payable 1,056,504 727,199
Amount due related party -- 245,260
Income taxes payable 5,000 50,000
Accrued liabilities 1,286,969 1,308,987
------------ ------------
Total current liabilities 5,406,426 4,925,481
LONG-TERM DEBT 12,138,486 10,623,946
OBLIGATIONS UNDER CAPITAL LEASES 1,235,369 1,395,049
DEFERRED REVENUE 1,886,748 1,992,026
NET LIABILITIES OF DISCONTINUED OPERATIONS 197,065 593,855
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value; authorized 5,000,000 shares;
200,000 shares designated as Series A convertible cumulative
preferred stock; issued and outstanding
44,520 shares (liquidation value - $445,200) 445 445
Common stock - $0.01 par value; authorized 30,000,000
shares; issued and outstanding 5,748,419 and
5,742,586 shares, respectively 57,484 57,426
Additional paid in capital 13,309,909 13,299,467
Note receivable from the sale of shares, net of
valuation allowance of $5,007,390 and
$4,666,755, respectively (1,660,962) (1,660,962)
Accumulated deficit (6,047,514) (6,262,487)
------------ ------------
Total stockholders' equity 5,659,362 5,433,889
------------ ------------
Total liabilities and stockholders' equity $ 26,523,456 $ 24,964,246
============ ============
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
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5
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED MAY 31,
(UNAUDITED)
===================================================================================================================
1999 1998
------------ ------------
FOOD AND BEVERAGE REVENUE $ 14,020,536 $ 12,713,910
COSTS AND EXPENSES
Cost of food and beverages 4,070,017 3,668,318
Operating expenses 8,165,362 7,629,492
General and administrative expenses 875,570 1,569,966
Depreciation and amortization 622,849 619,629
------------ ------------
Total costs and expenses 13,733,798 13,487,405
------------ ------------
OPERATING EARNINGS (LOSS) 286,738 (773,495)
OTHER INCOME (EXPENSE)
Interest expense (669,348) (740,757)
Interest income 249,590 315,444
Other income -- 518,312
Gain on disposal of assets 297,227 --
Minority interest -- 25,677
------------ ------------
Total other income (expense) (122,531) 118,676
------------ ------------
Earnings (loss) from continuing operations 164,207 (654,819)
EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS - NOTE C 70,800 (479,232)
------------ ------------
Net earnings (loss) 235,007 (1,134,051)
DIVIDENDS ON PREFERRED STOCK 20,034 62,274
------------ ------------
NET EARNINGS (LOSS) ON COMMON SHARES $ 214,973 $ (1,196,325)
============ ============
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
Continuing operations $ 0.03 $ (0.16)
Discontinued operations 0.01 (0.11)
------------ ------------
Net earnings (loss) $ 0.04 $ (0.27)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 5,745,021 4,414,859
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 5,943,546 4,414,859
============ ============
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
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MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MAY 31,
(UNAUDITED)
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1999 1998
----------- -----------
FOOD AND BEVERAGE REVENUE $ 7,527,506 $ 6,690,794
COSTS AND EXPENSES
Cost of food and beverages 2,178,904 1,953,142
Operating expenses 4,355,593 3,882,603
General and administrative expenses 365,463 621,735
Depreciation and amortization 324,853 309,265
----------- -----------
Total costs and expenses 7,224,813 6,766,745
----------- -----------
EARNINGS (LOSS) FROM OPERATIONS 302,693 (75,951)
OTHER INCOME (EXPENSE)
Interest expense (339,001) (371,253)
Interest income 119,422 158,989
Other income -- 518,239
Gain on disposal of assets 140,592 --
----------- -----------
Total other income (expense) (78,987) 305,975
----------- -----------
Earnings from continuing operations 223,706 230,024
LOSS FROM DISCONTINUED OPERATIONS - NOTE C -- (164,270)
----------- -----------
Net earnings 223,706 65,754
DIVIDENDS ON PREFERRED STOCK 10,017 31,137
----------- -----------
NET EARNINGS ON COMMON SHARES $ 213,689 $ 34,617
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
Continuing operations $ 0.04 $ 0.04
Discontinued operations -- (0.03)
----------- -----------
Net earnings $ 0.04 $ 0.01
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 5,747,404 5,006,008
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 5,900,365 5,006,008
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SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
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MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED NOVEMBER 30, 1998 AND THE SIX MONTH PERIOD ENDED MAY 31, 1999
(UNAUDITED)
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SERIES A NOTE
CONVERTIBLE ADDITIONAL RECEIVABLE
PREFERRED COMMON PAID-IN SALE OF ACCUMULATED
STOCK STOCK CAPITAL SHARES DEFICIT TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 1, 1997 $ 1,384 $ 32,188 $ 12,982,295 $ (5,700,645) $ (7,285,261) $ 29,961
Issuance of 1,999,935 shares of
common stock -- 19,999 4,561,155 -- -- 4,581,154
Conversion of 73,867 shares of
convertible preferred shares into
523,873 common shares (739) 5,239 (4,500) -- -- --
Cancellation of 20,000 shares of
convertible preferred stock (200) -- (199,800) -- -- (200,000)
Dividends paid - preferred stock -- -- -- -- (107,928) (107,928)
Recognition of interest income
on note receivable from sale
of shares -- -- 627,072 (627,072) -- --
Establishment of valuation
allowance on note receivable
from sale of shares -- -- (4,666,755) 4,666,755 -- --
Net earnings -- -- -- -- 1,130,702 1,130,702
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BALANCE AT NOVEMBER 30, 1998 445 57,426 13,299,467 (1,660,962) (6,262,487) 5,433,889
Issuance of 5,835 shares of
common stock -- 58 10,442 -- -- 10,500
Dividends paid - preferred stock -- -- -- -- (20,034) (20,034)
Recognition of interest income
on note receivable from sale
of shares -- -- 340,635 (340,635) -- --
Increase in valuation allowance
on note receivable from sale
of shares -- -- (340,635) 340,635 -- --
Net earnings -- -- -- -- 235,007 235,007
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BALANCE AT MAY 31, 1999 $ 445 $ 57,484 $ 13,309,909 $ (1,660,962) $ (6,047,514) $ 5,659,362
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SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
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MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED MAY 31,
(UNAUDITED)
1998
1999 (RESTATED)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 235,007 $(1,134,051)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities
Depreciation and amortization 622,849 619,629
Compensation and fees paid by issuance of common stock 10,500 2,809
Insurance proceeds in excess of net book value of
fire damaged assets 102,733 --
Minority interest in net loss of consolidated subsidiaries -- (25,677)
Interest income on note receivable from sale of shares -- (306,878)
Interest expense refinanced as long-term debt -- 5,299
Decrease (increase) in cash value of life insurance 22,943 (8,884)
(Decrease) increase in deferred revenue (105,278) 2,090,000
(Increase) decrease in current assets (47,695) 113,934
Decrease in net (liabilities) assets of discontinued operations (396,790) 380,860
Increase in current liabilities 17,028 774,925
----------- -----------
Net cash provided by operating activities 461,297 2,511,966
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (3,016,618) (165,854)
Payment for franchise agreement (25,000) --
Collection on note receivable 53,110 --
Payment for acquisition of business -- (755,200)
Increase in other assets -- (61,570)
----------- -----------
Net cash used in investing activities (2,988,508) (982,624)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 2,185,713 --
Payment of financing costs (68,106) (11,250)
Principal payments of long-term debt (223,630) (760,274)
Payments on obligations under capital leases (143,305) (128,613)
Proceeds from issuance of stock -- 3,335
Preferred dividends paid (20,034) (62,274)
----------- -----------
Net cash provided by (used in) financing activities 1,730,638 (959,076)
----------- -----------
Net (decrease) increase in cash (796,573) 570,266
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,109,358 1,061,475
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,312,785 $ 1,631,741
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION - SEE NOTE A
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
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9
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED MAY 31, 1999 AND 1998
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NOTE A - SUPPLEMENTAL CASH FLOW INFORMATION
1999 1998
(Restated)
-------------- -------------
Cash paid for interest expense $ 670,731 $ 681,355
============== =============
SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
$550,000 short term note payable retired and replaced
by construction loan $ -
=============
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
=============
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, 1999 and 1998:
THREE MONTHS ENDED MAY 31, SIX MONTHS ENDED MAY 31,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Numerators
Earnings (loss) from continuing
operations $ 223,706 $ 230,024 $ 164,207 $(654,819)
Less preferred stock dividends 10,017 31,137 20,034 62,274
--------- --------- --------- ---------
Earnings (loss) on common shares - basic 213,689 198,887 144,173 (717,093)
Effect of dilutive securities
Convertible preferred stock 10,017 31,137 20,034 62,274
Stock options -- -- -- --
--------- --------- --------- ---------
Earnings (loss) on common shares - diluted $ 223,706 $ 230,024 $ 164,207 $(654,819)
========= ========= ========= =========
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MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS - CONTINUED
FOR THE SIX MONTH PERIODS ENDED MAY 31, 1999 AND 1998
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NOTE B - EARNINGS (LOSS) PER SHARE (CONTINUED)
THREE MONTHS ENDED MAY 31, SIX MONTHS ENDED MAY 31,
-------------------------------- ------------------------------
1999 1998 1999 1998
------------- -------------- ------------- -----------
Denominators
Weighted average common shares
outstanding - basic 5,747,404 5,006,008 5,745,021 4,414,859
Effect of dilutive securities
Convertible preferred stock 130,557 -- 184,730 --
Stock options 22,404 -- 13,795 --
--------- --------- --------- ---------
Weighted average common shares
outstanding - diluted 5,900,365 5,006,008 5,943,546 4,414,859
========= ========= ========= =========
For the three and six months ended May 31, 1998, (i) convertible
preferred stock was not included in the computation of diluted earnings per
share because the effect of conversion would be antidilutive, and (ii)
exercisable stock options were not included in the computation of diluted
earnings per share because the option prices were greater than average quarterly
market prices.
NOTE C - DISCONTINUED OPERATIONS
Effective May 31, 1998, the Company began accounting for its lodging
business segment as discontinued operations. As of May 31, 1999 and November 30,
1998, assets and liabilities of the discontinued lodging segment included in the
balance sheet are summarized below:
MAY 31, NOVEMBER 30,
1999 1998
-------------- ------------
Assets
Current assets $ -- $ 13,264
Other assets -- 16,511
Liabilities
Current liabilities (197,065) (623,630)
--------- ---------
Net liabilities of discontinued operations $(197,065) $(593,855)
========= =========
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MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS - CONTINUED
FOR THE SIX MONTH PERIODS ENDED MAY 31, 1999 AND 1998
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NOTE C - DISCONTINUED OPERATIONS (CONTINUED)
A summary of the results of operations of the discontinued operations
for the three and six month periods ended May 31, 1999 and 1998 is as follows:
For the six month periods ended
May 31, 1999 and 1998 1999 1998
----------- -----------
Revenues $ -- $ 4,224,973
Costs and expenses -- 4,016,185
----------- -----------
Earnings from operations -- 208,788
Other expense -- (688,020)
----------- -----------
Loss from operations of discontinued operations -- (479,232)
Gain on disposal of discontinued operations (70,800) --
----------- -----------
Net income (loss) from discontinued operations $ 70,800 $ (479,232)
=========== ===========
For the three month periods ended
May 31, 1999 and 1998 1999 1998
----------- -----------
Revenues $ -- $ 2,184,674
Costs and expenses -- 2,008,674
----------- -----------
Earnings from operations -- 176,000
Other expense -- (340,270)
----------- -----------
Loss from operations of discontinued operations $ -- $ (164,270)
=========== ===========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
The Company's continuing operations consists of its operation of 27
"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, results of continuing operations for the
three and six month periods ended May 31, 1999 and May 31, 1998 also include
expenses related to the Company's corporate office and are summarized in the
following tables:
Statement of Operations
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Three month periods ended May 31, Six month periods ended May 31,
---------------------------------------------- ------------------------------------------
$ (000's) % of Revenue $ (000's) % of Revenue
-------------------- ---------------------- -------------------- -----------------
1999 1998 1999 1998 1999 1998 1999 1998
-------------------- ---------------------- -------------------- ------------------
Food and beverage revenue $ 7,528 $ 6,691 100.0% 100.0% $ 14,020 $ 12,714 100.0% 100.0%
Costs and expenses
Cost of food and beverages 2,179 1,953 28.9 29.2 4,069 3,668 29.0 28.9
Operating expenses 4,356 3,883 57.9 58.0 8,173 7,629 58.3 60.0
General and administrative
Restaurant operations 274 297 3.7 4.4 570 644 4.1 5.1
Corporate level expenses 91 325 1.2 4.9 297 926 2.1 7.3
Depreciation and amortization 325 309 4.3 4.6 623 620 4.4 4.9
-------------------- ---------------------- -------------------- -----------------
Total costs and expenses 7,225 6,767 96.0 101.1 13,732 13,487 97.9 106.1
-------------------- ---------------------- -------------------- -----------------
Earnings (loss) from operations 303 (76) 4.0 (1.1) 288 (773) 2.1 (6.1)
Other income (expense)
Interest expense (339) (371) (4.5) (5.6) (670) (741) (4.8) (5.8)
Interest income 119 159 1.6 2.4 249 315 1.8 2.5
Other income -- 518 -- 7.7 -- 518 -- 4.0
Gain on disposal of assets 141 -- 1.9 -- 297 -- 2.1 --
Minority interest -- -- -- -- -- 26 -- 0.2
-------------------- ---------------------- -------------------- -----------------
Total other income (expense) (79) 306 (1.0) 4.5 (124) 118 (.9) 0.9
-------------------- ---------------------- -------------------- -----------------
Earnings (loss) from
continuing operations $ 224 $ 230 3.0% 3.4% $ 164 $ (655) 1.2% (5.2%)
==================== ====================== ==================== =================
REVENUE
Food and beverage revenue increased $837,000 or 12.5% for the three
months ended May 31, 1999 compared to the same period of 1998. For the six
months ended May 31, 1999 food and beverage revenue increased $1,306,000 or
10.2% compared to the same period of 1998. Revenue for the three and six months
ended May 31, 1999 includes sales from two new restaurants opened on February
18, 1999 and March 18, 1999, respectively. In April 1999, one of the Company's
existing restaurants was damaged by fire and is currently closed for renovation.
Food and beverage revenue on a per restaurant basis for restaurants in operation
during both the first and second quarters of 1999 and 1998 are set forth in the
following table:
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Average Net Sales Per Restaurant Unit
-------------------------------------
1999 1998 Increase % Increase
--------- --------- ----------- -----------
Three months ended May 31 $287,207 $267,199 $ 20,008 7.5%
Three months ended February 28 257,908 240,465 17,443 7.3%
-------- -------- --------
Six months ended May 31 $545,115 $507,664 $ 37,451 7.4%
======== ======== ========
The 7.5% ($480,000) increase in same store sales for the second quarter
of 1999 was primarily attributable to (i) increased customer traffic during late
night hours (sales between the hours of 10:00 p.m. and midnight) resulting in a
$95,000 increase in late-night sales, and (ii) a $585,000 increase in "combo"
sales and "upsizing" (the addition of a larger beverage and larger french fry to
the standard combo meal for an additional 39 cents). Same store sales for the
six months ended May 31, 1999 increased 7.4% ($899,000). The increase is
primarily attributable to the continued success of the two promotions described
above: late-night business (increased $208,000 over the prior year), and "combo"
sales (increased $1,032,000 over the prior year). There were no increases in the
average price of menu items for the three and six months ended May 31, 1999. The
Company has experienced an increase in both average sales per transaction and in
increased customer traffic.
COST OF FOOD AND BEVERAGES
Cost of food and beverages as a percentage of food and beverage revenue
was 28.9% for the three months ended May 31, 1999 compared to 29.2% for the
three months ended May 31, 1998. The .3 percentage point decrease in cost of
food and beverages for the second quarter of 1999 is due to both product mix and
cost changes. Cost of food and beverages for the six months ended May 31, 1999
was 29.0% compared to 28.9% for the same period of 1998. Cost of food and
beverage percentages of 28.9% and 29.0%, respectively, for the three and six
months ended May 31, 1999 are in line with the Company's and Wendy's
International's guidelines.
OPERATING EXPENSES
Operating expenses as a percentage of revenue remained fairly constant
for the three months ended May 31, 1999 compared to the same period of 1998
(58.0% of revenue in 1998 and 57.9% in 1999). For the six months ended May 31,
1999, operating expenses were reduced 1.7 percentage points (from 60.0% of
revenue in 1998 to 58.3% in 1999). The net decrease in operating expenses as a
percentage of revenue was primarily the result of reductions in rent expense and
advertising expense in excess of increased payroll costs. A detail discussion
follows:
- Rent Expense
Rent expense decreased $100,000 and $187,000 for the three and six
months ended May 31, 1999, respectively, compared to the same periods of 1998.
As a percentage of sales, rent expense decreased from 4.6% of sales for both the
three and six months ended May 31, 1998 to 2.8% of sales for the same periods in
1999. The reduction in rent expense resulted from the September 1998 purchase of
five restaurants which were previously leased. The Company has realized a
corresponding increase in interest and depreciation expense due to this
purchase.
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- Advertising Expense
As a percentage of revenue, advertising expense decreased .8 percentage
points ($11,000) and 1.3 percentage points ($101,000) for the three and six
month periods ended May 31, 1999, respectively, compared to the same periods in
1998. The reduced expense for the second quarter was the result of an increase
in advertising rebates from PepsiCo compared to rebates received during 1998
from Coca-Cola. Advertising expense for the second quarter of 1999 included
$32,000 of advertising costs incurred by the two new restaurants opened during
1999. The decrease for the six month period also reflected a savings from a
program sponsored by Wendy's International which reduced the national
advertising contribution paid by the franchisees for the six month period ended
February 28, 1999.
- Increased Payroll Costs
Payroll costs for the three months ended May 31, 1999 increased from
31.0% of revenue in 1998 to 33.2% of revenue in 1999. The Company has continued
to be affected by a tight labor market and its effect on the availability and
cost of labor. Average restaurant crew labor cost on a same store basis
increased 14.4% for the three months ended May 31, 1999, compared to the same
period of 1998, due to the following factors:
(i) an increase in the average hourly rate of 5.8% (from
$6.02 to $6.37);
(ii) an increase of 95% in overtime premium paid
(from $31,000 to $61,000); and
(iii) increased average same store sales of 7.5%.
Compounding these cost increases, employee health insurance costs
increased for the second quarter of 1999 from 1.8% of revenue to 2.5% of
revenue, due to an increase in premiums. Beginning April 1, 1999, a portion of
the total premium increase was shared by employees. Additionally, the Company
expensed $19,000 (.3% of revenue) of pre-opening labor costs during the second
quarter of 1999 related to new store openings.
The same factors described above impacted payroll costs for the six
months ended May 31, 1999 compared to the same period of 1998. Payroll costs
increased from 31.9% of revenue in 1998 to 33.3% of revenue in 1999. Average
restaurant crew labor cost on a same store basis increased 12.3% for the six
months ended May 31, 1999 compared to the same period of 1998 due to the
following factors:
(i) an increase in the average hourly rate of 7.4%
(from $5.93 to $6.37);
(ii) an increase of 54% in overtime premium paid
(from $92,000 to $143,000); and
(iii) increased average same store sales of 7.4%.
Compounding these cost increases, employee health insurance costs
increased from 1.9% of revenue to 2.2% of revenue, due to an increase in
premiums. Beginning April 1, 1999 a portion of the total premium increase was
shared by the employees. And finally, the expensing of the pre-opening labor
costs incurred by new stores resulted in a .3 percentage point increase in the
overall payroll cost.
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GENERAL AND ADMINISTRATIVE
Restaurant Operations
General and administrative expenses for the restaurant operations
decreased $23,000 for the three months ended May 31, 1999 compared to the same
period of 1998 (from $297,000 to $274,000), from 4.4% of revenue to 3.7% of
revenue. For the six months ended May 31, 1999 general and administrative
expenses decreased $74,000 (from $644,000 to $570,000), from 5.1% of revenue to
4.1% of revenue. The decrease for the second quarter was primarily due to the
elimination of the general partner fee ($40,000) associated with the former
general partner of the Wendy's limited partnership. The decrease for the six
months ended May 31, 1999 was primarily due to (i) a $72,000 reduction in the
general partner fee, (ii) a $14,000 decrease in outside recruiting costs, and
(iii) a $15,000 decrease in accounting and legal fees. These decreases were
partially offset by an increase in transportation costs due to (i) additional
costs related to two new supervisor positions, and (ii) increased leased vehicle
costs as the various lease agreements were renewed.
Corporate Level Expenses
General and administrative expenses for corporate level expenses
decreased $234,000 (from $325,000 to $91,000), from 4.9% of revenue to 1.2% of
revenue for the three months ended May 31, 1999 compared to the same period of
1998. The decrease was primarily due to (i) a $93,000 reduction in salaries,
bonuses, and related costs resulting from the elimination of several positions,
(ii) a $208,000 reduction in legal expenses resulting primarily from the receipt
of insurance proceeds offsetting costs incurred from previous litigation, and
(iii) a $34,000 decrease in life insurance premiums resulting from the sale of
policies earlier this year. These decreases were offset by non-recurring
reductions in expenses during the second quarter of 1998 which totaled $53,000,
primarily resulting from a workers' compensation insurance adjustment.
For the six months ended May 31, 1999 general and administrative
expenses decreased approximately $629,000 (from $926,000 to $297,000), from 7.3%
of revenue to 2.1% of revenue. The decrease was primarily due to reductions in
the same expense categories as described above including (i) a $211,000 decrease
in salaries, bonuses and related costs, (ii) a $396,000 reduction in legal
expenses resulting from $192,000 in insurance proceeds in 1999 and unusually
high costs in 1998 due to litigation brought by the former general partner of
the now dissolved Wendy's of West Michigan Limited Partnership, and (iii) an
$81,000 reduction in life insurance premiums.
INTEREST EXPENSE
Interest expense for the second quarter of 1999 and 1998 was $339,000
and $371,000, respectively. Interest expense for the six months ended May 31,
1999 and 1998 was $670,000 and $741,000, respectively. Long-term debt was
restructured during the fourth quarter of 1998 which resulted in a weighted
average interest rate of approximately 9.1% for the three and six months ended
May 31, 1999 compared to approximately 13.75% for the same periods of 1998. All
of the Company's long-term debt is now at fixed interest rates compared to
long-term debt prior to the debt restructuring when the Company had both fixed
and variable rate long-term debt. This significant reduction in interest rates
more than offsets the increase in long-term debt. See "Liquidity and Capital
Resources" for details about the Company's long-term debt.
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INTEREST INCOME
Interest income decreased $40,000 for the second quarter (from $159,000
in 1998 to $119,000 in 1999), and $66,000 for the six months ended May 31, 1999
(from $315,000 in 1998 to $249,000 in 1999). During the three and six month
periods ended May 31, 1998 the Company recognized $153,000 and $307,000,
respectively, of non-cash interest on the Company's note receivable from the
sale of stock. In June 1998, the Company discontinued its recognition of this
interest income and reversed the year-to-date interest income previously
recognized. The cash interest income recorded in fiscal year 1999 was primarily
the result of interest earned on the notes receivable obtained in the sale of
the Thomas Edison Inn and the Grand Harbor Resort & Yacht Club.
OTHER INCOME
Other income of $518,000 for the three and six months ended May 31,
1998 was primarily due to the forfeiture of an earnest deposit in the amount of
$500,000 on a contract to sell one of the Company's hotel properties.
GAIN ON DISPOSAL OF ASSETS
A gain of $141,000 and $297,000 was recognized for the three and six
months ended May 31, 1999, respectively. These gains were due to the sale of
life insurance policies during the first two quarters ($200,000), and from the
excess of insurance proceeds over the net book value of fire damaged equipment
($97,000). The Company expects that insurance will cover substantially all of
the costs to restore and equip the fire damaged restaurant.
DISCONTINUED OPERATIONS - LODGING GROUP
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 C of the Company's Financial Statements.
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LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS
Cash and cash equivalents ("cash") decreased $796,573, from $2,109,358
as of November 30, 1998, to $1,312,785 as of May 31, 1999. The decrease in cash
was the result of the following:
Net cash provided by operating activities $ 461,297
Net cash used in investing activities (2,988,508)
Net cash provided by financing activities 1,730,638
------------------
Net decrease in cash $ (796,573)
==================
Net cash provided by operating activities decreased $2,051,000 for the
six months ended May 31, 1999 compared to the same period of 1998 despite an
increase in net earnings of $1,369,000. The decrease was due in large part to
the receipt of $2,090,000 in marketing and conversion funds (deferred revenue)
from the Company's beverage supplier in May 1998. The decrease was also the
result of a significant increase in net current liabilities (excluding the
current portions of long-term debt and capital lease obligations) in 1998
compared to a reduction in net liabilities of discontinued operations from
November 30, 1998 to May 31, 1999.
Net cash used in investing activities increased $2,006,000 for the six
months ended May 31, 1999 compared to the same period of 1998. The increase was
primarily the result of a $2,933,000 investment in two new restaurants and the
land for a third new restaurant in 1999. This investment in new restaurants
compares to an investment of $755,000 in 1998 for the acquisition of the
remaining interest in the former Wendy's of West Michigan Limited Partnership.
Net cash provided by financing activities increased $2,690,000 for the
six months ended May 31, 1999 compared to the same period of 1998. The increase
is primarily the result of the acquisition of $2,186,000 of long-term debt used
to finance the investment in two new restaurants and the land for a third new
restaurant in 1999. Also, due to the restructuring of the Company's long-term
debt in the fourth quarter of 1998, principal payments on long-term debt were
$537,000 less for the six months ended May 31, 1999 compared to the same period
of 1998.
FINANCIAL CONDITION
As of May 31, 1999 the Company's current liabilities exceeded its
current assets by $553,000, compared to November 30, 1998 when current assets
exceeded current liabilities by $230,000. At these dates, the ratios of current
assets to current liabilities were 0.90:1 and 1.05:1, respectively. The
discussion above of cash flows for the six months ended May 31, 1999 explains
the decrease in cash as well as the most significant reasons for the decrease in
working capital.
As of May 31, 1999, the Company's long-term debt consisted primarily of
the following:
1) $9,517,000 mortgage notes payable requiring monthly payments of
$80,568, including interest at rates ranging from 7.77% to 8.42%
with maturity 20 years from date of loan ranging from September
2018 through June 2019.
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2) $1,094,000 notes payable requiring monthly payments of $10,802,
including interest at 8.15% through September 2018.
3) $1,546,000 construction notes payable requiring monthly payments
of interest only at rates ranging from 7.44% to 7.50% through the
completion of the building construction, at which time a
permanent mortgage note will be secured.
4) $307,000 equipment notes payable requiring monthly payments of
$8,126, including interest at rates ranging from 7.5% to 8.8%.
5) $1,322,000 obligation arising from the assignment of the note
receivable from the sale of the Grand Harbor Resort & Yacht Club,
which assignment was with recourse. Due to the recourse nature of
the obligation, it is included in the current portion of
long-term debt in the Financial Statements. The related note
receivable is accounted for as a current asset. Because the
obligation was assigned with recourse, to the extent the note
receivable is not paid by the maker, the company would be
required to make payment to the assignee upon completion of its
collection efforts. On July 1, 1999 the Company received a
scheduled payment on the note receivable from the sale of the
Grand Harbor Resort & Yacht Club reducing the outstanding balance
of both the obligation and note receivable to $475,000.
The various loan agreements contain loan 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; 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 May 31, 1999, the Company was in compliance with these covenants.
The cash management issues currently facing the Company can be
described in three areas: (i) on-going operations and capital improvements at
the existing Wendy's restaurants, (ii) investment in new Wendy's restaurants,
and (iii) continued control of corporate level expenses.
The single most significant issue facing management at existing
restaurants is the combination of decreased availability of employees and the
continued increasing cost of labor. Wendy's International has established a
"Service Excellence" program which incorporates the use of new tools (e.g.
timing mechanisms to improve drive-through service times) to allow for lower
labor costs per customer. The required capital expenditures for the Service
Excellence program are estimated at an average cost of approximately $10,000 per
restaurant over the next twelve months. In addition to those capital expenditure
requirements, the Company estimates that the existing restaurants will require
approximately $250,000 of capital improvements over the next twelve months.
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The Company has invested approximately $3,000,000 into new restaurants
during the six months ended May 31, 1999. This investment consists of land,
building and equipment for two new restaurants and land for a third new
restaurant which opened on June 24, 1999. The third restaurant requires an
additional investment of $1,000,000 in the third quarter. The financing for this
third new restaurant is being provided by Fleet Business Credit Corporation
under a program approved by Wendy's International. It is also estimated that the
Company will open two more restaurants during the remainder of the fiscal year
(for a total of five new restaurants in 1999). The Company has received a
forward commitment to finance $3,750,000 in new store investments for three
additional restaurants over the next twelve months. The Company plans to provide
financing for the new restaurants through a combination of (i) proceeds from
borrowings under the forward fixed rate financing commitment, (ii) leasing of
real estate and equipment, and (iii) equipment financing. It is anticipated that
these financing options will provide for approximately 90% of the cost for newly
opened units over the next twelve months. The Company has begun discussions with
a number of lenders to provide the equipment financing at rates from 5.6%
(floating) to 8.5% (fixed).
For the three new restaurants already opened this fiscal year, the
Company has secured financing totaling $3,201,000, of which $2,965,000 has been
borrowed. Permanent 20 year mortgages have been obtained for $1,940,000 at fixed
rates ranging from 8.42% to 8.53%. A permanent mortgage of $1,261,000 will be
obtained for the restaurant which opened June 24, 1999 at such time as all the
final costs are known. This mortgage is for the first of four restaurants which
are committed to be financed at a fixed rate equal to 2.2% over the then-current
20 year treasuries (approximately 8.0% at current rates).
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 this requirement
will be met in the current year given the reductions in corporate level expenses
and the receipt of non-operating cash during this fiscal year. Approximately
$392,000 of such non-operating proceeds were received during the first six
months of the year, and it is expected that $744,000 of net proceeds from notes
receivable will be received during the remainder of this fiscal year.
In light of these operational and investment cash management issues,
the Company plans to meet its current obligations over the next twelve months
by:
- Utilizing cash reserves in excess of $1,000,000.
- Using $900,000 of annual projected operating cash generated from
existing Wendy's restaurants.
- Generating additional operating cash flow from newly opened
restaurants.
- Exploring the acquisition of a working capital and an equipment
line of credit.
- Collecting on the notes receivable, which are expected to
generate net proceeds of approximately $744,000.
- Exploring the financing of certain capital expenditures at
existing Wendy's restaurants.
- Participating in vendor financing programs for capital
expenditures required under the Service Excellence program.
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20
- Exploring the use of equipment financing for certain of the new
restaurants.
- Reducing or deferring capital expenditures described above.
There can be no assurances, however, that the Company will be able to
complete the above activities or that completion would yield the results
expected. Also, $1,575,000 of the notes receivable have been assigned with
recourse. To the extent those notes are not paid by their makers, the Company
would be obligated to make the payments to the assignees upon completion of its
collection efforts. Although the Company believes that the collateral is
sufficient to cover the remaining obligations on those notes, there is no
assurance that the Company would be able to effect such a realization when
payments on the notes would ultimately be due to the assignees, and no
assurances that the amounts recovered would be sufficient to cover amounts due
those assignees. In such circumstances, the Company would be required to secure
necessary funds through borrowings or other means.
INFLATION AND CHANGING PRICES
The 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. 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.
COMPUTER SYSTEMS - YEAR 2000 IMPACT
The Company and its vendors have become increasingly reliant on
computer systems to process transactions and to provide relevant business
information. The majority of computer systems designed prior to the mid-1990's
are susceptible to a well publicized problem associated with an inability to
process date related information beginning with the year 2000. Almost all of the
Company's computer hardware was acquired within the past three years. The
Company is completing its review of its computer hardware and software with the
assistance of the software designers to ensure that all significant software
applications are year 2000 compliant. Based on the results of the review to
date, the Company believes that the point-of-sale system (which monitors all
sales, inventory and labor activity) is year 2000 compliant. The critical
systems which are used to (i) produce financial statements, (ii) process
payroll, and (iii) process purchases and cash disbursements have also been
tested and are year 2000 compliant. However, the Company's software used to
compare actual product usage with planned product usage is not year 2000
compliant. The Company plans to replace its product usage software with year
2000 compliant software.
The Company has estimated that replacement and enhancement of systems
will be necessary at a cost ranging from $75,000 to $150,000. However, the
Company can make no assurance that all year 2000 risks to the Company and to its
critical vendor systems can be identified and successfully negated through
modification or replacement of existing programs. The Company does not expect to
incur significant additional costs to complete 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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Despite assurances from its various software vendors, the Company could
find that its critical computer systems are not year 2000 compliant or that it
experiences computer equipment failures. In such event, the Company's
contingency plan includes the following:
1) Point-of-Sale System - The Company would immediately begin to
manually process its sales, monitor its inventory, and record its
labor expense. This manual system would remain in effect until
such time as the year 2000 issues are corrected or a substitute
computerized system is installed. It is possible, however, that
if the year 2000 issues cannot be corrected, or a substitute
system cannot be installed within a short period of time, there
could be adverse financial and operational effects on the
Company.
2) Financial Statements, Cash Disbursements and Payroll Systems -
The Company would initiate one or more of the following
contingency plans until the year 2000 issue can be corrected: (i)
manual processing, (ii) utilization of an alternative software
program on a "stop-gap" basis until the system can be corrected,
or (iii) contract with a third party vendor to process payments,
payroll and financial statements. If the year 2000 issues cannot
be corrected on a timely basis, there could be adverse financial
and operational effects on the Company.
Although the Company has not been informed of material year 2000 issues
by third parties with which it has a material relationship, there is no
assurance that these entities will be year 2000 compliant on a timely basis.
Unanticipated failures or significant delays in furnishing products or services
by third parties or general public infrastructure service providers could have
adverse financial and operational effects on the Company.
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PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1999 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 18, 1999,
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 March 26, 1999.
4,812,619 Common Shares were present in person or by proxy at the meeting,
representing 83.7% 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 (4,751,103
shares), Christopher P. Hendy (4,750,853 shares), Joseph L. Maggini (4,751,103
shares), Jerry L. Ruyan (4,750,853 shares), Robert E. Schermer, Sr. (4,750,693
shares) and Robert E. Schermer, Jr. (4,751,103 shares). Each director received
at least 98.7% of the total shares voted.
The shareholders also ratified the appointment of Grant Thornton LLP as the
Company's independent public accountants for the fiscal year ending November 30,
1999 pursuant to the following vote: In Favor: 4,771,803; Opposed: 26,578;
Abstentions: 14,238.
ITEM 5. OTHER INFORMATION.
On May 18, 1999, 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.
On April 16, 1999, the Company announced plans to join with Meijer, Inc. to
develop and operate an experimental prototype combination store, which combines
a 3,400 square foot full service Wendy's restaurant and drive-through operated
by the Company, with a 3,500 square foot convenience store and gas station
facility operated by Meijer. Meijer is a major retail operator that currently
operates over 100 convenience store and gas station facilities located adjacent
to Meijer's retail properties in Michigan, Ohio, Indiana, Illinois and Kentucky.
One or two combination stores are being planned during the next 6-12 months.
Depending on their performance, additional stores may be rolled out in the
future.
On May 12, 1999, the Company announced that it had obtained a $5.0 million
construction and permanent financing commitment from Fleet Business Credit
Corporation to develop up to four new free-standing Wendy's restaurants. The
financing terms include a 20-year amortization with a fixed interest rate of
220 basis points over 20-year treasuries.
On March 18, 1999 the Company opened its 27th Wendy's restaurant located
near 16th Street and Waverly Road in Holland, Michigan. On June 24, 1999, the
Company opened its 28th Wendy's restaurant located in the Knapp's Corner
development along East Beltline in Grand Rapids, Michigan. Both new restaurants
employ approximately 40 people.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit List.
-------------
Exhibit No. Description of Document
- ----------- ----------------------------------------------------------------
10.1 Amended Indemnification Agreement dated May
21, 1999 among Meritage Hospitality Group
Inc., MHG Food Service Inc., WM Limited
Partnership - 1998, S & Q Management, LLC,
Robert E. Schermer, Jr. and Ray E. Quada.
10.2 Sample Loan Agreement with Fleet Business
Credit Corporation.
10.3 Sample Promissory Note with Fleet Business
Credit Corporation.
10.4 Sample Mortgage with Fleet Business Credit
Corporation.
10.5 Sample Guaranty with Fleet Business Credit
Corporation.
27 Financial Data Schedule.
- -------------------------
(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 12, 1999 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
- ----------- ----------------------------------------------------------
10.1 Amended Indemnification Agreement dated May 21, 1999 among
Meritage Hospitality Group Inc., MHG Food Service Inc.,
WM Limited Partnership - 1998, S & Q Management, LLC,
Robert E. Schermer, Jr. and Ray E. Quada.
10.2 Sample Loan Agreement with Fleet Business
Credit Corporation.
10.3 Sample Promissory Note with Fleet Business
Credit Corporation.
10.4 Sample Mortgage with Fleet Business Credit
Corporation.
10.5 Sample Guaranty with Fleet Business Credit
Corporation.
27 Financial Data Schedule.
24