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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____.
COMMISSION FILE NUMBER: 0-17442
MERITAGE HOSPITALITY GROUP INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2730460
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
40 PEARL STREET, N.W., SUITE 900
GRAND RAPIDS, MICHIGAN 49503
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (616) 776-2600
Securities registered pursuant to Section 12(b) of the Act:
COMMON SHARES, $0.01 par value
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting shares held by non-affiliates as of
February 20, 1997 was $6,785,314 based on the closing price of the Common
Shares on the Chicago Stock Exchange on February 20, 1997.
As of February 20, 1997, there were outstanding 3,213,017 Common Shares of the
Registrant.
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MERITAGE HOSPITALITY GROUP INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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PART I PAGE
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Item I - Business 3
Item 2 - Properties 10
Item 3 - Legal Proceedings 12
Item 4 - Submission of Matters to Vote of Security-Holders 12
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6 - Selected Financial Data 16
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 8 - Financial Statements and Supplementary Data 24
Item 9 - Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 24
PART III
Item 10 - Directors and Executive Officers of the Registrant 25
Item 11 - Executive Compensation 28
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 29
Item 13 - Certain Relationships and Related Transactions 30
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 33
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PART I
ITEM 1. BUSINESS
GENERAL
Meritage Hospitality Group Inc. is engaged in the hospitality business and
conducts its operations through two business segments: the Lodging Group and
the Food Service Group.
In the Lodging Group, the Company owns and operates three full service
hotels: the 149-room Thomas Edison Inn located on the St. Clair River in Port
Huron, Michigan; the 78-room St. Clair Inn located on the St. Clair River in St.
Clair, Michigan; and the 121-room Grand Haven Holiday Inn located on the Grand
River in Spring Lake, Michigan. Each Hotel has a picturesque waterfront setting
and seeks business and leisure travelers who desire full service accommodations
such as guest rooms and suites, a restaurant and cocktail lounge, and
meeting/conference rooms.
In the Food Service Group, the Company owns 680.8 limited partnership
units of the Wendy's of West Michigan Limited Partnership (the "WENDY'S
PARTNERSHIP"), representing approximately 54% of the total outstanding limited
partnership units. The Wendy's Partnership operates 26 "Wendy's Old-Fashioned
Hamburgers" restaurants throughout Western and Southern Michigan which are
operated pursuant to franchise agreements with Wendy's International, Inc.
On May 21, 1996, the shareholders of the Company approved an amendment to
the Company's Articles of Incorporation changing the Company's name from
"Thomas Edison Inns, Inc." to "Meritage Hospitality Group Inc." The Company's
principal executive office is located at 40 Pearl Street, N.W., Suite 900,
Grand Rapids, Michigan 49503, its telephone number is (616) 776-2600 and its
facsimile number is (616) 776-2776. Unless otherwise specified, or unless the
context otherwise requires, all references to "the Company" include Meritage
Hospitality Group Inc. and its subsidiaries.
ACQUISITION
WENDY'S OF WEST MICHIGAN LIMITED PARTNERSHIP
In June 1996, the Company purchased 14 limited partnership units of the
Wendy's Partnership for $5,000 cash per unit. In July 1996, the Company
purchased an additional 143.25 units in exchange for 171,900 Company Common
Shares which were trading at $6.25 per share at that time (equal to $7,500 per
unit). These transactions resulted in the Company owning approximately 12.5% of
the outstanding units.
As reported on Form 8-K/A Amendment No. 1, filed with the Securities and
Exchange Commission on January 6, 1997, the Company commenced a tender offer on
September 17, 1996 to acquire an additional 480 units in exchange for $7,000
cash per limited partnership unit. When the tender offer expired on October 31,
1996, a total of 698.75 limited partnership units had been deposited. The
Company accepted 482.55 validly tendered units, thereby giving the Company 639.8
(approximately 51%) of the outstanding limited partnership units. The Company
thereafter acquired an additional 41 limited partnership units (which the
Company valued at $7,200 per unit) in exchange for 29,520 shares of Company
preferred stock, bringing the Company's total
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ownership interest to approximately 54%. All of the Company's limited
partnership units were then transferred to MHG Food Service Inc., a wholly
owned subsidiary of the Company.
On October 21, 1996, the Company entered into an agreement to acquire the
General Partnership interest in the Wendy's Partnership. The acquisition is
conditioned upon, among other things, the approval of Wendy's International.
The current General Partner of the Wendy's Partnership (Wendy's West Michigan,
Inc., a Michigan corporation) oversees the day-to-day operations of the Wendy's
Partnership, subject to the right of the limited partners to vote on certain
matters.
It is the Company's intention ultimately to acquire the entire business of
the Wendy's Partnership.
REPLACEMENT AND RESTRUCTURING OF MANAGEMENT
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, to
manage the Company's business pursuant to a Management Agreement.
As reported in the Company's Report on Form 8-K filed with the SEC 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
(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.
("MCC"), then the Company's majority shareholder, amended the Company's Bylaws
to, among other things, expand the Board of Directors to 10 directors and
appointed 5 new directors. On January 25, 1996, the Company's newly expanded
Board of Directors appointed Christopher B. Hewett as the Company's new
President and Chief Executive Officer. The Board also terminated the Management
Agreement with Innkeepers and removed David C. Distad, Mr. Reynolds's
son-in-law, as Vice President and Chief Financial Officer of the Company.
Instead of employing a third party management company, the Company now operates
the Company's business directly in an effort to more effectively utilize the
Company's resources and employees.
On January 24, 1997, the Board of Directors amended the Company's Bylaws
to remove the requirement that the Board of Directors consist of two classes.
Pursuant to this amendment, the Board shall be comprised of not less than 5 nor
more than 15 directors, and all directors shall be elected for a term of office
continuing only until the next election of directors by the shareholders.
LODGING GROUP
The Company's Hotels are full service properties that attract business and
leisure travelers. Each Hotel provides fully appointed guest rooms and numerous
amenities and services including a restaurant and cocktail lounge,
meeting/conference rooms, and a swimming pool and fitness facility.
Approximately 150 full time, and 325 part time, employees are involved in the
operation of the three Hotels, none of whom are members of a labor union or
part of a collective bargaining unit.
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THOMAS EDISON INN
The Thomas Edison Inn, which opened in 1987, is located on approximately 4
acres bordering the St. Clair River in Port Huron, Michigan. The Hotel has 149
guest rooms, a 250 seat restaurant that overlooks the St. Clair River and Lake
Huron, a 150 seat cocktail lounge, and a variety of meeting/conference rooms
accommodating up to 500 people. Other facilities include an indoor swimming
pool, a pool side whirlpool, and a health club and retail shops leased to third
party vendors. The Hotel's room revenue is derived from business and leisure
travelers. The Hotel's food and beverage facilities are heavily patronized by
local clientele which results in food and beverage revenues significantly
higher than industry norms for similar size hotels. In 1996, the Hotel
underwent a $650,000 renovation which included building improvements and the
installation of point-of-sale, property management and telephone systems.
ST. CLAIR INN
The St. Clair Inn, which opened in 1926, is a state historic site located
on approximately 2.5 acres bordering the St. Clair River in St. Clair, Michigan.
The Hotel has 78 rooms, a 240 seat restaurant that overlooks the St. Clair
River, a 60 seat cocktail lounge, and a variety of meeting/conference rooms
accommodating up to 250 people. Other facilities include an indoor swimming pool
and approximately 1,000 feet of frontage along the St. Clair River with a
boardwalk running most of that distance. The Hotel's market mix is similar to
that of the Thomas Edison Inn, and the Hotel also derives substantial food and
beverage revenue from local clientele. In order to facilitate the sale of
certain Non-core Assets (described below), three buildings adjacent to the Hotel
are slated to be demolished in 1997, resulting in eighteen rooms having been
removed from service in late 1996. The Hotel underwent a $500,000 renovation in
1996 which included building improvements and the installation of point-of-sale,
property management and telephone systems.
GRAND HAVEN HOLIDAY INN
The Grand Haven Holiday Inn, which opened in 1969, is located on
approximately 4 acres bordering the Grand River in Spring Lake, Michigan. The
Hotel has 121 rooms, a 185 seat restaurant that overlooks the Grand River, a 125
seat cocktail lounge, and a variety of meeting/conference rooms accommodating up
to 300 people. Other facilities include an outdoor and indoor swimming pool. The
Grand Harbor Yacht Club, a 52-slip marina owned by the Company, borders the
property. The Hotel's market mix is similar to that of the Thomas Edison Inn and
the St. Clair Inn, and the Hotel also derives substantial food and beverage
revenue from local clientele. In 1996, the Hotel underwent a $700,000 renovation
whereby the exterior of the Hotel was redesigned and renovated to compliment and
accentuate its nautical surroundings.
The Hotel is operated under a license agreement between Holiday Inns
Franchising, Inc. and the Company's subsidiary, Grand Harbor Resort Inc. Under
this agreement, the Hotel is entitled to use the service marks "Holiday Inn"
and certain other service and trademarks, and a computerized reservation
network operating under the name "Holidex." The Hotel is required to pay a
variety of fees and assessments to Holiday Inns Franchising which, in fiscal
1996, totaled $148,811, or 8.3% of the Hotel's gross room revenues. The license
agreement expires in August 2009. Holiday Inns Franchising may terminate the
license if the Hotel fails to meet its obligations under the license agreement
to the satisfaction of Holiday Inns Franchising. The Company believes its
subsidiary is in compliance with the license agreement. However, the Company is
presently negotiating the terms of a property improvement plan mandated by
Holiday Inns Franchising which, if an agreement is not reached, may be viewed
as a
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default under the license agreement. The Company is also presently reviewing
the significance of its affiliation with Holiday Inn to determine whether
continuing the Holiday Inn affiliation is in the Company's best interests. The
Company does not believe that the termination of the license agreement would
have a material effect on its operations.
CAPITAL EXPENDITURE PROGRAM
The Company spent approximately $2.2 million in its capital expenditure
program in 1996, primarily to upgrade and refurbish the Company's properties.
The program is described in more detail in Item 7 "Financial Condition and
Liquidity." The Company intends to continue basic capital improvements in 1997
and may finance such expenditures through the sale of Non-core Assets
(described below) or with funds generated from operations.
COMPETITION AND INDUSTRY CONDITIONS
The lodging industry is highly competitive. Since 1993, the industry has
been steadily recovering from the recession of the early 1990's and the
over-building of the late 1980's. Occupancy and average daily rates have
consistently increased since 1993. Also, new hotel construction has resumed.
Industry sources continue to forecast modest increases in occupancy, average
daily rates and profits for 1997.
The following table illustrates the average daily room rates for the
Hotels during 1995 and 1996 as compared to the national average:
AVERAGE DAILY ROOM RATES
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THOMAS GRAND HAVEN HOLIDAY NATIONAL
FISCAL YEAR EDISON INN ST. CLAIR INN INN AVERAGE*
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1995 $ 80.68 $ 71.39 $ 68.11 $ 67.34
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1996 $ 80.48 $ 83.26 $ 71.02 $ 69.50
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* Source: Smith Travel, Coopers & Lybrand and CLS Estimates
The following table illustrates the percentages of occupancy for 1995 and
1996 as compared to the national occupancy rate:
OCCUPANCY RATES
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THOMAS GRAND HAVEN HOLIDAY NATIONAL
FISCAL YEAR EDISON INN ST. CLAIR INN INN AVERAGE*
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1995 59.5% 59.9% 61.7% 65.5%
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1996 65.5% 56.6% 57.7% 66.5%
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* Source: Smith Travel, Coopers & Lybrand and CLS Estimates
The Hotels compete with a wide range of lodging facilities offering various
types of hospitality related services to the public. The competition includes
several national and regional hotel chains offering a variety of accommodations,
amenities and levels of service, and independent hotels in each market segment.
Business at the Company's Hotels varies seasonally. Historically,
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demand has been greatest during the summer, resulting in higher revenues
during the Company's third fiscal quarter.
The Company's Hotels are the dominant full service properties in their
respective markets. To maintain its market share, the Company has expanded its
sales and marketing programs and made significant capital improvements. In
recent years, most newly constructed hotels in the Company's markets have been
limited service hotel properties which offer mid-priced or economy level room
rates. The Company anticipates increased competition in its markets as a result
of these new properties.
Current market conditions make this an opportune time to sell full service
hotels. Accordingly, the Company intends to explore carefully any opportunity
which may arise regarding the sale of one or more of the Company's full service
hotels. Proceeds would be used to pay down the Company's long term
indebtedness.
RISKS AND GOVERNMENTAL REGULATIONS
The Company's Lodging Group is subject to all the risks inherent in the
lodging industry. These include, among others, general and local economic
conditions; changes in travel patterns and highway conditions and construction;
changes in governmental regulations that influence wages, prices and
construction costs; changes in interest rates; changes in health insurance
coverage requirements; the geographical concentration of the Company's Hotels;
working conditions; and the recurring need for renovation and capital
improvements. Because of the high level of fixed costs required to operate full
service hotels, certain significant expenditures cannot generally be reduced
when circumstances cause a reduction in revenue. Substantial changes in the
minimum wage or mandatory health care coverage could have an adverse effect on
the Company's operations.
The hotel, restaurant and lounge operations within the Company's Lodging
Group are subject to governmental regulation and licensing requirements,
including, but not limited to, zoning ordinances, public health certification
and liquor licenses. The Company believes its operations would be adversely
affected if these licenses or permits were terminated. The Company does not
anticipate that its licenses or permits will be terminated.
FOOD SERVICE GROUP
THE WENDY'S PARTNERSHIP
The Company's Food Service Group consists of a majority interest in the
Wendy's Partnership which operates 26 "Wendy's Old-Fashioned Hamburgers"
quick-service restaurants in the Michigan counties of Allegan, Calhoun,
Kalamazoo, Kent, Muskegon, Ottawa and Van Buren. The Wendy's Partnership
employs approximately 900 people and reported sales of approximately $26.5
million in fiscal 1996. The restaurants offer a diverse menu featuring
hamburgers, chicken breast sandwiches, baked and french fried potatoes, pita
sandwiches, freshly prepared salads, soft drinks and "Frosty" desserts.
The Wendy's restaurants are operated pursuant to license agreements with
Wendy's International. These agreements impose requirements regarding the
preparation and quality of food products, the level of service, and general
operating procedures. The Wendy's Partnership makes a monthly royalty payment to
Wendy's International (the greater of 4% of monthly gross sales or
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$250 per restaurant) and commits a certain percentage of monthly gross sales to
advertising. The Wendy's Partnership is also permitted to utilize Wendy's
International's trademarks, service marks, designs and other propriety rights
in connection with the operation of the restaurants.
The franchise agreements provide, among other things, that a change in the
operational control of the Wendy's Partnership or the General Partner cannot
occur without the prior consent of Wendy's International. The Company executed a
letter of intent with Wendy's International in January 1997 whereby the basic
business terms of the Company's assumption of control of the Wendy's Partnership
were agreed to by Wendy's International. The franchise agreements also provide
that any proposed sale of the Wendy's Partnership's business, interests or
franchise rights is subject to the consent and right of first refusal of Wendy's
International.
The franchise agreements currently in place with the Wendy's Partnership
generally expire 20 years after the date the restaurant at issue was opened or
under construction. Subject to certain conditions, the franchise agreements
generally are renewable for a term equal to the term set forth in the standard
form of franchise agreement that is executed by other Wendy's International
franchise owners renewing their franchises at or about the same time.
The Wendy's Partnership cannot conduct its present business without its
affiliation with Wendy's International which gives the Wendy's Partnership the
right to use certain registered trademarks and service marks such as "Wendy's"
and "Wendy's Old-Fashioned Hamburgers." A default by the Wendy's Partnership
under a franchise agreement could result in adverse consequences, including the
termination of the franchise agreement.
COMPETITION AND INDUSTRY CONDITIONS
The food service industry serves as the nation's largest retail employer,
providing jobs for over 9 million people at over 730,000 locations in the United
States. The growth rate of the quick-service segment has consistently exceeded
that of the food service industry as a whole for more than 20 years. The
historic change in domestic lifestyles which favor greater convenience has
significantly impacted this trend. Because of this growth rate, competition in
the quick-service restaurant segment is intense and can be expected to
increase. Most of the Wendy's Partnership's restaurants are in close proximity
to other quick-service restaurants (e.g. McDonald's, Burger King and Taco Bell)
which compete on the basis of price, service, quality and variety. Recently,
the major competitors have attempted to draw customer traffic by a deep
discounting strategy. However, neither Wendy's International nor the Company
believes this is a profitable long-term strategy. The Company intends to achieve
growth both by developing new Wendy's restaurants and by increasing the sales
at existing restaurants.
The restaurant industry is subject to seasonal fluctuations. Like the rest
of the quick-service industry, traffic typically increases during the summer
months, which results in increased revenues for the Wendy's Partnership during
those months.
The Company is exploring other acquisitions that would significantly
increase the size of the Company's Food Service Group.
RISKS AND GOVERNMENTAL REGULATIONS
The Company's Food Service Group is subject to all the risks inherent in
its industry. These include, among others, changes in local, regional or
national economic conditions; changes in consumer
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tastes and concerns about the nutritional quality of quick-service food;
increases in food, labor and energy costs; the availability and cost of
suitable restaurant sites; the general reputation of Wendy's restaurants;
changes in travel patterns and highway conditions and construction; changes in
governmental regulations that influence prices and construction costs; changes
in health insurance coverage requirements; and changes in interest rates. Also,
the Wendy's Partnership is subject to extensive federal, state and local
government regulations relating to the zoning, development and operation of the
restaurants and the preparation and sale of food. The Wendy's Partnership is
also sensitive to laws governing relationships with its employees such as
minimum and overtime wage laws, health insurance coverage requirements, and
working conditions. Substantial changes in the minimum wage or mandatory
health care coverage could have an adverse effect on the Wendy's Partnership.
FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
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1996 1995 1994
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Revenue:
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Lodging Group $ 14,762,822 $ 14,441,020 $ 15,360,028
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Food Service Group 2,122,040 * *
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Operating Profit or (Loss):
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Lodging Group (966,885) (2,043,858) 1,309,492
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Food Service Group (8,136) * *
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Identifiable Assets:
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Lodging Group 21,418,956 17,983,503 19,688,429
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Food Service Group 10,509,908 * *
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* The Company's Food Service Group commenced operations on November 1, 1996.
NON-CORE ASSETS
The Company has a number of assets which do not directly relate to its
hospitality business. These assets include (i) approximately 5.5 acres of
undeveloped land adjacent to the Thomas Edison Inn, (ii) approximately 1 acre of
commercial property adjacent to the St. Clair Inn, (iii) the Grand Harbor Yacht
Club, a 55-slip marina which borders the Grand River adjacent to the Grand Haven
Holiday Inn, (iv) $5.1 million in life insurance policies on the life of the
former President and Chief Executive Officer, and (v) a note receivable from the
sale of shares in the outstanding principal amount of $9,750,000 (together the
"NON-CORE ASSETS"). The Company intends to sell some or all of the Non-core
Assets described in (i) through (iv) above to raise additional funds which may
be used to pay down the Company's long-term indebtedness or fund acquisitions,
capital expenditures or other corporate purposes.
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ITEM 2. PROPERTIES.
For a description of the properties that are owned and operated by the
Company and its subsidiaries, see Item 1.
The Company leases approximately 4,600 square feet of office space located
at 40 Pearl Street, N.W., Suite 900, Grand Rapids, Michigan 49503 as its
corporate headquarters and as the registered office of the Company and its
subsidiaries.
The Wendy's Partnership operates 26 restaurants in the Michigan counties
of Allegan, Calhoun, Kalamazoo, Kent, Muskegon, Ottawa and Van Buren. The
Wendy's Partnership (i) owns the land and buildings comprising five
restaurants, (ii) leases the land and buildings comprising 20 restaurants, and
(iii) owns the building and leases the land comprising one restaurant. The term
of the leases (including options to renew) range from one to 25 years. All of
the equipment used in the operation of the restaurants is owned by the Wendy's
Partnership. Each restaurant is a size, shape, design and layout that is
required, and has been approved, by Wendy's International. The ages of the
restaurants range from one to twenty-three years. The restaurants are subject
to the encumbrances that are described in "Financing and Encumbrances" below.
The Wendy's Partnership also leases approximately 4,000 square feet of
office space located at 4613 West Main, Kalamazoo, Michigan 49006 as its
operating headquarters. The principal office of the General Partner is located
at 125 Ottawa, N.W., Suite 235, Grand Rapids, Michigan 49503.
The Company believes that its properties, and the properties held by the
Wendy's Partnership, are adequately covered by insurance.
FINANCING AND ENCUMBRANCES
On February 26, 1996, the Company entered into an agreement with Great
American Life Insurance Company ("GALIC"), an affiliate of American Financial
Group, Inc., to refinance all of its mortgage debt. The Company executed two
promissory notes in favor of GALIC in the principal amount of $12,000,000
("LOAN A") and $3,000,000 ("LOAN B"), respectively. The interest rate on Loan A
was the Prime Rate of The Provident Bank (Cincinnati, Ohio) plus 1%, fully
floating. The interest rate on Loan B was the Prime Rate of The Provident Bank
plus 8%, fully floating. Loan A had a maturity date of March 1, 2012, with
monthly payments of interest only during the first year and 180 equal monthly
payments of principal plus accrued interest thereafter. Loan B had a maturity
date of March 1, 2002, with monthly payments of interest only during the first
year and 60 equal monthly payments of principal and accrued interest
thereafter. Loan A could be prepaid in whole or in part at any time without
penalty upon payment of all accrued interest and principal. Loan B could be
prepaid in whole or in increments of $100,000 upon payment of all accrued
interest plus a prepayment premium of 10% of the principal balance so prepaid,
except that no prepayment premium would be payable if GALIC required such
prepayment from the proceeds resulting from the disposition of certain
collateral securing Loan B. Loan A was secured by, among other things, a first
priority mortgage lien on the Hotels. Loan B was secured by a second priority
mortgage lien on the Hotels; by a first priority mortgage lien on the
undeveloped land adjacent to the Thomas Edison Inn, the commercial property
adjacent to the St. Clair Inn, and the Grand Harbor Yacht Club; by a collateral
assignment of all life insurance policies owned by the Company on the life of
Mr. Reynolds; and by an assignment of a Secured Promissory Note in the
principal amount of $10,500,000 payable by MCC to the Company. Both Loan A and
Loan B contained cross-default provisions.
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On October 31, 1996, the Company entered into Amendment No. 1 to the loan
agreement with GALIC to obtain an additional $3,000,000 mortgage loan ("LOAN
C"). The proceeds from Loan C were used to pay the costs associated with
commencing and closing the tender offer for the limited partnership units of
the Wendy's Partnership. The terms of Loan C were nearly identical to Loan B
described above, although Loan C's security included all of the outstanding
limited partnership units of the Wendy's Partnership owned by the Company.
On November 26, 1996, the Company entered into a new loan agreement with
GALIC to replace the existing loan agreement and restructure the Company's
total indebtedness. Loan A was refinanced and an additional $2,000,000 was
borrowed ("LOAN I"). Loan I is with the subsidiaries of the Company and is
secured by a first mortgage lien on the Hotels, a first priority security
interest in the Hotel personal property and an assignment of the Hotel
franchise agreement. Loan I is guaranteed by the Company and bears a fixed
interest rate of 10.3%. Loan I requires equal monthly payments of principal and
interest of $137,897 (based upon a 20 year amortization) through December 1,
2003, at which time the loan matures and any remaining unpaid principal and
interest will be due. Loan I may not be prepaid, in whole or in part, within 48
months, except in the event of the sale of one of the Hotels, in which case the
prepayment amount is an amount equal to a predetermined release price for the
property being sold plus a prepayment premium. The prepayment premium is 4% of
the amount prepaid if the sale is within 12 months after closing; 3% if the
sale is after 12 months and prior to 24 months after closing; 2% if the sale is
after 24 months and prior to 36 months after closing; and 1% if the sale is
after 36 months and prior to 48 months after closing. Beginning after the
fourth anniversary of the closing, and continuing until the sixth anniversary
of the closing, Loan I may be prepaid, with a "make whole premium" as defined
in the loan agreement.
At the same time, Loan B and Loan C (together totaling $5,250,000) were
combined into one loan ("LOAN II"). Loan II is with the Company and certain of
its subsidiaries, and bears an interest rate of prime (based on The Provident
Bank - Cincinnati, Ohio) plus 8%, fully floating. Loan II has a maturity date
of June 1, 2002, with monthly payments of interest only during the first year;
principal payments of $50,000 plus accrued interest from December 1, 1997
through March 1, 1998; and principal payments of $100,000 plus accrued interest
thereafter. Loan II may be prepaid in whole or in increments of $100,000 upon
payment of all accrued interest plus a prepayment premium of 10% of the
principal balance so prepaid, except that no prepayment premium shall be
payable if GALIC requires such prepayment from the proceeds resulting from the
disposition of certain collateral securing Loan II. Loan II is secured by a
second priority mortgage lien on the Hotels; by a first priority security
interest on undeveloped land adjacent to the Thomas Edison Inn, commercial
property adjacent to the St. Clair Inn, and the Grand Harbor Yacht Club; by a
collateral assignment of all life insurance policies owned by the Company on
the life of Mr. Reynolds; by an assignment of the Secured Promissory Note in
the principal amount of $9,750,000 payable by MCC to the Company; by the
Company's pledge of the common stock of each of its subsidiaries; and by the
Company's pledge of its partnership interests in the Wendy's Partnership. Both
Loan I and II contain cross-default provisions.
The loan agreement contains a covenant that requires that (i) Mr. Hewett,
or another person acceptable to GALIC, serve as the Company's President and
Chief Executive Officer, (ii) Mr. Hewett own not less than 50% of MCC, and
(iii) MCC own and control at least 25% of the Company's issued and outstanding
Common Shares, or in the event of an issuance of Common Shares by the Company,
that MCC own more Common Shares than any other person or group acting in
concert and have sufficient control to cause the election of persons nominated
by MCC as a majority of the Company's directors.
-11-
<PAGE> 12
The Wendy's Partnership has a note payable with First of America
Bank-Michigan, N.A. in the principal amount of $2,192,351. The loan requires
monthly payments of $43,313 based on a ten year amortization including interest
at 1% over prime. The revolving loan agreement allows the Wendy's Partnership
to apply its excess cash against the loan balance to reduce the interest
charged on the loan. As of November 30, 1996, the loan was paid down to a
balance of $2,192,351 while the permitted (amortized) balance was $2,978,702.
The loan is secured by substantially all the assets of the Wendy's Partnership
and by the guaranty of the General Partner and the personal guarantees of the
shareholders of the General Partner.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in certain routine legal proceedings which are
incidental to its business. Except as described below, all of these proceedings
arose in the ordinary course of the Company's business and, in the opinion of
the Company, any potential liability of the Company with respect to these legal
actions will not, in the aggregate, be material to the Company's financial
condition or operations. The Company maintains various types of insurance
standard to the industry which would cover most actions brought against the
Company.
On December 5, 1996, the Company received a notice from the Internal
Revenue Service that it had concluded that legal and professional fees totaling
approximately $2.1 million that were incurred by the Company in fiscal 1995 in
connection with the then existing litigation and deducted as an ordinary and
necessary business expense, should be treated as a capital expenditure and,
therefore, disallowed the deduction. These expenditures related to various
lawsuits in fiscal 1995 concerning the "Replacement and Restructuring of
Management" described in Item 1. The Company believes the deduction was proper
and is vigorously contesting the disallowance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of fiscal 1996.
-12-
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
On October 22, 1996, the Company's Common Shares commenced trading under
the symbol "MHG" on the Chicago Stock Exchange. Since October 18, 1995, the
Company's Common Shares have also appeared under the symbol "MHGI" (or "TEIR"
prior to the Company's name change in May 1996) on the OTC Bulletin Board
System administered by the National Association of Securities Dealers, Inc.
Prior to October 18, 1995, there was no established public trading market for
the Company's Common Shares.
The following table sets forth the high and low bid prices for the
Company's Common Shares beginning on October 18, 1995 and ending on November
30, 1996 (the last day of fiscal 1996) as reported by the NASDAQ Trading and
Market Services:
<TABLE>
<CAPTION>
---------------------------------------------- --------------------------------------------------------------
BID
FISCAL QUARTER HIGH LOW
---------------------------------------------- --------------------------------------------------------------
<S> <C> <C>
1st, 2nd & 3rd Quarters, 1995 No Published Quotations
---------------------------------------------- --------------------------------------------------------------
October 18, 1995 - November 30, 1995 $ 7.50 $ 5.88
---------------------------------------------- -------------------------------- -----------------------------
First Quarter 1996 $ 7.125 $ 5.50
---------------------------------------------- -------------------------------- -----------------------------
Second Quarter 1996 $ 6.375 $ 5.625
---------------------------------------------- -------------------------------- -----------------------------
Third Quarter 1996 $ 6.375 $ 4.25
---------------------------------------------- -------------------------------- -----------------------------
Fourth Quarter 1996 $ 6.25 $ 4.25
---------------------------------------------- -------------------------------- -----------------------------
</TABLE>
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
The following table sets forth the high and low prices for the Company's
Common Shares beginning on October 22, 1996 (the first day of trading) and
ending on November 30, 1996 as reported by the Chicago Stock Exchange:
<TABLE>
<CAPTION>
---------------------------------------------- --------------------------------------------------------------
SALES
PERIOD HIGH LOW
---------------------------------------------- -------------------------------- -----------------------------
<S> <C> <C>
October 22, 1996 - November 30, 1996 $ 6.25 $ 5.63
---------------------------------------------- -------------------------------- -----------------------------
</TABLE>
HOLDERS
As of February 21, 1997, there were approximately 600 record holders of
the Company's Common Shares, which the Company believes represents
approximately 1,400 beneficial holders.
-13-
<PAGE> 14
DIVIDENDS
On April 26, 1996, the Company paid a special dividend in the amount of
$.50 per Common Share. Pursuant to the Company's loan agreement with GALIC (see
Item 2 "Financing and Encumbrances"), the Company may not pay any further
dividends without GALIC's consent until Loan II has been paid in full. The
Company does not intend to pay any dividends on its Common Shares in 1997.
The Wendy's Partnership Agreement provides for cash distributions to its
limited partners. On a semi-annual basis, the General Partner reviews the
Wendy's Partnership's results of operations and cash requirements and
determines the cash flow from operations available for distribution to the
limited partners. Pursuant to the Wendy's Partnership's loan agreement (see
Item 2 "Financing and Encumbrances"), the Wendy's Partnership must maintain
certain minimum Tangible New Worth and Cash Availability (as defined in the
loan agreement) which may limit the amount of cash distributions to the
limited partners.
Cash distributions for the two most recent fiscal years are set forth
below:
<TABLE>
<CAPTION>
- ---------------------------------------- ------------------------------------- ------------------------------------
DATE OF DISTRIBUTION PER LIMITED PARTNERSHIP UNIT TOTAL CASH DISTRIBUTION
- ---------------------------------------- ------------------------------------- ------------------------------------
<S> <C> <C>
January 1995 $ 200.00 $ 253,899
- ---------------------------------------- ------------------------------------- ------------------------------------
July 1995 $ 250.00 $ 317,374
- ---------------------------------------- ------------------------------------- ------------------------------------
January 1996 $ 100.00 $ 126,950
- ---------------------------------------- ------------------------------------- ------------------------------------
July 1996 $ 150.00 $ 190,424
- ---------------------------------------- ------------------------------------- ------------------------------------
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
On September 19, 1995, the Company issued 1,500,000 Common Shares to MCC
in exchange for a non-interest bearing note in the original principal amount of
$10,500,000. See Item 13 "Certain Relationships and Related Transactions" for a
more detailed description of the transaction.
In October 1996, the Company commenced a private offering of up to 200,000
shares ($2,000,000) of a new issue of Series A Convertible Preferred Stock. As
of February 21, 1997 the Company had sold $1,083,870 in Convertible Preferred
Stock, with the sales consisting of $788,670 in cash ($243,670 of which certain
executive officers and management elected to take in lieu of all or a portion
of their year end cash bonuses), and $295,200 in units of the Wendy's
Partnership (valued at $7,200 per unit).
Each Convertible Preferred Share has an annual dividend rate of $.90 per
share which is payable in equal quarterly installments on the first day of each
January, April, July and October to holders of record as of the 15th day of the
preceding month. The holders may convert their Preferred Shares at any time
into Common Shares at a conversion price of $7.00 per share, taking the
Preferred Shares at the liquidation value of $10.00 per share, which, at such
ratio, would yield approximately 1.43 Common Shares for each Convertible
Preferred Share. The conversion rate is subject to adjustment in the event of
stock splits, stock dividends, combinations, reclassifications and similar
occurrences. Upon any dissolution or winding up, the holder of each Preferred
Share will be entitled to receive a liquidation value of $10 plus all accrued
but unpaid dividends after the payment of all indebtedness of the Company
-14-
<PAGE> 15
and before any distributions to holders of Common Shares. No voting rights are
provided except that should the Company miss six consecutive quarterly dividend
payments, the holders of the Preferred Shares, voting as a class, will be
entitled to elect two additional directors to the Company's Board of Directors.
The offering's objective is to increase shareholders' equity and provide funds
for both acquisition activities and capital improvements.
The following schedule provides information regarding the Series A
Convertible Preferred Shares:
<TABLE>
<CAPTION>
- -------------------------------------- ------------ ------------------------ ------------------ -------------------
SHARES COMMON SHARES IF
DATE OF SALE PURCHASED CLASS OF PURCHASER CONSIDERATION CONVERTED
- -------------------------------------- ------------ ------------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
October and November 1996 42,500 Non Employee Directors $ 425,000 cash 60,715
- -------------------------------------- ------------ ------------------------ ------------------ -------------------
Certain Executive
November and December 1996 24,367 Officers & Management $ 243,670 cash 34,810
- -------------------------------------- ------------ ------------------------ ------------------ -------------------
$ 120,000 cash
November 1996 41,520 Others and 41 Units of 59,314
the Wendy's
Partnership
- -------------------------------------- ------------ ------------------------ ------------------ -------------------
</TABLE>
On July 25, 1996, the Company issued 171,900 Common Shares to acquire
143.25 limited partnership units of the Wendy's Partnership from three
individuals. 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.
On November 5, 1996, the Company issued 7,500 Common Shares to a law firm
as payment for services rendered. The amount of stock issued was determined by
using the trading price on the day that the Company agreed to pay the fee in
Common Stock ($4.30 per share).
On January 21, 1997, the Company issued 5,000 Common Shares to a company
as a signing deposit in connection with the execution of a hotel acquisition
agreement that is subject to various conditions prior to closing. The amount of
stock issued was determined by using an agreed upon trading price of $6.25 per
share.
These issuances were exempt from registration under the Securities Act of
1933 pursuant to Section 4(2) of that Act.
-15-
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth the selected financial information of the
Company.
(In thousands except for per share information)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total revenue $ 16,885 $ 14,441 $ 15,360 $ 14,245 $ 14,345
Earnings (loss) from operations $ (975) $ (2,044) $ 1,309 $ 1,064 $ 1,700
Earnings (loss) before cumulative effect
of change in accounting principle $ (1,926) $ (2,049) $ 90 $ 230 $ 299
Net earnings (loss) $ (1,926) $ (2,049) $ (27) $ 230 $ 299
Earnings (loss) per share:
Before cumulative effect of change in
accounting principle $ (0.62) $ (1.13) $ 0.06 $ 0.15 $ 0.20
After cumulative effect of change in
accounting principle $ (0.62) $ (1.13) $ (0.02) $ 0.15 $ 0.20
Property & equipment $ 21,757 $ 13,218 $ 13,645 $ 14,068 $ 14,867
Total assets $ 31,929 $ 17,984 $ 19,688 $ 20,004 $ 20,145
Long-term obligations (1) $ 24,293 $ 11,443 $ 12,647 $ 12,905 $ 13,209
Cash dividends declared per common share $ 0.50 $ 0.00 $ 0.00 $ 0.00 $ 0.00
</TABLE>
(1) For comparative purposes, long-term obligations include current portions of
long-term obligations.
-16-
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
LODGING GROUP
The following summarizes the Company's results of operations for the
Lodging Group for the years ended November 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Statements of Operations
$ in Thousands % of Revenue
-------------------------------- -----------------------------
1996 1995 1994 1996 1995 1994
-------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Room revenue $ 6,282 $ 5,999 $ 6,048 42.6% 41.5% 39.4%
Food and beverage revenue 7,786 8,246 9,100 52.7 57.1 59.2
Telephone and sundry revenue 695 196 212 4.7 1.4 1.4
---------------------------------- -----------------------------
Total revenue 14,763 14,441 15,360 100.0 100.0 100.0
Costs and expenses
Cost of food and beverages 2,700 2,864 3,041 18.3 19.8 19.8
Operating expenses 8,166 7,215 7,180 55.3 50.0 46.7
General and administrative 3,854 4,980 2,597 26.1 34.5 16.9
Depreciation and amortization 1,010 1,427 1,232 6.8 9.9 8.0
---------------------------------- -----------------------------
Total costs and expenses 15,730 16,485 14,051 106.6 114.2 91.5
---------------------------------- -----------------------------
Earnings (loss) from operations (967) (2,044) 1,309 (6.6) (14.2) 8.5
Other income (expense)
Interest expense (1,605) (1,355) (1,206) (10.9) (9.4) (7.9)
Interest income 658 387 87 4.5 2.7 0.6
Gain (loss) on sale of assets (7) 242 12 (0.0) 1.7 0.1
---------------------------------- -----------------------------
(954) (727) (1,107) (6.4) (5.0) (7.2)
---------------------------------- -----------------------------
Earnings (loss) before federal income
tax and cumulative effect of change
in accounting principle (1,921) (2,771) 202 (13.0) (19.2) 1.3
Federal income tax expense (benefit) (20) (721) 112 (0.1) (5.0) 0.7
---------------------------------- -----------------------------
Earnings (loss) before cumulative
effect of change in accounting
principle (1,901) (2,049) 90 (12.9) (14.2) 0.6
Cumulative effect of change in
accounting principle (117) (0.8)
---------------------------------- -----------------------------
Net loss $(1,901) $ (2,049) $ (27) (12.9%) (14.2%) (0.2%)
================================== =============================
</TABLE>
-17-
<PAGE> 18
YEARS ENDED NOVEMBER 30, 1996 AND 1995
REVENUE
Total revenue for the Lodging Group was $14,762,822 for fiscal 1996
compared to $14,441,020 for fiscal 1995, an increase of 2.2%. The following
table outlines revenues (excluding sundry and telephone) by category:
<TABLE>
<CAPTION>
Increase % Increase
1996 1995 (Decrease) (Decrease)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Room revenue $ 6,281,711 $ 5,999,024 $ 282,687 4.7%
Food and beverage revenue $ 7,786,154 $ 8,245,880 (459,726) (5.6%)
---------------------------------------------------------------
Total $14,067,865 $14,244,904 $(177,039) (1.2%)
===============================================================
</TABLE>
The increase in room revenue was attributable to an increase in the
overall average daily rate of $2.94 (4.0%), from $74.46 in fiscal 1995 to
$77.40 in fiscal 1996. Also contributing to the increase in room revenue was a
slight increase in Hotel occupancy from 60.3% in fiscal 1995 to 60.6% in fiscal
1996. The decrease in food and beverage revenue from fiscal 1995 to fiscal
1996 was primarily attributable to a decrease in social function bookings at
the Hotels during the second half of fiscal 1996.
Telephone and sundry revenue increased $498,841, from $196,116 in fiscal
1995 to $694,957 in fiscal 1996. A large portion of the increase was
attributable to the recognition of approximately $217,000 of expired gift
certificates as income in fiscal 1996. Also contributing to the increase was
the recovery of approximately $68,000 from the collection of amounts due from
parties related to the Company prior to the change in control of the Company,
which had been written off to bad debt expense in fiscal 1995. In addition, new
telephone systems were installed at the Thomas Edison Inn and the St. Clair
Inn. Rate schedules used to calculate telephone charges were updated
generating additional telephone income.
COST OF FOOD AND BEVERAGES
Due to a change in revenue mix between room revenue and food and beverage
revenue (as a percentage of total revenue), cost of food and beverages was
18.3% in fiscal 1996 and 19.8% in fiscal 1995. As a percentage of food and
beverage revenue, cost of food and beverages was 34.7% in both fiscal 1996 and
fiscal 1995 despite the decline in food and beverage revenue.
OPERATING EXPENSES
Operating expenses for fiscal 1996 and fiscal 1995 were $8,166,380 and
$7,215,061, respectively, an increase of $951,319 (13.2%). As a percentage of
total revenue, operating expenses increased 5.3 percentage points, from 50.0%
of total revenue in fiscal 1995 to 55.3% of total revenue in fiscal 1996. The
increase in operating expenses in fiscal 1996 compared to fiscal 1995 was
primarily the result of a 4.0 percentage point increase in payroll costs due to
increased staffing, and salary and wage
-18-
<PAGE> 19
increases aimed at improving service to increase revenue. Increases in sales
and marketing expenses, entertainment expense and repairs and maintenance also
contributed to the increase in operating expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $1,126,084 in fiscal 1996
compared to fiscal 1995. General and administrative expenses were abnormally
high in fiscal 1995 as a result of $2,154,163 of expenses related to various
lawsuits in fiscal 1995 resulting in the "Replacement and Restructuring of
Management" described in Item 1. Excluding this $2,154,163 of expenses, general
and administrative expenses increased $1,028,079 in fiscal 1996 compared to
fiscal 1995. In fiscal 1996, the Company decided to manage the Hotels directly
as compared to fiscal 1995 when the Hotels were managed by a management
company (owned by Mr. Reynolds, the former majority shareholder of the
Company). This decision eliminated the fees and expenses assessed by the
management company, but increased payroll costs attributable to the corporate
management staff. This additional staffing was also required to implement the
Company's strategy to expand the Company through the acquisition of new
businesses (including the Wendy's Partnership). The Company did not receive the
financial benefits in fiscal 1996 that it expects to receive in future years as
a result of the Wendy's Partnership acquisition and future acquisitions.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $416,871, from $1,426,642
in fiscal 1995 to $1,009,771 in fiscal 1996. Amortization expense was
abnormally high in fiscal 1995 due to the write-off of deferred loan costs of
approximately $350,000 because of the refinancing of the Company's long-term
debt in February 1996. Also, certain property and equipment acquired in 1986
(the year of incorporation) which had a ten year life became fully depreciated
during fiscal 1995. As a result, depreciation expense for fiscal 1996 was lower
compared to fiscal 1995.
INTEREST EXPENSE
Interest expense for fiscal 1996 and 1995 was $1,605,047 and $1,335,389,
respectively. The increase of $249,658 from fiscal 1995 to fiscal 1996 was due
to additional borrowings in fiscal 1996. See Note F to the Financial Statements
beginning on page F-1 for details of the Company's long-term debt. Also see
Item 2 "Financing and Encumbrances."
INTEREST INCOME
Interest income increased from $387,099 in fiscal 1995 to $658,007 in
fiscal 1996. The increase was due to an increase in cash and cash equivalents
in fiscal 1996 compared to fiscal 1995, and an increase in interest income from
the note receivable from the sale of stock which is described in Note J to the
Financial Statements beginning on Page F-1.
FOURTH QUARTER OPERATIONS
The Company's loss before federal income tax increased from $19,677 for
the nine months ended August 31, 1996 to $1,945,570 for the year ended November
30, 1996. The significant loss in the
-19-
<PAGE> 20
fourth quarter of fiscal 1996 was attributable to several factors. Hotel
revenues decreased approximately 9% in the fourth quarter of fiscal 1996 as
compared to fiscal 1995. This decrease was the result of a decline in food and
beverage revenue caused by a decline in social function bookings combined with
a decrease in food and beverage business from local clientele as a result of
increased competition. Hotel operating expenses also increased, including
increases in fixed payroll costs, entertainment expense and sales and marketing
expenses, all of which were increased in an effort to reverse the downward
sales trend. General and administrative expenses were also unusually high for
the fourth quarter of fiscal 1996 due to increased professional fees, year-end
bonuses to employees which were allocated at the discretion of the Company's
Compensation Committee, and significant costs related to public company matters
including fees and expenses associated with creating a market for the Company's
Common Stock.
FOOD SERVICE GROUP
As described in Item 1 "Acquisition," the Company acquired a majority
interest in the Wendy's Partnership on October 31, 1996, resulting in the
consolidation of the Wendy's Partnership's operations for the month of November
1996. Revenue from the Wendy's Partnership was $2,122,040. The Wendy's
Partnership's operating loss for the month of November was $8,136 and the loss
before federal income tax was $24,745.
YEARS ENDED NOVEMBER 30, 1995 AND 1994
REVENUE
Total revenue of the Lodging Group decreased 6.0%, from $15,360,028 in
fiscal 1994 to $14,441,020 in fiscal 1995. The decrease in total revenue was
primarily attributable to decreased food and beverage revenue. Room revenue
decreased only $48,486 (0.8%). Food and beverage revenue, however, decreased
$854,278 (9.4%). The following table outlines revenues (excluding sundry and
telephone) by category and Hotel:
<TABLE>
<CAPTION>
Increase % Increase
1995 1994 (Decrease) (Decrease)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Room revenue $ 5,999,024 $ 6,047,510 $ (48,486) (0.8%)
Food and beverage revenue $ 8,245,880 $ 9,100,158 $ (854,278) (9.4%)
--------------------------------------------------------------
Total $ 14,244,904 $ 15,147,668 $ (902,764) (6.0%)
==============================================================
</TABLE>
The decrease in room revenue was the result of a decrease in overall
occupancy for the Hotels in fiscal 1995 compared to fiscal 1994. Hotel
occupancy decreased 1.5%, from 61.2% in fiscal 1994 to 60.3% in fiscal 1995.
The decrease in hotel occupancy was largely offset by an increase in the
overall average daily rate of $0.55 (0.7%), from $73.91 in fiscal 1994 to
$74.46 in fiscal 1995. The decrease in food and beverage revenue from fiscal
1994 to fiscal 1995 was primarily attributable to the decrease in
meeting/conference business at the Thomas Edison Inn due to the loss of a
contract with a major customer.
-20-
<PAGE> 21
COST OF FOOD AND BEVERAGES
As a percentage of total revenue, cost of food and beverages was 19.8% in
fiscal 1995 and fiscal 1994. As a percentage of food and beverage revenue, cost
of food and beverages increased from 33.4% in fiscal 1994 to 34.7% in fiscal
1995. The increase in cost of food and beverages was due to a change in product
mix resulting primarily from the loss of banquet (e.g. meetings/conferences,
weddings, etc.) business at the Thomas Edison Inn described in the previous
paragraph. Food and beverage costs for banquet business are relatively lower
than food and beverage costs for restaurant and lounge business.
OPERATING EXPENSES
Operating expenses increased 0.5%, from $7,179,572 in fiscal 1994 to
$7,215,061 in fiscal 1995. As a percentage of total revenue, operating expenses
increased 3.3 percentage points to 50.0% in fiscal 1995 compared to 46.7% in
fiscal 1994. The increase in operating expenses was primarily the result of an
increase of approximately 2 percentage points in salaries and wages. This
increase was the result of increased hourly wages (due to the tight labor
market in Michigan) and the negative impact on fixed labor of reduced revenues
in fiscal 1995 compared to fiscal 1994. Increased property taxes and an
increase in repairs and maintenance also contributed to the increase in
operating expenses (as a percentage of sales).
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $2,384,070 in fiscal 1995
compared to fiscal 1994, of which $2,154,163 related to various lawsuits in
fiscal 1995 which resulted in the "Replacement and Restructuring of Management"
described in Item 1. General and administrative expenses in fiscal 1995 also
included bad debt expense of $260,000 relating to the former majority
shareholder's indebtedness to the Company. Excluding these unusual expenses of
$2,414,163, general and administrative expenses were $2,565,458 in fiscal 1995
compared to $2,597,278 in fiscal 1994.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $194,455, from $1,232,187
in fiscal 1994 to $1,426,642 in fiscal 1995. The increase was the result of
increased amortization due to the write-off of deferred loan costs of
approximately $350,000 because of the refinancing of the Company's long-term
debt in February 1996. Depreciation expense decreased approximately $156,000 in
fiscal 1995 compared to fiscal 1994. Depreciation expense decreased because
certain property and equipment acquired in 1986 (the year of incorporation)
became fully depreciated during fiscal 1995.
INTEREST EXPENSE
Interest expense for fiscal 1995 and 1994 was $1,355,389 and $1,206,151,
respectively. The increase of $149,238 from fiscal 1994 to fiscal 1995 was due
to increases in the prime rate. All of the Company's debt had been based on
variable interest rates that were based on the prime rate.
INTEREST INCOME
Interest income increased from $87,028 in fiscal 1994 to $387,099 in
fiscal 1995. The increase was due to an increase in cash and cash equivalents
in fiscal 1995 compared to fiscal 1994 and an increase in interest on the
payment of outstanding loans from then related parties. Also contributing to
-21-
<PAGE> 22
the increase was interest income from the note receivable from the sale of
stock in September 1995 (see Note J to the Financial Statements beginning on
Page F-1).
GAIN ON SALE OF ASSETS
The gain on sale of assets of $241,646 in fiscal 1995 was primarily the
result of the sale of a portion of the land adjacent to the Thomas Edison Inn.
LIQUIDITY AND CAPITAL RESOURCES
On October 31, 1996, the Company acquired a majority interest in the
Wendy's Partnership. At November 30, 1996, the Company owned approximately 54%
of the Wendy's Partnership, all of which was acquired in fiscal 1996. The cost
of the Wendy's Partnership acquisition was approximately $4,870,000. As a
result of this acquisition, the financial statements of the Wendy's Partnership
have been included in the Company's consolidated operating results beginning
November 1, 1996 and the Company's consolidated balance sheet at November 30,
1996. The fair value of the assets of the Wendy's Partnership as of November
30, 1996, which have been included in the consolidated financial statements,
was approximately $10,500,000. This accounts for the majority of the increase
in total assets of the Company from $17,983,503 at November 30, 1995 to
$31,928,864 as of November 30, 1996. The acquisition was funded by payment of
approximately $3,500,000 in cash and the issuance of approximately $1,370,000
of Company stock. Of the cash payment, $3,000,000 was provided by proceeds from
borrowings.
At November 30, 1996, the Company's current assets exceeded its current
liabilities by $103,112 compared to November 30, 1995, when current assets
exceeded current liabilities by $43,681. At these dates, the ratios of current
assets to current liabilities were 1.03:1 and 1.02:1, respectively. Because of
the net loss in fiscal 1996, the Company's operating activities did not provide
positive cash flow in fiscal 1996. As a result, proceeds from long-term debt
provided the necessary working capital for the Company to meet its financial
requirements for fiscal 1996. During fiscal 1996, the Company borrowed
approximately $7,500,000 (net of loan costs) of additional long-term debt. The
proceeds were used primarily for the acquisition of the Wendy's Partnership
(approximately $3,500,000), additions to property, plant and equipment
(approximately $2,200,000), operating activities (approximately $1,500,000) and
an increase in the balance of cash and cash equivalents from November 30, 1995
to November 30, 1996 (approximately $900,000).
The Company's long-term debt consists primarily of the following:
1) $14,000,000 first mortgage loan requiring monthly payments of $137,897,
including interest at 10.3%, through December 31, 2003 when the
remaining unpaid principal will be due.
2) $5,250,000 second mortgage loan requiring monthly payments of interest
only at 8% over the prime rate through November 1, 1997. Beginning
December 1, 1997, monthly principal payments of $50,000, plus interest
at 8% over the prime rate, will be required through March 1, 1998.
Beginning April 1, 1998, monthly principal payments of $100,000, plus
interest at 8% over the prime rate, will be required until the loan is
retired in June 2002.
3) $2,192,351 revolving term loan of the Wendy's Partnership requiring
monthly payments of $43,313, including interest at 1% over the prime
rate, through February 2005 when any remaining unpaid principal will be
due. Under the revolving loan agreement, the required monthly payments
may be offset by additional borrowings up to the unused available
-22-
<PAGE> 23
borrowings. The total available borrowings under the loan agreement
were $2,978,702 at November 30, 1996.
4) $582,359 note payable requiring monthly payments of $14,693, including
interest at 8.8%, through October 2000.
Minimum annual principal payments on the Company's long-term debt to
maturity as of November 30, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 395,120
1998 1,389,380
1999 1,678,253
2000 1,997,253
2001 1,911,939
Thereafter 14,735,022
-----------
$22,106,967
===========
</TABLE>
The loan agreement with the Company's primary lender contains numerous
covenants regarding the maintenance of a prescribed amount of net worth,
certain financial ratios, and restrictions on certain Common Stock purchases,
dividends, additional indebtedness and executive compensation. At November 30,
1996, the Company failed to meet the net worth covenant. However, a waiver has
been obtained through May 31, 1997.
During fiscal 1996, the Company issued $1,083,870 (108,387 shares) of
Series A Convertible Preferred Stock. The shares have an annual dividend rate
of $0.90 per share and payment of dividends is cumulative. Based on the present
shares outstanding, quarterly dividend payments of $24,387 are due on January
1, April 1, July 1 and October 1 of each year.
As described in Item 5 "Dividends," a special dividend was paid in the
amount of $0.50 per outstanding Common Share on April 26, 1996. The total
dividend paid was $1,510,075. Of this amount $435,124 was withheld from the
Company's former majority shareholder (Mr. Reynolds) and applied against
amounts due to the Company from Mr. Reynolds and companies related to Mr.
Reynolds at that date. An additional $775,000 of the dividend was paid to MCC
which then paid $750,000 to the Company as an early prepayment on the Company's
note receivable from the sale of shares to MCC described in Note J to the
Financial Statements beginning on page F-1.
The Company estimates 1997 capital expenditures to be approximately
$1,100,000 for building improvements, and furniture, fixtures and equipment
purchases, at its existing Hotels and at the existing Wendy's Partnership
restaurants. Of the $1,100,000, approximately $500,000 is allotted for fiscal
1997 capital expenditures at existing Wendy's restaurants. Also, the Company has
received various proposals to finance (through debt or lease) both the real
estate and furniture, fixtures and equipment for any new Wendy's restaurants. Of
the $1,100,000, the Company estimates fiscal 1997 capital expenditures at its
full service Hotels to be approximately $600,000. This is a reduction from
previous capital expenditures budgets for the Company's full service Hotels as
the Company is reassessing how to best utilize its capital resources between the
Wendy's restaurants and its lodging operations.
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<PAGE> 24
The Company has also entered into agreements to acquire the General
Partnership interest in the Wendy's Partnership (which would require a $200,000
cash payment in March 1997), and a hotel acquisition agreement which, if the
agreement closes, would require a cash payment of approximately $650,000 in
April 1997.
Sources of funds for the estimated $1,100,000 in capital expenditures and
$850,000 in acquisitions are expected to come from (i) improved operations of
the Company's Lodging Group, (ii) proceeds from the private placement of
approximately 92,000 shares ($10 per share) of the unissued Series A
Convertible Preferred Stock, and (iii) the sale of certain Non-core Assets
valued at approximately $1,000,000 to $1,500,000. The acquisition of the
remaining Wendy's Partnership units and the hotel acquisition referenced above,
if completed, should provide the Company with a significant source of
additional cash flow.
INFLATION AND CHANGING PRICES
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the Company's financial condition or
results of operations for the periods presented.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data included in the report
under this Item are set forth in pages F-1 through F-24 appearing at the end of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors and Executive Officers
The following is information concerning each of the current directors and
executive officers as of February 21, 1997:
<TABLE>
<CAPTION>
- -------------------------------------------- ---------------------------------- ----------------------------------
COMMON SHARES
BENEFICIALLY OWNED
NAME AND AGE (1) POSITION AMOUNT (2) PERCENTAGE
- -------------------------------------------- ---------------------------------- ---------------- -----------------
<S> <C> <C> <C>
Robert E. Schermer, Sr. (3) (4) (5) (6) (7) Chairman of the Board of 162,104 4.9%
61 Directors
- -------------------------------------------- ---------------------------------- ---------------- -----------------
Christopher B. Hewett (4) (8) (9) President, Chief Executive 1,573,014 48.7%
38 Officer and Director
- -------------------------------------------- ---------------------------------- ---------------- -----------------
Robert E. Schermer, Jr. (4) (9) (10) Executive Vice President and 15,886 *
38 Director
- -------------------------------------------- ---------------------------------- ---------------- -----------------
William D. Badgerow (9) Vice President, Treasurer and 581 *
37 Chief Financial Officer
- -------------------------------------------- ---------------------------------- ---------------- -----------------
James R. Saalfeld (9) Vice President, General Counsel 1,734 *
29 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%
35
- -------------------------------------------- ---------------------------------- ---------------- -----------------
Joseph L. Maggini (3) (7) (12) Director 51,502 1.6%
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 *
51
- -------------------------------------------- ---------------------------------- ---------------- -----------------
All Current Executive Officers and 2,084,769 62.3%
Directors as a Group (12 persons)
- -------------------------------------------- ---------------------------------- ---------------- -----------------
</TABLE>
(1) Unless otherwise indicated, the persons named have sole voting and
investment power and beneficial ownership of the securities.
(2) The column sets forth Common Shares which are deemed "beneficially owned"
by the named persons under Rule 13d-3 of the Securities Exchange Act of
1934. This includes options to acquire 5,000 shares of Company Common
Stock which were granted to all non-employee directors of the Company
pursuant to the terms of the 1996 Directors' Share Option Plan and which
are immediately exercisable.
(3) Compensation Committee Member
(4) Executive Committee Member
(5) Nominating Committee Member
(6) Includes 2,000 shares held directly by Mr. Schermer, Sr.'s wife.
(7) Includes Series A Convertible Preferred Stock acquired in a private
offering conducted by the Company which is immediately convertible.
(8) See description of Common Share ownership contained under Item 12 "Security
Ownership of Certain Beneficial Owners and Management."
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<PAGE> 26
(9) Includes Series A Convertible Preferred Stock which is immediately
convertible and which the Executive Officers elected to receive in lieu of
all or a portion of their year-end cash bonus.
(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%
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
(1990-91) and President (1991-1997) 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 and was renamed Key Largo Group, Inc.
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 Partnership. In this position, 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 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 1989-1994, Mr. Garrabrant was a
Vice President with the real estate investment banking division of The Bankers
Trust Company in New York City.
-26-
<PAGE> 27
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 shareholder of the General Partner of the Wendy's Partnership
and is also a director of First National Bank of Manatee, Manatee, Florida.
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 SEC 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: (a) Mr.
Staiger's untimely filing of his Form 3, (b) Mr. Goerlich's untimely filing of
his Form 3, and (c) Mr. Schermer, Jr.'s untimely reporting of his purchase of
500 Common Shares. Messrs. Staiger and Goerlich filed Forms 3 upon learning of
their inadvertent failure to do so on a timely basis. Mr. Schermer, Jr.
reported the above-described transaction on his Form 5 upon discovery of his
failure to report the transaction in a timely fashion.
-27-
<PAGE> 28
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information regarding 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:
<TABLE>
<CAPTION>
==================================================================================================================
SUMMARY COMPENSATION TABLE
- -------------------------------- ---------- ------------------------------ ---------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS 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) Former 1996 (4) --- --- ---
Chairman of the Board of 1995 (4) --- --- $ 193,875 (5)
Directors, President, Chief 1994 (4) --- --- $ 193,500 (5)
Executive Officer, Treasurer
and Secretary
==================================================================================================================
</TABLE>
(1) MCC acquired majority control of the Company on January 25, 1996 and
Messrs. Hewett and Schermer, Jr. assumed their positions as officers on
that date.
(2) Represents Series A Convertible Preferred Stock which Messrs. Hewett and
Schermer, Jr. elected to receive in lieu of a year-end cash bonus (see Item
5 "Recent Sales of Unregistered Securities").
(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, 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 $193,500, respectively, to Mr. Reynolds for his
personal guarantee of certain obligations of the Company.
In fiscal 1994, the Company adopted a plan established under Section
401(k) of the Internal Revenue Code that covers employees of the Company and
its subsidiaries who have met certain eligibility requirements. Company
contributions to the Plan are voluntary and at the discretion of the Board of
Directors. The Company made no contributions to the Plan during fiscal 1996.
STOCK OPTIONS
The following tables contain information concerning the grant of stock
options to the executives identified in the Summary Compensation Table and the
appreciation of such options:
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<PAGE> 29
<TABLE>
<CAPTION>
===================================================================================================================
OPTION GRANTS IN FISCAL 1996
- -------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR
OPTION TERM
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES IN PRICE ($ EXPIRATION
NAME OPTIONS GRANTED 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>
<TABLE>
<CAPTION>
===================================================================================================================
FISCAL 1996 OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR FISCAL YEAR END
END
SHARES
NAME ACQUIRED ON VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
EXERCISE
- --------------------------- --------------- ----------------- ------------------------- ---------------------------
<S> <C> <C> <C> <C>
Christopher B. Hewett --- --- 0/50,000 $0/$0 (1)
- --------------------------- --------------- ----------------- ------------------------- ---------------------------
Robert E. Schermer, Jr. --- --- 0/45,000 $0/$0 (1)
===================================================================================================================
</TABLE>
(1) The Compensation Committee established the exercise price as $7.00 per
share. Because the stock is currently trading for less than $7.00 per
share, the unexercisable options have no value.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following persons are the only shareholders known by the Company to
own beneficially 5% or more of its outstanding Common Shares as of February 21,
1997:
<TABLE>
<CAPTION>
- ---------------------------------------- -------------------------------------------------- =======================
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ---------------------------------------- -------------------------------------------------- -----------------------
<S> <C> <C>
Christopher B. Hewett 1,573,014 (1) 48.7%
- ---------------------------------------- -------------------------------------------------- -----------------------
Jerry L. Ruyan 206,859 (2) 6.4%
===================================================================================================================
</TABLE>
(1) Includes Series A Convertible Preferred Stock which Mr. Hewett elected to
receive in lieu of a year-end cash bonus. Also includes 1,551,300 shares
held by MCC of which Mr. Hewett is the majority shareholder, an executive
officer and a director. See Item 13 "Certain Relationships and Related
Party Transactions" for a description of MCC's acquisition of 1,500,000
Common Shares.
(2) Includes options to acquire 5,000 Common Shares which were granted to all
non-employee directors pursuant to the terms of 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.
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<PAGE> 30
All of MCC's Common Shares are pledged to GALIC as security for the loan
between the Company and GALIC described in Item 2 "Financing and Encumbrances."
In the event of a default by the Company under the loan agreement with GALIC,
GALIC may enforce its rights under the loan agreement, including the right to
register the pledged stock in its name and exercise all voting and corporate
rights with respect to the pledged stock.
ITEM 13. 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 Management" described in Item 1. 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 William F. 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
refinancing with GALIC, and the guarantees were extinguished, in February 1996.
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 TAI's 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
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<PAGE> 31
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.
At December 1, 1995, Mr. Schermer, Jr. was indebted to Grand Harbor Resort
Inc. 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 change in
management described in Item 1 "Replacement and Restructuring of Management."
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.
On July 10, 1996, the Company entered into an agreement with Robert E.
Schermer, Sr. to acquire from him 103.25 limited partnership units of the
Wendy's Partnership. 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.
As described in Item 1 "Acquisition," 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.
As discussed in Item 5 "Recent Sales of Unregistered Securities," 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, and Mr. Schermer, Sr. purchased 20,000 Convertible
Preferred Shares.
-31-
<PAGE> 32
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
the occasional use by MCC and its principals of Company employees, office space
and other property. MCC and the Company share the same business offices. The
Compensation Committee of the Board of Directors will review the arrangement on
an annual basis.
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.
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<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) Financial Statements and Schedules.
All financial statements and schedules required to be filed by Item 8 of
this Form and included in this report appear in pages F-1 through F-24 at the
end of this report. No additional financial statements or schedules are being
filed since the requirements of paragraph (d) under Item 14 are not applicable
to the Company.
(a)(3) Exhibit List.
The following documents are filed as exhibits to this Annual Report:
Exhibit No. Description of Document
- ----------- -------------------------------------------------------------
3.1 Articles of Incorporation of Meritage Hospitality Group Inc.,
as amended (1).
3.2 Restated and Amended Bylaws of Meritage Hospitality Group
Inc. (1).
4.1 Certificate of Designation of Series A Convertible
Preferred Shares of Meritage Hospitality Group Inc.
(1).
4.2 Subscription Agreement relating to issuance of Series A
Convertible Preferred Shares of Meritage Hospitality Group
Inc. (1).
10.1 Adoption Agreement for Pathway Benefit Services, Inc.
Regional Prototype Non-Standardized 401(k) Profit Sharing
Plan and Trust; Pathway Benefit Services, Inc. Regional
Prototype Defined Contribution Plan and Trust; as amended May
24, 1994 (2).
10.2 Stock Purchase and Sale Agreement dated September 19, 1995
between the Company, MCC, Mr. Reynolds and Innkeepers, and
accompanying exhibits (3).
10.3 Loan Agreement dated November 26, 1996 among Meritage
Hospitality Group Inc., St. Clair Inn, Inc., Grand Harbor
Resort Inc., Thomas Edison Inn, Incorporated, MHG Food
Service Inc. and Grand Harbor Yacht Club Inc., as obligors,
and Great American Life Insurance Company, as lender (1).
10.4 Promissory Note dated November 26, 1996 by St. Clair Inn,
Inc., Grand Harbor Resort Inc., and Thomas Edison Inn,
Incorporated, as makers, and Great American Life Insurance
Company, as payee (1).
10.5 Promissory Note dated November 26, 1996 by Meritage
Hospitality Group Inc., MHG Food Service Inc. and Grand
Harbor Yacht Club Inc., as makers, and Great American Life
Insurance Company, as payee (1).
10.6 Business Loan Agreement dated February 22, 1995 between
Wendy's of West Michigan Limited Partnership and First of
America Bank-Michigan, N.A. (4).
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<PAGE> 34
10.7 Promissory Note dated February 22, 1995 by Wendy's of West
Michigan Limited Partnership, as maker, and First of
America Bank-Michigan, N.A., as payee (4).
10.8 Restaurant Franchise Agreements between Wendy's of West
Michigan Limited Partnership and Wendy's International, Inc.
(5).
MANAGEMENT COMPENSATORY CONTRACTS:
10.9 1996 Management Equity Incentive Plan (6).
10.10 1996 Directors' Share Option Plan (6).
10.11 Directors' Compensation Plan (6).
10.12 Employee Share Purchase Plan (6).
21 Subsidiaries of the Registrant (1).
23 Consent of Independent Public Accountants (1).
27 Financial Data Schedule (1).
- ----------------------
Exhibits previously filed and incorporated by reference from:
(1) Filed herewith.
(2) The Annual Report on Form 10-KSB for the Company's fiscal year ended
November 30, 1994.
(3) The Quarterly Report on Form 10-QSB for the Company's fiscal quarter
ended August 31, 1995.
(4) The Annual Report on Form 10-K for Wendy's of West Michigan Limited
Partnership for the fiscal year ended December 31, 1994.
(5) Registration Statement No. 33-8586-C on Form S-18 filed with the SEC by
Wendy's of West Michigan Limited Partnership on September 8, 1986;
Annual Report on Forms 10-K for Wendy's of West Michigan Limited
Partnership for the fiscal years ended December 31, 1986, 1987, and
1995; and Quarterly Report on Forms 10-Q for Wendy's of West Michigan
Limited Partnership for the fiscal quarters ended September 30, 1987,
March 31, 1988, June 30, 1994, and March 31, 1995.
(6) Registration Statement No. 333-06657 on Form S-8 filed with the SEC by
the Company on June 24, 1996.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on November 13, 1996 to report (i)
the successful completion of the Wendy's Partnership tender offer, and (ii) the
agreement whereby the Company will acquire the General Partnership interest in
the Wendy's Partnership. No financial statements were filed with this report.
-34-
<PAGE> 35
On January 6, 1997, the Company filed an amendment to the Form 8-K
described above to include (i) audited financial statements of the Wendy's
Partnership for the fiscal year ended December 31, 1995, (ii) unaudited
financial statements of the Wendy's Partnership for the nine months ended
September 30, 1996, and (iii) pro forma financial statements of the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MERITAGE HOSPITALITY GROUP INC.
Dated: February 21, 1997 By /s/ CHRISTOPHER B. HEWETT
-------------------------------
Christopher B. Hewett
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ROBERT E. SCHERMER, SR. Chairman of the Board of Directors February 21, 1997
- ------------------------------
Robert E. Schermer, Sr.
/s/ CHRISTOPHER B. HEWETT President, Chief Executive Officer and February 21, 1997
- ------------------------------
Christopher B. Hewett Director (Principal Executive Officer)
/s/ WILLIAM D. BADGEROW Vice President, Chief Financial Officer February 21, 1997
- ------------------------------
William D. Badgerow and Treasurer (Principal Financial and
Accounting Officer)
/s/ GARY R. GARRABRANT Director February 19, 1997
- ------------------------------
Gary R. Garrabrant
/s/ JAMES R. GOERLICH Director February 20, 1997
- ------------------------------
James R. Goerlich
/s/ DAVID S. LUNDEEN Director February 21, 1997
- ------------------------------
David S. Lundeen
</TABLE>
-35-
<PAGE> 36
<TABLE>
<S> <C> <C>
/s/ JOSEPH L. MAGGINI Director February 19, 1997
- ---------------------------
Joseph L. Maggini
/s/ JERRY L. RUYAN Director February 19, 1997
- ---------------------------
Jerry L. Ruyan
/s/ JAMES R. SAALFELD Vice President, General Counsel February 21, 1997
- ---------------------------
James R. Saalfeld and Secretary
/s/ ROBERT E. SCHERMER, JR. Executive Vice President and Director February 21, 1997
- ---------------------------
Robert E. Schermer, Jr.
/s/ FRANK O. STAIGER Director February 19, 1997
- ---------------------------
Frank O. Staiger
/s/ RAYMOND A. WEIGEL, III Director February 19, 1997
- --------------------------
Raymond A. Weigel, III
</TABLE>
-36-
<PAGE> 37
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants......................... F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-5
Consolidated Statements of Stockholders' Equity........................ F-6
Consolidated Statements of Cash Flows.................................. F-7
Notes to Consolidated Financial Statements............................. F-9
SCHEDULES
Schedule I Condensed Financial Information of Registrant............... F-21
Schedule II Valuation and Qualifying Accounts.......................... F-24
</TABLE>
F-1
<PAGE> 38
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Meritage Hospitality Group Inc.
We have audited the accompanying consolidated balance sheets of Meritage
Hospitality Group Inc. (a Michigan corporation) and subsidiaries as of November
30, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended November 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Meritage
Hospitality Group Inc. and subsidiaries as of November 30, 1996 and 1995 and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended November 30, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note G to the consolidated financial statements, effective
December 1, 1993 the Company changed its method of accounting for income taxes.
We have also audited Schedules I and II of Meritage Hospitality Group Inc. and
Subsidiaries for the years ended November 30, 1996, 1995 and 1994. In our
opinion these schedules present fairly, in all material respects, the
information required to be set forth therein.
Detroit, Michigan
January 21, 1997
F-2
<PAGE> 39
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30,
<TABLE>
<CAPTION>
==========================================================================================================
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,265,497 $ 1,336,891
Trade accounts receivable, less allowance for doubtful
accounts of $54,000 in 1996 and $29,000 in 1995
respectively 938,448 570,428
Inventories 354,226 208,891
Deferred income taxes 14,000 111,900
Refundable income taxes -- 321,600
Prepaid expenses and other current assets 487,295 465,225
----------- ----------
Total Current Assets 4,059,466 3,014,935
PROPERTY, PLANT AND EQUIPMENT, NET 21,757,068 13,218,340
DEFERRED INCOME TAXES 621,000 437,100
OTHER ASSETS
Goodwill, net of amortization of $1,994,342 in 1996 3,687,764 --
Land held for expansion 697,313 642,757
Financing costs, net of amortization of $38,591 in 1996 605,593 --
Cash surrender value of life insurance, net of policy
loans of $77,564 and $99,270 in 1996 and 1995,
respectively 260,710 188,875
Sundry 239,950 46,066
----------- ----------
5,491,330 877,698
AMOUNTS DUE FROM RELATED PARTIES -- 435,430
----------- ----------
Total Assets $31,928,864 $17,983,503
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE> 40
<TABLE>
<CAPTION>
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Note payable - Bank $ -- $ 200,551
Current portion of long-term debt 395,120 237,651
Current portion of obligations under capital lease 232,442 --
Amounts due to stockholders and related parties -- 2,300
Trade accounts payable 2,228,406 448,886
Accrued expenses 936,111 2,081,866
Other 164,275 --
----------- -----------
Total Current Liabilities 3,956,354 2,971,254
LONG-TERM DEBT 21,711,847 11,204,883
OBLIGATIONS UNDER CAPITAL LEASES 1,953,999 --
DEFERRED INCOME TAXES 818,000 752,000
DEFERRED COMPENSATION 61,444 --
COMMITMENTS AND CONTINGENCIES (NOTES H AND N) -- --
MINORITY INTEREST 1,405,777 --
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value; authorized 5,000,000
shares; 200,000 shares designated as Series A
convertible cumulative preferred stock; issued and
outstanding, 108,387 shares (liquidation value -
$1,083,870) 1,084 --
Common stock - $0.01 par value; authorized
30,000,000 shares; issued and outstanding
3,204,483 and 3,020,150 shares respectively 32,045 30,200
Additional paid in capital 12,616,727 10,684,750
Note receivable from sale of shares (5,135,716) (5,602,532)
Accumulated deficit (5,492,697) (2,057,052)
----------- -----------
Total Stockholders' Equity 2,021,443 3,055,366
----------- -----------
Total Liabilities and Stockholders' Equity $31,928,864 $17,983,503
=========== ===========
</TABLE>
F-4
<PAGE> 41
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30,
<TABLE>
<CAPTION>
==========================================================================================================================
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue
Room rents $ 6,281,711 $ 5,999,024 $ 6,047,510
Food and beverages 9,885,062 8,245,880 9,100,158
Sundry 555,049 149,321 174,761
Telephone 163,040 46,795 37,599
----------- ----------- -----------
Total revenue 16,884,862 14,441,020 15,360,028
Cost and expenses
Cost of food and beverages 3,334,434 2,863,554 3,041,499
Operating expenses 9,492,345 7,215,061 7,179,572
General and administrative expenses 3,951,400 4,979,621 2,597,278
Depreciation and amortization 1,081,704 1,426,642 1,232,187
----------- ----------- -----------
Total costs and expenses 17,859,883 16,484,878 14,050,536
----------- ----------- -----------
Earnings (loss) from operations (975,021) (2,043,858) 1,309,492
Other income (expense)
Interest expense (1,642,735) (1,355,389) (1,206,151)
Interest income 658,007 387,099 87,028
Gain (loss) on sale of assets (6,900) 241,646 11,769
Minority interest 21,079 -- --
----------- ----------- -----------
(970,549) (726,644) (1,107,354)
----------- ----------- -----------
Earnings (loss) before federal income tax and
cumulative effect of change in accounting
principle (1,945,570) (2,770,502) 202,138
Federal income tax expense (benefit) (20,000) (721,400) 112,000
----------- ----------- -----------
Earnings (loss) before cumulative effect of
change in accounting principle (1,925,570) (2,049,102) 90,138
Cumulative effect on prior years of changing to a different
method of accounting for income taxes -- -- 117,300
----------- ----------- -----------
Net loss $(1,925,570) $(2,049,102) $ (27,162)
=========== =========== ===========
Earnings (loss) per share
Before cumulative effect of change in accounting principle $ (.62) $ (1.13) $ .06
Cumulative effect of change in accounting principle -- -- (.08)
----------- ----------- -----------
After cumulative effect of change in accounting principle $ (.62) $ (1.13) $ (.02)
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE> 42
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
==================================================================================================================================
SERIES A NOTE RETAINED
CONVERTIBLE ADDITIONAL RECEIVABLE EARNINGS
PREFERRED COMMON PAID-IN SALE OF (ACCUMULATED
STOCK STOCK CAPITAL SHARES DEFICIT) TOTAL
----------- ------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 1, 1993 $ -- $15,200 $ 5,217,820 $ -- $ 19,212 $ 5,252,232
Net loss -- -- -- -- (27,162) (27,162)
------ ------- ----------- ----------- ----------- -----------
Balance at December 1, 1994 -- 15,200 5,217,820 -- (7,950) 5,225,070
Issuance of common stock -- 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 108,387 shares of
preferred stock 1,084 -- 1,082,786 -- -- 1,083,870
Issuance of 184,333 shares of
common stock -- 1,845 1,139,281 -- -- 1,141,126
Recognition of interest income
on note receivable from
sale of shares -- -- -- (573,274) -- (573,274)
Dividends paid ($.50 per share) -- -- -- -- (1,510,075) (1,510,075)
Payment and present value
adjustment on note receivable
from sale of shares -- -- (290,090) 1,040,090 -- 750,000
Net loss -- -- -- -- (1,925,570) (1,925,570)
------ ------- ----------- ----------- ----------- -----------
Balance at November 30, 1996 $1,084 $32,045 $12,616,727 $(5,135,716) $(5,492,697) $ 2,021,443
====== ======= =========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE> 43
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30,
<TABLE>
<CAPTION>
===========================================================================================================================
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,925,570) $(2,049,102) $ (27,162)
Adjustments to reconcile net loss to net cash provided
by operating activities
Cumulative effect of change in accounting principle -- -- 117,300
Depreciation and amortization 1,081,704 1,426,642 1,232,187
Compensation paid by issuance of preferred and
common stock 310,099 -- --
Deferred income tax expense (benefit) (20,000) (431,900) 14,000
Loss (gain) on disposal of property, plant and
equipment 6,900 (241,646) (11,769)
Bad debt expense 32,655 280,910 8,395
Interest income on note receivable from sale of shares (573,274) (120,602) --
(Increase) decrease in assets
Accounts receivable (201,742) 84,754 (241,604)
Inventories 41,198 (12,131) (21,502)
Prepaid expenses and other current assets 104,707 (7,477) --
Refundable income taxes 321,600 (318,705) (114,795)
Increase (decrease) in liabilities
Accounts payable and accrued expenses (674,696) 1,814,566 34,831
------------ ----------- ----------
Net cash (used in) provided by operating
activities (1,496,419) 425,309 989,881
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (2,211,392) (456,132) (470,858)
Proceeds from sale of property, plant and equipment 40,146 616,646 100,964
Additions to amount due from related parties -- (682,248) (673,635)
Payments on amounts due from related parties 433,130 2,270,524 694,186
Acquisition of business, net of cash acquired (3,184,460) -- --
Increase in other assets (679,214) (5,981) (30,863)
------------ ----------- ----------
Net cash (used in) provided by investing
activities (5,601,790) 1,742,809 (380,206)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 37,717,705 46,887 --
Payments related to borrowings from
stockholders and related parties -- (248,163) (21,557)
Principal payments of notes payable -- -- (7,640)
Principal payments of long-term debt (29,446,007) (1,251,712) (409,429)
Payments on obligations under capital leases (29,808) -- --
Collection on note receivable from sale of shares 750,000 -- --
Proceeds from issuance of preferred and common shares 545,000 -- --
Dividends paid (1,510,075) -- --
------------ ----------- ----------
Net cash provided by (used in) financing
activities 8,026,815 (1,452,988) (438,626)
------------ ----------- ----------
Net increase in cash 928,606 715,130 171,049
</TABLE>
F-7
<PAGE> 44
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED NOVEMBER 30,
<TABLE>
<CAPTION>
===========================================================================================================================
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash and cash equivalents - beginning of year $1,336,891 $ 621,761 $ 450,712
---------- ---------- ----------
Cash and cash equivalents - end of year $2,265,497 $1,336,891 $ 621,761
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
Interest $1,709,312 $1,355,389 $1,206,151
Income taxes -- -- 192,500
</TABLE>
Non-cash investing activities for 1996 represents the acquisition of majority
equity interest in Wendy's of West Michigan Limited Partnership and includes
assets acquired and liabilities assumed.
<TABLE>
<S> <C>
Fair value of assets net of cash acquired $10,532,850
Liabilities assumed 7,348,390
-----------
$ 3,184,460
===========
</TABLE>
In connection with this acquisition, the Company issued 171,900 shares of
common stock and 29,520 shares of preferred stock with a value of $1,369,575.
During 1995 a non-cash transaction occurred whereby 1,500,000 Common Shares
were issued in exchange for a non-interest bearing note receivable in the
amount of $10,500,000. The discounted present value of the note receivable was
$5,481,930.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-8
<PAGE> 45
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company conducts its operations in two business segments. The lodging
industry segment consists of three full service hotels. The food service
industry segment consists of a limited partnership which operates twenty-six
Wendy's Old Fashioned Hamburger restaurants under franchise agreements with
Wendy's International Inc. All operations of the Company are located in
Michigan.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
the following wholly-owned subsidiaries:
St. Clair Inn, Inc.
Thomas Edison Inn, Incorporated
Grand Harbor Resort
Grand Harbor Yacht Club Inc.
MHG Food Service
All significant intercompany balances and transactions have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost or market as determined by the
first-in, first-out method. Inventories consist of restaurant food items,
beverages and food serving supplies.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
principally using the straight-line method based upon estimated useful lives
ranging from 3 to 39 years. Amortization of leasehold improvements is provided
over the terms of the various leases.
INCOME TAXES
Income taxes are accounted for by using an asset and liability approach.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial basis and tax basis
of assets and liabilities. Assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
FRANCHISE FEES
Franchise fees for hotel and restaurant units are amortized using the
straight-line method over the terms of the individual franchise agreements.
F-9
<PAGE> 46
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCING COSTS
Financing costs are amortized using the straight-line method over the terms of
the various loan agreements.
GOODWILL
Goodwill is amortized using the straight-line method over periods of up to
twenty years.
The Company evaluates the reasonableness of its amortization for goodwill. In
addition, if it becomes probable that expected future undiscounted cash flows
associated with goodwill are less than the carrying value, the assets are
written down to their fair value.
OBLIGATIONS UNDER CAPITALIZED LEASES
Lease transactions relating to certain restaurant buildings and equipment are
classified as capital leases. These assets have been capitalized and the
related obligations recorded based on the fair market value of the assets at
the inception of the leases. Amounts capitalized are being amortized over the
terms of the leases.
FRANCHISE COSTS AND OTHER ADVERTISING COSTS
Royalties and national advertising costs are based on a percentage of monthly
sales. These costs and other advertising costs are charged to operations as
incurred.
USE OF ESTIMATES
In the preparation of financial statements management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenue and expenses
during the reporting period. Actual results could differ from those estimates.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed based upon the weighted average number of
shares outstanding during each year. The weighted average number of shares
outstanding is 3,081,885, 1,815,984 and 1,520,150 shares for the years ended
November 30, 1996, 1995 and 1994, respectively.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate their fair values.
F-10
<PAGE> 47
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the presentation of the 1996 financial statements.
NEW PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121) - "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets
to be held and used and for long-lived assets and certain intangibles to be
disposed of. The adoption of this standard in 1996 had no effect on the
consolidated financial statements of the Company.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123) - "Accounting for Stock-Based
Compensation." SFAS 123 establishes accounting and reporting standards for
stock-based employee compensation plans with adoption required for fiscal years
beginning after December 15, 1995. As permitted under the provisions of this
statement, the Company has elected to continue the use of APB Opinion No. 25 to
measure compensation costs and will make the pro forma disclosures of net
earnings and earnings per share.
NOTE B - ACQUISITION
During the year, the Company began purchasing partnership units in Wendy's of
West Michigan Limited Partnership (the "Wendy's Partnership") and at November
30, 1996 the Company had acquired a majority interest (54.0%). Certain of the
units in the Wendy's Partnership were purchased from Stockholders/Directors at
prices no more favorable than that paid to non-related parties. The Company
then transferred this interest to its wholly-owned subsidiary, MHG Food Service
Inc.
The acquisition has been accounted for as a purchase and the acquisition cost
has been allocated to assets acquired and liabilities assumed based upon
estimates of their fair values. A total of $1,719,819, representing the excess
of acquisition cost over the fair value of assets acquired has been allocated
to goodwill.
F-11
<PAGE> 48
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE B - ACQUISITION (CONTINUED)
The Company's consolidated results of operations include the Wendy's
Partnership activity from November 1, 1996 (effective date of acquisition). The
unaudited pro forma information below presents combined results of operations
as if the acquisition had occurred at the beginning of the periods presented.
The unaudited pro forma information is not necessarily indicative of the
results of operations of the combined company had the acquisition occurred at
the beginning of the periods presented, nor is it necessarily indicative of
future results.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------
1996 1995
----------- ----------
(unaudited)
<S> <C> <C>
Revenues $43,974,000 $39,806,000
Net loss $(2,256,000) $(2,330,000)
Loss per share $ (.73) $ (1.28)
</TABLE>
The Company entered into an agreement on October 21, 1996, to acquire the
General Partnership interest in the Wendy's Partnership.
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows at November 30,:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land and improvements $ 2,014,914 $ 1,515,513
Buildings and improvements 21,597,196 18,522,242
Furnishings and equipment 14,552,410 7,067,815
Leasehold improvements 2,192,253 --
Leased property/capital leases 2,825,338 --
----------- ----------
43,182,111 27,105,570
Less accumulated depreciation
and amortization (21,425,043) (13,887,230)
----------- ----------
$21,757,068 $13,218,340
=========== ===========
</TABLE>
Depreciation and amortization expense was approximately $1,012,000, $883,000
and $1,047,000 for the years ended November 30, 1996, 1995 and 1994,
respectively.
F-12
<PAGE> 49
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE D - AMOUNTS DUE FROM RELATED PARTIES AND RELATED PARTY TRANSACTIONS
Amounts due from related parties at November 30, 1995 consisted of amounts due
from a stockholder and former officer of the Company, Donald W. Reynolds
("Reynolds"), or from companies related by common ownership to Reynolds. During
the year ended November 30, 1996, the Company collected approximately $433,000
of these receivables and wrote off the remainder.
In 1994 and 1995, the Company and each of its subsidiaries had a management
agreement with an affiliated company that was wholly-owned by Reynolds. The
agreement was terminated on January 25, 1996. Management fees charged to
operations totaled approximately $58,000, $403,000 and $457,000 for the years
ended November 30, 1996, 1995 and 1994, respectively. The Board of Directors
approved a 1-1/2% loan guarantee fee to be paid to Reynolds for the years ended
November 30, 1995 and 1994. The fee paid was $193,875 for 1995 and $193,500 for
1994.
NOTE E - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------- ----------
<S> <C> <C>
Litigation expenses $ -- $1,361,470
Professional fees 56,697 246,788
Property taxes 213,005 189,461
Payroll and related payroll taxes 526,812 125,685
Interest and other expenses 139,597 158,462
-------- ----------
$936,111 $2,081,866
======== ==========
</TABLE>
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following obligations at November 30,:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Mortgage note payable to bank, due $23,174 per month
including interest at prime plus 2% not to exceed 10.5%
due October 1, 1997. $ -- $ 2,924,975
Mortgage note payable to bank, due $28,108 per month
including interest at prime plus 1%, due October 31,
1997. -- 3,464,780
</TABLE>
F-13
<PAGE> 50
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE F - LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Term note payable to bank, due $16,531 per month
including interest at prime plus 1% due October 31, 1997. -- 808,922
Mortgage note payable to bank, due $37,194 per month
including interest at prime plus 2% but not to exceed
10.5%, due October 1, 1997. -- 3,929,506
Mortgage note payable to insurance company, due in
monthly installments beginning January 1, 1997 of
$137,897 including interest at 10.3% through December
31, 2003. (1) 14,000,000 --
Mortgage note payable to insurance company, due in
monthly installments of interest at prime plus 8%
beginning January 1, 1997 through November 1, 1997
and monthly installments of principal of $50,000
beginning December 1, 1997 through March 1, 1998,
$100,000 beginning April 1, 1998 through May 1, 2002
plus interest and final principal payment of $50,000
plus interest due June 1, 2002. (2) 5,250,000 --
Note payable to bank, due in monthly installments of
$14,693 including interest at 8.8% through October 8,
2000. (3) 582,359 --
Term note payable to bank, due in monthly installments
of $43,313, including interest at 1% over prime per
month through February 2005 when any remaining
unpaid principal will be due. Under the revolving loan
agreement, the required monthly payments described
above may be offset by additional borrowings up to
the unused available borrowings. The total available
borrowings under the loan agreement were $2,978,702
as of November 30, 1996. (4) 2,192,351 --
Other notes and land contracts payable, requiring
monthly payments aggregating $4,100 and $8,950,
respectively, subject to interest at rates ranging from
6.9% to 11.0%. 82,257 314,351
----------- -----------
22,106,967 11,442,534
Less current portion 395,120 237,651
----------- -----------
$21,711,847 $11,204,883
=========== ===========
</TABLE>
F-14
<PAGE> 51
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE F - LONG-TERM DEBT (CONTINUED)
The prime lending rate was 8.25% at November 30, 1996.
(1) The mortgage is collateralized by the hotel properties.
(2) The mortgage is collateralized by the Meritage Capital Corp. note, common
stock of the Company, life insurance policies in the amount of
$5,100,000, other property and equipment and a second security interest
in the hotel properties.
(3) The note is collateralized by certain equipment.
(4) The note is collateralized by substantially all of the assets of the
Wendy's Partnership and by the guaranty of the General Partner and the
personal guarantees of the shareholders of the General Partner.
Minimum principal payments on long-term debt to maturity as of November 30,
1996 are as follows:
<TABLE>
<S> <C>
1997 $ 395,120
1998 1,389,380
1999 1,678,253
2000 1,997,253
2001 1,911,939
Thereafter 14,735,022
-----------
$22,106,967
===========
</TABLE>
Loan covenants of the various loan agreements include a requirement for
maintenance of a prescribed amount of net worth and certain financial ratios
and restrictions on certain common stock purchases, dividends, additional
indebtedness and executive compensation. At November 30, 1996 the Company
failed to meet one of the covenants of its agreements with the insurance
company. A waiver has been obtained.
NOTE G - INCOME TAXES
In December 1993, the Company changed its method of accounting for income taxes
from Accounting Principles Board Opinion No. 11 (APB 11) and adopted Statement
of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." The adoption of SFAS 109 changed the Company's method of accounting for
income taxes from the deferred method to an asset and liability approach.
Previously, the Company deferred the past tax effects of timing differences
between financial reporting and taxable income. The asset and liability
approach requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
F-15
<PAGE> 52
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE G - INCOME TAXES (CONTINUED)
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Current expense (benefit) $ -- $(289,500) $ 98,000
Deferred expense (benefit) (20,000) (431,900) 14,000
-------- --------- --------
$(20,000) $(721,400) $112,000
======== ========= ========
</TABLE>
Deferred tax assets and liabilities at November 30, consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $1,181,000 $ 267,400
AMT credit carryforward 105,000 140,000
Allowance for doubtful accounts 8,500 111,900
Michigan Single Business Tax - Federal 63,000 69,000
Contribution carryforward 6,500 --
---------- ---------
1,364,000 588,300
Deferred tax liabilities
Depreciation (635,000) (549,000)
Michigan Single Business Tax - State (183,000) (203,000)
---------- ---------
(818,000) (752,000)
Less valuation allowance (729,000) (39,300)
---------- ---------
Net deferred tax liability $ (183,000) $(203,000)
---------- ---------
</TABLE>
The net operating loss carryforward expires in 2011.
The income tax provision reconciled to the tax computed at the statutory
Federal rate was as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Tax (benefit) at statutory rates applied to
income before federal income tax $(654,700) $(942,000) $ 68,700
Effect of nondeductible items (51,000) 24,700 43,300
Difference in rates of net operating loss carrybacks 151,300 --
Other (4,000) 5,300 --
Valuation allowance 689,700 39,300 --
--------- --------- --------
$ (20,000) $(721,400) $112,000
========= ========= ========
</TABLE>
F-16
<PAGE> 53
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE H - LEASE COMMITMENTS
The Wendy's Partnership leases land and buildings used in operations under
operating agreements, with remaining lease terms (including renewal options of
up to twelve years) ranging from one to seventeen years. Included in the leases
are five with parties related through common ownership of general partners,
where a stockholder of the general partner is also a stockholder/director of
the Company.
Certain restaurant leases (eight restaurant buildings, excluding land which is
accounted for as an operating lease) and equipment leases have been
capitalized. Minimum future obligations under capital leases and
noncancellable operating leases in effect are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------------------
CAPITAL RELATED
YEAR ENDING NOVEMBER 30, LEASES PARTIES OTHERS
------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
1997 $ 465,323 $ 285,552 $ 362,378
1998 465,323 153,127 294,506
1999 465,323 111,629 208,334
2000 465,323 111,629 193,511
2001 449,365 111,629 172,440
Later Years 769,948 419,892 344,880
--------- ---------- ----------
Total minimum lease obligations 3,080,605 $1,193,458 $1,576,049
========== ==========
Less amount representing interest
imputed at approximately 11% 894,164
----------
Present value of minimum lease obligations $2,186,441
==========
</TABLE>
The present value of minimum rental obligations is reflected in the balance
sheets as current and long-term obligations under capital leases.
Accumulated amortization of leased property under capital leases was
$1,648,146, at November 30, 1996.
In addition to minimum future obligations, percentage rentals may be paid under
all restaurant leases on the basis of percentage of sales in excess of minimum
prescribed amounts.
Total rental expense since the date of acquisition of the Wendy's Partnership
is not significant.
F-17
<PAGE> 54
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE I - SERIES A CONVERTIBLE CUMULATIVE PREFERRED STOCK
In 1996, the Company designated a series of non-voting preferred stock
consisting of 200,000 shares of $0.01 par value. The shares have an annual
dividend rate of $0.90 per share and the payment of the dividends are
cumulative. The shares are also convertible into common shares at the
conversion price of $7.00 per share. The shares also have a liquidation value
of $10.00 per share.
Under certain conditions relating to the market value of the Company's common
stock, the Company has the option to cause the preferred stock to be converted
into common stock.
NOTE J - NOTE RECEIVABLE FROM SALE OF SHARES
On September 19, 1995, a stock purchase and sale agreement (Agreement) was
executed by the Company, its principal stockholder and Meritage Capital Corp.
("MCC"). Under the agreement, the Company sold 1,500,000 shares of previously
authorized newly issued common stock to MCC at a total price of $10,500,000.
Upon execution of the agreement, MCC gave the Company a non-interest bearing
promissory note in the amount of $10,500,000. The Note provides that MCC does
not have to make any payments to the Company for five years from the date of
the Note (September 19, 1995). Beginning on the fifth anniversary of the Note,
MCC is required to make six annual payments of $1,625,000.
The Note is secured by the shares issued to MCC under the Agreement. The Note
was discounted at 11% and is recorded as a reduction of stockholders' equity.
During the year ended November 30, 1996 the Company received an unscheduled
principal payment of $750,000. As a result, the present value of the note was
recalculated and reduced by approximately $290,000.
NOTE K - EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution 401(k) plan that covers
substantially all employees of the lodging industry segment and corporate
employees. Contributions to the Plan may be made by the Company (which are
discretionary) or by plan participants through elective salary reductions. No
contributions were made to the plan by the Company during the years ended
November 30, 1996, 1995 and 1994.
The Wendy's Partnership maintains a 401(k) profit sharing plan that covers
substantially all of its employees. Contributions to the plan may be made by
the subsidiary (which are discretionary) or by plan participants through
elective salary reductions. Contributions to the plan by the subsidiary since
its date of acquisition are not significant.
The Wendy's Partnership has a deferred compensation agreement with a key
employee which provides for the payment of $150,000 upon the completion of the
five-year term of the agreement in December 1998. The agreement is funded by
the Wendy's Partnership through payment of premiums on a split dollar life
insurance contract.
F-18
<PAGE> 55
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE L - STOCK OPTION PLANS
The 1996 Management Equity Incentive Plan ("Incentive Plan") and, the 1996
Directors' Share Option Plan ("Directors' Plan") were approved by stockholders
on May 21, 1996.
The Incentive Plan provides for 300,000 shares of common stock to be reserved
for options that may be issued under the plan. The Board of Directors has the
discretion to designate an option to be an Incentive Share Option or a
non-qualified share option. The plan provides that the option price is not less
than the fair market value of the common stock at the date of grant. Unless the
option agreement provides otherwise, options granted under the plan become
exercisable on a cumulative basis at the rate of 20 percent during each of the
second through fifth years after the date of grant. Options granted under the
plan may have a term of from one to ten years.
The Directors' Plan provides for the non-discretionary grant of options to
non-employee directors of the Company to purchase a combined maximum of 60,000
shares. The plan provides that the option price is not less than the greater of
the fair market value of the common stock on the date of grant or $7.00 per
share. The plan provides that each non-employee director, on the date such
person becomes a non-employee director, will be granted options to purchase
5,000 shares of stock. Provided that such person is still serving as a
non-employee director, they will automatically be granted options to purchase
1,000 additional shares each year thereafter on the date of the Annual
Shareholders' Meeting. Options granted under the plan have a term of ten years.
The following table summarizes the changes in the number of common shares under
stock options granted pursuant to the preceding plans:
<TABLE>
<CAPTION>
1996 MANAGEMENT 1996 DIRECTOR'S
EQUITY INCENTIVE PLAN STOCK OPTION PLAN
-------------------------- ------------------------
AVERAGE AVERAGE
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Options outstanding at December 1, 1995 -- -- -- --
Options granted during the year 190,000 $7.00 50,000 $7.00
------- ------
Options outstanding at November 30, 1996 190,000 $7.00 50,000 $7.00
======= ===== ====== =====
Options exercisable at November 30, 1996 -- 50,000
------- ------
Options available for grant at
November 30, 1996 110,000 10,000
======= ======
</TABLE>
F-19
<PAGE> 56
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOVEMBER 30, 1996, 1995 AND 1994
===============================================================================
NOTE M - BUSINESS SEGMENT INFORMATION
The Company operates in two business segments, lodging and food service
operations. Intersegment transactions are not reported separately since they
are not significant.
Identifiable assets are those assets applicable to the respective industry
segment.
Data by business segment for the year ended November 30, 1996 is as follows:
<TABLE>
<CAPTION>
FOOD
LODGING SERVICE CONSOLIDATED
----------- ----------- ------------
<S> <C> <C> <C>
Revenues $14,762,822 $ 2,122,040 $16,884,862
Loss from operations $ (966,885) $ (8,136) $ (975,021)
Identifiable assets $21,418,956 $10,509,908 $31,928,864
Depreciation and amortization expense $ 1,009,771 $ 71,933 $ 1,081,704
Capital additions $ 2,198,341 $ 13,051 $ 2,211,392
</TABLE>
NOTE N - LEGAL PROCEEDINGS
The Company is involved in certain routine legal proceedings which are
incidental to the business. Except as described below, all of these proceedings
arose in the ordinary course of the Company's business and, in the opinion of
the Company, any potential liability of the Company with respect to these legal
actions will not, in the aggregate, be material to the Company's financial
condition. The Company maintains various types of insurance which cover most of
the actions brought against the Company.
On December 5, 1996, the Company received a notice from the Internal Revenue
Service that it had concluded that legal and professional fees totaling
approximately $2.1 million that were incurred by the Company in fiscal 1995 in
connection with the then existing litigation and deducted as a necessary
business expense, should be treated as a capital expenditure and, therefore,
disallowed the deduction. These expenditures related to various lawsuits in
1995 concerning the replacement and restructuring of management. The Company
believes the deduction is proper and is contesting the disallowance.
NOTE O - SUBSEQUENT EVENT
On January 21, 1997, the Company entered into a definitive agreement to acquire
two limited service hotels.
F-20
<PAGE> 57
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERITAGE HOSPITALITY GROUP INC.
CONDENSED BALANCE SHEET
NOVEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,768,204
Other current assets 30,424
------------
Total current assets 1,798,628
Property, plant and equipment, net 320,536
Investments in and advances to subsidiaries 19,534,617
Deferred income taxes 621,000
Other assets 551,417
------------
Total assets $ 22,826,198
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities $ 507,745
Deferred income taxes 818,000
Long-term debt 19,479,010
------------
Total liabilities 20,804,755
STOCKHOLDERS' EQUITY
Capital stock 7,514,140
Accumulated deficit (5,492,697)
------------
Total stockholders' equity 2,021,443
------------
Total liabilities and stockholders' equity $ 22,826,198
============
</TABLE>
F-21
<PAGE> 58
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
MERITAGE HOSPITALITY GROUP INC.
CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<S> <C>
REVENUE
Equity in earnings of subsidiaries $ 1,286,594
Interest and dividend income 619,085
-------------
Total revenue 1,905,679
EXPENSES
General and administrative expenses 2,551,237
Depreciation and amortization 37,983
Interest expense 1,262,029
-------------
Total expenses 3,851,249
-------------
Loss before federal income tax (1,945,570)
Federal income tax benefit 20,000
-------------
Net loss $ (1,925,570)
=============
</TABLE>
F-22
<PAGE> 59
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
MERITAGE HOSPITALITY GROUP INC.
CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<S> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (2,167,330)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (385,182)
Acquisition of business, net of cash acquired (3,184,460)
Increase in other assets (551,447)
-------------
Net cash used by investing activities (4,121,089)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 37,717,705
Principal payments of long-term debt (29,446,007)
Collection of note receivable from sale of shares 750,000
Proceeds from issuance of preferred and common shares 545,000
Dividends paid (1,510,075)
-------------
Net cash provided by financing activities 8,056,623
-------------
Net increase in cash 1,768,204
Cash and cash equivalents - beginning of year 0
-------------
Cash and cash equivalents - end of year $ 1,768,204
=============
</TABLE>
F-23
<PAGE> 60
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
--------------------------------------
Balance at (1) (2)
beginning Charged to Charged to other Deductions - Balance at
Description of period costs & expenses accounts-describe describe end of period
- -----------------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended November 30:
<S> <C> <C> <C> <C> <C>
1996 $ 289,000 $ 32,655 -0- $ (267,655)* $ 54,000
1995 24,000 275,910 -0- (10,910)* 289,000
1994 24,000 8,395 -0- (8,395)* 24,000
</TABLE>
* Amount written off as uncollectible
<TABLE>
<CAPTION>
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS:
Year ended November 30:
<S> <C> <C> <C> <C> <C>
1996 $ 39,300 $ 689,700 -0- -0- $ 729,000
1995 -0- 39,300 -0- -0- 39,300
1994 -0- -0- -0- -0- -0-
</TABLE>
F-24
<PAGE> 1
EXHIBIT 3.1
MERITAGE HOSPITALITY GROUP INC.
ARTICLES OF INCORPORATION
ARTICLE I
The name of the corporation is Meritage Hospitality Group Inc.
ARTICLE II
The purpose or purposes for which the corporation is organized is to engage in
any activity within the purposes for which corporations may be organized under
the Business Corporation Act of Michigan.
ARTICLE III
The total authorized capital stock is:
Common Shares: 30,000,000 Par Value Per Share $0.01
1.
Preferred Shares: 5,000,000 Par Value Per Share $0.01
and/or shares without par value as follows:
Common Shares 0 Stated Value Per Share $0
2.
Preferred Shares 0 Stated Value Per Share $0
3. A statement of all or any of the relative rights, preferences and
limitations of the shares of each class is as follows:
Authority is hereby expressly reserved and granted to the Board of Directors of
this Corporation to determine in the resolution or resolutions providing for
the issuance of Common Stock and/or Preferred Stock the voting powers,
designations, preferences and relative participating, operational or other
special rights, qualifications, limitations or restrictions thereof which shall
be incident to the ownership of shares of such Common Stock and Preferred
Stock.
The Corporation has a series of Preferred Stock, designated as Series A
Convertible Preferred Stock, consisting of 200,000 shares, par value $.01, the
qualifications, limitations, restrictions and terms of which are as follows:
(1) Each of such Shares shall have an annual dividend rate of $.90 per
Share and no more. The right to payment of dividends shall be cumulative.
Said annual dividend shall be payable in equal quarterly installments upon
the 1st day of each January, April, July and October in each year to
holders of record as of the 15th day of the preceding month commencing
January 1, 1997, before any sum shall be set apart or applied to the
redemption or purchase of, or any dividends
<PAGE> 2
(other than dividends of Common Shares) shall be declared or paid upon or
set apart for, Common Shares. The first of such quarterly dividend
payments shall be prorated to reflect the number of days in the quarter
during which the particular Shares were outstanding.
(2) Upon any dissolution, liquidation or winding up of the Corporation,
the holders of each of said Shares, shall be entitled to receive, before
any payment to holders of Common Shares, all accrued but unpaid dividends,
plus a liquidation value of $10.00 per share and no more. The
consolidation or merger of the Corporation, at any time, with another
corporation, or a sale of substantially all of the assets of the
Corporation, shall not be construed as a dissolution, liquidation or
winding up of the Corporation within the meaning hereof.
(3) The Series A Convertible Preferred Shares shall be convertible into
Common Shares of the Corporation at a conversion price of $7.00 for each
Common Share, (taking such Preferred Shares at the liquidation value of
$10.00 per share) upon the following terms and conditions:
(3.1) In case the Common Shares issuable upon conversion of the Series
A Convertible Preferred Shares at any time outstanding shall be
subdivided into a greater or combined into a lesser number of Common
Shares (whether with or without par value), and whether by stock split
or stock dividend, the conversion price shall be decreased in the case
of a subdivision or increased in the case of a combination to an
amount which shall bear the same relation to the conversion price in
effect immediately prior to such subdivision or combination, and shall
bear the total number of Common Shares outstanding immediately after
such subdivision or combination.
(3.2) No adjustments shall be made for dividends accrued on any Shares
that shall be issuable upon the conversion of such Shares.
(3.3) In case of a merger or consolidation of the Corporation with or
into another corporation, or the reclassification of its Common Shares
(other than by way of split-up or contraction), the holders of Series
A Convertible Preferred Shares shall thereafter be entitled to receive
upon conversion the kind and amount of shares of stock and securities
and property which they would have received had they converted such
Series A Convertible Preferred Shares into Common Shares of the
Corporation as of the record date for determination of common
shareholders entitled to participate in such merger, consolidation, or
reclassification.
(3.4) The holder of any shares of Series A Convertible Preferred
Shares may convert such Shares by surrendering the certificate or
certificates to any transfer agent of the Corporation or to the
Secretary of the Corporation duly endorsed in blank transfer and
accompanied by written notice of election to convert such Shares, or
portion thereof, executed on the form set forth on such certificates
or on such other form as may be provided from time to time by the
Corporation. No fractional Common Shares shall be issued upon the
conversion of any Series A Convertible Preferred Shares but, in lieu
thereof,
<PAGE> 3
the Corporation shall pay an amount in cash equal to the current
market value of such fractional interest computed on the basis of the
value of the Common Shares at the time the preferred shares are
surrendered for conversion as determined in such reasonable manner as
the Corporation may adopt. In case of the voluntary dissolution,
liquidation or winding up of the Corporation, all conversion rights of
the holders of Series A Convertible Preferred Shares shall terminate
on a date fixed by the Board of Directors, but not more than Thirty
(30) days prior to the record date for determining the holders of the
Common Shares entitled to receive any distribution upon such
dissolution, liquidation and winding up.
(3.5) The right of the holder to convert the Series A Convertible
Preferred Shares shall commence upon issuance of such Shares.
(3.6) The Corporation may cause the Series A Convertible Preferred
Shares to be converted at its option at any time if the average of the
closing sale prices for the Corporation's Common Shares is at least
120 percent of the then effective conversion price, as described
above, for at least 20 trading days within the period of 30
consecutive trading days ending no earlier than 5 trading days prior
to the date of the notice of conversion.
(5) Voting. Holders of the Series A Convertible Preferred Shares shall
have no voting rights except as provided by law and except that if at any
time the Corporation fails to make six consecutive quarterly dividend
payments thereon, the number of directors constituting its Board of
Directors will be increased by two and the holders of the Shares, voting
as a class with each Share having one vote, will be entitled to elect two
directors to the Board as long as any arrearages in dividend payments
remain outstanding. Upon payment by the Corporation of all such dividend
arrearages, the two directors elected pursuant to this provision will
cease to be directors and the holders of Shares will have no further right
to elect directors on account of such arrearages.
(6) The Corporation shall not, except upon the affirmation vote of the
holders of two-thirds of the Series A Convertible Preferred Shares
outstanding at the time, amend these articles of incorporation in any
manner that would result in the Series A Convertible Preferred Shares
being subordinate in terms of preference as to payments of dividends or
payments on liquidation to any other Preferred Shares of the Corporation.
ARTICLE IV
1. The address of the registered office is:
40 Pearl Street, N.W., Suite 900
Grand Rapids, Michigan 49503
2. The mailing address of the registered office if different than above:
(same)
<PAGE> 4
3. The name of the resident agent at the registered office is: Christopher B.
Hewett
ARTICLE V
The name and address of the incorporator is as follows:
Donald W. Reynolds
940 W. Savidge
Spring Lake, MI 49456
ARTICLE VI
When a compromise or arrangement or a plan of reorganization of this
corporation is proposed between this corporation and its creditors or any class
of them or between this corporation and its shareholders or any class of them,
a court of equity jurisdiction within the state, on application of this
corporation or of a creditor or shareholder thereof, or on application of a
receiver appointed for the corporation, may order a meeting of the creditors or
class of creditors or of the shareholders or class of shareholders to be
affected by the proposed compromise or arrangement or reorganization, to be
summoned in such manner as the court directs. If a majority in number
representing 3/4 in value of the creditors or class of creditors, or of the
shareholders or class of shareholders to be affected by the proposed compromise
or arrangement or a reorganization, agree to a compromise or arrangement or a
reorganization of this corporation as a consequence of the compromise or
arrangement, the compromise or arrangement and the reorganization, if
sanctioned by the court to which the application has been made, shall be
binding on all the creditors or class of creditors, or on all the shareholders
or class of shareholders and also on this corporation.
ARTICLE VII
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.
ARTICLE VIII
The Corporation shall be, and is hereby declared to be, subject to the
provisions of Chapter 7a of the Business Corporation Act of the State of
Michigan, as enacted through the adoption of Act No. 115 of the Public Acts of
the State of Michigan of 1984. The requirements therein provided and made
applicable with respect to the Corporation shall be in addition to all other
requirements of law and other provision of the Articles of Incorporation, or
any thereto.
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EXHIBIT 3.2
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.
Section 3. Order of Business at Annual Meeting. The order of business at
the annual meeting of the shareholders shall be as follows:
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(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.
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
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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.
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
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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.
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
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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 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 the10th 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
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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. The business and affairs of the corporation
shall be managed by a Board of Directors comprised of not less than 5 nor more
than 15 directors, as shall be fixed from time to time by the Board of
Directors. The directors shall be elected at each annual meeting of
shareholders. A director shall hold office until the director's successor is
elected and qualified, or until the director's resignation or removal.
Section 2. Vacancies. Vacancies in the Board of Directors occurring by
reason of death, resignation, removal, increase in the number of directors or
otherwise, shall be filled by the affirmative vote of a majority of the
remaining directors though less than a quorum of the Board of Directors, unless
otherwise filled by proper action of the shareholders of the corporation. Each
person so elected shall be a director for a term of office continuing only
until the next election of directors by the shareholders.
Section 3. Removal. A director may be removed, with or without cause, by
vote of the holders of a majority of the shares entitled to vote an election of
directors.
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.
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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 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
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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.
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
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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.
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
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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,
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.
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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 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,
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<PAGE> 12
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' 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.
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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. 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.
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
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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.
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.
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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 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.
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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.
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.
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<PAGE> 1
Exhibit 4.1
CERTIFICATE OF DESIGNATION
OF
SERIES A CONVERTIBLE PREFERRED SHARES OF
MERITAGE HOSPITALITY GROUP INC.
Pursuant to Section 450.1302 of the
Michigan Business Corporation Act
The undersigned DOES HEREBY CERTIFY that the following resolution was
duly adopted by the Board of Directors of Meritage Hospitality Group Inc., a
Michigan corporation (the "Corporation"), at a meeting duly convened and held,
at which a quorum was present and acting throughout, or pursuant to consent
resolution:
RESOLVED, that pursuant to the authority conferred on the Board of
Directors of the Corporation by Article III, Section 3 of the Corporation's
Articles of Incorporation, as amended, and pursuant to Section 450.1302 of the
Michigan Business Corporation Act, the President or a Vice President and
Secretary or Assistant Secretary of the Corporation be, and they hereby are,
authorized and directed to execute and to file with the Secretary of State of
Michigan, a Certificate of Designation fixing the designation, powers,
preferences and rights of a new series of Preferred Shares to consist of 200,000
Preferred Shares, par value $.01 per share, to be designated as Series A
Convertible Preferred Shares of the Corporation, and the qualifications,
limitations or restrictions thereof, as follows:
1. Each of such Shares shall have an annual dividend rate of $.90 per
Share and no more. The right to payment of dividends shall be
cumulative. Said annual dividend shall be payable in equal quarterly
installments upon the 1st day of each January, April, July and October
in each year to holders of record as of the 15th day of the preceding
month commencing January 1, 1997, before any sum shall be set apart or
applied to the redemption or purchase of, or any dividends (other than
dividends of Common Shares) shall be declared or paid upon or set
apart for, Common Shares. The first of such quarterly dividend
payments shall be prorated to reflect the number of days in the
quarter during which the particular Shares were outstanding.
2. Upon any dissolution, liquidation or winding up of the Corporation,
the holders of each of said Shares, shall be entitled to receive,
before any payment to holders of Common Shares, all accrued but unpaid
dividends, plus a liquidation value of $10.00 per share and no more.
The consolidation or merger of the Corporation, at any time, with
another corporation, or a sale of substantially all of the assets of
the Corporation, shall not be construed as a dissolution, liquidation
or winding up of the Corporation within the meaning hereof.
<PAGE> 2
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3. The Series A Convertible Preferred Shares shall be convertible
into Common Shares of the Corporation at a conversion price of
$7.00 for each Common Share, (taking such Preferred Shares at
the liquidation value of $10.00 per share) upon the following
terms and conditions:
3.1 In case the Common Shares issuable upon conversion of
the Series A Convertible Preferred Shares at any time
outstanding shall be subdivided into a greater or
combined into a lesser number of Common Shares
(whether with or without par value), and whether by
stock split or stock dividend, the conversion price
shall be decreased in the case of a subdivision or
increased in the case of a combination to an amount
which shall bear the same relation to the conversion
price in effect immediately prior to such subdivision
or combination, and shall bear the total number of
Common Shares outstanding immediately after such
subdivision or combination.
3.2 No adjustments shall be made for dividends accrued on
any Shares that shall be issuable upon the conversion
of such Shares.
3.3 In case of a merger or consolidation of the
Corporation with or into another corporation, or the
reclassification of its Common Shares (other than by
way of split-up or contraction), the holders of
Series A Convertible Preferred Shares shall
thereafter be entitled to receive upon conversion the
kind and amount of shares of stock and securities and
property which they would have received had they
converted such Series A Convertible Preferred Shares
into Common Shares of the Corporation as of the
record date for determination of common shareholders
entitled to participate in such merger,
consolidation, or reclassification.
3.4 The holder of any shares of Series A Convertible
Preferred Shares may convert such Shares by
surrendering the certificate or certificates to any
transfer agent of the Corporation or to the Secretary
of the Corporation duly endorsed in blank transfer
and accompanied by written notice of election to
convert such Shares, or a portion thereof, executed
on the form set forth on such certificates or on such
other form as may be provided from time to time by
the Corporation. No fractional Common Shares shall be
issued upon the conversion of any Series A
Convertible Preferred Shares but, in lieu thereof,
the Corporation shall pay an amount in cash equal to
the current market value of such fractional interest
computed on the basis of the value of the Common
Shares at the time the preferred shares are
surrendered for conversion as determined in such
reasonable manner as the Corporation may adopt. In
case of the voluntary
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dissolution, liquidation or winding up of the
Corporation, all conversion rights of the holders of
Series A Convertible Preferred Shares shall terminate
on a date fixed by the Board of Directors, but not
more than Thirty (30) days prior to the record date
for determining the holders of the Common Shares
entitled to receive any distribution upon such
dissolution, liquidation and winding up.
3.5 The right of the holder to convert the Series A
Convertible Preferred Shares shall commence upon
issuance of such Shares.
3.6 The Corporation may cause the Series A Convertible
Preferred Shares to be converted at its option at any
time if the average of the closing sale prices for
the Corporation's Common Shares is at least 120
percent of the then effective conversion price, as
described above, for at least 20 trading days within
the period of 30 consecutive trading days ending no
earlier than 5 trading days prior to the date of the
notice of conversion.
4. VOTING. Holders of the Series A Convertible Preferred Shares
shall have no voting rights except as provided by law and
except that if at any time the Corporation fails to make SIX
consecutive quarterly dividend payments thereon, the number of
directors constituting its Board of Directors will be increased
by two and the holders of the Shares, voting as a class with
each Share having one vote, will be entitled to elect two
directors to the Board as long as any arrearages in dividend
payments remain outstanding. Upon payment by the Corporation of
all such dividend arrearages, the two directors elected pursuant
to this provision will cease to be directors and the holders of
Shares will have no further right to elect directors on account
of such arrearages.
5. The Corporation shall not, except upon the affirmative vote of
the holders of two-thirds of the Series A Convertible Preferred
Shares outstanding at the time, amend these articles of
incorporation in any manner that would result in the Series A
Convertible Preferred Shares being subordinate in terms of
preference as to payments of dividends or payments on liquidation
to any other Preferred Shares of the Corporation.
<PAGE> 1
Exhibit 4.2
MERITAGE HOSPITALITY GROUP INC.
SUBSCRIPTION AGREEMENT
----------------------
Agreement entered into this ____ day of ________, 19__, between
Meritage Hospitality Group Inc. and the undersigned Investor.
1. GENERAL. This Agreement sets forth the terms upon which Investor
will invest in Series A Convertible Preferred Shares of the Corporation with the
provisions provided in the attached Certificate of Designation. A majority of
the proceeds will be utilized for working capital.
2. SUBSCRIPTION AMOUNT AND PAYMENT. Investor hereby subscribes for
_____ Series A Convertible Preferred Shares at $__ per share, and tenders
payment for the full purchase price made payable to Meritage Hospitality Group
Inc.
3. INVESTOR'S REPRESENTATIONS AND WARRANTIES. Investor represents,
warrants and covenants to the Corporation that:
3.1 Investor is acquiring the Series A Convertible Preferred
Shares for Investor's own account, for investment only and not with a
view to or for resale in connection with any distribution of such
shares;
3.2 Investor has received and read the Corporation's report on
Form 10-KSB/A Amendment No. 2 and Annual Report to Shareholders for the
year ended November 30, 1995, the Corporation's Form 10-QSB for the
quarter ended August 31, 1996, the Proxy Statement issued by the
Corporation in connection with its 1996 Annual Shareholders Meeting and
the Supplemental Offering Materials;
3.3 Investor is aware that the offer and sale of the Series A
Convertible Preferred Shares has not been registered under the
Securities Act of 1933 (the "Act") in reliance upon the exemptions
provided in Regulation D thereof;
3.4 Investor is an "accredited investor" as defined in
Regulation D promulgated under the Act, and has sufficient knowledge
and experience in business and financial matters to understand and
evaluate the merits and risks of this investment and has had an
opportunity to ask questions of and receive answers from officers of
the Corporation concerning this investment;
3.5 Investor understands the speculative nature of an
investment in Series A Convertible Preferred Shares and, accordingly,
is able to bear the economic risk of this investment and could afford a
complete loss of such investment;
3.6 Investor understands that the Corporation is under no
obligation nor does it have any intention to register the Series A
Convertible Preferred Shares under the Act or any State securities
laws or to comply with the requirements for any exemption which might
otherwise be available, or to supply any investor with any information
necessary to enable
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Investor to sell the Series A Convertible Preferred Shares under Rule
144 or any other rule or regulation of the Securities and Exchange
Commission, except for the registration rights provided in this
Agreement; and
3.7 Investor acknowledges that a legend will be placed upon
certificates representing the shares of Series A Convertible Preferred
Shares purchased in substantially the following form:
The securities represented by this certificate have not been
registered under the Securities Act of 1933 or the laws of any
state or province and may not be transferred in the absence of
(a) an effective registration statement for the securities
under the Securities Act of 1933 and applicable state or
provincial laws, or (b) an opinion of counsel satisfactory to
the Corporation that such registration is not required.
4. INDEMNITY. Investor understands the meaning and legal consequences
of the representations and warranties contained in Section 3 and agrees to
indemnify the Corporation, its officers, directors and controlling persons from
and against any and all loss, damage, liability or expense, including costs and
reasonable attorneys' fees, due to or arising out of a breach of any
representation or warranty of Investor, whether contained in this Agreement or
any other agreement which Investor has executed with respect to this offering.
5. REGISTRATION RIGHTS. The following registration rights apply to all
Series A Convertible Preferred Shares purchased by Investor pursuant to this
Agreement.
5.1 NUMBER OF REGISTRATIONS. On any two separate occasions,
upon the written request of Investor given on or before October 1,
1998, the Corporation will prepare and file, promptly after such
request and in no case more than 60 days after receipt of such notice,
and thereafter use its best efforts to cause to become effective, a
registration statement ("Registration Statement") on a form to be
selected by the Corporation under and complying with the Act, covering
such number of Series A Convertible Shares and Common Shares into which
they are convertible (together the "Shares") as shall be specified in
Investor's request; PROVIDED, HOWEVER, that the Corporation shall not
be obligated to register Shares with a market value of less than
$500,000 pursuant to any such request, market value to be measured as
of the date of such request.
5.2 UNDERWRITING. If Investor so requests, the offering or
distribution of Shares under this Section shall be pursuant to a firm
underwriting. The managing underwriter shall be a nationally recognized
investment banking firm selected by Investor, but subject to the
Corporation's approval, which approval shall not be unreasonably
withheld. The Corporation will enter into an underwriting agreement
containing representations, warranties and agreements not substantially
different from those customarily included by an issuer in underwriting
agreements with respect to secondary distribution; PROVIDED, HOWEVER,
that
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Investor shall be entitled to negotiate the underwriting discounts and
commission and other fees of such underwriter.
5.3 TIMING OF REGISTRATION STATEMENT. The Corporation shall be
entitled to postpone the filing of any Registration Statement otherwise
required to be prepared and filed by it if, at any time prior to the
filing of such Registration Statement, the Corporation determines in
good faith that such registration might interfere with, or affect the
negotiation or completion of, any transaction that is being
contemplated by the Corporation or involve initial or continuing
disclosure obligations that might not be in the best interest of the
Corporation's shareholders; PROVIDED, that the duration of such delay
shall not exceed 90 days from the date the Corporation became aware of
such material business information; PROVIDED FURTHER, that the
Corporation shall promptly make such filing as soon as the conditions
which permit it to delay such filing no longer exist; and PROVIDED
FURTHER that in the event of any such deferral, Investor shall have the
right to withdraw its request for registration and such withdrawn
request shall not be considered one of Investor's two permitted
requests for registration under Section 5.1.
5.4 COVENANTS OF INVESTOR. Any request for registration made
by Investor shall specify the number of Shares as to which such request
relates, express Investor's present intention to offer such Shares for
distribution, contain an undertaking to provide all such information
and materials, and take all such actions and execute all such documents
as may be required in order to permit the Corporation to comply with
all applicable requirements of the Securities and Exchange Commission
and to obtain acceleration of the effective date of the Registration
Statement.
5.5 COVENANTS OF THE CORPORATION. So long as the Corporation
is under an obligation pursuant to the provisions of this Section 5,
the Corporation shall:
5.5.1 Prepare and file with the Securities and
Exchange Commission such amendments and supplements to such
Registration Statement, and the prospectus used in connection
therewith, as may be necessary to keep such Registration
Statement effective for such period as shall be necessary to
complete the marketing of the Shares included therein, but in
no event for more than 120 days after the date the Shares may
first be sold;
5.5.2 Furnish to Investor such number of copies of a
prospectus, including, without limitation, a preliminary
prospectus, in conformity with the requirements of the Act,
and such other documents as Investor may reasonably request in
order to facilitate the public sale or other disposition of
such Shares;
5.5.3 Use its best efforts to register or qualify,
not later than the effective date of any Registration
Statement filed pursuant to this Agreement, the Shares covered
by such Registration Statement under the securities or Blue
Sky laws of such jurisdictions within the United States as
Investor may reasonably request, and do any
<PAGE> 4
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and all other acts or things which may be necessary or
advisable to enable Investor to consummate the public sale or
other disposition in such jurisdiction of such Shares;
5.5.4 Promptly notify Investor at any time when a
prospectus relating to the Shares being distributed is
required to be delivered under the Act, of the happening of
any event as a result of which the prospectus included in such
Registration Statement, as then in effect, includes an untrue
statement of material fact or omits to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading in the light of the
circumstances then existing and, at the request of Investor,
promptly prepare, file with the Securities and Exchange
Commission, and furnish to Investor, a reasonable number of
copies of a supplement to, or an amendment of, such prospectus
as may be necessary so that, as thereafter delivered to the
purchasers of such Shares, such prospectus shall not include
an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the
circumstances then existing;
5.5.5 Use its best efforts to furnish, at the request
of Investor or any underwriter of any distribution of the
Shares, an opinion of legal counsel to the Corporation,
covering such matters as are typically covered by opinions of
issuer's counsel in underwritten offerings under the Act;
5.5.6 Use its best efforts to cause all of the Shares
as to which Investor shall have requested registration to be
listed on any recognized securities exchange, including,
without limitation, the National Association of Securities
Dealers Automated Quotation System, on which the Shares are
then listed and to maintain the currency and effectiveness of
any such listings; and
5.5.7 Enter into an agreement with the underwriters
for such offering in which the Corporation shall provide
indemnities similar to those described in Section 5.7 hereof
to the underwriters and in which the Corporation shall make
the usual representations and warranties made by issues of
equity securities to underwriters.
5.6 COSTS AND EXPENSES. Except for expenses referred to in the
following sentence, the Corporation shall bear the entire cost and
expense of any registration made pursuant to this Agreement, including,
without limitation, all registration and filing fees, printing
expenses, the fees and expenses of the Corporation's counsel and its
independent accountants and all other out-of-pocket expenses incident
to the preparation, printing and filing under the Act of the
Registration Statement and all amendments and supplements thereto, the
cost of furnishing copies of each preliminary prospectus, each final
prospectus and each amendment or supplement thereto to, underwriters,
brokers and dealers and other purchasers of the securities so
registered, and the costs and expenses incurred in connection with the
qualification of the securities so registered under "blue sky" or other
state securities
<PAGE> 5
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laws. Notwithstanding the foregoing, the Corporation shall not be
liable or responsible for the fees and expenses of counsel and
accountants of Investor, all underwriting discounts and commissions
attributable to Shares registered at the request of Investor.
5.7 INDEMNIFICATION.
5.7.1 The Corporation will indemnify Investor, its officers,
directors and each underwriter of Shares as well as any person who
controls Investor or such underwriters against all claims, losses,
damages, liabilities and expenses resulting from any untrue statement
or alleged untrue statement of a material fact contained in a
prospectus or in any related Registration Statement, notification or
similar filing under securities laws of any jurisdiction, or from any
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same may have been based upon
information furnished in writing to the Corporation by Investor or such
underwriter expressly for use therein and used in accordance with such
writing.
5.7.2 Investor, by requesting any such registration, agrees to
furnish to the Corporation such information concerning it as may be
requested by the Corporation and which is necessary in connection with
any Registration or qualification of the Shares and to indemnify the
Corporation against all claims, losses, damages, liabilities and
expenses resulting from the utilization of such information furnished
in writing to the Corporation expressly for use therein and used in
accordance with such writing.
5.7.3 If any action is brought or any claim is made against a
party indemnified pursuant to this Section 5.7 in respect of which
indemnity may be sought against the indemnitor, such party shall
promptly notify the indemnitor in writing of the institution of such
action or the making of such claim and the indemnitor shall assume the
defense of such action or claim, including the employment of counsel
and payment of expenses. Such party shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such party unless the
employment of such counsel shall have been authorized in writing by the
indemnitor in connection with the defense of such action or claim, or
such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from
or additional to those available to the indemnitor (in which case the
indemnitor shall not have the right to direct any different or
additional defense of such action or claim on behalf of the indemnified
party or parties), in any of which events such fees and expenses of not
more than one additional counsel for the indemnified parties shall be
borne by the indemnitor. Except as expressly provided above, the
indemnitor shall not previously have assumed the defense of any such
action or claim, at such time as the indemnitor does not assume the
defense of such action or claim, the indemnitor shall thereafter be
liable to any person indemnified pursuant to this Agreement for any
legal or other expenses subsequently incurred by such person in
investigating, preparing or defending against such action or
<PAGE> 6
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claim. Anything in this paragraph to the contrary notwithstanding, the
indemnitor shall not be liable for any settlement of any such claim or
action effected without its written consent.
6. ADJUSTMENTS FOR OTHER ISSUANCES.
6.1 If the Corporation issues and sells through a publicly
underwritten offering at least $1 million of convertible preferred
shares prior to January 1, 1998, the terms of the Series A Convertible
Preferred Shares as expressed on the attached Certificate of
Designation, will be amended by the Board of Directors so that they
will be the same as provided for such publicly issued convertible
preferred shares.
6.2 If at any time prior to January 1, 1998, the Corporation
issues and sells through a publicly underwritten offering at least $1
million of Shares, the conversion price contained in the attached
Certificate of Designation will be changed so that it is 120% of the
public offering price for such Shares.
7. MISCELLANEOUS.
7.1 NOTICES. Notices given under this Agreement shall be
deemed given when received at the addresses for the parties set forth
below and may be delivered by facsimile or other telecommunications
device producing a document setting forth such notice.
If to the Corporation: Meritage Hospitality Group Inc.
40 Pearl Street, N.W., Suite 900
Grand Rapids, MI 49503
Attention: President
Facsimile - (616) 776-2776
If to Investor:
7.2 BINDING AGREEMENT. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their
respective successors and assigns.
7.3 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter
hereof, and supersedes and cancels any and all prior negotiations,
arrangements, agreements and understandings, whether oral or written,
between them, respecting the subject matter hereof.
<PAGE> 7
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7.4 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Michigan.
7.5 ASSIGNABILITY. The rights and obligations of Investor
hereunder may be assigned by it to any corporation or other entity
controlled by it or controlling it.
7.6 SUCCEEDING SECURITIES. If either the Series A Convertible
Preferred Shares or the Common Shares of the Corporation covered by
this Agreement is converted into any other security of the Corporation
or any other corporation, the terms of this Agreement shall apply with
full force and effect to any such other security and the obligations of
the Corporation to effect registration shall include such other
filings, qualifications, notices and similar acts as may be necessary
to enable Investor to realize the benefits of registration provided by
this Agreement.
7.7 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same agreement.
7.8 CONDITION TO ACCEPTANCE. Acceptance of this Agreement is
subject to the approval of the Board of Directors of the Corporation.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
Witnessed by:
- ------------------------------- ---------------------------------
Signature of Investor
- -------------------------------
MERITAGE HOSPITALITY GROUP INC.
_____________________________ By:_________________________________
Christopher B. Hewett
President
- -----------------------------
392829.4
<PAGE> 1
Exhibit 10.3
LOAN AGREEMENT
AMONG
MERITAGE HOSPITALITY GROUP INC.
ST. CLAIR INN, INC.
GRAND HARBOR RESORT INC.
THOMAS EDISON INN, INCORPORATED,
MHG FOOD SERVICE INC.
GRAND HARBOR YACHT CLUB INC.,
AS OBLIGORS
AND
GREAT AMERICAN LIFE INSURANCE COMPANY,
AS LENDER
DATED AS OF NOVEMBER 26, 1996
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C> <C>
ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS................................................................2
1.1 Defined Terms...................................................................................2
1.2 Accounting Terms...............................................................................14
1.3 Use of Defined Terms...........................................................................14
ARTICLE 2 LOAN TERMS AND AMOUNT..........................................................................15
2.1 Commitment.....................................................................................15
2.2 Use of Proceeds................................................................................15
2.3 Notes; Interest Rates..........................................................................15
2.4 Payments of Interest and Principal.............................................................16
2.5 Prepayment.....................................................................................16
2.6 Release Prices.................................................................................18
2.7 Manner of Payments; Computation of Interest....................................................18
2.8 Exchange of Notes..............................................................................19
2.9 Commitment Fee.................................................................................19
ARTICLE 3 REPRESENTATIONS AND WARRANTIES.................................................................19
3.1 Representations and Warranties of MHG..........................................................19
3.2 Representations and Warranties of the Lender...................................................24
3.3 Survival of Representations....................................................................25
ARTICLE 4 COVENANTS......................................................................................25
4.1 General Covenants..............................................................................25
4.2 Additional Covenants...........................................................................30
ARTICLE 5 DEFAULTS AND REMEDIES..........................................................................34
5.1 Event of Default...............................................................................34
5.2 Remedies.......................................................................................36
ARTICLE 6 CLOSING........................................................................................37
6.1 Place, Time and Disbursement of Loans..........................................................37
6.2 Conditions to Making the Loans.................................................................37
6.3 Documents to be Delivered to the Lender at Closing.............................................38
ARTICLE 7 MISCELLANEOUS..................................................................................39
7.1 Remedies Cumulative; No Waiver.................................................................39
7.2 Obligation to Pay, Expenses and Taxes..........................................................39
7.3 Severability...................................................................................39
7.4 Confidentiality................................................................................40
7.5 Entire Agreement; Amendments...................................................................40
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
- ii -
<S> <C> <C>
7.6 Notices....................................................40
7.7 Release of Collateral......................................41
7.8 Binding Effect.............................................41
7.9 Execution in Counterparts..................................42
7.10 Reference to Headings......................................42
7.11 Governing Law..............................................42
7.12 Designation of Forum.......................................42
7.13 Participation..............................................42
</TABLE>
<TABLE>
<CAPTION>
Exhibits
<S> <C>
A Form of Promissory Note for Loan I
B Form of Promissory Note for Loan II
C Legal Descriptions for Assets to be Sold
D Form of Assignment of Hotel Franchise Agreements
E Form of Assignment of Life Insurance
F Form of Assignment of Meritage Note
G Form of Environmental Indemnity Agreement
H Form of Guaranty of Meritage Hospitality Group Inc.
H-I Form of Guaranty of Other Obligors
I Form of First Mortgage on Hotel Properties
J Legal Descriptions for Hotel Properties
K Form of First Mortgage on Assets to be Sold
K-I Form of Second Mortgage on Assets to be Sold
L Form of Second Mortgage on Hotel Properties
M Form of Certificate and Agreement with Meritage
N Form of Pledge Agreement
O Form of Security Agreement
P Form of Opinion of Counsel to MHG
Q Life Insurance Policies on the life of Donald W. Reynolds
R Partnership Pledge Agreement
</TABLE>
<TABLE>
<CAPTION>
Schedules
<S> <C>
1.1(a) Filing Offices
1.1(b) Existing Liens
3.1(d) Transaction Authority and Proceedings
3.1(e) No Legal Bar
3.1(g) Litigation
3.1(h) Default
3.1(j) Designated Contracts
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
- iii -
<S> <C>
3.1(k) Principal Office; Name
3.1(o) Tax Liabilities
3.1(q) Commitments
3.1(v) Capitalization
4.2(c) Indebtedness
4.2(i) Lease Obligations
</TABLE>
<PAGE> 5
LOAN AGREEMENT
THIS LOAN AGREEMENT dated as of November 26, 1996 among GREAT AMERICAN
LIFE INSURANCE COMPANY, an Ohio corporation (referred to herein as the
"LENDER"), MERITAGE HOSPITALITY GROUP INC. (formerly known as Thomas Edison
Inns, Inc.), a Michigan corporation ("MHG"); ST. CLAIR INN, INC., a Michigan
corporation ("SCI"); GRAND HARBOR RESORT INC. (formerly known as Spring Lake
Inn, Inc.), a Michigan corporation ("GH Resort"); THOMAS EDISON INN,
INCORPORATED, a Michigan corporation ("TEI"); MHG FOOD SERVICE INC., a Michigan
corporation ("Food Service"); and GRAND HARBOR YACHT CLUB INC., a Michigan
corporation ("GH Yacht Club").
W I T N E S S E T H:
RECITALS
WHEREAS, on February 26, 1996, the Lender made two loans to MHG, one in
the amount of $12,000,000 ("Loan A") and the other in the amount of $3,000,000
("Loan B");
WHEREAS, SCI, GH Resort, TEI, Food Service and GH Yacht Club guaranteed
Loans A and B;
WHEREAS, on October 31, 1996, the Lender made an additional loan of
$3,000,000 ("Loan C") to MHG, which loan was guaranteed by SCI, GH Resort, TEI,
Food Service and GH Yacht Club;
WHEREAS, MHG has requested that the Lender increase the amount of the
first mortgage loan on the Hotel Properties (as hereinafter defined) by making a
new loan in the amount of $14,000,000; and
WHEREAS, MHG and the Lender have agreed to modify the terms of Loans B
and C and combine such loans into one revised loan;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereby agree as follows:
<PAGE> 6
- 2 -
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
Section 1.1 DEFINED TERMS.
As used in this Loan Agreement, the following terms shall have the
following meanings (such meaning to be equally applicable to both the singular
and plural forms of terms):
"ACCOUNTS" mean any and all "accounts", as such term is defined in
Section 9-106 of the Code, including any and all rights and claims in, to and
under, all accounts, accounts receivable, contract rights and rights to payment
for merchandise, goods or commodities sold or leased or to be sold or leased or
for services rendered or to be rendered however evidenced and all other forms of
obligations for the payment of money, all guaranties and security therefor, and
letters of credit relating thereto.
"ACT" means the Securities Act of 1933, as the same may be amended from
time to time.
"AFG" means American Financial Group, Inc., an Ohio Corporation.
"AFFILIATE" means, in relation to any Person, any Person which
(directly or indirectly) controls or is controlled by or is under common control
with such Person. For the purposes of this Loan Agreement, the term "control,"
including with correlative meanings, the terms "controlled by" and "under common
control with," as used with respect to any Person, shall mean the possession
(directly or indirectly) of the power to direct or to cause the direction of the
management or the policies of such Person, whether through the ownership of
shares of any class and the capital of such Person or by contract or otherwise.
"AGREEMENT" means this Loan Agreement, including all Schedules,
Exhibits, and Supplements hereto, if any, as the same may from time to time be
amended, supplemented or otherwise modified.
"ASSETS TO BE SOLD" means the commercial and vacant properties adjacent
to the St. Clair Inn, the marina slips owned and operated by GH Resort or GH
Yacht Club, and the residential properties and undeveloped land adjacent to the
Thomas Edison Inn, all as more particularly described on the attached Exhibit
"C."
"ASSIGNMENT OF HOTEL FRANCHISE AGREEMENTS" means that certain
Assignment of Hotel Franchise Agreements, Management Agreements, Permits and
Contracts dated as of even date herewith, between each Hotel Subsidiary and the
Lender substantially in the form of the attached Exhibit "D."
<PAGE> 7
- 3 -
"ASSIGNMENT OF LIFE INSURANCE" means the Assignment of Life Insurance
Policies and Proceeds of even date herewith on the life of Donald W. Reynolds by
and between MHG, St. Clair Inn and the Lender substantially in the form of
Exhibit "E" attached hereto.
"ASSIGNMENT OF MERITAGE NOTE" means the assignment by MHG to the Lender
of its rights under the Meritage Note, the Meritage Pledge Agreement and all
collateral and security related thereto substantially in the form of Exhibit "F"
attached hereto.
"BOOKS" means any and all books, records, ledger cards, files,
correspondence, computer programs, tapes, discs and related data processing
software that at any time evidence or contain information relating to any of the
Collateral or are otherwise necessary or helpful in the collection thereof or
realization thereupon, and any and all other rights now or hereafter arising out
of any contract or agreement between any Person and any service bureau or
computer or data processing company charged with preparing or maintaining any
Person's books or records or with credit reporting.
"BUILDING MATERIALS" means any and all building materials or items of
personal property used in connection with the development, construction or
renovation of any improvements.
"BUSINESS DAY" means any day except a Saturday, Sunday or legal holiday
under the laws of the State of Ohio.
"CAPITAL EXPENDITURES" means in relation to the Obligors for any
period, all expenditures by the Obligors paid or accrued for the lease,
purchase, construction or use of any property or assets the value of which, in
accordance with GAAP, is required to be (or is permitted to be, and the Obligor
so elects) capitalized on the consolidated balance sheet of the Obligor as of
the end of such period, including, without limitation, all amounts paid or
accrued by the Obligor for such period with respect to Capitalized Lease
Obligations (excluding the interest component thereof).
"CAPITALIZED LEASE OBLIGATIONS" means all lease obligations that, in
accordance with GAAP, should be capitalized. (A Capitalized Lease Obligation
shall be deemed incurred at the time a binding commitment to purchase or lease
the subject property or equipment shall become effective).
"CHATTEL PAPER" means any and all "chattel paper", as such term is
defined in Section 9-105(1)(b) of the Code, including any and all writings of
whatever sort which evidence a monetary obligation and a security interest in or
lease of specific goods.
"CLOSING" has the meaning attributed thereto in Section 6.1 hereof.
"CODE" means the Uniform Commercial Code as adopted in the State of
Michigan, as amended or supplemented from time to time.
<PAGE> 8
- 4 -
"COLLATERAL" means either the Loan I Collateral, the Loan II
Collateral, or both, as appropriate.
"CONSOLIDATED INTEREST EXPENSE" means with respect to a Person for any
period, interest accrued or payable by such Person and its Subsidiaries during
such period in respect of Total Debt determined on a consolidated basis in
accordance with GAAP.
"CONSOLIDATED NET WORTH" of any Person means, the consolidated
stockholders' equity of such Person and its Subsidiaries, as determined in
accordance with GAAP consistently applied.
"DEBT SERVICE" means for such period the sum (without duplication) of
(a) Consolidated Interest Expense plus (b) scheduled principal amortization of
Total Debt (other than the final balloon payments in connection with
Indebtedness of a Person and its Subsidiaries unless past due, whether or not
such payments are made, or prepayments in connection with any Indebtedness).
"DEFAULT" means any of the events specified in Section 5.1 hereof,
whether or not there has been satisfied any requirement in connection with such
event for the giving of notice, or the lapse of time, or the happening of any
further condition, event or act.
"DEFAULT RATE" shall mean, with respect to the amount due and payable
under either of Loan I or Loan II, that rate which is Four Percent (4%) in
excess of the amount otherwise payable from time to time under the respective
Note related to the applicable Loan, and, with respect to any other amounts
otherwise due and payable under the terms of the Loan Agreement or any other
Loan Document, shall mean Five Percent (5%) above the Prime Rate.
"DEPOT BUILDING" means the building located at the Thomas Edison Inn
Hotel and identified as parcel 6 on a survey dated February 7, 1996 prepared by
T.R. Valentine & Associates, Inc., a copy of which has been delivered to Lender.
"DESIGNATED TREASURY NOTE" shall mean the 5 7/8% U.S. Treasury Note
due February 15, 2004.
"DISCOUNT RATE" shall mean a rate per annum equal to the Subsequent
Yield to Maturity plus 100 basis points (1.00%).
"DOCUMENTS" mean any and all "documents", as such term is defined in
Section 9-105(1)(f) of the Code, and any and all documents of title, bills of
lading, dock warrants, dock receipts, warehouse receipts and other similar
documents, whether or not negotiable, including all documents which purport to
be issued by a bailee or agent and purport to cover goods in any bailee's or
agent's possession which are either identified or are fungible portions of an
identified mass, including such documents of title made available to a Person
for the purpose of ultimate sale or exchange of goods
<PAGE> 9
- 5 -
or for the purpose of loading, unloading, storing, shipping, transshipping,
manufacturing, processing or otherwise dealing with goods in a manner
preliminary to their sale or exchange.
"EBITDA" means with respect to a Person for any period, earnings (or
losses) before interest and income taxes of such Person and its Subsidiaries for
such period plus, to the extent deducted in computing such earnings (or losses)
before interest and income taxes, depreciation and amortization expense, all as
determined on a consolidated basis with respect to such Person and its
Subsidiaries in accordance with GAAP; PROVIDED, HOWEVER, EBITDA shall exclude
earnings or losses resulting from (i) cumulative changes in accounting
practices, (ii) discontinued operations, (iii) extraordinary items, (iv) net
income of any entity acquired in a pooling of interest transaction for the
period prior to the acquisition, (v) net income of a Subsidiary that is
unavailable to such Person, and (vi) net income from corporations, partnerships,
associations, joint ventures or other entities in which such Person or a
Subsidiary has a minority interest and which such Person does not control,
except to the extent actually received.
"ENVIRONMENTAL INDEMNITY AGREEMENT" means the Environmental Indemnity
Agreement between the Obligors and the Lender in the form of the attached
Exhibit "G."
"EQUIPMENT" means any and all "equipment" as such term is defined in
Section 9-109(2) of the Code, including: (i) any and all furniture and
furnishings, including all office and hotel furniture, carpets, rugs and other
floor coverings, shades, venetian blinds, drapes, curtains, tapestries, screens,
works of art, pictures, paintings, tables, chairs, desks, clocks, sofas, beds,
dressers, cabinets, lamps, decorative lighting fixtures and outdoor furniture;
(ii) any and all operating equipment, including washers, dryers, vacuum
cleaners, stoves, ovens, ranges, refrigerators, garbage disposals, minibars,
microwave ovens, timers, dishwashers, air conditioning equipment, beauty shop
and barber equipment, fire extinguishers, enunciator system and other fire and
life safety equipment; (iii) any and all office equipment, including all
computers, fax machines, safes and cash registers and all accounting,
duplicating, communication, switchboard and reservation equipment; (iv) any and
all hotel and restaurant equipment, including all chinaware, glassware, linens,
bedding, silverware, tableware, uniforms, kitchen utensils, janitor's equipment,
unlaid carpeting and mechanical stores, including any and all such items bearing
the name or identifying characteristics of any franchisor; (v) any and all
recreation and athletic equipment, including all equipment used in connection
with any gymnasium, sauna, hot tub, steam room or swimming pool and game and
sports equipment; (vi) any and all entertainment equipment, including radios CD
players, tape players, phonograph sets, speakers, phonograph records, tapes,
arcade games, television sets, antennae and antenna systems, projection systems,
intercoms and public address systems; (vii) any and all automobiles, trucks,
vans, buses and other vehicles; (viii) any and all other trade fixtures,
apparatus, other equipment and tangible personal property used in connection
with the management, maintenance and operation of the Hotel Subsidiaries'
business; and (ix) any and all renewals or replacements of, additions to or
substitution for, the above-enumerated items.
<PAGE> 10
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"EVENT OF DEFAULT" means any of the events specified in Section 5.1
hereof, provided that there has been satisfied any requirement in connection
with such event for the giving of notice, or the lapse of time, or the happening
of any further condition, event or act.
"FINANCING STATEMENTS" mean the UCC financing statements to be filed in
the offices listed on Schedule 1.1(a) hereto.
"FIXTURES" mean any and all "fixtures", as such term is defined in
Section 9-313(1)(a) of the Code, (other than tenant improvements in or which a
Person has at no time any right, title, claim, estate or interest) located upon
or within a Property or now or hereafter installed in, or used in connection
with a Property, including any and all machinery, equipment, appliances and
fixtures for generating or distributing air, water, heat, electricity, light,
fuel or refrigeration, for ventilating or sanitary purposes, for the exclusion
of vermin or insects or for the removal of dust, refuse or garbage or for other
purposes, all wall beds, wall safes, built-in furniture and installations,
furnishings, shelving, lockers, partitions, vaults, elevators, dumbwaiters,
awnings, mirrors, window shades, screens, venetian blinds, draperies, drapery
rods and brackets, screens, floor coverings, carpets, light fixtures, fire hoses
and brackets and boxes for the same, fire sprinklers, alarm systems, plumbing,
bathtubs, sinks, basins, pipes, faucets, water closets, washers, dryers, tubs,
trays and other laundry equipment, ice boxes, refrigerators, heating units,
stoves, ovens, ranges, dishwashers, disposals, water heaters, incinerators,
telephone, sound, television and communication systems, fire and life safety
equipment, and athletic equipment and installations, in each case whether or not
permanently affixed to a Property, together with all substitutions, replacements
or additions.
"GAAP" means Generally Accepted Accounting Principles at the time in
effect.
"GENERAL INTANGIBLES" mean any and all "general intangibles", as such
term is defined in Section 9-106 of the Code, including the following: (i) any
and all rights to payment of money other than Accounts, and all rights in any
returned, reclaimed and repossessed goods and all rights, claims, titles,
securities, security interests, liens and guaranties evidencing, securing,
guarantying payment of, relating to or otherwise with respect to such rights to
payment; (ii) any and all insurance policies covering any assets and all rights
and claims therein or thereunder, including insurance against damage (including
by fire or earthquake), loss, casualty or liability (including environmental
cleanup costs), title insurance and builder's risk insurance, whether covering
personal property, real property or intangible rights, together with the
proceeds, products, renewals and replacements thereof, including prepaid and
unearned premiums; (iii) any and all compensation, awards and payments and
relief given by any Governmental Authority or other source, including as a
result of damage to any of the assets resulting from earthquake, flood,
windstorm, emergency or any other event or circumstance; (iv) any and all
licensing agreements, royalties, license fees, reservations, sales literature,
telephone numbers, deposits (including security and cleaning deposits and
deposits collected from tenants or lessees or guests and deposits collected from
purchasers pursuant to contracts for sale of a Property or any part thereof) or
leases of personal property, purchase and sale contracts for a Property and
other contracts, contract rights, undertakings, surety and other bonds,
<PAGE> 11
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all forms of obligations owing to a Person or in which a Person may have an
interest, any and all choses and things in action, goodwill, catalogs, purchase
orders, customer lists (including pertaining to any mail order business operated
by such Person in conjunction with a Property), invoices, purchase orders and
tax and other refunds of every kind and nature; (v) any contracts, agreements,
rights or written materials relating to the ownership, use, development,
construction, maintenance, operation, marketing, leasing, occupancy, sale or
financing of a Property, or a Person's other assets, including improvement plans
and specifications, and architectural drawings and agreements with contractors,
subcontractors, suppliers, project managers and supervisors, designers,
architects, engineers, sales agents, leasing agents, consultants and property
managers; (vi) any lawsuit, claim or arbitration proceeding against any Person
or relating to any asset for any reason, whether or not presently excluded by
Section 9-104 of the Code; (vii) to the maximum extent permitted by the
applicable law of the State, any and all licenses and other rights, privileges
or permits issued by any Governmental Authority from time to time, including
building permits, excavation permits or other consents relating to the
construction, renovation, use or operation of a Property, but excluding any
asset that is a liquor license under subsection (ix) below; (viii) any
landlord's lien or innkeeper's lien or similar right created by law, in equity
or by contract; (ix) to the maximum extent permitted by the applicable law of
the State, any and all rights, title and interest in any liquor license, or
similar permit, consent, certificate right or privileges necessary to permit a
Person carrying on business at a Property to own, sell, serve, dispense and
otherwise deal with alcoholic beverages; and (x) any and all right, title and
interest arising from any rejection under the Bankruptcy Reform Act of 1978 (11
U.S.C. Sections 101-1330, as amended or supplemented from time to time, and any
successor statute, and all of the rules issued or promulgated in connection
therewith) of any lease under which a Person is the lessee by the lessor or any
sublessor.
"GOVERNMENTAL AUTHORITY" means any government, any federal, state,
local or other political subdivision thereof, and any entity exercising
executive, legislative, judicial, quasi-judicial, regulatory or administrative
functions of or pertaining to government.
"GUARANTY" means with respect to Loan I, the guaranty thereof by MHG,
Food Service and GH Yacht Club and with respect to Loan II, the guaranty thereof
by SCI, GH Resort and TEI substantially in the form of the attached Exhibits "H"
and "H-I" and "GUARANTEES" means both of such Guarantees.
"HERETO," "HEREIN," "HEREOF," "HEREUNDER" and other words of similar
import refer to this Agreement as a whole and not to any particular section or
other subdivision of this Agreement unless the context otherwise indicates.
"HOTEL ACCOUNTS" mean any and all "accounts", as such term is defined
in Section 9-106 of the Code, including any and all rights and claims in, to and
under, all accounts, accounts receivable, contract rights and rights to payment
for merchandise, goods or commodities sold or leased or to be sold or leased or
for services rendered or to be rendered, however evidenced, including, without
limitation, any of the room charges and other consideration paid by any lodger
or guest for the use
<PAGE> 12
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or occupancy of any guest room, banquet room, ballroom, recreational facility,
parking structure or other part of a Hotel Property, specifically, including,
without limitation, charges for any and all telephone calls, laundry and dry
cleaning, parking, valet, room service, use of rooms, banquet rooms and movie or
other entertainment, any office, copy, fax or other business machinery, and all
other forms of obligations for the payment of money owing to a Hotel Subsidiary
arising out of the ownership and operation of a Hotel Property, all guaranties
and security therefor, and letters of credit relating thereto.
"HOTEL FRANCHISE AGREEMENTS" means the License Agreement between Spring
Lake Inn, Inc. and Holiday Inns Franchising, Inc. dated August 21, 1995, as
amended, and any replacement or substitution thereof together with any other
franchise, management or other agreements covered by the Assignment of Hotel
Franchise Agreements.
"HOTEL PERSONAL PROPERTY" means each of the following related to the
operation of the Hotel Properties: Equipment, Building Materials, Inventory,
Fixtures, Chattel Paper, Hotel Accounts, Instruments, Intellectual Property,
Documents, General Intangibles, Books, Landscaping, and Proceeds.
"HOTEL PROPERTY" shall mean each of the Grand Haven Holiday Inn, Spring
Lake, Michigan; the Thomas Edison Inn, Port Huron, Michigan; and the St. Clair
Inn, St. Clair, Michigan and "HOTEL PROPERTIES" shall mean all of such
properties as more particularly described on the attached Exhibit "J".
"HOTEL SUBSIDIARIES" means each of SCI, GH Resort and TEI.
"INDEBTEDNESS" means, as to a Person, all obligations of such Person
and its Subsidiaries that, in accordance with GAAP, would be classified as
liabilities upon a consolidated balance sheet.
"INDEBTEDNESS FOR BORROWED MONEY" means, Indebtedness (i) in respect of
any money borrowed by a Person and its Subsidiaries; (ii) under or in respect of
any guaranty (whether direct or indirect) by such Person and its Subsidiaries of
any Indebtedness for borrowed money of any other person; or (iii) evidenced by a
loan or credit agreement, promissory note, debenture, bond or guaranty.
"INSTRUMENTS" means any and all "instruments", as such term is defined
in Section 9-105(1)(i) of the Code, including negotiable instruments,
certificated and uncertificated securities and every other writing which
evidences a right to the payment of money.
"INTELLECTUAL PROPERTY" means any and all of the following rights,
properties and assets: (i) any and all patents and patent applications, domestic
or foreign, all licenses relating to any of the foregoing and all income and
royalties with respect to any licenses (including such patents, patent
applications and patent licenses), all rights to sue for past, present or future
infringement thereof,
<PAGE> 13
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all rights arising therefrom and pertaining thereto and all reissues, divisions,
continuations, renewals, extensions and continuations-in-part thereof; (ii) any
and all copyrights and applications for copyright, domestic or foreign, together
with the underlying works of authorship (including titles), whether or not the
underlying works of authorship have been published and whether said copyrights
are statutory or arise under the common law, and all other rights and works of
authorship, all rights, claims and demands in any way relating to any such
copyrights or works, including royalties and rights to sue for past, present or
future infringement, and all rights of renewal and extension of copyright; (iii)
any and all state (including common law), federal and foreign trademarks,
service marks, logos and trade names, and applications for registration of such
trademarks, service marks, logos and trade names, all licenses relating to any
of the foregoing and all income and royalties with respect to any licenses
(including such marks, names, applications and licenses), whether registered or
unregistered and wherever registered, all rights to sue for past, present or
future infringement or unconsented use thereof, all rights arising therefrom and
pertaining thereto and all reissues, extensions and renewals thereof; (iv) any
and all trade secrets, confidential information, customer lists, license rights,
advertising materials, operating manuals, methods, processes, know-how, sales
literature, drawings, specifications, blue prints, descriptions, inventions,
name plates and catalogs; (v) any and all computer programs and software
(including all source codes and object codes in media of any type or nature in
which such source codes or object codes are reproduced, copied, stored or
maintained at any time or from time to time and all licenses and other rights
entitling a Person to use, copy and reproduce such object codes and source codes
and a Person's rights in all licenses and other rights granted to any other
Person to copy, use, sell, market or reproduce computer software and such source
codes and object codes); (vi) any and all rights, privileges and claims, under
any franchise agreements, and other contracts, agreements or licenses permitting
a Person to use any General Intangible, including any trademarks, trade names,
logos or service marks owned by any other Person; and (vii) the entire goodwill
of or associated with the businesses now or hereafter conducted by a Person
connected with and symbolized by any of the aforementioned assets.
"INVENTORY" means any and all "inventory", as such term is defined in
Section 9-109(4) of the Code, (including goods in transit) in all of its forms,
including: (i) any and all goods held by a Person for sale or lease or other
disposition or otherwise used in connection with a Property, including those
held for display or demonstration or out on lease or consignment or to be
furnished under a contract of service or so leased or furnished or provided for
the use of the guests of a Property, whether or not for a separate fee; (ii) any
and all operating supplies used at or in the operation of a Property, including
upholstery supplies, cleaning supplies, office supplies, paint supplies, laundry
supplies, janitorial supplies, inventories of food, beverages, recreational
supplies and any other supplies used or consumed in or in connection with any
Property or any Person's business, and to the maximum extent permitted by
applicable law of the State, liquor, wine and spirits; (iii) any and all raw
materials, work in process, finished goods and materials used or consumed in the
manufacture, packing, shipping, advertising, selling, leasing, furnishing or
production of the aforementioned goods or otherwise used or consumed in the
operation of a Property or any Person's business and the resulting product or
mass, including all supplies of food,
<PAGE> 14
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foodstuffs and beverages and contents and minibars; (iv) all repossessed,
returned, rejected, reclaimed and replevied goods of the kind described in
clauses (i) through (iii); and (v) all additions and accessions to any of the
foregoing, and all other similar items hereafter acquired by a Person by way of
substitution, replacement, return, repossession or otherwise.
"LANDSCAPING" means any and all trees, plants and other items of
landscaping and decoration owned or leased by a Person to the extent that the
same are not part of a Property under the applicable law of the State.
"LIEN" means any mortgage, pledge, hypothecation, assignment, security
interest, lien, charge or encumbrance of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any lease having substantially the same economic effect as a
conditional sale or title retention agreement, and the filing of, or agreement
to give, any financing statement under the Uniform Commercial Code or comparable
law of any jurisdiction).
"LIFE INSURANCE" means those policies of insurance on the life of
Donald W. Reynolds listed on the attached Exhibit "Q" having a death benefit of
not less than Five Million One Hundred Thousand and 00/100 Dollars
($5,100,000.00).
"LOAN I" means the Fourteen Million and 00/100 Dollar ($14,000,000.00)
loan secured by the Loan I Collateral.
"LOAN I COLLATERAL" means first mortgages on the Hotel Properties
substantially in the form of the attached Exhibit "I", a perfected
first-priority security interest in the Hotel Personal Property and the
Assignment of Hotel Franchise Agreements.
"LOAN II" means the Five Million Two Hundred Fifty Thousand and 00/100
Dollar ($5,250,000.00) loan secured by the Loan II Collateral.
"LOAN II COLLATERAL" means the first mortgages on the Assets to be Sold
substantially in the form of the attached Exhibit "K", a perfected
first-priority security interest in the Loan II Personal Property, the
assignment of the interest of the Obligor's in the Life Insurance, an assignment
of MHG's interest in the Meritage Note and the collateral therefor, a pledge by
MHG of the common stock of each of its Subsidiaries, and a pledge by MHG and
Food Service of all partnership interests in the Partnership owned by them.
"LOAN II PERSONAL PROPERTY" means each of the following located on or
created by or in connection with any of the Assets to be Sold: Equipment,
Building Materials, Inventory, Fixtures, Chattel Paper, Accounts, Instruments,
Intellectual Property, Documents, General Intangibles, Books Landscaping, and
Proceeds.
"LOANS" mean Loan I and Loan II to be made by the Lender under this
Agreement.
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"LOAN DOCUMENTS" mean the instruments delivered or to be delivered from
time to time in connection with the Loans, including without limitation, this
Agreement, the Notes, the Guarantees, the Assignment of Life Insurance, the
Security Agreements, the Pledge Agreement, the Assignment of Meritage Note, the
Meritage Certificate, the Environmental Indemnity Agreement, the Assignment of
Hotel Franchise Agreements, the UCC Financing Statements, the Mortgages and the
Partnership Pledge Agreement.
"MAKE WHOLE PREMIUM" has the meaning set forth in Section 2.5 hereof.
"MCC" means Meritage Capital Corp., a Florida corporation.
"MCC CERTIFICATE" means the Certificate and Agreement of Meritage in
the form of the attached Exhibit "M" dated as of the Closing Date.
"MERITAGE NOTE" means the Nine Million Seven Hundred Fifty Thousand and
00/100 Dollars ($9,750,000.00) First Amended and Restated Secured Promissory
Note dated September 19, 1995 payable by MCC to MHG.
"MERITAGE PLEDGE AGREEMENT" means the Amended and Restated Stock Pledge
Agreement dated September 19, 1995 between MCC and MHG, as amended by a First
Amendment to the Stock Pledge Agreement dated February 26, 1996 pursuant to
which MCC pledged to MHG One Million Three Hundred Ninety-Two Thousand Eight
Hundred Fifty-Eight (1,392,858) shares of MHG's common stock.
"MORTGAGES" mean collectively the mortgages securing Loans I and II.
"NET CASH FLOW" means, on a consolidated basis, EBITDA less Capital
Expenditures.
"NOTES" mean the promissory notes made to the order of the Lender,
executed pursuant hereto in substantially the form of Exhibit "A" attached
hereto with respect to Loan I and in substantially the form of Exhibit "B"
attached hereto with respect to Loan II and any promissory note made in exchange
or substitution for the Notes; and "Note" means any of the Notes.
"OBLIGORS" means, so long as any amount shall remain unpaid with
respect to Loan II, each of MHG, the Hotel Subsidiaries, GH Yacht Club and Food
Service, and after Loan II shall have been paid in full, means, each of the
Hotel Subsidiaries.
"ORIGINAL YIELD TO MATURITY" means Ten and three-tenths percent
(10.3%).
"PBGC" means the Pension Benefit Guaranty Corporation.
"PARTNERSHIP" means Wendy's of West Michigan Limited Partnership.
<PAGE> 16
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"PARTNERSHIP PLEDGE AGREEMENT" means the Pledge and Security Agreement
in the form of Exhibit "R" pursuant to which the Lender is granted a pledge of
and first priority security interest in all limited partnership units of the
Partnership and the general partner's interest in the Partnership owned at
anytime by any of the Obligors.
"PENSION REFORM ACT" means the Employee Retirement Income Security Act
of 1974, as it may be amended from time to time.
"PERMITTED LIEN" means:
(i) Liens for taxes, assessments, or similar charges, incurred
in the ordinary course of business that are not yet due and payable;
(ii) Pledges or deposits made in the ordinary course of
business to secure payment of workmen's compensation, or to participate
in any fund in connection with workmen's compensation, unemployment
insurance, old age pensions or other social security programs;
(iii) Encumbrances consisting of zoning restrictions,
easements or other restrictions on the use of real property, none of
which materially impairs the use of such property by a Person in the
operation of its business, and none of which is violated in any
material respect by existing or proposed structures or land use;
(iv) Liens in favor of the Lender; and
(v) Liens set forth on Schedule 1.1(b) hereof.
"PERSON" means any individual, corporation, partnership, limited
liability company, joint venture, joint-stock company, trust, unincorporated
organization, or government or any agency or political subdivision thereof.
"PLAN" means a defined benefit plan as defined in the Pension Reform
Act.
"PLEDGE AGREEMENT" means the Pledge Agreement between MHG and the
Lender in the form of the attached Exhibit "N" pursuant to which the stock of
each of the other Obligors is pledged to the Lender.
"PRIME RATE" means the rate of interest announced from time to time by
The Provident Bank, Cincinnati, Ohio, as its prime rate.
"PROCEEDS" means any and all proceeds whether receivable or received
from or upon the sale, lease, license, collection, use, exchange or other
disposition, whether voluntary or involuntary, of any Collateral including
"proceeds" as defined in Section 9-306 of the Code, any and all proceeds
<PAGE> 17
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of any insurance, indemnity, warranty or guaranty payable to or for the account
of a Person from time to time with respect to any of the Collateral, any and all
payments (in any form whatsoever) made or due and payable to a Person from time
to time in connection with any requisition, confiscation, condemnation, seizure
or forfeiture of all or any part of the Collateral by any Governmental Authority
(or any Person acting under color of governmental authority), any and all other
amounts from time to time paid or payable under or in connection with any of the
Collateral or for or on account of any damage or injury to or conversion of any
Collateral by any Person, and all proceeds of such proceeds.
"PROHIBITED TRANSACTION" has the meaning attributed thereto in the
Pension Reform Act.
"PROPERTY" shall mean each of the Hotel Properties and the Assets to be
Sold and "Properties" shall mean all of the Hotel Properties and the Assets to
be Sold.
"RELEASE PRICE" shall have the meaning set forth in Section 2.6 hereof.
"RELEVANT REFERENCE PERIOD" means, with respect to a Computation Date,
the period of four (4) consecutive fiscal quarters ending on such Computation
Date.
"REPORTABLE EVENT" means any of the events set forth in Section 4043(b)
of the Pension Reform Act or the regulations thereunder, other than any such
event for which the Thirty (30) day notice requirement under the Pension Reform
Act has been waived in regulations issued by the PBGC.
"RESTAURANTS" means each of the Wendy's Restaurants operated by Food
Service directly or through the Partnership.
"SEC" means the Securities and Exchange Commission, as from time to
time constituted, created under the Act.
"SECURITY" has the meaning attributed thereto in Section 2(1) of the
Act.
"SECURITY AGREEMENTS" mean each of the Security Agreements of even date
between the Lender, as secured party, and the Obligors (other than MHG)
substantially in the form of Exhibit "O" attached hereto pursuant to which the
Obligors (other than MHG) shall grant a security interest in the Collateral to
the Lender.
"STATE" shall mean the State of Michigan.
"SUBSEQUENT YIELD TO MATURITY" shall mean, with respect to any
prepayment of Loan I pursuant to Section 2.5 hereof, the offered side yield to
maturity in respect of the Designated Treasury Note on the business day prior to
the date of such prepayment as quoted in The Wall Street
<PAGE> 18
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Journal on the date of such prepayment; provided that if on any date on which
the Subsequent Yield to Maturity is to be determined the Designated Treasury
Note shall have ceased to be outstanding or the offered side yield to maturity
in respect thereof cannot for any other reason be determined as above provided,
the "Subsequent Yield to Maturity" shall be deemed to be the arithmetic average
of the average yields to maturity of the closing offers quoted daily (or less
frequently, if daily quotations shall not be available) by each of the Three (3)
Government Securities Dealers, during the Seven (7) day period ending on the
business day prior to the date of such prepayment, for actively traded
marketable U.S. Treasury fixed interest rate securities with a final maturity
date occurring during the period commencing July 1, 2003 and ending July 1, 2004
(other than securities which can, at the option of the holder, be surrendered at
face value in payment of any Federal estate tax and securities which provide tax
benefits to the holder and securities which were originally issued at a deep or
substantial discount).
"SUBSIDIARY" means any corporation in which a majority of the
outstanding shares are owned or controlled, directly or indirectly, by any
Person.
"TOTAL DEBT" means with respect to a Person at any time, all
Indebtedness of such Person and its Subsidiaries as determined on a consolidated
basis in accordance with GAAP.
"TOTAL REVENUES FROM HOTEL OPERATIONS" means all revenue generated by
the Hotel Subsidiaries in the normal course of their business, including, but
not limited to, those arising from room rentals, retail space rentals, vending
machine commissions, food and beverage service and telephone charges.
"UCC FINANCING STATEMENTS" means the financing statements executed by
the Obligors and to be filed in order to perfect the security interests granted
to the Lender under the Security Agreements and the Pledge Agreement.
Section 1.2 ACCOUNTING TERMS.
All accounting terms not specifically defined herein shall be construed
in accordance with GAAP.
Section 1.3 USE OF DEFINED TERMS.
All terms defined in this Agreement shall have their defined meanings
when used in the Notes and the other Loan Documents, unless the context
otherwise indicates or requires.
<PAGE> 19
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ARTICLE 2
LOAN TERMS AND AMOUNT
Section 2.1 COMMITMENT.
Subject to the terms and conditions of this Agreement, the Lender
agrees to make Loan I to TEI, GH Resort and SCI and Loan II to GH Yacht Club,
MHG and Food Service.
Section 2.2 USE OF PROCEEDS.
The proceeds of Loan I shall be used exclusively for the following
purposes: (i) to pay off Loan A; (ii) to fund capital expenditures with respect
to the Hotel Properties; and (iii) to pay the costs, fees and expenses incurred
by the Obligors in connection with the Loans, including, but not limited to,
title insurance fees, survey costs, closing costs and legal fees. The proceeds
of Loan II shall be used exclusively to refinance Loans B and C.
Section 2.3 NOTES; INTEREST RATES.
The Loans shall be evidenced by two separate promissory notes. The
promissory note with respect to Loan I shall be in the principal amount of
Fourteen Million and 00/100 Dollars ($14,000,000.00), shall be executed by SCI,
GH Resort and TEI and shall be substantially in the form of Exhibit "A" attached
hereto. Loan I shall be guaranteed by MHG, GH Yacht Club and Food Service and
shall be secured by the Loan I Collateral and a second lien on the Loan II
Collateral. The second lien on the Assets to be sold shall be substantially in
the form of the attached Exhibit "K-I". The promissory note with respect to Loan
II shall be in the principal amount of Five Million Two Hundred Fifty Thousand
and 00/100 Dollars ($5,250,000.00), and shall be executed by GH Yacht Club, MHG
and Food Service and shall be substantially in the form of Exhibit "B" attached
hereto. Loan II shall be guaranteed by the Hotel Subsidiaries and shall be
secured by the Loan II Collateral and a second lien on the Loan I Collateral.
The second lien on the Hotel Properties shall be substantially in the form of
the attached Exhibit "L." Each Note shall bear interest at the rate provided for
in such note.
In the event that any of the Obligors shall be in default under the
terms of the covenants contained in Section 4.2(d) or 4.2(e) hereof and until
such time as the Obligors shall demonstrate to the Lender that they are then in
compliance with such covenants, the interest rate payable with respect to Loan I
shall be increased to the rate which is Two Percent (2%) in excess of the rate
provided for in the promissory note with respect to Loan I and the interest rate
payable with respect to Loan II shall be equal to the Prime Rate plus Ten
Percent (10%); PROVIDED, HOWEVER, nothing contained in this Section 2.3 or
elsewhere in this Loan Agreement shall prevent the Lender from exercising any
other rights available to it hereunder, including, but not limited to, the
imposition of the Default Rate or the acceleration of the maturity of all
amounts payable hereunder.
<PAGE> 20
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Section 2.4 PAYMENTS OF INTEREST AND PRINCIPAL.
Interest accrued on the unpaid principal amount of the Notes and the
principal of such Notes shall be due and payable as provided therein.
Section 2.5 PREPAYMENT.
The Obligors may, at their option, upon notice to the Lender, as
provided in this Section 2.5, prepay the Notes at any time, as a whole or in
part at the principal amount so to be prepaid, together with accrued interest
thereon to the date fixed for such prepayment together with the premium, if any,
relating to such prepayment provided for below.
(a) Except as set forth herein, the Obligors may not prepay in whole or
in part, Loan I during the first four years after the Closing Date. In the event
of the sale of one of the Hotel Properties during the first four years after the
Closing Date, Obligors shall use the sale proceeds to make a partial or a
complete prepayment of Loan I as follows: (i) a prepayment premium equal to four
percent (4%) of the principal amount prepaid shall be paid if the sale occurs
within 12 months after the Closing Date, (ii) a prepayment premium equal to
three percent (3%) of the principal amount prepaid shall be paid if the sale
occurs after the first anniversary of the Closing Date and within 24 months
after the Closing Date, (iii) a prepayment premium equal to two percent (2%) of
the principal amount prepaid shall be paid if the sale occurs after the second
anniversary of the Closing Date and within 36 months after the Closing Date,
(iv) and a prepayment premium equal to one percent (1%) of the principal amount
prepaid shall be paid if the sale occurs after the third anniversary of the
Closing Date and within 48 months after the Closing Date. Beginning after the
fourth anniversary of the Closing Date, and continuing until the sixth
anniversary of the Closing Date, if Loan I is repaid in full through a
refinancing or otherwise, the Lender shall receive a Make Whole Premium in
addition to the principal and interest due under the terms of Loan I determined
as follows:
(i) if the Subsequent Yield to Maturity on the date fixed for
such prepayment plus one hundred basis points (1.00%) is equal to or greater
than the Original Yield to Maturity, no premium shall be due on the prepayment
of Loan I; and
(ii) if the Subsequent Yield to Maturity on the date fixed for
such prepayment plus one hundred basis points (1.00%) is less than the Original
Yield to Maturity, the premium due on the prepayment of Loan I shall be an
amount equal to the excess of
(x) The prorata portion of all remaining
payments of principal (including the balloon payment
due December 1, 2003) and interest attributable to
the principal to be prepaid (with the prorata portion
of such payments assumed to be payable and computed
as provided in the Note) on the Note with such
interest payments and principal
<PAGE> 21
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payments discounted from the respective due dates
thereof monthly at the Discount Rate
over
(y) the Principal amount of the Note to be
prepaid on such date.
(b) Subject to the terms of this Section 2.5, the Obligors may, at
their option, voluntarily prepay Loan II in whole at any time, or in part in
increments of One Hundred Thousand and 00/100 Dollars ($100,000.00) from time to
time upon payment of all accrued interest on the amount so prepaid plus a
prepayment premium of Ten Percent (10%) of the principal amount so prepaid;
PROVIDED, HOWEVER, no premium shall be payable if the Lender requires and the
Lender shall have the right to require such prepayment from the proceeds of (i)
the sale of any of the Assets to be Sold, (ii) any sale of or payment from the
Life Insurance, (iii) any payment on the Meritage Note, (iv) the sale of the
Depot Building, or (v) distributions with respect to the Partnership. Proceeds
from the sale of any of the Assets to be Sold shall, at the option of the
Lender, be applied to prepay all or a portion of the amounts due under Loan II
without premium or penalty. If the Lender requires the Obligors to use such
proceeds to prepay Loan II, the balance of the proceeds, if any, may be used, at
the option of the Obligors, to prepay all or a portion of Loan I, to make
Capital Expenditures on the Hotel Properties or for general corporate purposes.
If the Lender elects not to require the Obligors to use such proceeds to prepay
Loan II, such proceeds may be used, at the option of the Obligors, to prepay all
or a portion of Loan I or Loan II, to make Capital Expenditures on the Hotel
Properties or for general corporate purposes. If the Obligors or the Lender
shall receive or be entitled to receive any payments on the Life Insurance or
the Meritage Note, such payments shall, at the option of the Lender, be applied
to prepay all or a portion of the amounts due under Loan II without premium or
penalty. If the Lender requires the Obligors to use such proceeds to prepay Loan
II, the balance of such proceeds, if any, may be used, at the option of the
Obligors, to prepay all or a portion of Loan I, to make Capital Expenditures on
the Hotel Properties or for general corporate purposes. If the Lender elects not
to require the Obligors to use such proceeds to prepay Loan II, such proceeds
may be used, at the option of the Obligors, to prepay all or a portion of Loan I
or Loan II, to make Capital Expenditures on the Hotel Properties or for general
corporate purposes. If the Obligors receive or are entitled to receive any cash
compensation for the sale of the Depot Building, such payments shall be applied
to prepay all or a portion of the amounts due under Loan II without premium or
penalty. If the Obligors receive or are entitled to receive any distributions
with respect to the Partnership on or prior to December 1, 1997, the
distributions shall be applied first to pay any interest due on Loan II and then
to prepay all or a portion of Loan II. After December 1, 1997, if MHG or an
Obligor owns less than one hundred percent (100%) of the Partnership, any
distributions from the Partnership shall be applied to prepay all or a portion
of Loan II. Notwithstanding any other provision of this Agreement or any of the
other Loan Documents, in the event of any prepayment because of foreclosure of
the Mortgages or other judicial sale of the Collateral, there shall be due and
payable a prepayment premium in the amount of ten percent (10%) of the amount
prepaid.
<PAGE> 22
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(c) The Obligors shall give written notice to the Lender of any
intended prepayment under either of the Notes not less than Thirty (30) days
before the date fixed for prepayment, specifying (iii) the date fixed for such
prepayment, (iv) the principal amount of the Note to be prepaid, and (v) the
premium, if any, and accrued interest applicable to such prepayment. Upon the
giving of such notice, the unpaid principal amount of the Note to be prepaid,
together with the premium, if any, and accrued interest thereon, shall become
due and payable on the date fixed for such prepayment. If after giving notice to
the Lender, the Obligors fail to make the prepayment of which it gives notice to
the Lender, Obligors shall pay an administrative fee equal to the greater of One
Percent (1%) of the intended prepayment or the amount of the prepayment premium
payable with respect to such prepayment within Three (3) days after the date
fixed for such prepayment, which payment shall reinstate the Loan which was to
have been prepaid in accordance with the terms and provisions of the applicable
Note and this Agreement and shall not constitute a Default or Event of Default
hereunder.
(d) Any amounts prepaid with respect to Loan I or Loan II shall be
applied to the payments due under such Loans in the inverse order of maturity.
Section 2.6 RELEASE PRICES.
The initial Release Price for the Thomas Edison Inn will be Nine
Million Four Hundred Eight Thousand and 00/100 Dollars ($9,408,000), the initial
Release Price for the St. Clair Inn will be Four Million Thirty-Two Thousand and
00/100 Dollars ($4,032,000) and the initial Release Price for the Grand Haven
Holiday Inn will be Three Million Three Hundred Sixty Thousand and 00/100
($3,360,000). The Lender shall have the right to adjust the Release Prices
between the Hotel Properties on an annual basis so long as the aggregate Release
Prices do not exceed One Hundred Twenty Percent (120%) of the unpaid principal
balance of Loan I, and in the Lender's sole and reasonable discretion, the
Release Price for each Hotel Property is based upon the estimated fair market
value of each property compared to the total estimated fair market value of all
of the Hotel Properties.
Section 2.7 MANNER OF PAYMENTS; COMPUTATION OF INTEREST.
Interest on the Notes shall be calculated on the basis of a three
hundred sixty (360) day year composed of twelve (12) months each having thirty
(30) days.
All payments (including prepayments) by the Obligors on account of
principal or, premium, if any, and interest on, the Notes shall be made to the
Lender at the address specified in Section 7.6 hereof (or at such other place as
the Lender shall notify the Obligors in writing), in lawful money of the United
States of America and in immediately available funds.
If any payment to be made under the Notes becomes due on a day that is
not a Business Day, such payment may be made on the next succeeding Business
Day.
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Section 2.8 EXCHANGE OF NOTES.
At the written request of the holder of the Notes and upon surrender of
the Notes for such purposes, the Obligors shall, at any time and at its expense
(other than any transfer taxes) issue new Notes to the Lender or to another
entity designated by the Lender which is an Affiliate of AFG in exchange for
such Notes in denominations not smaller than One Million and 00/100 Dollars
($1,000,000.00) specified by such holder, in an aggregate principal amount equal
to the unpaid principal amount of the Notes so surrendered and substantially in
the form of Exhibit "A" or Exhibit "B", as applicable, with appropriate
insertions and variations, and bearing interest from the date to which interest
has been paid on the Notes so surrendered; provided, however, that the Obligors'
obligation to issue new Notes pursuant to this Section 2.8 shall be subject to
delivery to the Obligors by the holder of the Notes of a representation
substantially similar to that contained in Section 3.2(b) hereof.
Section 2.9 COMMITMENT FEE.
Obligors shall pay to the Lender at Closing a commitment fee of Two
Hundred Thousand and 00/100 Dollars ($200,000).
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
Section 3.1 REPRESENTATIONS AND WARRANTIES OF MHG.
In order to induce the Lender to enter into this Agreement and to make
the Loans, MHG makes the following representations and warranties to the Lender:
(a) CORPORATE EXISTENCE. MHG and each of its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Michigan.
(b) POWER AND AUTHORITY. MHG and each of its Subsidiaries have full
power, authority and legal right, material governmental permits, consents and
licenses, and all other authorizations which are necessary for them to own,
lease and operate their respective properties and to transact the business in
which each is engaged.
(c) QUALIFICATION. MHG and each of its Subsidiaries is duly qualified
as a foreign corporation and in good standing under the laws of each
jurisdiction in which the conduct of their respective businesses or the
ownership of their respective assets requires such qualification except where
the failure to be so qualified would not have a material adverse effect on MHG
or any of its Subsidiaries or their respective operations.
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(d) TRANSACTION AUTHORITY AND PROCEEDINGS. Except as set forth on
Schedule 3.1(d) hereto, MHG and each of its Subsidiaries has all requisite
power, authority and legal right to execute, deliver and perform all of their
respective obligations under this Agreement, the Notes and the other Loan
Documents to which each of them is a party; the execution, delivery and
performance by MHG and each of the Subsidiaries of this Agreement, the Notes and
the other Loan Documents to which each of them is a party have been duly
authorized by all necessary corporate action, and do not and will not require
any consent or approval of any other party, including the stockholders of MHG.
(e) NO LEGAL BAR. Except as set forth on Schedule 3.1(e) hereto, the
execution, delivery and performance by MHG and each of its Subsidiaries of this
Agreement, the Notes and the other Loan Documents to which each of them is a
party do not and will not (i) violate any material provision of any law, rule,
regulation (including, without limitation, Regulation X of the Board of
Governors of the Federal Reserve System), order, writ, judgment, injunction,
decree, determination or award presently in effect, or the certificate of
incorporation, charter, by-laws or any preferred stock provision of MHG or any
of its Subsidiaries; nor (ii) result in a material breach of or constitute a
material default under any existing Indebtedness, mortgage, indenture, loan or
credit agreement, or any other agreement, lease or instrument to which MHG or
any Subsidiary is a party or by which MHG, any of the Subsidiaries or their
respective properties may be bound or affected; nor (iii) result in the creation
or imposition of any Lien on any of the properties or assets of MHG or any of
its Subsidiaries except as contemplated by this Agreement.
(f) EXECUTION, BINDING EFFECT. This Agreement has been duly executed
and delivered by MHG and each of its Subsidiaries and constitutes, and the Notes
and other Loan Documents to which each of MHG and its Subsidiaries are parties
when executed and delivered by MHG and each of its Subsidiaries will constitute,
legal, valid and binding obligations of each of MHG and its Subsidiaries, as the
case may be, enforceable against such entities in accordance with their respec-
tive terms except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally or by the availability of equitable remedies.
(g) LITIGATION. Except as set forth on Schedule 3.1(g) hereto, there
are no actions, suits, investigations, claims or proceedings (whether or not
purportedly on behalf of MHG or one of its Subsidiaries) pending or, to the
knowledge of MHG, threatened against or affecting MHG, any of its Subsidiaries
or any of their respective properties before or by any court, arbitrator or
governmental body, which would, if determined adversely to MHG or any of its
Subsidiaries, have a material adverse effect on the financial condition,
business or operations of MHG or any of its Subsidiaries or the ability of such
entities to perform their obligations under this Agreement, the Notes and the
other Loan Documents.
(h) DEFAULT. Except as set forth on Schedule 3.1(h) hereto, neither MHG
nor any of its Subsidiaries is in default and no condition exists which, with
the passing of time, and/or the giving
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of notice would constitute a default or an event of default under any existing
Indebtedness, order, writ, judgment, injunction, decree, determination, award,
indenture, agreement, lease or other instrument to which MHG or any of its
Subsidiaries is a party or by which MHG or any of its Subsidiaries is subject or
bound.
(i) GOVERNMENT CONSENTS, REGISTRATION, ETC. To the best of MHG's
knowledge after diligent inquiry, no authorization, consent, approval, license,
exemption, filing, qualification or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary in connection with the execution, delivery or
performance by MHG or its Subsidiaries of this Agreement, the Notes or the other
Loan Documents or the transactions contemplated hereby or thereby. Neither MHG
nor any of its Subsidiaries is subject to regulation under the Public Utility
Holding Company Act of 1935, the Interstate Commerce Act, or any statute or
regulation which regulates the incurring of Indebtedness for Borrowed Money.
(j) DESIGNATED CONTRACTS. Except as set forth on Schedule 3.1(j), no
authorization, consent or approval from any party, is or will be necessary in
connection with the Assignment of Hotel Franchise Agreements.
(k) PRINCIPAL OFFICE; NAME. The principal place of business, the chief
executive office and the place at which the books and records of MHG and its
Subsidiaries are kept is 40 Pearl Street, N.W., Suite 900, Grand Rapids,
Michigan 49503. All other locations where MHG and its Subsidiaries conduct
business or own real or personal property are listed on Schedule 3.1(k) hereto.
(l) PRIVATE OFFERING. MHG has not, either directly or indirectly,
offered the Notes or any similar security of MHG or its Subsidiaries to, or
solicited offers to acquire from, or otherwise approached or negotiated with
respect thereto with, any Person other than the Lender. Neither MHG nor anyone
acting on its behalf shall offer the Notes or any part thereof or any similar
securities for issue or sale to, or solicit any offer to acquire any of the same
from, anyone so as thereby to bring the issuance of the Notes within the
provisions of Section 5 of the Act.
(m) FINDER'S FEE. Neither MHG nor any of its Subsidiaries have made any
agreement or taken any action which may cause anyone to become entitled to a
commission or finder's fee as a result of the making of the Loans.
(n) FINANCIAL STATEMENTS; INDEBTEDNESS. (i) The consolidated balance
sheet of MHG as of November 30, 1995, and the related consolidated statements of
income and retained earnings and consolidated statements of cash flows for the
fiscal year ended on November 30, 1995, reported upon by Grant Thornton LLP,
independent public accountants, copies of which have been furnished to the
Lender, (x) have been prepared in accordance with GAAP and are complete and
correct in all material respects, and (y) fully and fairly present the financial
condition of MHG as at such date and the results of operations of MHG for the
period covered thereby;
<PAGE> 26
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(ii) the consolidated balance sheet of MHG as of September 30,
1996 and the related consolidated statements of income and retained earnings and
consolidated statements of cash flows for the ten months ended September 30,
1996, copies of which have been furnished to the Lender, (x) have been prepared
in accordance with GAAP and are complete and correct in all material respects,
(y) fully and fairly present the financial condition of MHG at such date and the
results of operations of MHG for the period covered thereby, and (z) since
September 30, 1996, there has been no material adverse change in such condition
or operations;
(iii) since September 30, 1996 MHG has incurred no material
Indebtedness of any nature which remains unpaid, including, but without
limitation, liabilities for taxes and any interest or penalties relating
thereto, except to the extent listed on Schedule 4.2(c) hereof; and MHG does not
know of any basis for the assertion against MHG of any material claim or
liability of any nature not fully reflected and reserved against in the
financial statements referred to in the preceding paragraph.
MHG owns no material assets except for the Meritage Note, the Meritage
Pledge Agreement, and the common stock of its Subsidiaries. The Subsidiaries
have good and marketable title to the Hotel Properties, the Assets to be Sold
and the Collateral, free, clear and unencumbered except for Permitted Liens.
(o) TAXES. MHG and its Subsidiaries have filed all tax returns
(Federal, state and local) required to be filed (except those as to which valid
extensions of time have been granted) and paid all taxes, assessments, fees and
other governmental charges imposed upon MHG and its Subsidiaries or upon any of
their respective properties, income or franchises, which are due and payable
(except such taxes, if any, as are being contested in good faith and as to which
adequate reserves have been provided). Except as described on Schedule 3.1(o),
all tax liabilities of MHG and its Subsidiaries are adequately provided for, and
neither MHG nor any of its Subsidiary knows of any proposed additional tax
assessment against it or its Subsidiaries not adequately provided for in the
Balance Sheet of MHG at September 30, 1996. The provision for taxes on the books
of MHG and its Subsidiaries is adequate for their respective current fiscal
periods.
(p) REGULATIONS G AND U. MHG is not engaged in the business of
extending credit for the purpose of purchasing or carrying "margin securities"
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of the Loan will be used to extend
credit to others for the purpose of purchasing or carrying any "margin
securities." MHG does not own any "margin securities" (as defined in Regulation
G of the Board of Governors of the Federal Reserve System) which in the
aggregate would constitute a substantial part of the assets of MHG.
(q) COMMITMENTS. Except as described on Schedule 3.1(q) hereto, neither
MHG nor any of its Subsidiaries have any material lease, contract or commitment
of any kind which provides for an annual expenditure in excess of Fifty Thousand
and 00/100 Dollars ($50,000.00); to the best
<PAGE> 27
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knowledge of MHG and its Subsidiaries, all parties (including MHG and its
Subsidiaries) to all such material leases, contracts and other commitments have
complied with all material provisions of such leases, contracts and other
commitments; no party is in default under any thereof and no event has occurred
which, but for the giving of notice or the passage of time, or both, would
constitute a default.
(r) COMPLIANCE WITH LAW. MHG and each of its Subsidiaries have
complied with all material applicable laws, ordinances, governmental rules or
regulations with respect to:
(i) any restrictions, specifications, or other requirements
pertaining to products that MHG and its Subsidiaries sell or to
the services they perform;
(ii) the conduct of their respective businesses; and
(iii) the use, maintenance and operation of the real and
personal properties owned or leased by them in the conduct of
their respective businesses.
(s) SUBSIDIARIES. MHG has no Subsidiaries other than the other
Obligors.
(t) DISCLOSURE. No information, exhibit or report furnished by MHG to
the Lender in connection with the negotiation of the Loan, or the Loan Documents
contain any material misstatement of fact or omit to state a material fact
necessary to make the statements contained therein not misleading.
(u) RESTRICTIONS ON MHG. Except and as provided under the Articles of
Incorporation and Bylaws of MHG and its Subsidiaries, there are no limitations
in any indenture, mortgage, deed of trust or other agreement or instrument to
which MHG or any of its Subsidiaries is now a party or by which MHG or any of
its Subsidiaries may now be bound with respect to the declaration and payment of
dividends or other distributions on its capital stock, the incurrence of
indebtedness or payment of interest thereon, nor any provision which, by
requiring the maintenance of specified amounts of net current assets, ratios of
current assets to liabilities, ratios of equity or surplus to debt, or
otherwise, directly or indirectly has the effect of such a limitation.
(v) CAPITALIZATION. The authorized and issued capital stock of MHG and
each of its Subsidiaries is set forth on Schedule 3.1(v) hereto. Except as is
therein disclosed, there are no shares of any class of capital stock of MHG or
its Subsidiaries issuable upon conversion or exercise of any security of MHG,
nor are there any rights, options or warrants outstanding to purchase shares of
any class of capital stock of MHG except as set forth on Schedule 3.1(v). MHG
owns all of the outstanding equity securities of each of the other Obligors
free, clear and unencumbered by all Liens, except Liens in favor of Lender.
<PAGE> 28
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(w) INVESTMENT COMPANY. MHG is not an investment company within the
meaning of the Investment Company Act of 1940, as amended, nor, to the best of
MHG's knowledge, is it, directly or indirectly, controlled by or acting on
behalf of any person which is an investment company within the meaning of said
Act.
(x) ERISA. All Defined Benefit Pension Plans (as defined in the Pension
Reform Act) of MHG or any Affiliate of MHG meet, as of the date hereof, the
minimum funding standards of Section 302 of the Pension Reform Act, and no
Reportable Event or Prohibited Transaction has occurred with respect to any such
plan. No fact, including, but not limited to, any Reportable Event or prohibited
transaction exists in connection with any Plan of MHG or any Affiliate of MHG
which might constitute grounds for the termination of any such Plan by the PBGC
or for the appointment by the appropriate United States District Court of a
trustee to administer any such Plan.
(y) CONDITION OF ASSETS. Since September 30, 1996, neither the business
nor the properties of MHG or the other Obligors have been materially and
adversely affected as a result of any fire, explosion, earthquake, flood,
drought, windstorm, accident, strike or other labor disturbance, embargo,
requisition, or taking of property or cancellation of contracts, permits or
concessions by any domestic or foreign government or agency thereof, riot,
activities of armed forces or acts of God or of any public enemy.
(z) OWNERSHIP OF PARTNERSHIP UNITS. Food Service owns at least Six
Hundred Thirty-Nine and 80/100 (639.80) limited partnership units in the
Partnership, which limited partnership units represent 50.9% of the limited
partnership units outstanding. MHG has entered into an agreement to acquire the
general partnership interest in the Partnership which interest is assignable and
shall be assigned to Food Service.
(aa) DISTRIBUTIONS FROM THE PARTNERSHIP. The Partnership has made no
distributions of cash or other property to its partners since July 24, 1996.
Section 3.2 REPRESENTATIONS AND WARRANTIES OF THE LENDER.
The Lender makes the following representations and warranties to the
Obligors:
(a) CORPORATE ORGANIZATION. The Lender is a corporation duly organized,
validly existing and in good standing under the laws of the state of its
incorporation and has all requisite power and authority to carry on its business
as now conducted.
(b) INVESTMENT REPRESENTATION. The Lender is acquiring the Notes in the
ordinary course of its commercial lending business for its own account for
investment and not with a view to, or for sale in connection with, the
distribution thereof within the meaning of the Act, but subject, nevertheless,
to any requirement of law that the disposition of its property shall at all
times be within
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its control, and without prejudice to its right at all times to sell or
otherwise dispose of all or any part of the Notes under a registration or
exemption from registration available under the Act.
(c) CORPORATE AUTHORITY. The Lender has taken all corporate action
necessary to authorize the execution, delivery and performance of all
obligations on its part to be performed hereunder. The execution and delivery of
this Agreement is not, and the performance of this Agreement will not result in,
a breach of any of the terms, conditions or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, credit agreement, note or
other evidence of indebtedness, or other agreement, or the Certificate of
Incorporation or By-Laws of the Lender, as presently in effect, or any order,
writ, injunction, rule or regulation of any court or Federal, state, county,
municipal or other regulatory board or body or administrative agency having
jurisdiction over the Lender or over its properties or its business. No event
has occurred and no condition exists which, upon making of the Loans or the
passing of time, would constitute a default or an event of default under any
agreement, other instrument or understanding to which the Lender is a party or
by which it is bound.
(d) FINDERS FEE. The Lender has not made any agreement or taken any
action which may cause anyone to become entitled to a commission or finder's fee
as a result of the making of the Loans.
Section 3.3 SURVIVAL OF REPRESENTATIONS.
All representations and warranties made by MHG, the other Obligors and
Lender in this Agreement and the other Loan Documents shall survive the
execution and delivery of such instrument and the making of the Loans.
ARTICLE 4
COVENANTS
MHG and each of its Subsidiaries covenants and agrees that, until all
of the principal amount of and interest due on the Notes and all other amounts
due hereunder shall have been duly paid in full in lawful money, MHG and its
Subsidiaries will comply with the following covenants (unless such covenants
specifically provide otherwise).
Section 4.1 GENERAL COVENANTS.
(a) FINANCIAL STATEMENTS AND REPORTS. MHG will maintain an adequate
system of accounting in which complete entries are made in accordance with GAAP
reflecting all financial transactions of MHG, and MHG will furnish to the Lender
the following:
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(i) ANNUAL FINANCIAL STATEMENTS. Within ninety (90) days
after the close of each fiscal year an audit report, prepared in
accordance with GAAP, certified by nationally recognized independent
certified public accountants, including a consolidated balance sheet of
MHG as of the end of such period, the related consolidated statements
of income and retained earnings and the consolidated statements of cash
flows for MHG for the fiscal year then ended;
(ii) QUARTERLY FINANCIAL STATEMENTS. Within forty-five (45)
days after the close of each fiscal quarter, unaudited statements at
the close of such quarter, including a consolidated balance sheet of
MHG as of the end of such period, the related consolidated statements
of income and retained earnings and the consolidated statements of cash
flows for MHG for the quarter then ended, certified by a responsible
officer of MHG;
(iii) MONTHLY OPERATING REPORTS. Within twenty (20) days
after the close of each month, operating reports and other financial
information in such format as is reasonably requested by the Lender
detailing the results of operations for each of the Hotel Properties,
and the Restaurants, collectively;
(iv) ANNUAL OPERATING BUDGET. At least fifteen (15) days
after the start of each fiscal year, an annual operating and Capital
Expenditure budget for each Hotel Property, the Restaurants (on an
aggregate or consolidated basis) and any other operating entities,
including cash flow projections for the upcoming fiscal year, presented
on a monthly basis consistent with the operating statements referred to
in clauses (ii) and (iii) above;
(v) NO DEFAULT CERTIFICATE; CONSOLIDATING SCHEDULES;
Together with the annual and quarterly financial statements required
hereunder, a certificate signed by the President or any Vice President
of MHG to the effect that no Default under this Agreement exists, that
MHG is in full compliance with each of the financial covenants set
forth in Section 4.2 hereof, and that no condition exists which, with
the passage of time or the giving of notice or both, would give rise to
a Default hereunder except as specified in such certificate, and
consolidating schedules detailing the entries and adjustments made to
create the consolidated financial statements;
(vi) SEC AND SHAREHOLDER REPORTS. Promptly after the sending
or making available or filing of the same, copies of all reports, proxy
statements and financial statements that MHG sends or makes available
to its stockholders and all registration statements and reports that
MHG files with the Securities and Exchange Commission or any successor
Person;
(vii) TAX RETURNS. Within ten (10) days of the Lender's
request therefor, MHG and each of the other Obligors will furnish to
the Lender copies of the federal income tax returns filed by MHG and
each of its Subsidiaries;
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(viii) FINANCIAL STATEMENTS AND TAX RETURNS FOR THE
PARTNERSHIP. Within ninety (90) days after the close of each fiscal
year, MHG or Food Service will furnish to Lender an audit report,
prepared in accordance with GAAP, certified by nationally recognized
independent certified public accountants, including a balance sheet for
the Partnership as of the end of such period, the related statements of
income and partners' equity, and the statement of cash flows for the
Partnership for the fiscal year then ended. Within ten (10) days of the
Lender's request therefor, MHG or Food Service will furnish to the
Lender copies of all tax returns filed by the Partnership.
(ix) ADDITIONAL INFORMATION. Such other information as the
Lender may from time to time reasonably request.
Notwithstanding the foregoing, MHG and Food Service shall have no
obligation to provide any financial or other information to the Lender regarding
the Partnership or the Restaurants if such information is not available to MHG
or Food Service or if it would be a breach of duty or a violation of any
applicable law to do so.
(b) CORPORATE EXISTENCE. MHG and each of the other Obligors will carry
on and conduct their respective businesses in substantially the same manner and
in substantially the same fields of enterprise as they are presently conducted
and do all things necessary to preserve corporate existences, licenses or
qualifications as a domestic corporation in their respective jurisdictions of
incorporation and as a foreign corporation in every jurisdiction in which the
character of their respective properties or the nature of the business
transacted by them at any time makes qualification as a foreign corporation
necessary, and maintain all other material corporate rights and franchises.
Until Loan II shall have been paid in full, MHG shall not take any action to
cause or permit any change in the Partnership Agreement or structure of the
Partnership except as contemplated by the second sentence of subsection 4.1(c)
below.
(c) MERGER. Except as permitted by Section 2.5 hereof, neither MHG nor
any of the other Obligors will merge or consolidate with or into, or sell,
assign, lease or otherwise dispose of to any Person (whether in one transaction
or in a series of transactions) all or substantially all of its properties and
assets (whether now owned or hereafter acquired); provided, however, that any of
the Subsidiaries may be merged into MHG with Thirty (30) days prior notice to
the Lender. In the event that the Partnership or its assets are combined with,
merged into or contributed to MHG or any Subsidiary thereof in any manner, MHG
or the appropriate Subsidiary shall be required to grant first liens to the
Lender on all assets previously owned by the Partnership subject only to liens
existing prior to the date on which such assets are combined with, merged into
or contributed to MHG or one of its Subsidiaries. Upon the occurrence of such
combination, merger or contribution, the assets of the Partnership shall become
collateral for Loan II.
(d) COMPLIANCE WITH LAWS. MHG and each of the other Obligors will
comply with all laws, rules and regulations of any governmental body to which
each may be subject and maintain
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and keep in full force and effect all franchises, licenses, permits, approvals
or certificates required by governmental authorities material to the conduct of
their respective businesses.
(e) PRINCIPAL OFFICE. MHG and the other Obligors will maintain their
respective principal place of business, chief executive office and the place at
which their respective books and records are kept within the United States of
America, and will not change the location of their respective principal place of
business, chief executive office or the place at which their respective books
and records are kept from the address specified in Section 3.1(k) hereof unless
they shall have given the Lender at least Thirty (30) days prior written notice
of such change.
(f) DEFAULT NOTICE. MHG will give prompt notice in writing to the
Lender of any Default or Event of Default hereunder, or of any condition which
with the passage of time or the giving of notice or both would give rise to a
Default or an Event of Default hereunder, and of any development, financial or
otherwise, which would materially adversely affect their respective businesses,
properties or affairs or the ability of MHG and the other Obligors to perform
their respective obligations under this Agreement, the Notes, or under any other
Loan Document.
(g) USE OF PROCEEDS. The Obligors will use the proceeds of the Loans
for the purposes set forth in Section 2.2 hereof and not for the purpose of
purchasing or carrying any margin stock in violation of Regulations G or U of
the Board of Governors of the Federal Reserve System.
(h) FURTHER ASSURANCES. The Obligors will execute and deliver to the
Lender, as requested by it, all further instruments, documents and agreements
which may be deemed reasonably necessary and desirable by the Lender to carry
out and perform the intent and purpose of this Agreement, the Notes and the
other Loan Documents.
(i) TAXES AND OTHER CLAIMS. The Obligors will promptly pay and
discharge (i) all taxes, assessments and governmental charges and levies upon
income, profits or property, real, personal or mixed, or any part thereof, and
(ii) all lawful claims for labor, materials and supplies which, if unpaid, might
by law become a lien upon their properties, provided, however, that neither MHG
nor any of the other Obligors shall be required to pay or cause to be paid any
tax, assessment, charge, levy or claim which is contested in good faith by
appropriate proceedings and with respect to which it shall have set aside or
caused to be set aside on its books reserves adequate therefor.
(j) INSURANCE. The Obligors will keep and maintain public liability
insurance and property and casualty insurance on their respective properties in
such amounts and against such risks as provided for in the other Loan Documents,
but, in any event, as are customarily maintained by similar businesses,
including without limitation thereto, public liability, fire (with extended
cover age) and workmen's compensation insurance and employee fidelity insurance.
The Obligors shall make all premium payments required under the terms of the
Life Insurance, and shall not attempt to cancel such policies or make any loans
thereunder.
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(k) MAINTENANCE OF PROPERTIES. Each of the Obligors will do all things
reasonably necessary to materially maintain, preserve, protect and keep its
properties in good repair, working order and condition, and make all necessary
and proper repairs, renewals and replacements, including Capital Expenditures,
so that each of such properties is maintained in first-class operating
condition, provided, however, the Obligors may demolish or cause to be
demolished, the buildings, improvements and the Loan II Personal Property
located on or related to the ancillary buildings adjacent to the St. Clair Inn,
the commercial properties adjacent to the St. Clair Inn, and the residential
properties adjacent to the Thomas Edison Inn.
(l) ERISA. With respect to any Plan of MHG or any Affiliate of MHG, MHG
or such Affiliate will (i) make prompt payments of contributions required to
meet the minimum funding standards set forth in Sections 302 through 305 of the
Pension Reform Act, (ii) promptly after the filing thereof, furnish to the
Lender copies of each annual report required to be filed pursuant to Section 103
of the Pension Reform Act in connection with such Plan for each Plan year,
including, if required by Section 103, (x) a statement of the assets and
liabilities of such Plan as of the end of such Plan year and statements of
changes in fund balance and in financial position, or a statement of changes in
net assets available for Plan benefits, for such Plan year, certified by
independent public accountants of recognized standing acceptable to the Lender,
and (y) to the extent required by the Pension Reform Act, an actuarial statement
of such Plan applicable to such Plan year, certified by an enrolled actuary of
recognized standing acceptable to the Lender, (iii) notify the Lender
immediately of any fact, including, but not limited to, any Reportable Event or
Prohibited Transaction, arising in connection with any Plan which might
constitute grounds for the termination thereof by the PBGC or for the
appointment by the appropriate United States District Court of a trustee to
administer the Plan, and (iv) furnish to the Lender, promptly upon its request
therefor, such additional information concerning any Plan as may be reasonably
requested.
(m) SEC FILINGS. MHG will deliver to the Lender copies of (i) all
documents filed or delivered by MHG with or received by such Person from the SEC
or any successor agency, any securities exchange and any state blue sky or
securities law commission which relates to or affects MHG, and (ii) all notices
and other materials transmitted to its shareholders generally.
(n) LITIGATION. The Obligors will deliver to the Lender immediately
after the commencement thereof, notice in writing of all actions, suits and
proceedings before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, affecting Obligors of
the type described in Section 3.1(g) hereof.
(o) INSPECTION. The Obligors will permit the Lender, its
representatives and agents, to visit and inspect any of the properties,
corporate books and financial records of the Obligors, to examine and make
copies of the books of accounts and other financial records of the Obligors, to
examine and make copies of the books of accounts and other financial records of
the Obligors, and to discuss the affairs, finances and accounts of the Obligors,
and to be advised as to the same by, the
<PAGE> 34
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officers of, and the independent certified public accountants for, MHG at such
reasonable times and intervals as the Lender may designate.
Section 4.2 ADDITIONAL COVENANTS.
(a) ACQUISITION OF UNRELATED ASSETS. Until Loan II has been paid in
full, MHG shall not, without the prior written consent of Lender, purchase any
assets and shall not incur any obligations which are unrelated to and are not
required in connection with the operation of the Hotel Properties, the
Restaurants or the GH Yacht Club. Prior to consenting to any such acquisitions
of unrelated assets, MHG shall be required to raise additional equity in such
form and in such amounts as shall be satisfactory to the Lender in its sole
discretion.
(b) RESTRICTED PAYMENTS. Until Loan II has been paid in full, MHG will
not, without the prior written consent of the Lender, declare or pay any
dividends, purchase, redeem, retire, or otherwise acquire for value any of its
capital stock now or hereafter outstanding or return any capital to its
stockholders as such other than those dividends payable on shares of MHG's
convertible preferred stock which may be paid as provided for in the terms of
such shares.
(c) INDEBTEDNESS. Until Loan II has been paid in full, the Obligors
shall not without the prior written consent of Lender, incur or suffer to exist
any Indebtedness except (i) Indebtedness evidenced by the Notes, (ii)
Indebtedness with those lenders and creditors listed on Schedule 4.2(c) hereto
in amounts not in excess of the amounts listed thereon, (iii) trade indebtedness
incurred in the ordinary course of business; and (iv) Indebtedness incurred by
the Partnership prior to the time that MHG or Food Service acquires the general
partnership interest in the Partnership, and (v) Indebtedness incurred in
connection with an acquisition so long as such Indebtedness represents less than
67% of the total acquisition price.
After Loan II has been paid in full, the Hotel Subsidiaries shall not
incur or suffer to exist any Indebtedness except for Loan I, trade indebtedness
incurred in the ordinary course of business and indebtedness set forth on
Schedule 4.2(c) hereto in amounts not in excess of amounts listed thereon.
(d) MINIMUM CONSOLIDATED NET WORTH. MHG's Consolidated Net Worth as
reported on the balance sheets to be delivered in accordance with Section
4.1(a)(i), (ii) and (iii) hereof shall not be less than the following amounts
for the periods indicated on each Computation Date:
COMPUTATION DATE AMOUNT
---------------- ------
November 30, 1996 to July 31, 1997 $ 3,750,000
August 31, 1997 to October 31, 1997 $ 4,000,000
November 30, 1997 to October 31, 1998 $ 8,000,000
November 30, 1998 to October 31, 1999 $ 9,250,000
<PAGE> 35
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November 30, 1999 to October 31, 2000 $10,750,000
November 30, 2000 to October 31, 2001 $12,500,000
November 30, 2001 to October 31, 2002 $14,500.000
November 30, 2002 to October 31, 2003 $16,500.000
(e) COVERAGE RATIOS.
(i) On each Computation Date for the Relevant Reference
Period, the ratio of (x) actual consolidated EBITDA of the Hotel
Subsidiaries to (y) Debt Service of the Hotel Subsidiaries shall not be
less than the ratios listed below:
COMPUTATION DATE REQUIRED RATIO
---------------- --------------
May 31, 1997 1.1 to 1
August 31, 1997 1.1 to 1
November 30, 1997 1.2 to 1
February 28, 1998 1.75 to 1
May 31, 1998 1.75 to 1
August 31, 1998 1.75 to 1
November 30, 1998 1.9 to 1
February 28, 1999 1.9 to 1
May 31, 1999 1.9 to 1
August 31, 1999 1.9 to 1
November 30, 1999 1.9 to 1
February 28, 2000 1.9 to 1
May 31, 2000 1.9 to 1
August 31, 2000 1.9 to 1
November 30, 2000 2.0 to 1
February 28, 2001 2.1 to 1
May 31, 2001 2.2 to 1
August 31, 2001 and thereafter 2.3 to 1
(ii) On each Computation Date for the Relevant Reference
Period, the ratio of (x) actual consolidated EBITDA minus Capital
Expenditures of the Hotel Subsidiaries to (y) Debt Service of the Hotel
Subsidiaries shall not be less than the ratios listed below:
<PAGE> 36
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COMPUTATION DATE REQUIRED RATION
---------------- ---------------
May 31, 1997 0.3 to 1
August 31, 1997 0.3 to 1
November 30, 1997 0.4 to 1
February 28, 1998 0.7 to 1
May 31, 1998 0.7 to 1
August 31, 1998 0.7 to 1
November 30, 1998 0.8 to 1
February 28, 1999 1.0 to 1
May 31, 1999 1.2 to 1
August 31, 1999 1.4 to 1
November 30, 1999 1.6 to 1
February 28, 2000 1.6 to 1
May 31, 2000 1.6 to 1
August 31, 2000 1.6 to 1
February 28, 2001 1.6 to 1
May 31, 2001 1.7 to 1
August 31, 2001 1.7 to 1
November 30,2001 and thereafter 1.8 to 1
(f) LIMITATION ON CAPITAL EXPENDITURES. Except as set forth in the
following sentence, the Obligors will not make or contract to make Capital
Expenditures with respect to the Hotel Properties during any fiscal year in
excess of the following amounts:
FISCAL YEAR ENDING NOVEMBER 30, AMOUNT
------------------------------- ------
1997 $2,000,000
1998 $2,000,000
thereafter 4% of Total Revenues from
Hotel Operations
In any fiscal year, if the Obligors determine that it is unable or it
is unnecessary to make all Capital Expenditures with respect to the Hotel
Properties permitted by this section, they may carry over such unused amounts to
the immediately following fiscal year, which unused amounts shall be expended
first prior to the use of such fiscal year's Capital Expenditures budget.
(g) OWNERSHIP AND CONTROL OF MHG. Subject to the restrictions regarding
MCC's ability to vote its shares of MHG's Common Stock in connection with the
election of Class II directors contained in Article III of MHG's Bylaws, as
amended, at all times after the date hereof, (i) Christopher B. Hewett
<PAGE> 37
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("Hewett") shall own not less than 50% of the outstanding equity securities
having the power to vote of MCC, (ii) MCC shall own and control, directly, both
legally and beneficially, with the power to vote, Twenty-Five Percent (25%) or
more of the issued and outstanding shares of the common stock of MHG on a fully
diluted basis, or in the event of an issuance of common stock by MHG, MCC shall,
directly, legally and beneficially, own more shares of MHG's common stock than
any other shareholder or group of shareholders acting in concert and have
sufficient control to cause the election of persons nominated by MCC as a
majority of MHG's directors, and (iii) Hewett or another person acceptable to
the Lender in its sole and absolute discretion shall serve as the President and
Chief Executive Officer of MHG with all authority and responsibility generally
exercised by persons in similar offices.
(h) OWNERSHIP AND CONTROL OF THE OTHER OBLIGORS. MHG shall continue to
own One Hundred Percent (100%) of the outstanding equity securities of each of
the other Obligors and no additional equity securities shall be issued by any of
the other Obligors.
(i) LEASE OBLIGATIONS. No Obligor will incur or suffer to exist any
lease obligations (including Capitalized Lease Obligations) except (i) lease
obligations presently in existence and listed on Schedule 4.2(i) hereto, and
(ii) other lease obligations provided the aggregate annual rental payments under
all such other leases shall not exceed Fifty Thousand and 00/100 Dollars
($50,000.00).
(j) SALE AND LEASEBACK. No Obligor will enter into any sale and
leaseback transaction with respect to their respective assets.
(k) INVESTMENT AND LOANS. Except for the MCC Note, no Obligor will make
or permit to exist any loans or advances, to, or purchases of or investments in,
or acquisitions from any officer, shareholder, director or employee of MHG or
any of its Subsidiaries.
(l) GUARANTEES AND OTHER CONTINGENT LIABILITIES. No Obligor will
directly or indirectly, guarantee, endorse (other than for collection or deposit
in the ordinary course of business), discount with recourse, agree (contingently
or otherwise) to purchase, repurchase or otherwise acquire or to supply or
advance funds (whether by way of loan, stock purchase or capital contribution)
in respect of, or become liable with respect to, directly or indirectly, any
indebtedness, obligation, liability or dividend of any other person.
Notwithstanding the foregoing, MHG shall be permitted to guarantee (i) the
indebtedness of the Partnership to First of America Bank, Michigan in the
approximate amount of Two Million Eight Hundred Thousand and 00/100 Dollars
($2.8 Million) and (ii) the Holiday Inn Franchise Agreement and the Wendy's
International Franchise Agreement. MHG shall notify the Lender in writing if any
financial default or delinquency occurs under either such franchise agreement.
(m) ENCUMBRANCES. No Obligor will incur, or suffer to exist any pledge,
mortgage, assignment or other encumbrance of or upon any of their respective
assets or properties now owned, or of or upon the income or profits thereof,
except Permitted Liens.
<PAGE> 38
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(n) LIMITATION ON ENCUMBRANCES. No Obligor will enter into or suffer to
exist any indenture, contract or other instrument or agreement with any Person
which prohibits it from creating, incurring or suffering to exist any mortgage,
pledge, lien, security interest or other encumbrance upon their respective
assets and properties now owned, except as provided in this Agreement.
(o) PREPAYMENTS. Except as contemplated herein, the Obligors will not
make or suffer to be made any prepayment on Indebtedness other than the Notes.
(p) LIMITATION ON TRANSACTIONS WITH AFFILIATES. Subject to Section
4.2(q) hereof, neither MHG nor any of the other Obligors will at any time, enter
into or participate in any transaction with or make any payment to including,
without limitation, any purchase, sale, lease or exchange of property or the
rendering of any service, with any officer, director, shareholder or Affiliate
of MHG or MCC for an amount in excess of Twenty Five Thousand and 00/100 Dollars
($25,000.00) during any fiscal year, without the prior written consent of
Lender.
(q) LIMITATION ON EXECUTIVE COMPENSATION. For fiscal year 1996, neither
MHG nor any of its Subsidiaries shall pay any officer total compensation,
excluding bonuses, in excess of One Hundred Fifty Thousand and 00/100 Dollars
($150,000.00). Until Loan II is paid in full, (i) for any subsequent fiscal
year, neither MHG nor any of its Subsidiaries shall pay any officer total
compensation, excluding bonuses, in excess of One Hundred Fifty Thousand and
00/100 Dollars ($150,000.00) increased by 5% for each succeeding fiscal year;
and (ii) for fiscal year 1996 and thereafter, neither MHG nor any of its
Subsidiaries shall pay Hewett or Robert E. Schermer, Jr. bonuses in excess of
Seventy-Five percent (75%) of their respective total compensation in such year
payable in accordance with the guidelines established by the respective Board of
Directors or a designated committee thereof.
(r) NET CASH FLOW RESERVE. Upon and during the continuance of an Event
of Default under the terms of the covenants contained in Section 4.2(e)(i) or
4.2(e)(ii), Lender shall have the right to require that all Net Cash Flow of the
Hotel Subsidiaries shall be deposited with the Lender and applied to reduce the
outstanding principal of Loan I.
ARTICLE 5
DEFAULTS AND REMEDIES
Section 5.1 EVENT OF DEFAULT.
The occurrence of any one or more of the following events shall
constitute an Event of Default, provided that there has been satisfied any
requirement in connection with such event for the giving of notice or the lapse
of time, or the happening of any further condition, event or act, it being
agreed that time is of the essence hereof:
<PAGE> 39
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(a) PAYMENT. Failure to pay for a period of Three (3) days after the
same is due any installment of principal of, or premium or interest on either of
the Notes or any other amount due the Lender under this Agreement when due which
failure shall constitute an Event of Default under both Loans; or
(b) MISREPRESENTATION. Any material representation or warranty made by
the Obligors or any officer of any of the Obligors in this Agreement or in any
Loan Document including any certificate, agreement, instrument or written
statement contemplated hereby or made or delivered pursuant hereto or in
connection herewith, shall prove to have been incorrect in any material respect
as of the date on which made; or
(c) BREACH OF COVENANT. Failure by any of the Obligors in the
observance or performance of any other term, covenant or agreement contained in,
or made in connection with, this Agreement, including, but not limited to, the
covenants contained in Section 4.2 hereof, or any Loan Document on its part to
be performed or observed and any such failure shall remain unremedied for ten
(10) Business Days after (i) written notice thereof shall have been given to
Obligors by the Lender or (ii) the Lender is notified of such failure or should
have been so notified pursuant to Section 5.1(f), whichever is earlier;
provided, however, the failure by Obligors to deliver the documents required by
Section 6.3 hereof on a timely basis shall constitute an Event of Default
without notice to the Obligors; or
(d) CROSS DEFAULT. Failure by any of the Obligors to pay any
Indebtedness (other than as evidenced by the Notes) owing by any of the
Obligors, or any interest or premium thereon, when due, whether such
Indebtedness shall become due by scheduled maturity, by required prepayment, by
acceleration, by demand or otherwise, or shall fail to perform, prior to
expiration of any applicable period of grace, any term, covenant or agreement on
its part to be performed under any material agreement or instrument (other than
the Loan Documents), including, without limitation, the franchise agreements
described in Section 4.2(l) hereof when required to be performed if the effect
of such failure is to accelerate or terminate, or to permit the holder or
holders of such Indebtedness or the other party to such agreement or instrument
to terminate such agreement, or the trustee or trustees under any such agreement
or instrument to accelerate the maturity of such Indebtedness or to terminate
such agreement unless such failure to pay or perform shall be waived by the
holder or holders of such Indebtedness or the other party to such agreement or
such trustee or trustees or any of the Obligors commences a proceeding to
contest the validity or enforceability of such term, covenant or agreement
within 30 days after the date of such performance is due and proceeds with the
prosecution of such proceeding in good faith and such proceedings do not
adversely affect the business or operations of any of the Obligors; or
(e) INSOLVENCY. Any of the Obligors or MCC shall be or become
insolvent, or be adjudicated a bankrupt or insolvent, or admit its inability to
pay its debts as they mature, or make an assignment for the benefit of
creditors; or any of the Obligors or MCC, shall apply for or consent to the
appointment of any receiver, trustee, or similar officer for it or for all or
any substantial part of its respective property,
<PAGE> 40
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or such receiver, trustee or similar officer shall be appointed without the
application or consent of such Obligors or MCC, and such appointment shall
continue undischarged for a period of forty-five (45) days; or any of the
Obligors or MCC, shall institute (by petition, application, answer, consent or
otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment
of debt, dissolution, liquidation or similar proceeding relating to it under the
laws of any jurisdiction, or any such proceeding shall be instituted (by
petition, application or otherwise) against any of the Obligors or MCC and shall
remain undismissed for a period of forty-five (45) days; or any judgment, writ,
warrant of attachment or execution or similar process shall be issued or levied
against a substantial part of the property of any of the Obligors or MCC and
such judgment, writ, or similar process shall not be released, vacated or fully
bonded within forty-five (45) days after its issue or levy; or
(f) REPORTABLE EVENT. Any Reportable Event shall have occurred which
the Lender determines in good faith constitutes grounds for the termination by
the PBGC of any Plan or for the appointment by the appropriate United States
District Court of a trustee for any such Plan, or any such Plan shall be
terminated or any such trustee shall be appointed or any proceedings shall be
instituted by the PBGC for such appointment, if the Lender in good faith
determines such action could materially adversely affect the financial condition
of MHG and its Subsidiaries; or
(g) JUDGMENT. A final judgment for the payment of money in excess of
Fifty Thousand and 00/100 Dollars ($50,000.00) shall be rendered against any of
the Obligors and shall remain undischarged for a period of sixty (60) days after
the date upon which such judgment shall become final (including all appeals
thereof) or the time for appeal shall have elapsed without an appeal having been
taken and notice thereof has been given, by registered or certified mail, to the
Obligors by specifying such event and requiring the Obligors to cause such
judgment to be rescinded or annulled or to cause such indebtedness to be
discharged; or
(h) CONTEST LOAN. The validity or enforceability of this Agreement,
the Notes or any of the other Loan Documents shall be contested by any of the
Obligors, where any of the Obligors shall deny that it has any further liability
or obligation hereunder or thereunder.
(i) CONSENT OF WENDY'S INTERNATIONAL. Until the repayment of Loan II,
the failure by MHG to obtain the consent of Wendy's International prior to
February 1, 1997 for MHG or Food Service to own the general partnership interest
of the Partnership.
Section 5.2 REMEDIES.
If any Event of Default shall occur and be continuing, the Lender may
exercise any or all remedies granted to it under applicable law, this Agreement
and the other Loan Documents, and without further notice to the Obligors, may
declare either or both of the Notes and all other amounts payable hereunder to
be immediately due and payable, whereupon the principal amount of the Notes,
together with accrued interest thereon, shall become immediately due and payable
without presentment, demand,
<PAGE> 41
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protest or other notice of any kind, all of which are hereby expressly waived,
anything contained herein, in the Notes or in any Loan Document to the contrary
notwithstanding.
ARTICLE 6
CLOSING
Section 6.1 PLACE, TIME AND DISBURSEMENT OF LOANS.
The closing ("Closing") of the Loan shall take place at the offices of
the Lender or their counsel, Messrs. Keating, Muething & Klekamp, at the address
set forth for notices in Section 7.6 hereof. The Closing shall occur on or
before November 26, 1996 or at such other time as the parties shall agree upon.
At the Closing, upon satisfaction of all conditions set forth herein and subject
to the terms of 2.3 hereof, the Lender shall disburse the proceeds of the Loans
in accordance with written disbursement instructions of the Obligors delivered
by the Obligors to the Lender.
Section 6.2 CONDITIONS TO MAKING THE LOANS.
The Lender shall not be required to make the Loans unless each of the
below listed conditions shall have occurred on or prior to the Closing.
(a) DOCUMENTS. The Obligors shall deliver to the Lender all documents
required to be so delivered pursuant to Section 6.3 hereof.
(b) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of MHG made in this Agreement shall be true and correct in all material respects
as of the date of the Closing, with the same effect as if made on such date
except as affected by transactions contemplated by this Agreement.
(c) MATERIAL CHANGE. In the judgment of the Lender, neither MHG nor any
other Obligor shall have suffered any adverse material change in their
respective financial condition or their respective ability to perform the terms
and conditions of this Agreement and to consummate the transactions contemplated
hereby.
(d) COMPLIANCE WITH THIS AGREEMENT. The Obligors shall have performed
and complied with all agreements, covenants and conditions contained in this
Agreement which are required to be per formed or complied with by them before or
at the Closing and there shall have occurred no Default hereunder.
(e) LEGALITY. The Loan and the Notes shall qualify on the date of the
Closing as legal investments for insurance companies organized under the laws of
the State of Ohio pursuant to Sections 3925.01 et seq. and 3907.01 et seq. of
the Ohio Revised Code.
<PAGE> 42
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(f) LITIGATION. There shall have been no adverse change in the
Litigation listed on Schedule 3.1(g).
(g) LEGAL FEES. The Obligors shall have reimbursed Lender for all
reasonable fees and disbursements of legal counsel to Lender which shall have
been incurred by Lender through the Closing Date in connection with the
preparation, negotiation, review, execution and delivery of the Loan Documents
and the handling of any other matters incidental thereto.
(h) PAYMENT OF COMMITMENT FEE. The Obligors shall have paid to Lender
or made satisfactory arrangements with Lender for the payment of the Commitment
Fee provided for in Section 2.9 hereof.
(i) LIEN SEARCHES. Lender shall have received the results of a recent
search by a Person satisfactory to Lender, of the UCC, judgment and tax lien
filings which may have been filed with respect to personal property of the
Obligors in the jurisdictions listed on Schedule 3.1(k), and the results of such
search shall be satisfactory to Lender.
Section 6.3 DOCUMENTS TO BE DELIVERED TO THE LENDER AT CLOSING.
At the Closing, the Obligors shall deliver to the Lender the following
documents, each dated the date of the Closing unless otherwise herein indicated,
in form and substance reasonably satisfactory to the Lender and their counsel:
(a) ARTICLES OF INCORPORATION. Copies of the Articles of Incorporation
(and all amendments thereto) of each of the Obligors, certified not more than
seven days prior to the Closing by the Secretary of State of its state of
incorporation, together with certificates of the Secretary or Assistant
Secretary of each Obligor, dated the date of the Closing to the effect that the
foregoing Certificate of Incorporation has not been amended since the date of
the aforesaid certification.
(b) BY-LAWS AND CORPORATE RESOLUTIONS. A copy certified by the
Secretary or an Assistant Secretary of each Obligor of the By-Laws and the
resolutions of the Board of Directors of each Obligor authorizing and approving
the execution, delivery and performance of this Agreement, the Notes, the
Guarantees, the other Loan Documents and the transactions contemplated hereby
and thereby.
(c) LOAN DOCUMENTS. Each of the Loan Documents shall have been duly
and properly authorized, executed and delivered by each of the applicable
Obligors.
(d) INCUMBENCY OF OFFICERS. A certificate of the Secretary or an
Assistant Secretary of each obligor as to the identity and incumbency of the
officers of each Obligor authorized to sign the Loan Documents, together with
specimen true signatures of such officers.
<PAGE> 43
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(e) INSURANCE CERTIFICATE. A certificate of insurance evidencing
insurance with respect to policies covering the Properties and the Collateral,
stating that such policies are in full force and effect and naming the Lender as
an additional named insured and loss payee thereunder.
(f) OPINION OF MHG'S COUNSEL. A favorable opinion of counsel to the
Obligors satisfactory to the Lender, addressed to the Lender, substantially in
the form and to the effect set forth in Exhibit "P" hereof.
(g) CERTIFICATE OF MCC. A certificate of an authorized officer of MCC,
substantially in the form of the attached Exhibit "M."
ARTICLE 7
MISCELLANEOUS
Section 7.1 REMEDIES CUMULATIVE; NO WAIVER.
The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
No failure or delay on the part of the Lender or any holder of the
Notes in exercising any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy hereunder.
Section 7.2 OBLIGATION TO PAY, EXPENSES AND TAXES.
The Obligors agree, whether or not the transactions contemplated by
this Agreement shall be consummated, to pay or reimburse the Lender for all
costs and expenses incurred by the Lender (i) in connection with the
preparation, administration, amendment of the Loan and the Loan Documents,
including without limitation the reasonable fees and out-of-pocket expenses of
Messrs. Keating, Muething & Klekamp, counsel for the Lender, with respect
thereto and of local counsel, if any, who may be retained by said counsel with
respect thereto; (ii) all costs and expenses of the Lender, if any, in
connection with the enforcement of (or the preservation of any rights under) the
Loan Documents and any modification thereof; and (iii) all stamp, other taxes
and license fees, if any, payable or determined to be payable by Lender in
connection with execution and delivery of the Loan Documents, and the Obligors
shall jointly and severally indemnify and save the Lender harmless from and
against any and all liabilities with respect to or resulting from any delay in
paying or omission to pay such taxes. The obligations of the Obligors under this
Section 7.2 shall survive payment of the Notes and termination of this Agreement
and the other Loan Documents.
<PAGE> 44
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Section 7.3 SEVERABILITY.
Any provision of this Agreement which is prohibited and unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity or enforceability of such provision
in any other jurisdiction.
Section 7.4 CONFIDENTIALITY.
All materials and information furnished to Lender which are not
generally available to the public shall be confidential, and used only by Lender
and their legal counsel to enable Lender and the Obligors to consummate this
transaction.
Section 7.5 ENTIRE AGREEMENT; AMENDMENTS.
This Agreement and the instruments referred to herein constitute the
entire agreement of the parties hereto with respect to the subject matter
hereof.
No amendment, modification, termination, or waiver of any provision of
this Agreement or of the Notes nor consent to any departure by the Obligors
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given. No
notice to or demand on the Obligors in any case shall entitle the Obligors to
any other or further notice or demand in similar or other circumstances.
Section 7.6 NOTICES.
All notices, requests, demands and other communications provided for
hereunder shall be in writing, and if addressed to the Obligors, mailed or
delivered to it via facsimile or otherwise, addressed to it at:
Meritage Hospitality Group Inc.
40 Pearl Street, N.W., Suite 900
Grand Rapids, Michigan 49503
Attention: Christopher B. Hewett, President
with a copy to:
Dykema Gossett PLLC
200 Oldtown Riverfront Building
Grand Rapids, Michigan 49503-2688
Attention: Robert L. Nelson, Esq.
<PAGE> 45
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and, if to the Lender, mailed or delivered to it via facsimile or otherwise,
addressed to it at:
Great American Life Insurance Company
250 East Fifth Street
Cincinnati, Ohio 45202
Attention: Mark F. Muething, Esq.
with copies to:
American Money Management Corporation
Second Floor, Provident Tower
One East Fourth Street
Cincinnati, Ohio 45202
Attention: Robert C. Lintz and Daniel J. Vonderhaar
- and -
Keating, Muething & Klekamp
Provident Tower
One East Fourth Street
Cincinnati, Ohio 45202
Attention: Paul V. Muething, Esq.
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party complying as to delivery with the terms
of this Section. All notices, requests, demands and other communications
provided for hereunder shall be effective 3 business days after deposit in the
mail, first class, postage prepaid, delivered to the telegraph company charges
prepaid, or transmitted by facsimile to such party addressed as aforesaid.
Section 7.7 RELEASE OF COLLATERAL.
Upon the payment in full of Loan I, including the principal thereof,
all interest due thereon, and any applicable premium, all Loan I Collateral
shall be released. Upon the payment in full of Loan II, including principal
thereof, all interest due thereon, and any applicable premium, all Loan II
Collateral shall be released, and the Loan II Guarantees with respect to Food
Service and Yacht Club (but not MHG) shall be released. Notwithstanding the
foregoing, the Lender shall not be required to release the last collateral held
to secure either of the Loans if any amount remains due and payable to the
Lender under the terms of this Agreement.
<PAGE> 46
- 42 -
Section 7.8 BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of the
Obligors, the Lender and their respective successors and assigns. No Obligor
shall have the right to assign its respective rights hereunder or any interest
herein without the prior written consent of the Lender.
The Lender shall have the right to assign all or any part of their
obligations to make the Loans to any Affiliate or Subsidiary of Lender;
provided, however, such Assignment shall not relieve the Lender of their
obligations hereunder. In the event of such Assignment by the Lender, the
assignee in addition to the Lender, shall be deemed to have been named the
"Lender" in the first paragraph of this Agreement and all representations,
warranties and covenants of each Obligor made herein shall be deemed to have
been made to and shall inure to the benefit of such assignee.
Section 7.9 EXECUTION IN COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which taken
together shall constitute but one and the same instrument.
SECTION 7.10 REFERENCE TO HEADINGS.
The Article and Section headings and the Index used in this Agreement
are for convenience only and shall not affect the construction of this
Agreement.
Section 7.11 GOVERNING LAW.
Except as expressly set forth therein, the Loan Documents shall be
deemed to be contracts made under the laws of, executed, and delivered in the
State of Ohio, and for all purposes shall be construed in accordance with the
laws of the State of Ohio.
Section 7.12 DESIGNATION OF FORUM.
Each of the Obligors agrees (a) that any suit, action, or proceeding
pertaining to this Agreement may be instituted in the Courts of the State of
Ohio or the United States District Court for the Southern District of Ohio,
Western Division, and (b) irrevocably and unconditionally submits and consents
to the jurisdiction and venue of any such court for such purpose. Each of the
Obligors hereby irrevocably appoints CT Corporation, 3810 Carew Tower,
Cincinnati, Ohio 45202, and its duly constituted successor(s), if any, as the
agent for service of process in any proceeding instituted hereunder and each of
the Obligors agrees that service of process upon such agent, in accordance with
the then-prevailing and applicable law as hereinabove agreed to, with a copy of
such summons or other instrument mailed to the Obligors (or any of them) in the
manner specified in Section 7.6 hereof, shall, upon receipt by such Obligor,
constitute proper service on such Obligor for all purposes without objections of
any kind
<PAGE> 47
- 43 -
whatsoever. Notwithstanding the provisions of this Section 7.12, Lender shall
also be entitled to institute legal proceedings to adjudicate matters pertaining
to this Agreement against the other in any other competent court.
Section 7.13 PARTICIPATION.
Notwithstanding any other provision of this Agreement, each of the
Obligors agrees that the Lender may enter into participation agreements with one
or more Affiliates of AFG whereby the Lender will allocate certain percentages
of its commitment of the Loans and Notes to such AFG Affiliates. The Obligors
acknowledge that, for the convenience of all parties, this Agreement is being
entered into with the Lender only and that its obligations under this Agreement
are undertaken for the benefit, and as an inducement to, each such AFG Affiliate
as well as the Lender, and each Obligor hereby grants to each such Affiliate, to
the extent of its participation in the Loans the right to set off deposit
accounts, if any, maintained by each such Obligor with such Affiliate.
(Rest of Page intentionally left blank)
<PAGE> 48
- 44 -
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers, as of
the date first above written.
WITNESSES: GREAT AMERICAN LIFE INSURANCE
COMPANY
/s/ Gail T. King BY: /s/ Mark F. Muething
- --------------------------- ---------------------------------------
/s/ Kimberley S. Smith ITS: Senior Vice President
- --------------------------- ---------------------------------------
MERITAGE HOSPITALITY GROUP INC.
/s/ James R. Saalfeld BY:/s/ Christopher B. Hewett
- --------------------------- ---------------------------------------
/s/ Gail T. King Christopher B. Hewett, President
- --------------------------- ---------------------------------------
ST. CLAIR INN, INC.
/s/ James R. Saalfeld BY: /s/ Christopher B. Hewett
- --------------------------- ---------------------------------------
/s/ Gail T. King Christopher B. Hewett, President
- --------------------------- ---------------------------------------
GRAND HARBOR RESORT INC.
/s/ James R. Saalfeld BY:/s/ Christopher B. Hewett
- --------------------------- ---------------------------------------
/s/ Gail T. King Christopher B. Hewett, President
- --------------------------- ---------------------------------------
THOMAS EDISON INN, INCORPORATED
/s/ James R. Saalfeld BY:/s/ Christopher B. Hewett
- --------------------------- ---------------------------------------
/s/ Gail T. King Christopher B. Hewett, President
- --------------------------- ---------------------------------------
GRAND HARBOR YACHT CLUB INC.
/s/ James R. Saalfeld BY:/s/ Christopher B. Hewett
- --------------------------- ---------------------------------------
/s/ Gail T. King Christopher B. Hewett, President
- --------------------------- ---------------------------------------
<PAGE> 49
- 45 -
MHG FOOD SERVICE INC.
/s/ James R. Saalfeld BY:/s/ Christopher B. Hewett
- --------------------------- ---------------------------------------
/s/ Gail T. King Christopher B. Hewett, President
- --------------------------- ---------------------------------------
405182.2
<PAGE> 1
Exhibit 10.4
PROMISSORY NOTE
$14,000,000.00 Cincinnati, Ohio
November 26, 1996
This Promissory Note ("Note") is made and entered into on the date set
forth above by THOMAS EDISON INN, INCORPORATED, GRAND HARBOR RESORT INC., and
ST. CLAIR INN, INC., to the order of GREAT AMERICAN LIFE INSURANCE COMPANY, an
Ohio corporation, (hereinafter, together with its permitted successors and
assigns,"Lender").
This Note has been executed and delivered in connection with a certain Loan
Agreement dated as of November 26, 1996, among each of the undersigned, MHG Food
Service Inc., Grand Harbor Yacht Club Inc., Meritage Hospitality Group Inc. and
Lender (the "Loan Agreement") and is subject to the terms and conditions of the
Loan Agreement. All capitalized terms used herein shall have the meanings
assigned to them in the Loan Agreement unless the context hereof requires
otherwise.
FOR VALUE RECEIVED, the undersigned, jointly and severally, hereby promises
to pay to the order of Lender the principal sum of Fourteen Million and 00/100
Dollars ($14,000,000), together with interest at the annual rate of ten and
3/10ths percent (10.3%); PROVIDED, HOWEVER, in the event and during the
continuation of a violation by the Borrowers of certain financial covenants
contained in the Loan Agreement such interest rate shall be increased as
provided in Section 2.5 of the Loan Agreement. Commencing on January 1, 1997,
the undersigned shall pay the Lender principal and interest payments of One
Hundred Thirty-Seven Thousand Eight Hundred Ninety-Seven and 42/100 Dollars
($137,897.42) and shall continue to pay such amount on the first day of each
month thereafter until December 1, 2003 ("Maturity Date") when the entire
remaining unpaid principal balance and all accrued and unpaid interest shall be
due and payable.
Any amount of principal and interest which is not paid when due, whether at
stated maturity, by acceleration or otherwise, shall bear interest, payable on
demand at the Default Rate, or such lesser amount as shall be the maximum rate
legally enforceable.
Principal and interest payments shall be made in lawful money of the United
States of America and shall be divided equally and payable 50% to the Lender at
Bank of New York, Acct. No. 141001, and 50% to Great American Insurance Company
at Bankers Trust Company, Acct. No. 97-960, or at such other address as the
holder hereof may give to the Borrower, in immediately available funds.
<PAGE> 2
- 2 -
This Note is secured by mortgages on real estate and improvements owned by
the undersigned and located in St. Clair and Ottawa Counties, Michigan and more
fully described in the Open-End Mortgages and Assignments of Rents and Profits
dated of even date herewith, initially and is further secured by the Loan II
Collateral as described in the Loan Agreement.
Except as otherwise provided herein, all payments received by Lender from
the undersigned shall be applied as provided in the Loan Agreement. The
undersigned may, at their option, voluntarily prepay this Note in whole at any
time, or in part as provided for in Section 2.5 of the Loan Agreement.
In case of an Event of Default, the entire unpaid principal amount of this
Note, and all interest due hereon, may become immediately due and payable.
Each of the undersigned hereby: (i) waives presentment, demand, notice of
demand, protest, notice of protest and notice of nonpayment and any other notice
required to be given by law in connection with the delivery, acceptance,
performance, default or enforcement of this Note, of any indorsement or guaranty
of this Note; and (ii) consents to any and all delays, extensions, renewals or
other modifications of this Note or waivers of any term hereof or the failure to
act on the part of Lender or any indulgence shown by Lender, from time to time
and in one or more instances, (without notice to or further assent from the
undersigned) and agrees that no such action, failure to act or failure to
exercise any right or remedy, on the part of Lender shall in any way affect or
impair the obligations of the undersigned or be construed as a waiver by Lender
of, or otherwise affect, any of Lender's rights under this Note, under any
indorsement or guaranty of this Note.
This Note is made and delivered in the City of Cincinnati, Ohio and shall
be governed by and construed in accordance with the laws of the State of Ohio.
Each of the undersigned hereby designates all courts of record sitting in
Cincinnati, Ohio and having jurisdiction over the subject matter, state and
federal, as forums where any action, suit or proceeding in respect of or arising
from or out of this Note, its making, validity or performance, may be prosecuted
as to all parties, their successors and assigns, and by the foregoing
designation the undersigned consents to the jurisdiction and venue of such
courts.
EACH OF THE UNDERSIGNED HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED WITHIN THE COUNTY OF HAMILTON, STATE OF OHIO AND
IRREVOCABLY AGREES THAT, SUBJECT TO LENDER'S ELECTION, ALL ACTIONS OR
PROCEEDINGS ARISING OUT OF OR RELATING TO THIS NOTE, THE OTHER LOAN DOCUMENTS OR
ANY OBLIGATION SHALL BE LITIGATED IN SUCH COURTS. EACH OF THE UNDERSIGNED
ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS RESPECTIVE PROPERTIES, GENERALLY
AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND
WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES
<PAGE> 3
- 3 -
TO BE BOUND BY ANY OTHER LOAN DOCUMENT OR SUCH OBLIGATION. EACH OF THE
UNDERSIGNED DESIGNATES AND APPOINTS CT CORPORATION SYSTEM AND SUCH OTHER
PERSONS AS MAY HEREAFTER BE SELECTED BY EACH OF THE UNDERSIGNED WHICH
IRREVOCABLY AGREE IN WRITING TO SO SERVE AS ITS AGENT TO RECEIVE ON ITS BEHALF
SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE
BEING HEREBY ACKNOWLEDGED BY THE UNDERSIGNED TO BE EFFECTIVE AND BINDING
SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL BE MAILED
BY REGISTERED MAIL TO THE UNDERSIGNED AT ITS RESPECTIVE ADDRESS PROVIDED IN THE
LOAN AGREEMENT EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY
FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS.
IF ANY AGENT APPOINTED BY ANY OF THE UNDERSIGNED REFUSES TO ACCEPT SERVICE,
EACH OF THE UNDERSIGNED HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL
CONSTITUTE VALID SERVICE OF PROCESS. NOTHING HEREIN SHALL AFFECT THE RIGHT TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF
LENDER TO BRING PROCEEDINGS AGAINST THE UNDERSIGNED IN THE COURTS OF ANY OTHER
JURISDICTION.
EACH OF THE UNDERSIGNED AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
NOTE, ANY OF THE LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE
SUBJECT MATTER OF THIS LOAN TRANSACTION AND THE LENDER/BORROWER RELATIONSHIP
THAT IS BEING ESTABLISHED. EACH OF THE UNDERSIGNED AND LENDER ALSO WAIVE ANY
BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE
REQUIRED OF LENDER. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING
OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE
SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND
STATUTORY CLAIMS. EACH OF THE UNDERSIGNED AND LENDER ACKNOWLEDGE THAT THIS
WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH
HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS NOTE AND THAT EACH WILL
CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH OF THE
UNDERSIGNED AND LENDER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES
ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND THE WAIVER SHALL APPLY TO ANY
<PAGE> 4
- 4 -
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE, THE
LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOAN OR
THE NOTE. IN THE EVENT OF LITIGATION, THIS NOTE MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
IN WITNESS WHEREOF, each of the undersigned has caused this Note to be
executed by its duly authorized officer on the day and year first above written.
THOMAS EDISON INN, INCORPORATED
By:/s/ Christopher B. Hewett
---------------------------------
Christopher B. Hewett, President
GRAND HARBOR RESORT INC.
By:/s/ Christopher B. Hewett
---------------------------------
Christopher B. Hewett, President
ST. CLAIR INN, INC.
By:/s/ Christopher B. Hewett
---------------------------------
Christopher B. Hewett, President
<PAGE> 1
Exhibit 10.5
PROMISSORY NOTE
$5,250,000.00 Cincinnati, Ohio
November 26, 1996
This Promissory Note ("Note") is made and entered into on the date set
forth above by GRAND HARBOR YACHT CLUB INC., MERITAGE HOSPITALITY GROUP INC.,
and MHG FOOD SERVICE INC. to the order of GREAT AMERICAN LIFE INSURANCE COMPANY,
an Ohio corporation, (hereinafter, together with its permitted successors and
assigns, "Lender").
This Note has been executed and delivered in connection with a certain Loan
Agreement dated as of November 26, 1996, as of this date, among each of the
undersigned, Thomas Edison Inn, Incorporated, Grand Harbor Resort Inc., St.
Clair Inn, Inc. and Lender (the "Loan Agreement") and is subject to the terms
and conditions of the Loan Agreement. All capitalized terms used herein shall
have the meanings assigned to them in the Loan Agreement unless the context
hereof requires otherwise.
FOR VALUE RECEIVED, the undersigned, jointly and severally, hereby promises
to pay to the order of Lender the principal sum of Five Million Two Hundred
Fifty Thousand and 00/100 Dollars ($5,250,000), together with interest at the
annual rate equal to eight percent (8%) in excess of the rate of interest
announced from time to time by The Provident Bank, Cincinnati, Ohio, as its
prime rate ("Prime Rate"); provided, however, in the event and during the
continuation of a violation by the Borrowers of certain financial covenants
contained in the Loan Agreement, such interest rate shall be increased as
provided in Section 2.5 of the Loan Agreement. A rate based on the Prime Rate
will change each time and as of the date the Prime Rate changes. Interest only
shall be due and payable monthly in arrears on the first day of each month
commencing on January 1, 1997 and continuing on the first day of each month
thereafter through and including November 1, 1997. Payments of accrued interest
plus principal payments of Fifty Thousand and 00/100 Dollars ($50,000.00) shall
be due and payable on the first day of each month commencing on December 1, 1997
and continuing on the same day of each month thereafter until March 1, 1998 and
thereafter payments of accrued interest plus principal payments of One Hundred
Thousand and 00/100 Dollars ($100,000.00) shall be due and payable on the first
day of each month commencing on April 1, 1998 until June 1, 2002 ("Maturity
Date") when the entire remaining unpaid principal balance and all accrued and
unpaid interest shall be due and payable.
Any amount of principal and interest which is not paid when due, whether at
stated maturity, by acceleration or otherwise, shall bear interest, payable on
demand at the Default Rate, or such lesser amount as shall be the maximum rate
legally enforceable.
<PAGE> 2
- 2 -
Principal and interest payments shall be made in lawful money of the United
States of America and shall be divided equally and payable 50% to the Lender at
Bank of New York, Acct. No. 141001 and, 50% to Great American Insurance Company
at Bankers Trust Company, Acct. No. 97-960, or at such other address as the
holder hereof may give to the Borrower, in immediately available funds.
This Note is secured by mortgages on real estate and improvements owned by
the undersigned and located in St. Clair and Ottawa Counties, Michigan and more
fully described in the Open-End Mortgages and Assignments of Rents and Profits
dated of even date herewith and the other Loan II Collateral described in the
Loan Agreement, and is initially further secured by the Loan I Collateral as
described in the Loan Agreement.
Except as otherwise provided herein, all payments received by Lender from
the undersigned shall be applied as provided in the Loan Agreement.
The undersigned may, at their option, voluntarily prepay this Note in whole
at any time, or in part as provided for in Section 2.5 of the Loan Agreement.
In case of an Event of Default, the entire unpaid principal amount of this
Note, and all interest due hereon, may become immediately due and payable.
Each of the undersigned hereby: (i) waives presentment, demand, notice of
demand, protest, notice of protest and notice of nonpayment and any other notice
required to be given by law in connection with the delivery, acceptance,
performance, default or enforcement of this Note, of any indorsement or guaranty
of this Note; and (ii) consents to any and all delays, extensions, renewals or
other modifications of this Note or waivers of any term hereof or the failure to
act on the part of Lender or any indulgence shown by Lender, from time to time
and in one or more instances, (without notice to or further assent from the
undersigned) and agrees that no such action, failure to act or failure to
exercise any right or remedy, on the part of Lender shall in any way affect or
impair the obligations of the undersigned or be construed as a waiver by Lender
of, or otherwise affect, any of Lender's rights under this Note, under any
indorsement or guaranty of this Note.
This Note is made and delivered in the City of Cincinnati, Ohio and shall
be governed by and construed in accordance with the laws of the State of Ohio.
The undersigned hereby designates all courts of record sitting in Cincinnati,
Ohio and having jurisdiction over the subject matter, state and federal, as
forums where any action, suit or proceeding in respect of or arising from or out
of this Note, its making, validity or performance, may be prosecuted as to all
parties, their successors and assigns, and by the foregoing designation the
undersigned consents to the jurisdiction and venue of such courts.
EACH OF THE UNDERSIGNED HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED WITHIN THE COUNTY OF HAMILTON, STATE OF OHIO AND
IRREVOCABLY AGREES THAT, SUBJECT TO LENDER'S ELECTION, ALL ACTIONS OR
PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
<PAGE> 3
- 3 -
NOTE, THE OTHER LOAN DOCUMENTS OR ANY OBLIGATION SHALL BE LITIGATED IN SUCH
COURTS. EACH OF THE UNDERSIGNED ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE
AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY
AGREES TO BE BOUND BY ANY OTHER LOAN DOCUMENT OR SUCH OBLIGATION. EACH OF THE
UNDERSIGNED DESIGNATES AND APPOINTS CT CORPORATION SYSTEM AND SUCH OTHER PERSONS
AS MAY HEREAFTER BE SELECTED BY THE UNDERSIGNED WHICH IRREVOCABLY AGREE IN
WRITING TO SO SERVE AS ITS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF ALL PROCESS
IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY
ACKNOWLEDGED BY THE UNDERSIGNED TO BE EFFECTIVE AND BINDING SERVICE IN EVERY
RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL BE MAILED BY REGISTERED MAIL
TO EACH OF THE UNDERSIGNED AT THEIR ADDRESSES PROVIDED IN THE LOAN AGREEMENT
EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL
SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT
APPOINTED BY THE UNDERSIGNED REFUSES TO ACCEPT SERVICE, THE UNDERSIGNED HEREBY
AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE VALID SERVICE OF PROCESS.
NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF LENDER TO BRING PROCEEDINGS AGAINST
THE UNDERSIGNED IN THE COURTS OF ANY OTHER JURISDICTION.
EACH OF THE UNDERSIGNED AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
NOTE, ANY OF THE LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE
SUBJECT MATTER OF THIS LOAN TRANSACTION AND THE LENDER/BORROWER RELATIONSHIP
THAT IS BEING ESTABLISHED. EACH OF THE UNDERSIGNED AND LENDER ALSO WAIVE ANY
BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE
REQUIRED OF LENDER. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING
OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE
SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND
STATUTORY CLAIMS. EACH OF THE UNDERSIGNED AND LENDER ACKNOWLEDGE THAT THIS
WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH
HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS NOTE AND THAT EACH WILL
CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH OF THE
UNDERSIGNED AND LENDER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES
ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND
<PAGE> 4
- 4 -
THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS NOTE, THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR
AGREEMENTS RELATING TO THE LOAN OR THE NOTE. IN THE EVENT OF LITIGATION, THIS
NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed by its
duly authorized officer on the day and year first above written.
MERITAGE HOSPITALITY GROUP INC.
By:/s/ Christopher B. Hewett
--------------------------------
Christopher B. Hewett, President
GRAND HARBOR YACHT CLUB INC.
By:/s/ Christopher B. Hewett
-------------------------------
Christopher B. Hewett, President
MHG FOOD SERVICE INC.
By:/s/ Christopher B. Hewett
---------------------------------
Christopher B. Hewett, President
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Thomas Edison Inn, Incorporated, a Michigan corporation, d/b/a the Thomas
Edison Inn.
2. St. Clair Inn, Inc., a Michigan corporation, d/b/a the St. Clair Inn.
3. Grand Harbor Resort Inc., a Michigan corporation, d/b/a the Grand Haven
Holiday Inn.
4. Grand Harbor Yacht Club Inc., a Michigan corporation, d/b/a the Grand Harbor
Yacht Club.
5. MHG Food Service Inc., a Michigan corporation.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in and incorporated by reference in this
Form 10-K, into the Company's previously filed Registration Statements File No.
333-06657 on Form S-8.
GRANT THORNTON LLP
Detroit, Michigan
February 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<CASH> 2,265,497
<SECURITIES> 0
<RECEIVABLES> 938,448
<ALLOWANCES> 54,000
<INVENTORY> 354,226
<CURRENT-ASSETS> 4,059,466
<PP&E> 43,182,111
<DEPRECIATION> 21,425,043
<TOTAL-ASSETS> 31,928,864
<CURRENT-LIABILITIES> 3,956,354
<BONDS> 23,665,846
0
1,084
<COMMON> 32,045
<OTHER-SE> 1,988,314
<TOTAL-LIABILITY-AND-EQUITY> 31,928,864
<SALES> 16,884,862
<TOTAL-REVENUES> 16,884,862
<CGS> 3,334,434
<TOTAL-COSTS> 17,859,883
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 32,655
<INTEREST-EXPENSE> 1,642,735
<INCOME-PRETAX> (1,945,570)
<INCOME-TAX> (20,000)
<INCOME-CONTINUING> (1,925,570)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,925,570)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
