<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended August 31, 1996.
Or
/ / Transition report under 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 Small Business Issuer as Specified in its Charter)
MICHIGAN 38-2730460
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
40 PEARL STREET, N.W., SUITE 900
GRAND RAPIDS, MICHIGAN 49503
(Address of Principal Executive Offices)
(616) 776-2600
(Issuer's Telephone Number, including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 1, 1996, there were 3,192,050 outstanding Common Shares, $.01 par
value.
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
- --------------------------------------------------------------------------------
<PAGE> 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-QSB and Item 310(b)
of Regulation S-B. 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, shareholders'
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-KSB/A Amendment No. 2
for the fiscal year ended November 30, 1995. Certain reclassifications have been
made in 1995 to conform with the 1996 presentation. The results of operations
for the three and nine month periods ended August 31, 1996 are not necessarily
indicative of the results to be expected for the full year.
As discussed in the Company's "Plan of Operation" (Part I, Item 2), the
Company is involved in a tender offer to obtain a majority of the limited
partnership interests in the Wendy's of West Michigan Limited Partnership (the
"Partnership"). Successful acquisition of a controlling interest in the
Partnership will not, by itself, give the Company control over management. Under
the terms of the Partnership Agreement, the general partner of the Partnership
has complete authority over the management of the Partnership. Because control
of management requires control of the general partner, which has not occurred,
consummation of a significant combination by the Company is not probable at this
time. Therefore, the Company has not included in this report the financial
statements of the Partnership as prescribed by Item 310(c) of Regulation S-B.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
2
<PAGE> 3
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF AUGUST 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 1,166,096
Trade accounts receivable, less allowance
for doubtful accounts of $54,000 864,652
Inventories 166,842
Prepaid expenses and other current assets 492,265
------------
Total Current Assets 2,689,855
PROPERTY, PLANT AND EQUIPMENT, NET 14,242,807
DEFERRED INCOME TAXES 437,100
OTHER ASSETS 1,249,071
INVESTMENT IN UNCONSOLIDATED COMPANY 1,144,375
AMOUNTS DUE FROM SHAREHOLDER --
------------
Total Assets $ 19,763,208
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 711,029
Accrued expenses 829,046
Current portion of long-term debt 583,334
------------
Total Current Liabilities 2,123,409
LONG-TERM DEBT, EXCLUSIVE OF CURRENT PORTION 13,967,193
DEFERRED INCOME TAXES 752,000
------------
Total Liabilities 16,842,602
------------
COMMITMENTS AND CONTINGENCIES --
SHAREHOLDERS' EQUITY
Preferred Shares - $.01 par value;
authorized 5,000,000 shares; issued and
outstanding, none --
Common Shares - $.01 par value;
authorized 30,000,000 shares; issued and
outstanding, 3,192,050 shares 31,919
Additional paid in capital 11,467,316
Note receivable from sale of shares (4,998,515)
Accumulated deficit (3,580,114)
------------
Total Shareholders' Equity 2,920,606
------------
Total Liabilities and Shareholders' Equity $ 19,763,208
============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
3
<PAGE> 4
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1996 AND 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
REVENUE
<S> <C> <C>
Room revenue $ 4,828,014 $ 4,483,745
Food revenue 4,396,949 4,447,658
Beverage revenue 1,707,551 1,732,903
Telephone revenue 105,715 32,849
Sundry revenue 366,668 198,802
------------ ------------
Total Revenue 11,404,897 10,895,957
------------ ------------
COST AND EXPENSES
Cost of food sales 1,601,464 1,713,821
Cost of beverage sales 472,846 447,797
Operating expenses 5,560,444 5,418,688
General and administrative expenses 2,328,843 2,319,438
Other expenses (net) 107,990 --
Depreciation and amortization 675,372 921,624
------------ ------------
Total costs and expenses 10,746,959 10,821,368
------------ ------------
EARNINGS FROM OPERATIONS 657,938 74,589
OTHER INCOME (EXPENSE)
Gain on sale of land -- 234,113
Interest income 517,382 219,999
Interest expense (1,194,997) (1,011,736)
------------ ------------
Loss before federal income tax (19,677) (483,035)
FEDERAL INCOME TAX BENEFIT 6,690 103,000
------------ ------------
Net loss $ (12,987) $ (380,035)
============ ============
LOSS PER SHARE $ 0.00 $ (0.25)
============ ============
AVERAGE NUMBER OF SHARES OUTSTANDING 3,043,903 1,520,150
============ ============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
4
<PAGE> 5
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED AUGUST 31, 1996 AND 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
REVENUE
<S> <C> <C>
Room revenue $ 2,256,899 $ 2,126,236
Food revenue 1,566,136 1,820,475
Beverage revenue 676,574 702,084
Telephone revenue 53,964 32,849
Sundry revenue 159,101 83,564
----------- -----------
Total Revenue 4,712,674 4,765,208
----------- -----------
COST AND EXPENSES
Cost of food sales 536,194 693,892
Cost of beverage sales 198,854 181,923
Operating expenses 2,037,659 2,003,154
General and administrative expenses 838,422 781,518
Other expenses 22,101 --
Depreciation and amortization 225,995 307,724
----------- -----------
Total costs and expenses 3,859,225 3,968,211
----------- -----------
EARNINGS FROM OPERATIONS 853,449 796,997
OTHER INCOME (EXPENSE)
Interest income 159,730 31,279
Interest expense (470,252) (279,085)
----------- -----------
Earnings before federal income tax 542,927 549,191
FEDERAL INCOME TAX EXPENSE 184,596 247,900
----------- -----------
Net Earnings $ 358,331 $ 301,291
=========== ===========
EARNINGS PER SHARE $ 0.12 $ 0.20
=========== ===========
AVERAGE NUMBER OF SHARES OUTSTANDING 3,091,152 1,520,150
=========== ===========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
5
<PAGE> 6
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED NOVEMBER 30, 1995 AND THE
NINE-MONTH PERIOD ENDED AUGUST 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE
ADDITIONAL RECEIVABLE
PREFERRED COMMON PAID-IN FROM SHARE ACCUMULATED
SHARES SHARES CAPITAL SALE DEFICIT TOTAL
------ ------ ------- ---- ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
NOVEMBER 30, 1994 $ -- $ 15,200 $ 5,217,820 $ -- $ (7,950) $ 5,225,070
Issuance of 1,500,000
Common Shares -- 15,000 5,466,930 (5,481,930) -- --
Recognition of
interest income on
note receivable
from sale of shares -- -- -- (120,602) -- (120,602)
Net loss -- -- -- -- (2,049,102) (2,049,102)
------------ ------------ ------------- ------------- ------------ -------------
BALANCE AT
NOVEMBER 30, 1995 -- 30,200 10,684,750 (5,602,532) (2,057,052) 3,055,366
------------ ------------ ------------- -------------- ------------ -------------
Issuance of 171,900
Common Shares -- 1,719 1,072,656 -- -- 1,074,375
Dividend paid ($.50 per share) -- -- -- -- (1,510,075) (1,510,075)
Recognition of
interest income on
note receivable
from sale of shares -- -- -- (436,073) -- (436,073)
Prepayment of note receivable -- -- (290,090) 1,040,090 -- 750,000
Net loss -- -- -- -- (12,987) (12,987)
------------ ------------ ------------- -------------- ------------- ------------
BALANCE AT AUGUST 31, 1996 $ -- $ 31,919 $ 11,467,316 $ (4,998,515) $ (3,580,114) $ 2,920,606
============ ============ ============= ============== ============= ============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
6
<PAGE> 7
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1996 AND 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (12,987) $ (380,035)
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 675,372 921,912
Deferred income tax benefit (6,690) (7,807)
Interest income on note receivable from sale of shares (436,073) --
Gain on sale of land -- (234,113)
(Increase) decrease in assets
Accounts receivable (294,224) 39,404
Other current assets 15,009 39,609
Refundable federal income taxes 460,068 11,795
Increase (decrease) in liabilities
Accounts payable and accrued expenses (1,010,555) 244,892
------------ ------------
Net cash provided by (used in) operating activities (610,080) 635,657
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,699,839) (331,148)
Proceeds from sale of property, plant and equipment -- 609,113
Increase in other assets (371,373) (189,755)
Purchase of investment in unconsolidated company (70,000) --
Reduction in amounts due from shareholder 435,430 1,827,431
------------ ------------
Net cash provided by (used in) investing
activities (1,705,782) 1,915,641
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 14,875,000 --
Payments related to borrowing
from shareholders (2,300) (250,463)
Principal payments of long-term debt (11,967,558) (1,126,476)
Partial prepayment of note receivable 750,000 --
Dividend paid (1,510,075) --
------------ ------------
Net cash provided by (used in) financing 2,145,067 (1,376,939)
------------ ------------
Net increase (decrease) in cash (170,795) 1,174,359
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,336,891 621,761
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,166,096 $ 1,796,120
============ ============
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION - SEE NOTE A
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
7
<PAGE> 8
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED AUGUST 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A - SUPPLEMENTAL CASH FLOW INFORMATION
1996 1995
Cash paid for interest expense $1,222,245 $1,011,736
Non-cash investing and financing activities - On July 25, 1996 a non-cash
transaction occurred whereby 171,900 Common Shares, with a fair value of
$1,074,375, were issued in exchange for an 11.4% ownership interest in an
unconsolidated company.
NOTE B - STOCK OPTION AND STOCK PURCHASE PLANS
Effective May 21, 1996, the Company's shareholders approved the 1996 Management
Equity Incentive Plan, the 1996 Directors' Share Option Plan, the Directors'
Compensation Plan and the Employee Share Purchase Plan. The complete plan
documents were included in the Company's 1996 Proxy Statement. There has been no
activity during 1996 under any plan except the 1996 Management Equity Incentive
Plan. Activity under the 1996 Management Equity Incentive Plan is summarized as
follows:
<TABLE>
<CAPTION>
Options Granted (shares):
<S> <C>
Beginning of year ---
Additional granted 167,500
-------
End of period 167,500
=======
Option Price Per Share $ 7.00
=========
Options Exercised ---
=========
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following is management's discussion and analysis of certain
significant factors which have affected the Company's results of operations and
financial condition during the periods included in the accompanying unaudited
consolidated financial statements.
PLAN OF OPERATION
From the Company's inception in 1986 until January 1996, Donald W.
Reynolds served as Chairman of the Board, President, Chief Executive Officer,
Treasurer and Secretary of the Company, and the Company engaged Innkeepers
Management Company, a Michigan corporation wholly owned by Mr. Reynolds
("Innkeepers"), to manage the Company's business pursuant to a Management
Agreement.
As reported in the Company's Report on Form 8-K filed on February 5,
1996, Mr. Reynolds was removed as an officer and director of the Company by the
St. Clair County (Michigan) Circuit Court on January 8, 1996, in the course of a
proceeding brought by TEI Acquisition, Inc. ("TAI") (Case No. 95-00-33-88-CZ,
Deegan, J.). The court appointed Frank O. Staiger as acting President and
director. On January 25, 1996, Meritage Capital Corp., then the Company's
majority shareholder, amended the Company's Bylaws to classify the Board of
Directors into two classes, expanded the Board of Directors to 10 directors and
appointed five new directors. On January 25, 1996, the Company's newly expanded
Board of Directors removed David C. Distad, son-in-law of Mr. Reynolds, as Vice
President and Chief Financial Officer of the Company and terminated the
Management Agreement with Innkeepers. The Company no longer employs a third
party management company. Instead, the Company has installed new management to
operate its business directly in an effort to utilize more efficiently the
Company's resources and employees. Since January 25, 1996, the Company has
fundamentally changed its operations in a manner management believes will have a
positive effect on future performance.
On September 17, 1996, the Company commenced a tender offer to obtain a
majority of the limited partnership interests in the Wendy's of West Michigan
Limited Partnership. If the Company is successful in obtaining control of the
Partnership, it is expected that the acquisition would have a positive effect on
the net earnings and operating cash flow of the Company. The Partnership
operates 26 "Wendy's Old-Fashioned Hamburgers" restaurants in West Michigan. The
Partnership reported sales of $25.4 million in 1995 and has approximately 900
employees. For details of the acquisition see "Financial Condition and
Liquidity" below.
RESULTS OF OPERATIONS
Telephone and Sundry Revenue, previously included as Other Income in
1995 in the amount of $231,651 for the nine-month period ended August 31, 1995
and $116,413 for the third quarter ended August 31, 1995, has been reclassified
to Sundry Revenue to conform with the 1996 presentation.
Total Revenue
Total revenue for the nine-month period ended August 31, 1996 increased
4.7% to $11,404,897 as compared to $10,895,957 for the same period of 1995.
Total revenues for the third quarter of 1996 and 1995 were $4,712,674 and
$4,765,208 respectively, a decrease of 1.1%. A decrease in social function
bookings in the third quarter of 1996 compared to the third quarter of 1995
contributed to the decrease in food and beverage revenue. The variance in total
revenues is also partially attributable to a variance in hotel occupancy. For
the nine-month periods ended August 31, 1996 and 1995, hotel occupancy was 61.6%
and 59.1%, respectively. For the third quarter of 1996 and 1995, hotel occupancy
was 74.5% and 78.0%, respectively. Increases in the average daily rate had a
favorable impact on room revenue for both the three and nine month periods ended
August 31, 1996 compared to the same periods of 1995. The average daily rate
increased from $81.77 per day for the third quarter of 1995 to $89.52 per day
for the third quarter of 1996, an increase of
9
<PAGE> 10
9.5%. For the nine months ended August 31, 1996, the average daily rate was
$77.85 compared to $75.69 for the nine months ended August 31, 1995, an increase
of 2.9%.
Cost of Sales
Cost of food sales for the nine-month periods ended August 31, 1996 and
1995 was $1,601,464 (36.4%) and $1,713,821 (38.5%), respectively; cost of
beverage sales was $472,846 (27.7%) and $447,797 (25.8%), respectively. For the
third quarter of 1996 and 1995, cost of food sales was $536,194 (34.2%) and
$693,892 (38.1%), respectively; cost of beverage sales was $198,854 (29.4%) and
$181,923 (25.9%), respectively. The improvement in cost of food sales is a
result of the introduction of new menus with higher profit margins and
improvements in food cost controls. The increase in cost of beverage sales was
primarily due to abnormally high employee turnover at the hotel bars.
Operating Expenses
For the nine-month period ended August 31, 1996, operating expenses
increased 2.6% to $5,560,444 as compared to $5,418,688 for the same period of
1995. The increase in operating expenses is directly related to the increase in
hotel revenues and occupancy. For the third quarter of 1996, operating expenses
increased 1.7% to $2,037,659 as compared to $2,003,154 for the same period of
1995.
General and Administrative Expenses
For the nine-month period ended August 31, 1996, general and
administrative expenses increased $9,505 (.4%), as compared to the same period
of 1995. For the third quarter of 1996, general and administrative expenses
increased $56,904 (7.3%) as compared to the same period of 1995. The increase in
administrative expenses for the third quarter of 1996 was primarily due to
increased legal and professional fees incurred in connection with the settlement
of all litigation and claims on August 13, 1996. (See "Legal Proceedings," Part
II, Item 1.)
Other Expenses
As previously mentioned, other income for 1995 has been reclassified to
facilitate comparison of operations. For the nine-month period ended August 31,
1996, other expenses (net) of $107,990 consisted primarily of approximately
$173,000 of expenses incurred to effect the change in control and management of
the Company less approximately $87,000 of income from the collection of
outstanding amounts due from parties related to the Company prior to the change
in control and management.
Depreciation and Amortization
Depreciation and amortization expense for the nine-month period ended
August 31, 1996 was $675,372 as compared to $921,624 for the same period of
1995. For the third quarter of 1996, depreciation expense was $225,995 as
compared to $307,724 for the same period of 1995. Certain property and equipment
acquired in 1986 (the year of incorporation) which had a ten year life became
fully depreciated in 1995. As a result, depreciation expense for the three and
nine-month periods ended August 31, 1996 was lower than that for the same
periods in 1995.
Interest Income
Interest income for the nine-month period ended August 31, 1996 was
$517,382 as compared to $219,999 for the same period of 1995. For the third
quarter of 1996, interest income was $159,730 as compared to $31,279 for the
same period last year. Interest income consists primarily of interest on notes
receivable from the sale of Common Shares ($436,073 for the nine-month period
ended August 31, 1996, and
10
<PAGE> 11
$135,943 for the quarter ended August 31, 1996). Interest income for the
nine-month period ended August 31, 1995 was primarily due to amounts received
from parties related to the Company prior to the change in control and
management.
Interest Expense
Similar to other businesses in the hospitality industry, the Company is
sensitive to changes in interest rates and costs. In fiscal 1995, the Federal
Reserve Board increased the discount rate on several occasions, resulting in
increases in the prime rate. The Company currently has indebtedness of
approximately $14,500,000, $12,000,000 ("first mortgage loan") which is subject
to interest at a floating rate of 1% over the prime rate and $2,500,000 ("second
mortgage loan") which is subject to interest at a floating rate of 8% over the
prime rate. At August 31, 1995, the Company had indebtedness of approximately
$11,700,000 subject to interest at floating rates from 1% over the prime rate to
2% over the prime rate, which debt was retired in connection with the Company's
long-term debt refinancing in February 1996. The increase in interest expense
for the three and nine months ended August 31, 1996 is due primarily to the
Company's increased indebtedness along with slight increases in the prime rate.
FINANCIAL CONDITION AND LIQUIDITY
As of August 31, 1996, the Company's current assets exceeded its
current liabilities by $566,446 (working capital) for a current ratio of 1.3:1,
compared to working capital of $43,681 (1.0:1) at November 30, 1995 and working
capital of $1,935,389 (2.1:1) at May 31, 1996. The increase in working capital
from November 30, 1995 to August 31, 1996 was the result of an increase in
working capital provided by the Company's long-term debt refinancing in February
1996. Working capital has decreased since the date of the refinancing due to the
Company's significant investment in property, plant and equipment, which
investment totaled $1,699,839 for the nine months ended August 31, 1996.
As discussed in the Company's "Plan of Operation" (Part I, Item 2), the
Company has commenced a tender offer to obtain a majority of the limited
partnership interests in the Wendy's of West Michigan Limited Partnership. Under
the terms of the tender offer, the acquisition of the Partnership interests will
cost $3,360,000. The Company has a loan commitment in the amount of $3,000,000,
the proceeds from which will be used to acquire the Partnership interests. The
balance of the funds needed to complete the tender offer will be provided from
cash on hand. The $3,000,000 loan will require monthly payments of interest only
at 8% over the prime rate for the first year followed by sixty equal monthly
payments of principal, plus accrued interest. It is expected that the
acquisition of the Partnership will have a positive effect on the net earnings
and operating cash flow of the Company.
As discussed in the Company's Annual Report on Form 10-KSB/A Amendment
No. 2 for the fiscal year ended November 30, 1995, in order to increase revenues
at the Company's existing properties, the Company believes it must make
substantial capital expenditures in both the short and long term. This
investment in property, plant and equipment began in the current fiscal year.
For the next twelve months, the Company has budgeted capital expenditures at its
existing properties of approximately $2,000,000. The Company plans to provide
funds for this investment from (i) proceeds from a proposed private placement of
$1,000,000 in convertible preferred stock, (ii) proceeds from refinancing the
Company's first mortgage loan, (iii) funds generated from operations, or (iv)
the sale of non-core assets. If the Company is not successful in its proposed
convertible preferred stock private placement, in refinancing its first mortgage
loan or in the sale of non-core assets, the Company may be required to revise
its capital expenditure plan (both in amount and in timing of the expenditures)
based on available cash.
The Company's long-term debt consists primarily of promissory notes in
the principal amount of $12,000,000 (first mortgage loan) and $2,500,000 (second
mortgage loan). The $12,000,000 first mortgage loan requires monthly payments of
interest only at 1% over the prime rate through March 1, 1997. The $2,500,000
11
<PAGE> 12
second mortgage loan requires monthly payments of interest only at 8% over the
prime rate through March 1, 1997. Beginning April 1, 1997 monthly principal
payments will be required on both loans totaling $116,667 plus accrued interest.
The scheduled annual principal payments on the first and second mortgage loans
are as follows:
<TABLE>
<CAPTION>
Principal
Year Payments
---- --------
<S> <C> <C>
1997 933,333
1998 1,400,000
1999 1,400,000
2000 1,400,000
2001 1,400,000
Later years 7,966,667
---------
Total 14,500,000
==========
</TABLE>
Because the terms of the loan agreements provide for the scheduled
reduction in principal, and because the Company desires to increase the first
mortgage loan from $12,000,000 to $14,000,000 to partially fund scheduled
capital expenditures through 1998, the Company is pursuing refinancing and
restructuring of the first mortgage loan. If the Company is successful in
refinancing its first mortgage loan, the restructured $14,000,000 first mortgage
is anticipated to contain a 20 year amortization schedule (due in seven years)
with a fixed interest rate of approximately 10% (based on current interest
rates). This loan would result in a more favorable first mortgage loan from a
cash flow perspective. There can be no assurance, however, that the Company will
be successful in the refinancing and restructuring of its first mortgage loan.
12
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As reported on a Form 8-K dated August 20, 1996, all litigation
described in Part 1, Item 3 of the Company's Annual Report on Form 10-KSB/A
Amendment No. 2 for the fiscal year ended November 30, 1995, was settled on
August 13, 1996. Pursuant to this settlement, Donald W. Reynolds (the Company's
former majority shareholder and President), and various parties affiliated with
Mr. Reynolds, agreed to sell all 860,148 shares of Common Stock of the Company
owned by them, with a portion of the proceeds to be paid to other parties to the
litigation. On September 24, 1996, it was reported that all 860,148 shares of
Common Stock had been sold by Reynolds and his affiliates pursuant to the
settlement agreement. The Company incorporates by reference herein the Form 8-K
dated August 20, 1996.
ITEM 2. CHANGES IN SECURITIES.
As reported on a Form 8-K dated August 20, 1996, in order to facilitate
the settlement described in Item 1 above, the Company's Board of Directors
adopted a resolution, effective August 13, 1996, to amend the Company's Bylaws
to add a new article whereby the Company opted out of Chapter 7B of the Michigan
Business Corporation Act. Chapter 7B, also called the Michigan Control Share
Acquisition Act, defines "control shares" as shares that, when added to
previously owned shares, increase an individual's percentage ownership of voting
stock to 20% or more, 33 1/3% or more, or a majority or more of outstanding
Common Stock. Under Chapter 7B, a person purchasing control shares must receive
shareholder approval or the purchased shares may be non-voting shares. The
Company incorporates by reference herein the Form 8-K dated August 20, 1996. See
Article X of the Bylaws attached hereto as Exhibit 3(ii).
ITEM 5. OTHER INFORMATION.
In June and July, 1996, the Company acquired 157.25 units, or about 12.5%,
of the Wendy's of West Michigan Limited Partnership. The Partnership reported
sales of $25.4 million in 1995 and has approximately 900 employees. Also, as
discussed in the Company's "Plan of Operation" (Part I, Item 2), on September
17, 1996, the Company commenced a tender offer to obtain an additional 480 units
of the Partnership which, if successful, would give the Company a majority of
the limited partnership interests.
During the third quarter, the Company changed the name of its
subsidiary, Spring Lake Inn, Inc., to Grand Harbor Resort Inc.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBIT LIST.
Exhibit No. Description of Document
- ----------- --------------------------------------------------------------
3(ii) Restated and Amended Bylaws of Meritage Hospitality Group Inc.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K. The Company filed a report on Form 8-K on
August 20, 1996, which reported (i) the settlement agreement
discussed in Part II, Item 1 herein and (ii) the Bylaw
amendment described in Part II, Item 2 herein. No financial
statements were filed.
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: October 8, 1996 MERITAGE HOSPITALITY GROUP INC.
By /s/ Christopher B. Hewett
-------------------------------------
Christopher B. Hewett
President and Chief Executive Officer
By /s/ William D. Badgerow
-------------------------------------
William D. Badgerow
Vice President and Treasurer
(Chief Financial Officer)
15
<PAGE> 16
EXHIBIT INDEX
Exhibit No. Description of Document
- ------------ --------------------------------------------------------------
3(ii) Restated and Amended Bylaws of Meritage Hospitality Group Inc.
27 Financial Data Schedule.
16
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EXHIBIT 3(ii)
RESTATED AND AMENDED
BYLAWS
OF
MERITAGE HOSPITALITY GROUP INC.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be in the
City of Grand Rapids, County of Kent, State of Michigan.
SECTION 2. OTHER OFFICES. The corporation may also have offices at such
other places both within and without the State of Michigan as the board of
directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
SHAREHOLDERS
SECTION 1. PLACE OF MEETING. All meetings of the shareholders of this
corporation shall be held at the registered office or such other place, either
within or without the State of Michigan, as may be determined from time to time
by the board of directors.
SECTION 2. ANNUAL MEETING OF SHAREHOLDERS. The annual meeting of
shareholders for election of directors and for such other business as may
properly come before the meeting, commencing with the year 1987, shall be held
on the third Tuesday of May, if not a legal holiday, and if a legal holiday,
then on the next business day following, at 10:00 am., local time, or at such
other date and time as shall be determined from time to time by the board of
directors, unless such action is taken by written consent as provided in Article
II, Section 12 of these bylaws. If the annual meeting is not held on the date
designated therefor, the board shall cause the meeting to be held as soon
thereafter as convenient.
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SECTION 3. ORDER OF BUSINESS AT ANNUAL MEETING. The order of business
at the annual meeting of the shareholders shall be as follows:
(a) Reading of notice and proof of mailing,
(b) Reports of Officers,
(c) Election of Directors,
(d) Transaction of other business mentioned in the
notice,
(e) Adjournment,
provided that, in the absence of any objection, the presiding officer may vary
the order of business at his discretion.
SECTION 4. NOTICE OF MEETING OF SHAREHOLDERS. Except as otherwise
provided in the Michigan Business Corporation Act (herein called the "Act"),
written notice of the time, place, and purpose of a meeting of shareholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting, either personally or by mail, to each shareholder of record
entitled to vote at the meeting. When a meeting is adjourned to another time or
place, it is not necessary to give notice of the adjourned meeting if the time
and place to which the meeting is adjourned are announced at the meeting at
which the adjournment is taken and at the adjourned meeting only such business
is transacted as might have been transacted at the original meeting. However, if
after the adjournment the board of directors fix a new record date for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record on the new record date entitled to vote at the meeting.
SECTION 5. LIST OF SHAREHOLDERS ENTITLED TO VOTE. The officer or agent
having charge of the stock transfer books for shares of the corporation shall
make and certify a complete list of the shareholders entitled to vote at a
shareholders' meeting or any adjournment thereof. The list shall:
(a) Be arranged alphabetically within each class and series,
with the address of, and the number of shares held by, each
shareholder.
(b) Be produced at the time and place of the meeting.
(c) Be subject to inspection by any shareholder during the
whole time of the meeting.
(d) Be prima facie evidence as to who are the shareholders
entitled to examine the list or to vote at the meeting.
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SECTION 6. SPECIAL MEETING OF SHAREHOLDERS. A special meeting of
shareholders may be called at any time by the chief executive officer of the
corporation (See Article V, Section 4) or by a majority of the members of the
board of directors then in office, or by shareholders owning, in the aggregate,
not less than ten percent (10%) of all the shares entitled to vote at such
special meeting. The method by which such meeting may be called is as follows:
Upon receipt of a specification in writing setting forth the date and objects of
such proposed special meeting, signed by the chief executive officer, or by a
majority of the members of the board of directors then in office, or by
shareholders as above provided, the secretary of this corporation shall prepare,
sign, and mail the notices requisite to such meeting.
SECTION 7. QUORUM OF SHAREHOLDERS. Unless a greater or lesser quorum is
provided in the articles of incorporation, in a bylaw adopted by the
shareholders, or in the Act, shares entitled to cast a majority of the votes at
a meeting constitute a quorum at the meeting. The shareholders present in person
or by proxy at such meeting may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum. Whether or not a quorum is present, the meeting may be adjourned by a
vote of the shares present.
SECTION 8. VOTE OF SHAREHOLDERS. Each outstanding share is entitled to
one (1) vote on each matter submitted to a vote, unless otherwise provided in
the articles of incorporation. A vote may be cast either orally or in writing.
When an action, other than the election of directors, is to be taken by vote of
the shareholders, it shall be authorized by a majority of the votes cast by the
holders of shares entitled to vote thereon, unless a greater plurality is
required by the articles of incorporation or the Act. Directors shall be elected
by a plurality of the votes cast at an election.
SECTION 9. RECORD DATE FOR DETERMINATION OF SHAREHOLDERS. For the
purpose of determining shareholders entitled to notice of and to vote at a
meeting of shareholders or an adjournment thereof, or to express consent or to
dissent from a proposal without a meeting, or for the purpose of determining
shareholders entitled to receive payment of a dividend or allotment of a right,
or for the purpose of any other action, the board may fix, in advance, a date as
the record date for any such determination of shareholders. The date shall not
be more than sixty (60) nor less than ten (10) days before the date of the
meeting, nor more than sixty (60) days before any other action. If a record date
is not fixed (a) the record date for determination of shareholders entitled to
notice of or to vote at a meeting of shareholders shall be the close of business
on the day next preceding the day on which notice is given, or, if no notice is
given, the day next preceding the day on which the meeting is held, and (b) the
record date for determining shareholders for any purpose other than that
specified in subdivision (a) shall be the close of business on the day on which
the resolution of the board relating thereto is adopted. When a determination of
shareholders of record entitled to notice of or to vote at a meeting of
shareholders has been made as provided in this Section, the determination
applies to any adjournment of the meeting, unless the board fixes a new record
date under this Section for the adjourned meeting.
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SECTION 10. PROXIES. A shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent without a meeting may authorize
one or more other persons to act for him by proxy. A proxy shall be signed by
the shareholder or his authorized agent or representative. A proxy is not valid
after the expiration of three (3) years from its date unless otherwise provided
in the proxy.
SECTION 11. INSPECTORS OF ELECTION. The board of directors, in advance
of a shareholders' meeting, may appoint one (1) or more inspectors of election
to act at the meeting or any adjournment thereof. If inspectors are not so
appointed, the person presiding at a shareholders' meeting may, and on request
of a shareholder entitled to vote thereat shall, appoint one (1) or more
inspectors. In case a person appointed fails to appear or act, the vacancy may
be filled by appointment made by the board of directors in advance of the
meeting or at the meeting by the person presiding thereat. The inspectors shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the validity and
effect of proxies, and shall receive votes, ballots or consents, hear and
determine challenges and questions arising in connection with the right to vote,
count and tabulate votes, ballots or consents, determine the result, and do such
acts as are proper to conduct the election or vote with fairness to all
shareholders. On request of the person presiding at the meeting or a shareholder
entitled to vote thereat, the inspectors shall make and execute a written report
to the person presiding at the meeting of any of the facts found by them and
matters determined by them. The report is prima facie evidence of the facts
stated and of the vote as certified by the inspectors.
SECTION 12. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. The articles of
incorporation may provide that any action required or permitted by the Act to be
taken at an annual or special meeting of shareholders may be taken without a
meeting, without prior notice, and without a vote, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take the action at a meeting at which all shares entitled to vote
thereon were present and voted. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to shareholders who have not consented in writing. Any action required or
permitted by the Act to be taken at an annual or special meeting of shareholders
may be taken without a meeting, without prior notice, and without a vote, if all
the shareholders entitled to vote thereon consent thereto in writing.
SECTION 13. PARTICIPATION IN MEETING BY TELEPHONE. By oral or written
permission of a majority of the shareholders, a shareholder may participate in a
meeting of shareholders by conference telephone or similar communications
equipment by which all persons participating in the meeting may hear each other
if all participants are advised of the communications equipment and the names of
the participants in the conference are divulged to all participants.
Participation in a meeting pursuant to this Section constitute presence in
person at the meeting.
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SECTION 14. NOMINATIONS AND OTHER BUSINESS.
(a) ANNUAL MEETING OF SHAREHOLDERS. (1) Nominations of persons for
election to the Board of Directors of the corporation and proposals of business
to be considered by the shareholders may be made at an annual meeting of
shareholders (i) pursuant to the corporation's notice of meeting, (ii) by or at
the direction of the Board of Directors or (iii) by a shareholder of the
corporation who was a shareholder of record at the time of giving of notice
provided for in this bylaw, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this bylaw.
(2) For nominations or other business to be properly brought
before an annual meeting by a shareholder pursuant to clause (iii) of paragraph
(a)(1) of this bylaw, the shareholder must have given timely notice thereof in
writing to the Secretary of the corporation. To be timely, a shareholder's
notice shall be delivered to the Secretary at the principal executive offices of
the corporation not less than 60 days prior to the annual meeting. Such
shareholder's notice shall set forth (i) as to each person whom the shareholder
proposes to nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (ii)
as to any other business that the shareholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting, and any
material interest in such business of such shareholder and the beneficial owner,
if any, on whose behalf the proposal is made; (iii) as to the shareholder giving
the notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (A) the name and address of such shareholder, as it appears on
the corporation's books, and of such beneficial owner, and (B) the class and
number of shares of the corporation owned beneficially and of record by such
shareholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (a)(2) of this bylaw to the contrary, if the number of directors to
be elected to the Board of Directors of the corporation is increased and there
is no public announcement naming all of the nominees for director or specifying
the size of the increased Board of Directors made by the corporation at least 70
days prior to the annual meeting, a shareholder's notice required by this bylaw
shall also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the Secretary at
the principal executive offices of the corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the corporation.
(b) SPECIAL MEETINGS OF SHAREHOLDERS. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of shareholders at which directors are to be elected pursuant to the
corporation's notice of meeting (i) by or at the direction of the Board of
Directors or (ii) by any shareholder of the corporation who is a shareholder of
record at the time of giving of notice provided for in this bylaw, who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in
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<PAGE> 6
this bylaw. Nominations by shareholders of persons for election to the Board of
Directors may be made at such a special meeting of shareholders if the
shareholder's notice required by paragraph (a) (2) of this bylaw shall be
delivered to the Secretary at the principal executive offices of the corporation
not later than the close of business on the later of the 60th day prior to such
special meeting or the 10th day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting.
(c) GENERAL. (1) Only such persons who are nominated in accordance with
the procedures set forth in this bylaw shall be eligible to serve as directors
and only such shareholder proposals shall be considered at a meeting of
shareholders as shall have been brought before the meeting in accordance with
the procedures set forth in this bylaw. The chairman of the meeting shall have
the power and duty to determine whether a nomination or any business proposed to
be brought before the meeting was made in accordance with the procedures set
forth in this bylaw and, if any proposed nomination or business is not in
compliance with this bylaw, to declare that such defective proposal shall be
disregarded.
(2) For purposes of this bylaw, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national new service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Sections 13, 14, or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this bylaw, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this bylaw. Nothing in this bylaw shall be deemed to affect any rights
of a shareholder to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 of the Exchange Act.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM. (a) The business and affairs of the
corporation shall be managed by a Board of Directors comprised of not less than
10 directors. The directors shall be divided into two classes, as nearly equal
in number as possible. By majority vote of the directors comprising each of the
Class I and Class II directors, the number of directors on the Board may be
increased to any number greater than 10. A director shall hold office until his
or her successor has been duly elected and qualified.
(b) Christopher B. Hewett, David S. Lundeen, Joseph L. Maggini, Robert
E. Schermer, Sr., and Robert E. Schermer, Jr. shall be the initial Class I
directors. The initial Class I directors shall take office on January 25, 1996,
and shall serve until the 1996 annual meeting of shareholders. The term of
office of the Class I directors elected as such at the 1996 annual meeting of
shareholders shall expire at
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the 1997 annual meeting of shareholders. The term of office of the Class I
directors elected as such at the 1997 annual meeting of shareholders and
thereafter shall expire at the second annual meeting of shareholders following
their election.
(c) The incumbent directors as of January 25, 1996 (i.e., Rebecca L.
Awtrey, William F. Ehinger, Joseph L. Michael, Frank O. Staiger, Jr., and
Raymond A. Weigel, III) shall be the initial Class II directors. The initial
Class II directors shall serve until the 1996 annual meeting of shareholders.
The term of office of the Class II directors elected as such at the 1996 annual
meeting of shareholders and thereafter shall expire at the second annual meeting
of shareholders following their election.
(d) Prior to the 1998 annual meeting of shareholders, Meritage
Hospitality Group Incorporated ("Meritage") shall have the right to vote the
shares of the corporation's stock that Meritage owns as of January 25, 1996 (the
"Meritage Block") (i) for the election or removal of Class II directors, and
(ii) for the amendment of this Section 1, only if the corporation determines (or
a court of competent jurisdiction orders) that the corporation's stock acquired
by TEI Acquisition, Inc. directly and indirectly from Donald W. Reynolds (the
"TAI Block") has voting power, or with the consent of a majority of the Class II
directors. There is no limitation on the voting rights or voting power of the
stock in the Meritage Block except as expressly set forth in the immediately
preceding sentence of this subsection (d), and in Article III, Section 3 of
these bylaws. Further, the Meritage Block shall have the right and power to vote
for the election or removal of Class II directors and for the amendment of this
Section 1 at the 1998 annual meeting of shareholders and at all times
thereafter. If for any reason an annual meeting of shareholders does not occur
in 1998, all voting limitations applicable to the Meritage Block contained in
these bylaws in any event shall become null and void on December 31, 1998. There
is no limitation on the voting rights or voting power of any stock with respect
to which Meritage acquires ownership or voting power after January 25, 1996.
(e) Prior to the 1998 annual meeting of shareholders, this Section 1
may be amended only (i) with the approval of a majority of each of the Class I
directors and Class II directors, or (ii) by the holders of a majority of the
shares entitled to vote at an election of directors (subject to the limitation
applicable to the Meritage Block set forth in subsection (d) of this Section 1);
provided, however, that prior to the 1998 annual meeting of shareholders, this
Section 1 may be amended in the same manner that any other provision of these
bylaws may be amended if the amendment is to become effective on or after the
date of the 1998 annual meeting of shareholders. On and after the date of the
1998 annual meeting of shareholders (and in any event after December 31, 1998),
this Section 1 may be amended in the same manner that any other provision of
these bylaws may be amended.
(f) The last sentence of Article IX, Section 1 of these bylaws shall
not be applicable to this Section 1.
SECTION 2. VACANCIES. A position occurring in the board resulting from
a vacancy may be filled by affirmative vote of a majority of the remaining
directors in the class in which the vacancy occurs, though less than a quorum of
the board. A position occurring in the board resulting from an increase in the
number of directors may be filled by affirmative vote of a majority of each
class of directors. Any person who becomes a director pursuant to this Section 2
shall serve for a term of office
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continuing until the annual meeting of shareholders at which the term of office
of the class of directors to which such person was elected expires. If because
of death, resignation, removal or other cause, the corporation has no directors
in office, an officer, a shareholder, an executor, administrator, trustee or
guardian of the person or estate of a shareholder, may call a special meeting of
shareholders in accordance with the articles of incorporation or these bylaws.
SECTION 3. REMOVAL. A director or the entire board may be removed at
any time, with or without cause, by vote of the holders of a majority of the
shares entitled to vote at an election of directors; provided, however, that
prior to the 1998 annual meeting of shareholders, the Meritage Block may be
voted on the question of removing Class II directors only if the corporation
determines (or a court of competent jurisdiction orders) that the TAI Block has
the right to vote on such question. If for any reason an annual meeting of
shareholders does not occur in 1998, all voting limitations applicable to the
Meritage Block contained in these bylaws in any event shall become null and void
on December 31, 1998.
SECTION 4. RESIGNATION. A director may resign by written notice to the
corporation. The resignation is effective upon its receipt by the corporation or
a subsequent time as set forth in the notice of resignation.
SECTION 5. POWERS. The business and affairs of the corporation shall be
managed by its board of directors except as otherwise provided in the Act or in
the articles of incorporation.
SECTION 6. LOCATION OF MEETINGS. Regular or special meetings of the
board of directors may be held either within or without the State of Michigan.
SECTION 7. ORGANIZATION MEETING OF BOARD. The first meeting of each
newly elected board of directors shall be held at the place of holding the
annual meeting of shareholders, and immediately following the same, for the
purpose of electing officers and transacting any other business properly brought
before it, provided that the organization meeting in any year may be held at a
different time and place than that herein provided by a consent of a majority of
the directors of such new board. No notice of such meeting shall be necessary to
the newly elected directors in order legally to constitute the meeting, provided
a quorum shall be present, unless said meeting is not held at the place of
holding and immediately following the annual meeting of shareholders.
SECTION 8. REGULAR MEETING OF BOARD. Regular meetings of the board of
directors may be held without notice at such time and at such place as shall
from time to time be determined by the board.
SECTION 9. SPECIAL MEETING OF BOARD. Special meetings of the board of
directors may be called by the chief executive officer, or by a majority of the
persons then comprising the board of directors, at any time by means of notice
of the time and place thereof to each director, given not less than twenty-four
(24) hours before the time such special meeting is to be held.
SECTION 10. COMMITTEES OF DIRECTORS. The board of directors may
designate one (1) or more committees, each committee to consist of one or more
of the directors of the corporation. The board
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<PAGE> 9
may designate one or more directors as alternate members of any committee, who
may replace an absent or disqualified member at a meeting of the committee. In
the absence or disqualification of a member of a committee, the members thereof
present at a meeting and not disqualified from voting, whether or not they
constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors creating such committee, may exercise all the powers and
authority of the board of directors in the management of the business and
affairs of the corporation. However, such a committee does not have the power or
authority to amend the articles of incorporation, adopt an agreement of merger
or consolidation, recommend to the shareholders the sale, lease, or exchange of
all or substantially all of the corporation's property and assets, recommend to
the shareholders a dissolution of the corporation or a revocation of a
dissolution, amend the bylaws of the corporation, fill vacancies in the board of
directors, or fix compensation of the directors serving on the board or on a
committee; and, unless the resolution of the board of directors creating such
committee or the articles of incorporation expressly so provides, such a
committee does not have the power or authority to declare a dividend or to
authorize the issuance of stock. Any such committee, and each member thereof,
shall serve at the pleasure of the board of directors.
SECTION 11. QUORUM AND REQUIRED VOTE OF BOARD AND COMMITTEES. At all
meetings of the board of directors, or of a committee thereof, a majority of the
members of the board then in office, or of the members of a committee thereof,
constitutes a quorum for transaction of business. The vote of the majority of
members present at a meeting at which a quorum is present constitutes the action
of the board or of the committee unless the vote of a larger number is required
by the Act. Amendment of these bylaws by the board requires the vote of not less
than a majority of the members of the board then in office. If a quorum shall
not be present at any meeting of the board of directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
SECTION 12. ACTION BY WRITTEN CONSENT. Action required or permitted to
be taken pursuant to authorization voted at a meeting of the board of directors
or a committee thereof, may be taken without a meeting if, before or after the
action, all members of the board or of the committee consent thereto in writing.
The written consents shall be filed with the minutes of the proceedings of the
board or committee. The consent has the same effect as a vote of the board or
committee for all purposes.
SECTION 13. COMPENSATION OF DIRECTORS. The board of directors, by
affirmative vote of a majority of directors in office and irrespective of any
personal interest of any of them, may establish reasonable compensation of
directors for services to the corporation as directors or officers, but approval
of the shareholders is required if the articles of incorporation, these bylaws
or any provisions of the Act so provide.
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SECTION 14. PARTICIPATION IN MEETING BY TELEPHONE. By oral or written
permission of a majority of the board of directors, a member of the board of
directors or of a committee designated by the board may participate in a meeting
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section constitutes presence in
person at the meeting.
ARTICLE IV
NOTICES
SECTION 1. NOTICE. Whenever any notice or communication is required to
be given by mail to any director or shareholder under any provision of the Act,
or of the articles of incorporation or of these bylaws, it shall be given in
writing, except as otherwise provided in the Act, to such director or
shareholder at the address designated by him for that purpose or, if none is
designated, at his last known address. The notice or communication is given when
deposited, with postage thereon prepaid, in a post office or official depository
under the exclusive care and custody of the United States postal service. The
mailing shall be registered, certified, or other first class mail except where
otherwise provided in the Act. Written notice may also be given in person or by
telegram, telex, radiogram, cablegram, or mailgram, and such notice shall be
deemed to be given when the recipient receives the notice personally, or when
the notice, addressed as provided above, has been delivered to the company, or
to the equipment transmitting such notice. Neither the business to be transacted
at, nor the purpose of, a regular or special meeting of the board of directors
need be specified in the notice of the meeting.
SECTION 2. WAIVER OF NOTICE. When, under the Act or the articles of
incorporation or these bylaws, or by the terms of an agreement or instrument, a
corporation or the board or any committee thereof may take action after notice
to any person or after lapse of a prescribed period of time, the action may be
taken without notice and without lapse of the period of time, if at any time
before or after the action is completed the person entitled to notice or to
participate in the action to be taken or, in case of a shareholder, by his
attorney-in-fact, submits a signed waiver of such requirements. Neither the
business to be transacted at, nor the purpose of, a regular or special meeting
of the board of directors need be specified in the waiver of notice of the
meeting. Attendance of a person at a meeting of shareholders, in person or by
proxy, or of a director at a meeting constitutes a waiver of notice of such
meeting, except when the person or director attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
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ARTICLE V
OFFICERS
SECTION 1. SELECTION. The board of directors, at its first meeting and
at each meeting following the annual meeting of shareholders, shall elect or
appoint a president, a secretary, and a treasurer. The board of directors may
also elect or appoint a chairman of the board, one (1) or more vice presidents
and such other officers, employees, and agents as it shall deem necessary who
shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the board. Two
(2) or more offices may be held by the same person but an officer shall not
execute, acknowledge, or verify an instrument in more than one (1) capacity.
SECTION 2. COMPENSATION. The salaries of all officers, employees, and
agents of the corporation shall be fixed by the board of directors; provided,
however, that the board may delegate to the officers the fixing of compensation
of assistant officers, employees, and agents.
SECTION 3. TERM, REMOVAL, AND VACANCIES. Each officer of the
corporation shall hold office for the term for which he is elected or appointed
and until his successor is elected or appointed and qualified, or until his
resignation or removal. An officer elected or appointed by the board of
directors may be removed by the board with or without cause at any time. An
officer may resign by written notice to the corporation. The resignation is
effective upon its receipt by the corporation or at a subsequent time specified
in the notice of resignation. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
SECTION 4. CHIEF EXECUTIVE OFFICER. At the first meeting of each
newly-elected board of directors, the board shall designate the chairman of the
board or president as the chief executive officer of the corporation; provided,
however, that if a motion is not made and carried to change the designation, the
designation shall be the same as the designation for the preceding year;
provided, further, that the designation of the chief executive officer may be
changed at any special meeting of the board of directors. The president shall be
the chief executive officer whenever the office of chairman of the board is
vacant. The chief executive officer shall be responsible to the board of
directors for the general supervision and management of the business and affairs
of the corporation and shall see that all orders and resolutions of the board
are carried into effect. The chairman of the board or president who is not the
chief executive officer shall be subject to the authority of the chief executive
officer, but shall exercise all of the powers and discharge all of the duties of
the chief executive officer, during the absence or disability of the chief
executive officer.
SECTION 5. CHAIRMAN OF THE BOARD OF DIRECTORS. If the board of
directors elects or appoints a chairman of the board, he shall be elected or
appointed by, and from among, the membership of, the board of directors. He
shall preside at all meetings of the shareholders, of the board of directors and
of any executive committee. He shall perform such other duties and functions as
shall be assigned to him from time to time by the board of directors. He shall
be, ex officio, a member of all standing committees. Except where by law the
signature of the president of the corporation is required, the chairman of the
board of directors shall possess the same power and authority to sign all
certificates,
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<PAGE> 12
contracts, instruments, papers, and documents of every conceivable kind and
character whatsoever in the name of and on behalf of the corporation which may
be authorized by the board of directors. During the absence or disability of the
president, or while that office is vacant, the chairman of the board of
directors shall exercise all of the powers and discharge all of the duties of
the president.
SECTION 6. PRESIDENT. The president shall be elected or appointed by,
and from among the membership of, the board of directors. During the absence or
disability of the chairman of the board, or while that office is vacant, the
president shall preside over all meetings of the board of directors, of the
shareholders and of any executive committee, and shall perform all of the duties
and functions, and when so acting shall have all powers and authority, of the
chairman of the board. He shall be, ex officio, a member of all standing
committees. The president shall, in general, perform all duties incident to the
office of president and such other duties as may be prescribed by the board of
directors.
SECTION 7. VICE PRESIDENTS. The board of directors may elect or appoint
one or more vice presidents. The board of directors may designate one or more
vice presidents as executive or senior vice presidents. Unless the board of
directors shall otherwise provide by resolution duly adopted by it, such of the
vice presidents as shall have been designated executive or senior vice
presidents and are members of the board of directors in the order specified by
the board of directors (or if no vice president who is a member of the board of
directors shall have been designated as executive or senior vice president, then
such vice presidents as are members of the board of directors in the order
specified by the board of directors) shall perform the duties and exercise the
powers of the president during the absence or disability of the president. The
vice presidents shall perform such other duties as may be delegated to them by
the board of directors, any executive committee, or the president.
SECTION 8. SECRETARY. The secretary shall attend all meetings of the
stockholders, and of the board of directors and of any executive committee, and
shall preserve in the books of the corporation true minutes of the proceedings
of all such meetings. He shall safely keep in his custody the seal of the
corporation and shall have authority to affix the same to all instruments where
its use is required or permitted. He shall give all notice required by the Act,
these bylaws or resolution. He shall perform such other duties as may be
delegated to him by the board of directors, any executive committee, or the
president.
SECTION 9. TREASURER. The treasurer shall have custody of all corporate
funds and securities and shall keep in books belonging to the corporation full
and accurate accounts of all receipts and disbursements; he shall deposit all
moneys, securities, and other valuable effects in the name of the corporation in
such depositories as may be designated for that purpose by the board of
directors. He shall disburse the funds of the corporation as may be ordered by
the board of directors, taking proper vouchers for such disbursements, and shall
render to the president and the board of directors whenever requested an account
of all his transactions as treasurer and of the financial condition of the
corporation. If required by the board of directors he shall keep in force a bond
in form, amount, and with a surety or sureties satisfactory to the board of
directors, conditioned for faithful performance of the duties of his office, and
for restoration to the corporation in case of his death, resignation,
retirement, or removal from office, of all books, papers, vouchers, money, and
property of whatever kind in his possession or under his control belonging to
the corporation. He shall perform such other
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<PAGE> 13
duties as may be delegated to him by the board of directors, any executive
committee, or the president.
SECTION 10. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretary or assistant secretaries, in the absence or disability of
the secretary, shall perform the duties and exercise the powers of the
secretary. The assistant treasurer or assistant treasurers, in the absence or
disability of the treasurer, shall perform the duties and exercise the powers of
the treasurer. Any assistant treasurer, if required by the board of directors,
shall keep in force a bond as provided in Section 9, Article V. The assistant
secretaries and assistant treasurers, in general, shall perform such duties as
shall be assigned to them by the secretary or by the treasurer, respectively, or
by the board of directors, any executive committee, or the president.
SECTION 11. DELEGATION OF AUTHORITY AND DUTIES BY BOARD OF DIRECTORS.
All officers, employees, and agents shall, in addition to the authority
conferred, or duties imposed, on them by these bylaws, have such authority and
perform such duties in the management of the corporation as may be determined by
resolution of the board of directors not inconsistent with these bylaws.
ARTICLE VI
INDEMNIFICATION
SECTION 1. THIRD PARTY ACTIONS. The corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholders, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation or its shareholders, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
SECTION 2. ACTIONS IN THE RIGHT OF THE CORPORATION. The corporation
shall indemnify any person who was or is a party to or is threatened to be made
a party to any threatened, pending, or completed action or suit by or in the
right of the corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise against expenses (including attorneys'
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<PAGE> 14
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholders and except that no indemnification shall be made
in respect of any claim, issue, or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the corporation unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
SECTION 3. MANDATORY AND PERMISSIVE PAYMENTS.
(a) To the extent that a director, officer, employee, or agent
of a corporation has been successful on the merits or otherwise in
defense of any action, suit, or proceeding referred to in Sections 1 or
2 of this Article VI, or in defense of any claim, issue, or matter
therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
(b) Any indemnification under Sections 1 or 2 of this Article
VI (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that
indemnification of the director, officer, employee, or agent is proper
in the circumstances because he has met the applicable standard of
conduct set forth in Sections 1 and 2 of this Article VI. Such
determination shall be made in either of the following ways:
(1) By the board of a majority vote of a quorum
consisting of directors who were not parties to such action,
suit, or proceeding.
(2) If such quorum is not obtainable, or, even if
obtainable, a quorum of disinterested directors, so directs,
by independent legal counsel who may be the regular counsel of
the corporation in a written opinion.
(3) By the shareholders.
SECTION 4. EXPENSE ADVANCES. Expenses incurred in defending a civil or
criminal action, suit, or proceeding described in Sections 1 or 2 of this
Article VI may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding as authorized in the manner provided in
subsection (b) of Section 3 of this Article VI upon receipt of an undertaking by
or on behalf of the director, officer, employee, or agent to repay such amount
unless it shall ultimately be determined that he is entitled to be indemnified
by the corporation.
SECTION 5. VALIDITY OF PROVISIONS. A provision made to indemnify
directors or officers of any action, suit, or proceeding referred to in Sections
1 or 2 of this Article VI whether contained in the articles of incorporation,
these bylaws, a resolution of shareholders or directors, an agreement or
otherwise, shall be invalid only insofar as it is in conflict with Sections 1 to
5 of this Article VI.
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<PAGE> 15
Nothing contained in Sections 1 to 5 of this Article VI shall affect any rights
to indemnification to which persons other than directors and officers may be
entitled by contract or otherwise by law. The indemnification provided in
Sections 1 to 5 of this Article VI continues as to a person who has ceased to be
a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors, and administrators of such person.
SECTION 6. INSURANCE. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the corporation would have power to indemnify
him against such liability under Sections 1 to 5 of this Article VI.
SECTION 7. CONSTITUENT CORPORATION. For the purposes of this Article
VI, references to the corporation include all constituent corporations absorbed
in a consolidation or merger and the resulting or surviving corporation, so that
a person who is or was a director, officer, employee, or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise shall stand in the same
position under the provisions of this Article VI with respect to the resulting
or surviving corporation as he would if he had served the resulting or surviving
corporation in the same capacity.
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<PAGE> 16
ARTICLE VII
STOCK AND TRANSFERS
SECTION 1. SHARE CERTIFICATES: REQUIRED SIGNATURES. The shares of the
corporation shall be represented by certificates signed by the chairman of the
board of directors, vice chairman of the board of directors, president or a vice
president and which also may be signed by another officer of the corporation.
The certificates may be sealed with the seal of the corporation or a facsimile
of the seal. The signatures of the officers may be facsimiles if the certificate
is countersigned by a transfer agent or registered by a registrar other than the
corporation itself or its employee. If an officer who has signed or whose
facsimile signature has been placed upon a certificate ceases to be an officer
before the certificate is issued, it may be issued by the corporation with the
same effect as if he were the officer at the date of issue.
SECTION 2. SHARE CERTIFICATES: REQUIRED PROVISIONS. A certificate
representing shares of the corporation shall state upon its face:
(a) That the corporation is formed under the laws of this
state.
(b) The name of the person to whom issued.
(c) The number and class of shares, and the designation
of the series, if any, which the certificate represents.
(d) The par value of each share represented by the
certificate, or a statement that the shares are without par value.
A certificate representing shares issued by a corporation which is authorized to
issue shares of more than one class shall set forth on its face or back or state
that the corporation will furnish to a shareholder upon request and without
charge a full statement of the designation, relative rights, preferences, and
limitations of the shares of each class authorized to be issued, and if the
corporation is authorized to issue any class of shares in series, the
designation, relative rights, preferences, and limitations of each series so far
as the same have been prescribed and the authority of the board to designate and
prescribe the relative rights, preferences, and limitations of other series.
SECTION 3. REPLACEMENT OF LOST OR DESTROYED SHARE CERTIFICATES. The
corporation may issue a new certificate for shares or fractional shares in place
of a certificate theretofore issued by it, alleged to have been lost or
destroyed, and the board of directors may require the owner of the lost or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify the corporation against any claim that may be made
against it on account of the alleged lost or destroyed certificate or the
issuance of such new certificate.
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<PAGE> 17
SECTION 4. REGISTERED SHAREHOLDERS. The corporation shall have the right to
treat the registered holder of any share as the absolute owner thereof, and
shall not be bound to recognize any equitable or other claim to, or interest in,
such share on the part of any other person, whether or not the corporation shall
have express or other notice thereof, save as may be otherwise provided by the
statutes of Michigan.
SECTION 5. TRANSFER AGENT AND REGISTRAR. The board of directors may
appoint a transfer agent and a registrar in the registration of transfers of its
securities.
SECTION 6. REGULATIONS. The board of directors shall have power and
authority to make all such rules and regulations as the board shall deem
expedient regulating the issue, transfer, and registration of certificates for
shares in this corporation.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 1. DIVIDENDS OR OTHER DISTRIBUTIONS IN CASH OR PROPERTY. By
action of the board of directors, the corporation may declare and pay dividends
or make other distributions in cash, bonds, or property, including the shares or
bonds of other corporations, on its outstanding shares, except when currently
the corporation is insolvent or would thereby be made insolvent, or when the
declaration, payment, or distribution would be contrary to any restriction
contained in the articles of incorporation. Dividends may be declared or paid
and other distributions may be made out of surplus only. A dividend paid or any
other distribution made, in any part, from sources other than earned surplus,
shall be accompanied by a written notice (a) disclosing the amounts by which the
dividend or distribution affects stated capital, capital surplus, and earned
surplus, or (b) if such amounts are not determinable at the time of the notice,
disclosing the approximate effect of the dividend or distribution upon stated
capital, capital surplus and earned surplus and stating that the amounts are not
yet determinable.
SECTION 2. RESERVES. The board of directors shall have power and
authority to set apart, out of any funds available for dividends, such reserve
or reserves, for any proper purpose, as the board in its discretion shall
approve, and the board shall have the power and authority to abolish any reserve
created by the board.
SECTION 3. VOTING SECURITIES. Unless otherwise directed by the board,
the chairman of the board or president, or in the case of their absence or
inability to act, the vice presidents, in order of their seniority, shall have
full power and authority on behalf of the corporation to attend and to act and
to vote, or to execute in the name or on behalf of the corporation a consent in
writing in lieu of a meeting of shareholders or a proxy authorizing an agent or
attorney-in-fact for the corporation to attend and vote at any meetings of
security holders of corporations in which the corporation may hold securities,
and at such meetings he or his duly authorized agent or attorney-in-fact shall
possess and may exercise any and all rights and powers incident to the ownership
of such securities and which, as the owner thereof, the corporation might have
possessed and exercised if present. The board by
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<PAGE> 18
resolution from time to time may confer like power upon any other person or
persons.
SECTION 4. CHECKS. All checks, drafts, and orders for the payment of
money shall be signed in the name of the corporation in such manner and by such
officer or officers or such other person or persons as the board of directors
shall from time to time designate for that purpose.
SECTION 5. CONTRACTS, CONVEYANCES, ETC. When the execution of any
contract, conveyance, or other instrument has been authorized without
specification of the executing officers, the chairman of the board, president or
any vice president, and the secretary or assistant secretary, may execute the
same in the name and on behalf of this corporation and may affix the corporate
seal thereto. The board of directors shall have power to designate the officers
and agents who shall have authority to execute any instrument in behalf of this
corporation.
SECTION 6. CORPORATE BOOKS AND RECORDS. The corporation shall keep
books and records of account and minutes of the proceedings of its shareholders,
board of directors and executive committees, if any. The books, records, and
minutes may be kept outside this state. The corporation shall keep at its
registered office, or at the office of its transfer agent within or without this
state, records containing the names and addresses of all shareholders, the
number, class, and series of shares held by each and the dates when they
respectively became holders of record thereof. Any of such books, records, or
minutes may be in written form or in any other form capable of being converted
into written form within a reasonable time. The corporation shall convert into
written form without charge any such record not in such form, upon written
request of a person entitled to inspect them.
SECTION 7. FISCAL YEAR. The fiscal year of the corporation shall
be fixed by resolution of the board of directors.
SECTION 8. SEAL. If the corporation has a corporate seal, it shall have
inscribed thereon the name of the corporation and the words "Corporate Seal" and
"Michigan." The seal may be used by causing it or a facsimile to be affixed,
impressed, or reproduced in any other manner.
ARTICLE IX
AMENDMENTS
SECTION 1. The shareholders or the board of directors may amend or
repeal the bylaws or adopt new bylaws unless power to do so is reserved
exclusively to the shareholders by the articles of incorporation. Such action
may be taken by written consent or at any meeting of shareholders or the board
of directors; provided that if notice of any such meeting is required by these
bylaws, the notice of the meeting shall contain notice of the proposed
amendment, repeal, or new bylaws. Any bylaw hereafter made by the shareholders
shall not be altered or repealed by the board.
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<PAGE> 19
ARTICLE X
CONTROL SHARE ACQUISITION
Pursuant to Section 794 of the Michigan Business Corporation Act, as
amended ("MBCA"), Chapter 7B of the MBCA (being Sections 790 through 799 of the
MBCA) shall not apply to any "control share acquisition" (as that term is
defined in Section 791 of the MBCA) of the shares of common stock of the Company
occurring after the effective date of this Article X. So long as Donald W.
Reynolds owns, of record and beneficially, title to 20% or more of the Company's
outstanding common stock, this Article X may be amended only with the approval
of the holders of 80% or more of the outstanding common stock entitled to vote.
-19-
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