SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. ___)
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Filed by a Party other than the Registrant [ ]
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[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
Meritage Hospitality Group Inc.
(Name of Registrant as Specified In Its Charter)
_______________________________________________________________________
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
_________________________________________________________________
2) Aggregate number of securities to which transaction applies:
_________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined)
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
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previously previously. Identify the previous filing by registration statement
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<PAGE>
1997
NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT
MERITAGE
(PICTURE OF CORPORATE SYMBOL HERE) HOSPITALITY
GROUP INC.
40 Pearl Street, N.W., Suite 900
Grand Rapids, Michigan 49503
<PAGE>
MERITAGE HOSPITALITY GROUP INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 20, 1997
Dear Shareholder:
We are pleased to invite you to attend our Annual Shareholders' Meeting
at the Van Andel Museum Center located at 272 Pearl Street, N.W., Grand Rapids,
Michigan on May 20, 1997 at 10:00 a.m. Eastern time.
The purposes of this Annual Meeting are:
1. to elect eight directors to serve for the next fiscal year;
2. to approve an amendment to the 1996 Management Equity Incentive
Plan increasing the number of Common Shares in the Plan by
175,000;
3. to approve an amendment to the 1996 Directors' Share Option Plan
increasing the number of Common Shares in the Plan by 60,000;
4. to ratify the appointment of Grant Thornton LLP as the Company's
independent public accountants for fiscal 1997; and
5. to transact such other business as may properly come before the
meeting or any adjournment thereof.
Following the formal meeting, we will review the Company's progress
during the last fiscal year and our plans for fiscal 1997, and answer your
questions regarding the Company. Board members and executive officers will also
be available to discuss the Company's plans and operations with you.
Very truly yours,
/s/ Robert E. Schermer Sr.
____________________________
Robert E. Schermer, Sr.
Chairman of the
Board of Directors
Dated: April 15, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE, SIGN, AND PROMPTLY
RETURN YOUR PROXY CARD IN THE ENCLOSED ENVELOPE. PROXIES MAY BE REVOKED BY
WRITTEN NOTICE OF REVOCATION, THE SUBMISSION OF A LATER PROXY, OR BY ATTENDING
THE MEETING AND VOTING IN PERSON.
<PAGE>
MERITAGE HOSPITALITY GROUP INC.
40 Pearl Street, N.W., Suite 900
Grand Rapids, Michigan 49503
Telephone: (616) 776-2600
--------------------------------------------------
P R O X Y S T A T E M E N T
Annual Meeting of Shareholders
May 20, 1997
INTRODUCTION
The Board of Directors of Meritage Hospitality Group Inc. is requesting
your Proxy for use at the Annual Meeting of Shareholders on May 20, 1997 and at
any adjournment thereof, pursuant to the foregoing Notice. The approximate
mailing date of this Proxy Statement and the accompanying Proxy Card is April
15, 1997.
VOTING AT ANNUAL MEETING
GENERAL
Shareholders may vote in person or by proxy. Proxies given may be
revoked at any time by filing with the Company either a written revocation or a
duly executed Proxy Card bearing a later date, or by appearing at the Annual
Meeting and voting in person. All shares will be voted as specified on each
properly executed Proxy Card. If no choice is specified, the shares will be
voted as recommended by the Board of Directors "FOR" the nominees for directors
named herein, in favor of Items 2 through 4, and in the discretion of the named
proxies on any other matters voted on at the meeting. Abstentions and shares not
voted for any reason, including broker non-votes, will have no effect on the
outcome of any vote taken at the Annual Meeting.
As of March 28, 1997, the record date for determining shareholders
entitled to notice of and to vote at the Annual Meeting, the Company had
3,214,379 Common Shares outstanding. Each share is entitled to one vote. Only
shareholders of record at the close of business on March 28, 1997 will be
entitled to vote at the Annual Meeting.
PRINCIPAL SHAREHOLDERS
The following persons are the only shareholders known by the Company to
own beneficially 5% or more of its outstanding Common Shares as of March 28,
1997:
<PAGE>
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------ -------------------- ------------------
Christopher B. Hewett 1,611,586 (1) 49.3%
Jerry L. Ruyan 206,859 (2) 6.4%
(1) Includes, and assumes conversion of, Series A Convertible Preferred Stock.
Also includes 1,551,300 shares held by Meritage Capital Corp. ("MCC") of
which Mr. Hewett is the majority shareholder, an executive officer and a
director. Also includes options for 10,000 Common Shares exercisable within
60 days.
(2) Includes options for 5,000 Common Shares granted to all non-employee
directors pursuant to the 1996 Directors' Share Option Plan.
The business address of Mr. Hewett is 40 Pearl Street, N.W., Suite 900,
Grand Rapids, Michigan 49503.
The business address of Mr. Ruyan is 10260 Alliance Road, Suite 350,
Cincinnati, Ohio 45242.
ELECTION OF DIRECTORS
The Company's Bylaws require that the Board of Directors consist of not
less than 5 nor more than 15 directors, with the exact number to be established
by the Board of Directors. The Board has established the number of directors to
be elected at the Annual Meeting at eight.
The Board is nominating for reelection the following directors, namely Gary
R. Garrabrant, Christopher B. Hewett, David S. Lundeen, Joseph L. Maggini, Jerry
L. Ruyan, Robert E. Schermer, Sr., Robert E. Schermer, Jr. and Frank O. Staiger.
Proxies solicited by the Board of Directors will be voted for the
election of these nominees. All directors elected at the Annual Meeting will be
elected to hold office until the next Annual Meeting. Shareholders are not
entitled to cumulate their votes in the election of directors.
If any nominee should be unavailable for election, proxies will be voted
for a substitute nominated by the Board of Directors. Nominees receiving the
highest number of votes cast for the positions to be filed will be elected.
AMENDMENT OF THE 1996 MANAGEMENT EQUITY INCENTIVE PLAN
The Board of Directors believes that option grants are an important
factor in enabling the Company to attract, retain and motivate its employees.
Accordingly, on April 16, 1996, the Board of Directors adopted, and on May 21,
1996 the Shareholders approved, an employee share option plan known as the 1996
Management Equity Incentive Plan. The Plan provides for 300,000 Common Shares to
be the subject of options which may be granted to employees. The Company
presently has approximately 500 full and part-time employees.
Approximately 140,000 Common Shares remain available for grant under the
Plan without shareholder approval. The Board of Directors has approved the grant
of an additional 128,500 shares contingent upon the passage of this amendment.
The Board of Directors believes that additional options should be made available
now for purposes of the Plan and desires to increase the number of Common Shares
available for grant under the Plan by 175,000 shares.
<PAGE>
All options under the Plan have been granted with an exercise price of
$7.00 per share which, in all cases, was above the market value on the date of
the grant. Because the stock is trading at less than $7.00 per share, the
options have no value. To date, options for the following number of shares have
been granted to current executive officers and groups (share numbers include the
option grant of 128,500 shares which is contingent upon the passage of this
amendment): Christopher B. Hewett (President and Chief Executive Officer) -
100,000; Robert E. Schemer, Jr. (Executive Vice President) - 90,000; William D.
Badgerow (Vice President, Treasurer and Chief Financial Officer) - 27,500; James
R. Saalfeld (Vice President, General Counsel and Secretary) - 27,500; all
current executive officers as a group - 245,000; and all current employees,
except executive officers, as a group - 43,500.
The Plan provides that options may be granted either as incentive or
nonqualified options. Options may be granted for varying periods of from one to
ten years. Employees who own 10% or more of the outstanding Common Shares may be
granted incentive options only for terms of five years or less and at an
exercise price of 110% of the market value. Options do not become exercisable
until at least one year from the date of grant. Thereafter, the right to
exercise options vests at a schedule determined at the time of grant, which
generally shall be at a rate of 20% per year. The right to exercise options is
cumulative to the extent not utilized in prior periods. The Compensation
Committee determines the exercise prices of all options granted. However, an
incentive option must be granted with an exercise price at least equal to the
market value of the Common Shares on the date of grant.
No option will be transferable otherwise than by will, by the laws of
descent and distribution, or pursuant to a qualified domestic relations order.
There are no federal income tax consequences to either the Company or
the recipient of an option upon the grant of an option or upon the exercise of
an incentive option. If a person sells or otherwise disposes of shares acquired
upon the exercise of an incentive option within one year of the date of exercise
or within two years from the date of grant, the gain equal to the excess of the
amount realized over the amount paid for the shares will be taxed as ordinary
income. The Company will be entitled to an income tax deduction to the same
extent. If the shares are held for more than one year following the date of
exercise and two years from the date of grant, any gain realized thereafter will
be taxed as a capital gain, in which case the Company will not be entitled to
any deduction.
A person exercising a non-qualified option will recognize ordinary
income to the extent of the difference between the exercise price and the fair
market value of the Common Shares on the date of exercise, and the Company will
be entitled to a corresponding deduction. Upon any sale of such shares, the
difference between the amount realized and the fair market value on the date of
the exercise will be treated as a capital gain or loss.
In the event of any changes in the outstanding Common Shares by way of a
share dividend, split-up, recapitalization, combination or exchange, the number
and class of Common Shares authorized for the Plan and the number and class of
Common Shares and option price for each option which is outstanding shall be
correspondingly adjusted by the Compensation Committee. The Committee shall also
make appropriate adjustments to reflect any spin-off of assets, extraordinary
dividends or other distributions to shareholders.
In the event of the dissolution or liquidation of the Company or any
merger, consolidation or combination in which the Company is not the surviving
corporation or in which the outstanding Common Shares of the Company are
converted into cash, other securities or other property, each outstanding option
<PAGE>
shall terminate as of a date fixed by the Compensation Committee, provided that
not less than 20 days' written notice of the date of expiration shall be given
to each holder of an option. Each such holder shall have the right during such
period following notice to exercise the portion of the option which is vested
at the time of such notice.
The Compensation Committee, comprised of Messrs. Schermer, Sr. (Chairman),
Garrabrant, Maggini and Staiger, administers the Plan. Subject to the express
provisions of the Plan, the Committee shall have the authority to establish the
terms and conditions of options agreements, which need not be uniform.
The Board of Directors recommends that Section 4.1 of the Plan be
amended to increase the number of shares subject to options by 175,000 shares
and, as so amended, Section 4.1 will read in its entirety as follows:
4.1 The Shares that may be made subject to Options granted under
the Plan shall not exceed 475,000 Shares in the aggregate. Except
as provided in Section 4.2, upon lapse or termination of any
Option for any reason without being completely exercised, the
Shares which were subject to such Option may again be subject to
other Options.
All other terms and conditions of the Plan will remained unchanged.
The affirmative vote of the holders of a majority of Common Shares
voting on the matter at the Annual Meeting is required to approve the amendment
to the Plan.
AMENDMENT OF THE 1996 DIRECTORS' SHARE OPTION PLAN
The Board of Directors believes that option grants to non-employee
directors are an effective means of advancing the interests of the Company and
its shareholders by increasing the proprietary interest of directors in the
Company. Accordingly, on April 16, 1996, the Board of Directors adopted, and on
May 21, 1996 the Shareholders approved, the 1996 Directors' Share Option Plan.
The Plan provides 60,000 Common Shares to be the subject of options which may be
granted to non-employee directors.
Approximately 10,000 Common Shares remain available for grant under the
Plan without shareholder approval. The Board of Directors believes that
additional options should be made available now for purposes of the Plan and
desires to increase the number of Common Shares available for grant under the
Plan by 60,000 shares.
All options granted under the Plan have been granted with an exercise
price of $7.00 per share which, in all cases, was above the market value on the
date of the grant. Because the stock is trading for less than $7.00 per share,
the options have no value. To date, options for 50,000 shares have been granted
under the Plan to current and former non-employee directors.
Non-employee directors are granted options to purchase 5,000 shares when
first elected and options for 1,000 shares each time they are reelected.
<PAGE>
Each option is for a term of ten years. The option price will be the
last closing sale price reported on the date of grant, provided such price shall
not be less than $7.00 per share. Options are immediately exercisable upon
grant.
No option will be transferable otherwise than by will, by the laws of
descent and distribution, or pursuant to a qualified domestic relations order.
Neither the optionee nor the Company will incur any federal tax
consequences as a result of the grant of an option. Upon exercise of an option,
the optionee generally must recognize ordinary income equal to the difference
between the exercise price and the fair market value of the Common Shares on the
date of exercise. The Company will be entitled to a deduction of the same
amount. Upon disposition of option shares acquired under the Plan, the
difference between the sale proceeds and the market value of the shares at the
time of exercise will be treated as a capital gain or loss, either long-term or
short-term, depending on how long the shares have been held. The Company will
not be entitled to a deduction in connection with a disposition of option
shares.
If there is a share dividend, split-up, recapitalization, combination or
exchange, the number and class of Common Shares authorized for this Plan, and
the number and class of Common Shares and option price for each option which is
outstanding, shall be correspondingly adjusted by the Compensation Committee.
The Committee shall also make appropriate adjustments to reflect any spin-off of
assets, extraordinary dividends or other distributions to shareholders.
In the event of the dissolution or liquidation of the Company or any
merger, consolidation or combination in which the Company is not the surviving
corporation or in which the outstanding Common Shares of the Company are
converted into cash, other securities or other property, each outstanding option
shall terminate as a date fixed by the Committee, provided that not less than 20
days' written notice of the date of expiration shall be given to each holder of
an option. Each such holder shall have the right during such period following
notice to exercise the option as to all or any part of the option for which it
is exercisable at the time of such notice.
The following table describes the benefits that would be received by
non-employee directors under the 1996 Directors' Share Option Plan assuming an
exercise price of seven dollars per share. Executive Officers and employees as a
group would not receive any benefits under this Plan.
Potential Realizable Dollar
Value ($/Share) at Assumed
Annual Rates of Share Price
Appreciation for Option Term
Number of -----------------------------
Name Shares 0% 5% 10%
- ----------------------------- --------- ------ ----- -----
Non-Executive Director Group 60,000 $0 $1.55 $6.62
The market value of the Common Shares on March 31, 1997 was $5.25 per
share. The Plan requires that options be granted at a price not less than $7.00
per share. The potential realizable dollar value, set out in dollars per share,
at assumed annual rates of share price appreciation for the option term, is
hypothetical and is not intended to forecast future appreciation, if any, of the
Common Shares or future dollar value, if any, of the granted options.
<PAGE>
The Compensation Committee administers the 1996 Directors' Share Option
Plan. Subject to the express provisions of the Plan, the Committee shall have
the authority to establish the terms and conditions of options agreements, which
need not be uniform.
The Board of Directors recommends that Section 2 of the Plan be amended
to increase the number of shares subject to options by 60,000 shares and, as so
amended, Section 2 will read in its entirety as follows:
2. Shares Subject to the Plan. The Shares to be issued upon the
exercise of the options granted under the Plan shall be Common
Shares, $.01 par value, of the Company. Either treasury or
authorized and unissued Common Shares, or both, as the Board of
Directors shall from time to time determine, may be so issued. No
Common Shares which are the subject of any lapsed, expired or
terminated options may be made the subject of additional options
under the Plan.
Subject to the provisions of Section 4 hereof, the aggregate
number of Common Shares for which options may be granted under
the Plan shall be 120,000 Shares.
All other terms and conditions of the Plan will remained unchanged.
The affirmative vote of the holders of a majority of Common Shares
voting on the matter at the Annual Meeting is required to approve the amendment
to the Plan.
RATIFICATION OF APPOINTMENT OF ACCOUNTANTS
The Board of Directors appointed Grant Thornton LLP as the Company's
independent public accounts for the fiscal year ending November 30, 1997. Grant
Thornton LLP has been the independent accounting firm for the Company since
fiscal 1993. Although not required by law, the Board of Directors is seeking
shareholder ratification of this selection. The affirmative vote of a majority
of shares voting at the Annual Meeting is required for ratification.
Representatives of Grant Thornton LLP are expected to be present at the
Annual Meeting and will be given an opportunity to comment, is they so desire,
and to respond to appropriate questions that may be asked by shareholders.
OTHER MATTERS
Any other matters considered at the Annual Meeting including adjournment
will require the affirmative vote of a majority of shares voting.
VOTING BY PROXY
All Proxy Cards properly signed will, unless a different choice is
indicated, be voted "FOR" election of all nominees for director proposed by the
Board of Directors, "FOR" approval of an amendment to the 1996 Management Equity
Incentive Plan increasing the number of Common Shares in the Plan by 175,000,
"FOR" approval of an amendment to the 1996 Directors' Share Option Plan
increasing the number of Common Shares in the Plan by 60,000, and "FOR"
ratification of the selection of independent public accountants.
<PAGE>
If any other matters come before the Annual Meeting or any adjournment,
each proxy will be voted in the discretion of the individuals named as proxies
on the card.
SHAREHOLDER PROPOSALS
Shareholders who desire to have proposals included in the Notice for the
Annual Meeting to be held in 1998 must submit their proposals in writing to the
Company, Attention: Secretary, at its offices on or before December 18, 1997.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following is information concerning each of the current directors
and executive officers as of March 28, 1997:
<TABLE>
<CAPTION>
COMMON SHARES PREFERRED SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------ ------------------
NAME AND AGE (1) POSITION AMOUNT (2) PERCENTAGE AMOUNT PERCENTAGE
- -------------------------------------- --------------------------- ---------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C>
Robert E. Schermer, Sr.(3)(4)(5)(6)(7) Chairman of the Board of 162,104 4.9% 20,000 14.5%
61 Directors
Christopher B. Hewett(4)(7)(8)(9) President, Chief Executive 1,611,586 49.3% 31,000 22.4%
38 Officer and Director
Robert E. Schermer, Jr.(4)(7)(9)(10) Executive Vice President 39,472 1.2% 20,000 14.5%
38 and Director
William D. Badgerow(7) Vice President, Treasurer 581 * 400 *
37 & Chief Financial Officer
James R. Saalfeld(7)(9) Vice President, General 5,234 * 1,067 *
30 Counsel and Secretary
Gary R. Garrabrant(3)(5) Director 5,180 * -- --
39
James R. Goerlich(11) Director 5,644 * -- --
59
David S. Lundeen(7)(11) Director 45,359 1.4% 12,500 9.0%
35
Joseph L. Maggini(3)(7)(12) Director 51,502 1.6% 10,000 7.2%
57
Jerry L. Ruyan(8)(11) Director 206,859 6.4% -- --
50
Frank O. Staiger(3)(5) Director 5,894 * -- --
67
Raymond A. Weigel, III (11) Director 11,012 * -- --
52
All Current Executive Officers and 2,150,427 62.3% 94,967 68.6%
Directors as a Group (12 persons)
- -----------------------
<FN>
(1) Unless otherwise indicated, the persons named have sole voting and
investment power and beneficial ownership of the securities.
(2) Includes options held by all non-employee directors to acquire 5,000 Common
Shares.
(3) Compensation Committee Member
<PAGE>
(4) Executive Committee Member
(5) Nominating Committee Member
(6) Includes 2,000 shares held directly by Mr. Schermer, Sr.'s wife.
(7) Includes Common Shares issuable upon conversion of Series A Convertible
Preferred Stock which is immediately convertible.
(8) See description of Common Share ownership contained in "Principal
Shareholders" above.
(9) Includes options exercisable within 60 days for Mr. Hewett of 10,000
shares, Mr. Schermer, Jr. of 9,000 shares; and Mr. Saalfeld of 3,500
shares.
(10) Includes 300 shares held by Mr. Schermer, Jr. as a custodian for his minor
child.
(11) Audit Committee Member
(12) Includes 2,000 shares held by Mr. Maggini jointly with his wife and 1,100
shares held directly by his wife.
* Less than 1%
</FN>
</TABLE>
Robert E. Schermer, Sr. has been a director of the Company since January
25, 1996. He is currently Senior Vice President and Managing Director of Robert
W. Baird & Co. Incorporated, an investment banking and securities brokerage firm
headquartered in Milwaukee, Wisconsin. Mr. Schermer has held this position for
more than five years. He is the father of Robert E. Schermer, Jr.
Christopher B. Hewett has been President, Chief Executive Officer and a
director of the Company since January 25, 1996. He has served as President of
MCC since its inception in 1993. Mr. Hewett was Executive Vice President (1990
to 1991) and President (1991 to 1997) of Ocean Reef Club, Inc., which was the
owner, developer and operator of the Ocean Reef Club, a 5,000 acre mixed-use
residential resort community in Key Largo, Florida. In 1993, Ocean Reef Club,
Inc. sold the Ocean Reef Club.
Robert E. Schermer, Jr. has been Executive Vice President and a director of
the Company since January 25, 1996. From January 25, 1996 until September 16,
1996, Mr. Schermer also served as Treasurer of the Company. Mr. Schermer has
served as Executive Vice President of MCC since 1993. From 1989 until 1993, he
was Executive Vice President of Landquest Ltd, a private investment partnership
which financed and developed residential real estate and hotel investments. He
is the son of Robert E. Schermer, Sr.
William D. Badgerow has been Vice President, Treasurer and Chief Financial
Officer of the Company since September 16, 1996. From 1987 to 1996, Mr. Badgerow
was the Vice President of EIP Financial Services, Inc., an affiliate of the
Wendy's of West Michigan Limited Partnership (the "Wendy's Partnership"), which
operates 26 "Wendy's Old Fashioned Hamburgers" restaurants throughout Western
and Southern Michigan. In his position with EIP Financial Services, Inc., Mr.
Badgerow also acted as the Chief Financial Officer for the Wendy's Partnership.
Mr. Badgerow is a Certified Public Accountant.
James R. Saalfeld has been Vice President, General Counsel and Secretary of
the Company since March 20, 1996. From 1992 until 1996, Mr. Saalfeld was an
attorney with Dykema Gossett PLLC, a Grand Rapids, Michigan law firm.
Gary R. Garrabrant has been a director of the Company since October 24,
1996. Since January 1996, Mr. Garrabrant has been the Senior Vice President of
Chicago-based Equity Group Investments, an investment company controlling one of
the largest real estate portfolios in the United States. Since September 1996,
Mr. Garrabrant has also been the Managing Partner of EGI Capital Markets,
Chicago, Illinois, which is responsible for real estate finance, equity capital
raising and new ventures. In January 1997, Mr. Garrabrant was appointed to the
Board of Directors of California Real Estate Investment Trust which is based in
San Francisco. In 1995, Mr. Garrabrant was director with the Sentinel Securities
Corporation, a real estate securities management firm located in New York City.
In 1994, Mr. Garrabrant co-founded Genesis Realty Capital Management, a money
management firm located in New York City. From 1989 to 1994, Mr. Garrabrant was
a Vice President with the real estate investment banking division of The Bankers
Trust Company in New York City.
<PAGE>
James R. Goerlich has been a director of the Company since May 21, 1996.
Since founding it in 1972, Mr. Goerlich has served as the Managing Partner of
Goerlich, Richert and Kaiser PLLC, Port Huron, Michigan. Mr. Goerlich is a
Certified Public Accountant.
David S. Lundeen has been a director of the Company since January 25, 1996.
Since 1995, he has served as Executive Vice President and Chief Financial
Officer of BSG Corporation, Austin, Texas, an information technology consulting
company. From 1992 to 1995, Mr. Lundeen was President of Blockbuster Technology,
a division of Blockbuster Entertainment. From 1990 to 1992, he worked for
Blockbuster Entertainment as Director of Mergers & Acquisitions and Corporate
Finance. Prior to 1990, Mr. Lundeen was an investment banker at Drexel Burnham
Lambert in New York City.
Joseph L. Maggini has been a director of the Company since January 25, 1996.
Since founding it in 1974, he has served as President and Chairman of the Board
of the Magic Steel Corporation, Grand Rapids, Michigan, a steel service center.
Jerry L. Ruyan has been a director of the Company since October 24, 1996.
Since 1995, Mr. Ruyan has been a partner in Redwood Ventures, LLC, an
investment/venture capital company located in Cincinnati, Ohio. Mr. Ruyan is
also a founder of Cincinnati-based Meridian Diagnostics, Inc., which is engaged
in the production of medical diagnostic products, and has been a member of its
Board of Directors since 1977. Mr. Ruyan's other positions with Meridian
Diagnostics, Inc. included Chief Executive Officer (1992 to 1995), and President
and Chief Operating Officer (1986 to 1992). Since October 1996, Mr. Ruyan has
been a member of the Board of Directors of Frisch's Restaurants, Inc., which
operates more than 100 Big Boy restaurants.
Frank O. Staiger has been a director of the Company since January 8, 1996.
Since 1957, Mr. Staiger has been a member of the law firm of Davidson, Staiger &
Hill, Port Huron, Michigan, where he currently serves as its President.
Raymond A. Weigel, III has been a director of the Company since December
1986. Since 1992, he has been the President of CLB Consulting Inc., Grand
Rapids, Michigan, a business consulting firm. From 1988 to 1992, he was First
Vice President of the Grand Rapids office of Robert W. Baird & Co. Mr. Weigel
currently is a director of First National Bank of Manatee, Manatee, Florida, and
is also a shareholder of Wendy's West Michigan, Inc., the General Partner of the
Wendy's Partnership.
BOARD ACTIONS
The Board of Directors met eight times, and took action in writing on six
occasions, during fiscal 1996.
The Executive Committee, comprised of Messrs. Schermer, Sr. (Chairman),
Hewett and Schermer, Jr., possesses and may exercise all of the powers of the
Board of Directors in the management and control of the business of the
Corporation to the extent permitted by law. The Executive Committee took action
in writing on six occasions during fiscal 1996.
<PAGE>
The Audit Committee, comprised of Messrs. Goerlich (Chairman), Lundeen,
Ruyan and Weigel, III, all of whom are non-employee directors, reviews the audit
reports submitted by the Company's independent accountants, reviews the
Company's internal accounting operations, and recommends the employment of the
Company's independent accountants. The Audit Committee met once during fiscal
1996.
The Compensation Committee, comprised of Messrs. Schermer, Sr. (Chairman),
Garrabrant, Maggini and Staiger, all of whom are non-employee directors,
establishes the Company's general compensation policies, recommends and
establishes the compensation and incentives awards for management, and
administers the 1996 Management Equity Incentive Plan, the 1996 Directors' Share
Option Plan, the Directors' Compensation Plan and the Employee Share Purchase
Plan. The Compensation Committee met twice, and took action in writing on three
occasions, during fiscal 1996.
The Company established a Nominating Committee in January 1997, comprised of
Messrs. Schermer, Sr. (Chairman), Garrabrant and Staiger, all of whom are
non-employee directors. The Nominating Committee evaluates and recommends to the
Board of Directors individuals to be nominated by the Company to stand for
election or reelection at any shareholder meeting and to fill interim vacancies
on the Board of Directors.
Directors who are not employed by the Company receive a retainer of $1,000
for each meeting of the Board of Directors attended, and $500 for each committee
meeting attended. These fees are reduced by 50% if participation is by
telephone. Compensation is paid by the Company quarterly in arrears, in the form
of Company Common Shares which are priced at not less than $7.00 per share. Each
non-employee director is granted an option for 5,000 shares upon initial
election and another option for 1,000 shares upon each subsequent election. The
exercise price of options granted pursuant to the Directors' Compensation Plan
is the last closing sale price reported on the date of grant, provided such
price shall not be less than $7.00 per share. Directors who are employees of the
Company are not separately compensated for serving as directors.
In fiscal 1996, each incumbent director attended all of the meetings of the
Board of Directors and the committees on which the director served, except for
Mr. Lundeen who was absent for one Board meeting and one Audit Committee
meeting.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons who own more than ten percent of the Company's
Common Shares to file reports of ownership with the Securities and Exchange
Commission and to furnish the Company with copies of these reports. Based solely
upon its review of reports received by it, or upon written representation from
certain reporting persons that no reports were required, the Company believes
that during fiscal 1996 all filing requirements were met, except for Messrs.
Staiger and Goerlich who untimely filed their initial reports of ownership, and
Mr. Schermer, Jr. who untimely reported a purchase of 500 Common Shares.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid by the Company to its Chief
Executive Officer, former Chief Executive Officer, and to all executive officers
earning in excess of $100,000 in fiscal 1996:
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------ -------------------------------
SECURITIES UNDER- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS LYING OPTIONS COMPENSATION
- ------------------------------ ---- ---------- ------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Christopher B. Hewett (1) 1996 $ 127,735 $ 110,000(2) 50,000 ---
President and Chief Executive 1995 --- --- --- ---
Officer 1994 --- --- --- ---
Robert E. Schermer, Jr. (1) 1996 $ 114,961 $ 100,000(2) 45,000 ---
Executive Vice President 1995 --- --- --- ---
1994 --- --- --- ---
Donald W. Reynolds (3) 1996 (4) --- --- ---
Former Chairman of the 1995 (4) --- --- $ 193,875(5)
Board of Directors, President 1994 (4) --- --- $ 193,500(5)
Treasurer and Secretary
<FN>
(1) Messrs. Hewett and Schermer, Jr. assumed their positions as officers on
January 25, 1996.
(2) Represents Series A Convertible Preferred Stock which Messrs. Hewett and
Schermer, Jr. elected to receive in lieu of a year-end cash bonus.
(3) Mr. Reynolds was removed as a director and officer of the Company by the
St. Clair County (Michigan) Circuit Court on January 8, 1996.
(4) In fiscal 1996, fiscal 1995 and fiscal 1994, Mr. Reynolds received
compensation from Innkeepers Management Company, a company wholly owned by
Mr. Reynolds. From its inception until January 1996, the Company engaged
Innkeepers to manage the Company's hotel properties. In fiscal 1996, fiscal
1995 and fiscal 1994, the Company paid fees to Innkeepers of $57,650,
$402,786, and $456,750, respectively.
(5) In fiscal 1996, fiscal 1995 and fiscal 1994, a subsidiary of the Company
furnished an automobile to Mr. Reynolds. In fiscal 1995 and 1994, the
Company paid $193,875 and $193,500, respectively, to Mr. Reynolds for his
personal guarantee of certain obligations of the Company.
</FN>
</TABLE>
No contributions were made by the Company to its 401(k) Plan during
fiscal 1996.
STOCK OPTIONS
The following tables contain information concerning the grant of stock
options to the executives identified in the Summary Compensation Table and the
appreciation of such options:
<TABLE>
OPTION GRANTS IN FISCAL 1996
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION
SECURITIES OPTIONS GRANTED EXERCISE FOR OPTION TERM
UNDERLYING TO EMPLOYEES PRICE EXPIRATION --------------------
NAME OPTIONS GRANTED IN FISCAL 1996 ($ PER SHARE) DATE 5% 10%
- ----------------------- --------------- -------------- ------------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Christopher B. Hewett 50,000 26.3 % $ 7.00 5/21/2006 $118,500 $395,500
Robert E. Schermer, Jr. 45,000 23.7 % $ 7.00 5/21/2006 $106,650 $355,950
</TABLE>
<PAGE>
<TABLE>
FISCAL 1996 OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR AT FISCAL YEAR END
ACQUIRED ON ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------- -------------- ---------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Christopher B. Hewett --- --- 0/50,000 $0/$0 (1)
Robert E. Schermer, Jr. --- --- 0/45,000 $0/$0 (1)
<FN>
(1) The Compensation Committee established the exercise price as $7.00 per
share. Because the stock is trading for less than $7.00 per share, the
unexercisable options have no value.
</FN>
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee establishes compensation for executive
officers by setting salaries, establishing bonus ranges, making bonus awards and
granting stock options on an annual basis. The Committee believes it is
important to provide competitive levels of compensation that will enable the
Company to attract and retain the most qualified executives and to provide
incentive plans that emphasize stock ownership, thereby aligning the interests
of management and shareholders.
At a meeting held on March 9, 1996, the Committee established base
salaries and bonus ranges for the Company's executive officers for fiscal 1996.
Each executive officer's bonus range represented a specific percentage of that
officer's base salary. Since a change in management had occurred only weeks
earlier, and because many of the executive officers had just been appointed to
their positions, the salaries and bonus ranges were not tied to any specific or
quantifiable performance objectives. Instead, the salaries and bonus ranges were
based on the Committee's subjective judgment of each executive officer's level
of responsibility and duties for the fiscal year. The Committee took into
account the recommendations of the President and Chief Executive Officer in
establishing the salaries and bonus ranges for executive officers other than
himself.
Mr. Hewett's salary and bonus range, as President and Chief Executive
Officer, was determined separately but in the same manner as all other
executives officers of the Company (but without Mr. Hewett's participation).
At a meeting held on April 10, 1996, the Committee approved and recommended
passage to the Board of Directors of the 1996 Management Equity Incentive Plan.
In addition, the Committee authorized, subject to shareholder approval at the
1996 Annual Meeting, an initial grant of options to the executive officers as
follows (amounts indicate number of shares underlying the options granted): Mr.
Hewett: 50,000 shares; Mr. Schermer, Jr.: 45,000 shares, and Mr. Saalfeld:
17,500 shares. The options granted to the officers have an exercise price of
$7.00 per share, vest over a five-year period at a rate of 20% per year
commencing with the first anniversary of the grant date, and expire ten years
from the grant date.
Pursuant to written action taken on November 26, 1996, the Committee
authorized an initial grant of options to Mr. Badgerow in the amount of 17,500
shares in accordance with the same terms set forth above. The Committee also
awarded bonuses to the executive officers based on the bonus ranges established
at the March 9, 1996 meeting. The bonuses awarded ranged from 0% to 100% of an
executive's specific percentage established at the March 9, 1996 meeting. The
Committee's decision regarding the bonuses awarded was based on each executive
officer's performance, level of responsibility, contributions to the Company's
accomplishments during the fiscal year, and potential for future contributions
to the Company. In the aggregate, the executive officers elected to receive 97%
of their cash bonuses in Series A Convertible Preferred Stock.
<PAGE>
The options granted and bonuses awarded by the Committee to the
executive officers in fiscal 1996 were ratified by the entire Board of Directors
on January 24, 1997. All salaries and bonuses were fully deductible for federal
income tax purposes for 1996.
Compensation Committee of the
Board of Directors
Robert E. Schermer, Sr., Chairman
Gary R. Garrabrant
Joseph L. Maggini
Frank O. Staiger
CORPORATE PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
the Company's Common Shares from October 18, 1995 through November 30, 1996,
with the cumulative total return on the S & P Lodging-Hotels Index and the S & P
500 Index. The Company's stock price was not published from May 1989 through
October 18, 1995. Therefore, the graph does not reflect cumulative shareholder
return prior to October 18, 1995. The comparison assumes $100 was invested on
October 18, 1995 in the Company's Common Shares and in each of the indexes
presented. It also assumes reinvestment of dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN
Measurement Period Meritage Hospitality S&P 500 S&P Lodging-
(fiscal year ends 11/30) Group Inc. Index Hotels Index
- ------------------------ -------------------- ------- ------------
Measurement Pt. 10/18/95 $100 $100 $100
11/30/95 $ 90 $104 $ 96
11/29/96 $ 94 $133 $124
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following transactions relate to Mr. Reynolds, the former Chairman
of the Board, President, Chief Executive Officer, Treasurer and Secretary of the
Company, who was removed from these positions by the St. Clair County (Michigan)
Circuit Court on January 8, 1996. Accordingly, Mr. Reynolds served as an officer
and director of the Company for only 39 days in fiscal 1996 prior to the
replacement and restructuring of the Company's management which occurred on
January 25, 1996. Mr. Reynolds's daughter, Rebecca L. Awtrey, served as a
director until May 1996. Management is unable to determine whether these
transactions were on terms no less favorable to the Company than those that
could be obtained from unaffiliated parties.
From the Company's inception in 1986 until January 1996, the Company
engaged Innkeepers, a company wholly-owned by Mr. Reynolds, to manage the
Company's hotels pursuant to a Management Agreement. For services in fiscal
1996, prior to termination of the Management Agreement on January 25, 1996,
Innkeepers received $57,650. At December 1, 1995, Mr. Reynolds, and companies
affiliated with Mr. Reynolds and former Board member Ehinger, owed the Company
$695,430. In 1996, Mr. Reynolds incurred an additional $76,364 of indebtedness,
and made payments of $580,053 toward this total indebtedness. This left a
balance due of $191,741 for which a $260,000 allowance for doubtful accounts had
been established on November 30, 1995, resulting in a bad debt recovery by the
Company of $68,259.
Mr. Reynolds guaranteed the Company's obligations to First Federal
Savings and Loan Association in the amount of $2,924,975 at December 1, 1995.
Reynolds also guaranteed the Company obligations to First Federal under a letter
of credit in the amount of $3,929,506. Reynolds also pledged personally owned
life insurance policies with a face value of $3,000,000 as additional collateral
for the Company's obligations pursuant to a loan from Michigan National Bank in
the amount of $4,273,702 at December 1, 1995. The Company's obligations to First
Federal and Michigan National were paid in full with proceeds from the $15
million refinancing with Great American Life Insurance Company in February 1996.
Mr. Reynolds's guarantees were extinguished at that time.
In fiscal 1996, the Company expended approximately $280,000 for litigation
expenses on behalf of, among others, Ms. Awtrey, Mr. Reynolds, Mr. Ehinger (a
director until October 1996), Mr. Joseph P. Michael (a director until October
1996) and Mr. Weigel. These expenses related to litigation brought by TEI
Acquisitions, Inc. ("TAI"), in its attempt to gain control of the Company
through its alleged purchase of the former majority shareholder's Common Shares.
TAI's claims were ultimately dismissed during the fiscal year.
Management believes that the following transactions were on terms no
less favorable to the Company than those that could be obtained from
unaffiliated parties.
At November 30, 1996, MCC, owned by Messrs. Hewett and Schermer, Jr.,
owed the Company $9,750,000 pursuant to a secured, non-interest bearing note in
the original amount of $10,500,000 issued to the Company in payment for
1,500,000 Common Shares. On May 21, 1996, the Company's Board of Directors
approved an early prepayment of $750,000 and released 107,142 shares of the
pledged stock. The note was thereafter amended to provide for repayment in six
annual installments of $1,625,000 beginning on the fifth anniversary of the
promissory note.
<PAGE>
At December 1, 1995, Mr. Schermer, Jr. was indebted to a subsidiary of the
Company in the amount of $70,544. This indebtedness arose from a 7% promissory
note dated December 27, 1987 that Mr. Schermer, Jr. entered into with a third
party. This note was, unbeknownst to Mr. Schermer, Jr., assigned to one of the
Company's subsidiaries. Upon learning of this assignment, Mr. Schermer, Jr. paid
the note in full on March 27, 1996.
In fiscal 1996, the Company expended approximately $170,000 for
litigation expenses incurred by MCC in connection with litigation brought by TAI
in its attempt to gain control of the Company through its alleged purchase of
the former majority shareholder's Common Shares. TAI's claims were ultimately
dismissed during the fiscal year. This amount was accrued by the Company in
fiscal 1995.
On April 16, 1996, the Company's Board of Directors approved
reimbursement of $300,188 for expenditures incurred by MCC in connection with
the replacement and restructuring of management which occurred on January 25,
1996. These expenditures included, among other things, office furniture,
equipment, staff and other associated expenses, and were reimbursed in
accordance with the Stock Purchase and Sale Agreement dated September 19, 1995
between MCC and the Company. On April 10, 1996, the Company's Compensation
Committee conducted an item-by-item examination of the reimbursable expenses and
recommended that the Board approve the request for reimbursement.
In fiscal 1996 the Company successfully completed a tender offer for a
majority interest in the Wendy's Partnership. Also in 1996, the Company entered
into an agreement to acquire the General Partnership interest in the Wendy's
Partnership. Board member Weigel is a shareholder of the General Partner of the
Wendy's Partnership. Mr. Weigel excused himself from any discussions, and
abstained from any actions, regarding these transactions. During fiscal 1996,
the Wendy's Partnership paid management fees of $146,667 to the General Partner.
The General Partner of the Wendy's Partnership is also the general
partner of Wendy's Real Estate Limited Partnership I, a partnership which leases
real property to the Wendy's Partnership for its use in its restaurant
operations. During fiscal 1996, the Wendy's Partnership made lease payments of
$400,300 to Wendy's Real Estate Limited Partnership I.
On October 24, 1996, the Company's Board of Directors authorized the
issuance of up to 200,000 shares of Series A Convertible Preferred Stock in a
private offering of such preferred stock. Certain members of the Board of
Directors purchased Convertible Preferred Stock pursuant to the private
offering. Mr. Maggini purchased 10,000 Convertible Preferred Shares, Mr. Lundeen
purchased 12,500 Convertible Preferred Shares, Mr. Schermer, Sr. purchased
20,000 Convertible Preferred Shares; Mr. Hewett purchased 31,000 Convertible
Preferred Shares; Mr. Schermer, Jr. purchased 20,000 Convertible Preferred
Shares; Mr. Saalfeld purchased 1,067 Convertible Preferred Shares; and Mr.
Badgerow purchased 400 Convertible Preferred Shares.
On November 19, 1996, the Company purchased 40 limited partnership units of
the Wendy's Partnership from Raymond A. Weigel, Sr. and his wife, Wavelet M.
Weigel. The Company assigned a value of $7,200 to each unit. Mr. and Mrs.
Weigel, Sr. are the parents of Board Member Weigel. The purchase price was
28,800 shares of Series A Convertible Preferred Stock.
On January 24, 1997, the Board of Directors approved an expense sharing
arrangement whereby MCC and its principals (Messrs. Hewett and Schermer, Jr.)
will pay the Company $2,500 per year (commencing as of January 25, 1996) for
shared office space and occasional use of equipment and employee services. The
Compensation Committee of the Board of Directors will review the arrangement on
an annual basis.
<PAGE>
On January 24, 1997, the Board of Directors authorized agreements
whereby MCC and its principals will be indemnified by the Company for any losses
or expenses that they may incur as guarantors of the Company's obligations to
its primary financing institutions and franchisors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Robert E. Schermer, Sr., who is the Chairman of the Compensation
Committee, sold 103.25 limited partnership units of the Wendy's Partnership to
the Company on July 10, 1996. The purchase price was 123,900 newly issued
Company Common Shares. The amount of stock issued was determined by using the
trading price on the day that the agreement was reached ($6.25 per share) and
assigning a value of $7,500 to each Wendy's unit, the same price at which Mr.
Schermer originally purchased the units in 1996. Mr. Schermer, Sr. also
purchased 20,000 shares of Series A Convertible Preferred Stock in fiscal 1996.
Joseph L. Maggini, who is a member of the Compensation Committee,
purchased 10,000 shares of Series A Convertible Preferred Stock in fiscal 1996.
The law firm of Davidson, Staiger & Hill, of which Frank O. Staiger is
President, was paid professional fees in fiscal 1996. Mr. Staiger is also a
member of the Compensation Committee.
OTHER MATTERS
Meritage is not aware of any other matters to be presented at the Annual
Meeting other than those specified in the Notice.
By Order of the Board of Directors,
/s/ James R. Saalfeld
-----------------------------------
James R. Saalfeld
Secretary
