SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. ____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Meritage Hospitality Group Inc.
-------------------------------------------------
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
2. Aggregate number of securities to which transaction applies:
3. Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined)
4. Proposed maximum aggregate value of transaction:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identity the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
1998
NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT
MERITAGE
(CORPORATE SYMBOL HERE) HOSPITALITY
GROUP INC.
40 Pearl Street, N.W., Suite 900
Grand Rapids, Michigan 49503
<PAGE>
MERITAGE HOSPITALITY GROUP INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 19, 1998
Dear Shareholder:
We are pleased to invite you to attend our Annual Shareholders' Meeting at
the Thomas Edison Inn, 500 Thomas Edison Parkway, Port Huron, Michigan on May
19, 1998 at 10:00 a.m. Eastern time.
The purposes of this Annual Meeting are:
1. to elect seven directors to serve for the next fiscal year;
2. to approve an amendment to the 1996 Management Equity Incentive Plan
increasing the number of Common Shares in the Plan by 250,000; and
3. to transact such other business as may properly come before the
meeting or any adjournment thereof.
Following the formal meeting, we will review the Company's progress during
the last fiscal year and our plans for fiscal 1998, and answer your questions
regarding the Company.
Very truly yours,
/s/ Robert E. Schermer, Sr.
----------------------------------
Robert E. Schermer, Sr.
Chairman of the Board of Directors
Dated: April 13, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE, SIGN AND PROMPTLY
RETURN YOUR PROXY CARD IN THE ENCLOSED ENVELOPE. PROXIES MAY BE REVOKED BY
WRITTEN NOTICE OF REVOCATION, THE SUBMISSION OF A LATER PROXY, OR BY ATTENDING
THE MEETING AND VOTING IN PERSON.
<PAGE>
MERITAGE HOSPITALITY GROUP INC.
40 Pearl Street, N.W., Suite 900
Grand Rapids, Michigan 49503
Telephone: (616) 776-2600
--------------------------------------------------
P R O X Y S T A T E M E N T
Annual Meeting of Shareholders
May 19, 1998
INTRODUCTION
The Board of Directors of Meritage Hospitality Group Inc. is requesting
your Proxy for use at the Annual Meeting of Shareholders on May 19, 1998 and at
any adjournment thereof, pursuant to the foregoing Notice. The approximate
mailing date of this Proxy Statement and the accompanying Proxy Card is April
14, 1998.
VOTING AT ANNUAL MEETING
GENERAL
Shareholders may vote in person or by proxy. Proxies given may be revoked
at any time by filing with the Company either a written revocation or a duly
executed Proxy Card bearing a later date, or by appearing at the Annual Meeting
and voting in person. All shares will be voted as specified on each properly
executed Proxy Card. If no choice is specified, the shares will be voted as
recommended by the Board of Directors "FOR" the nominees for directors named
herein, in favor of Item 2, and in the discretion of the named proxies on any
other matters voted on at the meeting. Abstentions and shares not voted for any
reason, including broker non-votes, will have no effect on the outcome of any
vote taken at the Annual Meeting.
As of March 29, 1998, the record date for determining shareholders entitled
to notice of and to vote at the Annual Meeting, the Company had 4,993,549 Common
Shares outstanding. Each share is entitled to one vote. Only shareholders of
record at the close of business on March 29, 1998 will be entitled to vote at
the Annual Meeting.
PRINCIPAL SHAREHOLDER
The following person is the only shareholder known by the Company to own
beneficially 5% or more of its outstanding Common Shares as of March 29, 1998:
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------ -------------------- ----------------
Christopher B. Hewett 1,646,937 32.5%
<PAGE>
Mr. Hewett's beneficial ownership includes (i) 31,800 Series A Convertible
Preferred Shares which, if converted, would equal 45,429 Common Shares, (ii)
options for 30,000 Common Shares which are either vested or exercisable within
60 days, and (iii) 1,551,300 shares held by Meritage Capital Corp. ("MCC") of
which Mr. Hewett is the majority shareholder, an executive officer and a
director.
The business address of Mr. Hewett is 40 Pearl Street, N.W., Suite 900,
Grand Rapids, Michigan 49503.
ELECTION OF DIRECTORS
The Company's Bylaws require that the Board of Directors consist of not
less than 5 nor more than 15 directors, with the exact number to be established
by the Board of Directors. The Board has established the number of directors to
be elected at the Annual Meeting at seven.
The Board is nominating for reelection the following directors: Gary R.
Garrabrant, Christopher B. Hewett, David S. Lundeen, Joseph L. Maggini, Jerry L.
Ruyan, Robert E. Schermer, Sr., and Robert E. Schermer, Jr.
Proxies solicited by the Board of Directors will be voted for the election
of these nominees. All directors elected at the Annual Meeting will be elected
to hold office until the next Annual Meeting. Shareholders are not entitled to
cumulate their votes in the election of directors.
If any nominee should be unable to serve, proxies will be voted for a
substitute nominated by the Board of Directors. Nominees receiving the highest
number of votes cast for the positions to be filed will be elected.
AMENDMENT OF THE 1996 MANAGEMENT EQUITY INCENTIVE PLAN
The Board of Directors believes that option grants are an important factor
in enabling the Company to attract, retain and motivate its employees.
Accordingly, on April 16, 1996, the Board of Directors adopted, and on May 21,
1996 the Shareholders approved, an employee share option plan known as the 1996
Management Equity Incentive Plan. The Plan provided for 300,000 Common Shares to
be the subject of options which may be granted to employees. On May 20, 1997,
the Shareholders approved an amendment to the Plan increasing the number of
Common Shares in the Plan by 175,000. The Company, through its subsidiaries,
presently has approximately 1,200 full and part-time employees.
Approximately 45,000 Common Shares remain available for grant under the
Plan without shareholder approval. The Board of Directors believes that
additional options should be made available now for purposes of the Plan and
desires to increase the number of Common Shares available for grant under the
Plan by 250,000 shares.
Options under the Plan for 283,500 Common Shares have been granted with an
exercise price of $7.00 per share which, in all cases, was above the market
value on the date of the grant. Additional options under the Plan for 147,500
Common Shares have been granted with an exercise price of $3.50 per share which
was also above the market value on the date of the grant. To date, options for
the following number of shares have been granted to current executive officers
and groups: Christopher B. Hewett (President and Chief Executive Officer) -
150,000; Robert E. Schemer, Jr. (Executive Vice President) - 135,000; Pauline M.
Krywanski (Vice President, Treasurer and Chief Financial Officer) - 20,000;
James R. Saalfeld (Vice President, General Counsel and Secretary) - 37,500; all
<PAGE>
current executive officers as a group - 342,500; and all current employees,
except executive officers, as a group - 88,500.
The Plan provides that options may be granted either as incentive or
nonqualified options. Options may be granted for varying periods of from one to
ten years. Incentive options granted to employees who own 10% or more of the
outstanding Common Shares must be for terms of five years or less and at an
exercise price of 110% of the market value. Options do not become exercisable
until at least one year from the date of grant. Thereafter, the right to
exercise options vests at a schedule determined at the time of grant, which
generally shall be at a rate of 20% per year. The right to exercise options is
cumulative to the extent not utilized in prior periods. The Compensation
Committee determines the exercise prices of all options granted. However, an
incentive option must be granted with an exercise price at least equal to the
market value of the Common Shares on the date of grant.
No option will be transferable otherwise than by will, by the laws of
descent and distribution, or pursuant to a qualified domestic relations order.
There are no federal income tax consequences to either the Company or the
recipient of an option upon the grant of an option or upon the exercise of an
incentive option. If a person sells or otherwise disposes of shares acquired
upon the exercise of an incentive option within one year of the date of exercise
or within two years from the date of grant, the gain equal to the excess of the
amount realized over the amount paid for the shares will be taxed as ordinary
income. The Company will be entitled to an income tax deduction to the same
extent. If the shares are held for more than one year following the date of
exercise and two years from the date of grant, any gain realized thereafter will
be taxed as a capital gain, in which case the Company will not be entitled to
any deduction.
A person exercising a non-qualified option will recognize ordinary income
to the extent of the difference between the exercise price and the fair market
value of the Common Shares on the date of exercise, and the Company will be
entitled to a corresponding deduction. Upon any sale of such shares, the
difference between the amount realized and the fair market value on the date of
the exercise will be treated as a capital gain or loss.
In the event of any changes in the outstanding Common Shares by way of a
share dividend, split-up, recapitalization, combination or exchange, the number
and class of Common Shares authorized for the Plan and the number and class of
Common Shares and option price for each option which is outstanding shall be
correspondingly adjusted by the Compensation Committee. The Committee shall also
make appropriate adjustments to reflect any spin-off of assets, extraordinary
dividends or other distributions to shareholders.
In the event of the dissolution or liquidation of the Company or any
merger, consolidation or combination in which the Company is not the surviving
corporation or in which the outstanding Common Shares of the Company are
converted into cash, other securities or other property, each outstanding option
shall terminate as of a date fixed by the Compensation Committee, provided that
not less than 20 days' written notice of the date of expiration shall be given
to each holder of an option. Each such holder shall have the right during such
period following notice to exercise the portion of the option which is vested at
the time of such notice.
The Compensation Committee, comprised of Messrs. Schermer, Sr. (Chairman),
Garrabrant and Maggini, administers the Plan. Subject to the express provisions
of the Plan, the Committee shall have the authority to establish the terms and
conditions of options agreements, which need not be uniform.
<PAGE>
The Board of Directors recommends that Section 4.1 of the Plan be amended
to increase the number of shares subject to options by 250,000 shares and, as so
amended, Section 4.1 will read in its entirety as follows:
4.1 The Shares that may be made subject to Options granted
under the Plan shall not exceed 725,000 Shares in the
aggregate. Except as provided in Section 4.2, upon lapse or
termination of any Option for any reason without being
completely exercised, the Shares which were subject to such
Option may again be subject to other Options.
All other terms and conditions of the Plan will remained unchanged.
The affirmative vote of the holders of a majority of Common Shares voting
on the matter at the Annual Meeting is required to approve the amendment to the
Plan.
OTHER MATTERS
Any other matters considered at the Annual Meeting which have properly come
before the meeting, including adjournment of the meeting, will require the
affirmative vote of a majority of shares voting.
VOTING BY PROXY
All Proxy Cards properly signed will, unless a different choice is
indicated, be voted "FOR" election of all nominees for director proposed by the
Board of Directors, and "FOR" approval of an amendment to the 1996 Management
Equity Incentive Plan increasing the number of Common Shares in the Plan by
250,000.
If any other matters come before the Annual Meeting or any adjournment,
each proxy will be voted in the discretion of the individuals named as proxies
on the card.
SHAREHOLDER PROPOSALS
Shareholders who desire to have proposals included in the Notice for the
Annual Meeting to be held in 1999 must submit their proposals in writing to the
Company, Attention: Secretary, at its offices on or before December 17, 1998.
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES
The following is information concerning the current directors, executive
officers and significant employees of the Company as of March 29, 1998:
<TABLE>
<CAPTION>
Common Shares Preferred Shares
Beneficially Owned Beneficially Owned
---------------------- ------------------
Name and Age (1) Position Amount(2) Percentage Amount Percentage
- ---------------------- --------------------- --------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Robert E. Schermer, Sr. Chairman of the Board 163,748 3.3% 20,000 14.5%
(3)(4)(5)(6)(7) of Directors
62
Christopher B. Hewett President, Chief 1,646,937 32.5% 31,800 22.9%
(4)(5)(7)(8)(9) Executive Officer
39 and Director
Robert E. Schermer, Jr. Executive Vice Presi- 57,972 1.1% 20,000 14.5%
(4)(7)(9)(10) dent and Director
39
Pauline M. Krywanski Vice President, 2,000 * 0 --
(9) Treasurer & Chief
37 Financial Officer
James R. Saalfeld Vice President, 10,834 * 1,067 *
(7)(9) 31 Secretary and
31 General Counsel
Ray E. Quada Chief Operating 2,000 * 0 --
53 Officer of Wendy's
of Michigan
Gary R. Garrabrant Director 6,538 * 0 --
(3)(5)(11)
40
David S. Lundeen Director 49,074 1.0% 12,500 9.0%
(7)(11)
36
Joseph L. Maggini Director 64,146 1.3% 10,000 7.2%
(3)(7)(12)
58
Jerry L. Ruyan Director 228,396 4.6% 0 --
(11)
51
All Current Directors, 2,231,645 42.7% 95,367 68.9%
Executive Officers and
and Significant
Employees and as a
Group (10 persons)
<FN>
(1) Unless otherwise indicated, the persons named have sole voting and investment
power and beneficial ownership of the securities.
(2) Includes options held by all non-employee directors to acquire 6,000 Common Shares.
(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 Common Shares issuable upon conversion of Series A Convertible
Preferred Stock which is immediately convertible.
(8) See description of Common Share ownership contained in "Principal
Shareholders" above.
(9) Includes options exercisable for Mr. Hewett of 20,000 shares, Mr. Schermer,
Jr. of 18,000 shares, and Mr. Saalfeld of 5,500 shares; and also includes
options exercisable within 60 days for Mr. Hewett of 10,000 shares, Mr.
Schermer, Jr. of 9,000 shares, Mr. Saalfeld of 3,500 shares, and Ms.
Krywanski of 2,000 shares.
(10) Includes 600 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, 1,100
shares held directly by his wife, and 1,000 shares held directly by his
son.
* Less than 1%
</FN>
</TABLE>
<PAGE>
Robert E. Schermer, Sr. has been a director of the Company since January
25, 1996. He is currently Senior Vice President, Regional Manager for the State
of Michigan and a member of the Board of Directors of Robert W. Baird & Co.
Incorporated, an investment banking and securities brokerage firm headquartered
in Milwaukee, Wisconsin. Mr. Schermer has held this position for more than five
years. He is the father of Robert E. Schermer, Jr.
Christopher B. Hewett has been President, Chief Executive Officer and a
director of the Company since January 25, 1996. He has served as President of
MCC since its inception in 1993. Mr. Hewett was Executive Vice President (1990
to 1991) and President (1991 to 1997) of Ocean Reef Club, Inc.,t an affiliate of
American Financial Group 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. Mr.
Hewett is also a director of Frisch's Restaurants, Inc., which operates
approximately 80 Big Boy Restaurants.
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.
Pauline M. Krywanski has been Vice President, Treasurer and Chief Financial
Officer of the Company since May 20, 1997. From 1988 to 1997, Ms. Krywanski was
with American Medical Response, a nationwide provider of healthcare
transportation and a wholly-owned subsidiary of Laidlaw, Inc. Her most recent
position with American Medical Response was Director of Financial Operations for
the Midwest Region. Ms. Krywanski is a Certified Public Accountant.
James R. Saalfeld has been Vice President, Secretary and General Counsel 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.
Ray E. Quada has been the Chief Operating Officer of Wendy's of Michigan
since its inception on January 30, 1998, and was the Chief Operating Officer of
its predecessor since March 1990. From 1994 through 1997, Mr. Quada was a
director of First Michigan Bank.
Gary R. Garrabrant has been a director of the Company since October 24,
1996. Mr. Garrabrant is Executive Vice President of Equity Group Investments,
Inc., a private investment company headquartered in Chicago, with significant
real estate and corporate holdings. He joined Equity Group as a Senior Vice
President in January 1996. Previously, Mr. Garrabrant was director of Sentinel
Securities Corporation and co-founded Genesis Realty Capital Management, both of
which were based in New York, and specialized in real estate securities
investment management. From 1989 to 1994, he was associated with The Bankers
Trust Company in New York. Mr. Garrabrant is also a director of Capital Trust, a
real estate finance company based in New York.
David S. Lundeen has been a director of the Company since January 25, 1996.
Mr. Lundeen is presently a private investor. From 1995 to September 1997, he
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
<PAGE>
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). Mr. Ruyan is also a director of
Frisch's Restaurants, Inc.
BOARD ACTIONS
The Board of Directors met four times, and took action in writing on three
occasions, during fiscal 1997.
The Executive Committee, comprised of Messrs. Schermer, Sr. (Chairman),
Hewett and Schermer, Jr., possesses and may exercise all of the powers of the
Board of Directors in the management and control of the business of the
Corporation to the extent permitted by law. The Executive Committee took action
in writing on twelve occasions during fiscal 1997.
The Audit Committee, comprised of Messrs. Garrabrant (Chairman), Lundeen
and Ruyan, all of whom are non-employee directors, reviews the audit reports
submitted by the Company's independent accountants, reviews the Company's
internal accounting operations, and recommends the employment of the Company's
independent accountants. The Audit Committee met once during fiscal 1997.
The Compensation Committee, comprised of Messrs. Schermer, Sr. (Chairman),
Garrabrant and Maggini, all of whom are non-employee directors, establishes the
Company's general compensation policies, recommends and establishes the
compensation and incentives awards for management, and administers the 1996
Management Equity Incentive Plan, the 1996 Directors' Share Option Plan, the
Directors' Compensation Plan and the Employee Share Purchase Plan. The
Compensation Committee met once, and took action in writing on four occasions,
during fiscal 1997.
The Nominating Committee, comprised of Messrs. Schermer, Sr. (Chairman),
Hewett and Ruyan, evaluates and recommends to the Board of Directors individuals
to be nominated by the Company to stand for election or reelection at any
shareholder meeting and to fill interim vacancies on the Board of Directors. The
Nominating Committee did not meet during fiscal 1997.
Directors who are not employed by the Company receive a retainer of $1,000
for each meeting of the Board of Directors attended, and $500 for each committee
meeting attended. These fees are reduced by 50% if participation is by
telephone. Compensation is paid by the Company quarterly in arrears, in the form
of Company Common Shares which are priced at not less than $7.00 per share. Each
non-employee director is granted an option for 5,000 shares upon initial
election and another option for 1,000 shares upon each subsequent election. The
exercise price of options granted pursuant to the Directors' Compensation Plan
is the last closing sale price reported on the date of grant. Directors who are
employees of the Company are not separately compensated for serving as
directors.
<PAGE>
In fiscal 1997, each incumbent director attended all of the meetings of the
Board of Directors and the committees on which the director served, except for
Mr. Lundeen who was absent for two Board meetings.
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 1997 all
filing requirements were met, except for Mr. Maggini's late reporting of the
purchase of 1,000 Common Shares by his son, which transaction was reported on
his Form 5 upon discovery of this omission.
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid by
the Company to its Chief Executive Officer and executive officers or significant
employees earning in excess of $100,000 in fiscal 1997:
Summary Compensation Table
Annual Compensation Long-Term Compensation
-------------------- ------------------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
- --------------------------- ---- -------- ---------- ---------- ------------
Christopher B. Hewett (1) 1997 $157,500 $ 37,500 50,000 --
President and Chief 1996 $127,735 $110,000(2) 50,000 --
Executive Officer 1995 -- -- -- --
Robert E. Schermer, Jr. (1) 1997 $157,500 $ 17,500 45,000 --
Executive Vice President 1996 $114,961 $100,000(2) 45,000 --
1995 -- -- -- --
Ray E. Quada 1997 $105,666 $ 20,707(3) -- --
Chief Operating Officer 1996 -- -- -- --
Wendy's of Michigan 1995 -- -- -- --
(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.
(3) Includes 2,000 shares of Meritage Common Stock valued at $10,000.
<PAGE>
STOCK OPTIONS
The following tables contain information concerning the grant of stock
options to the executives and employees identified in the Summary Compensation
Table and the appreciation of such options:
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
Number of % of Total of Stock Price
Securities Options Appreciation for
Underlying Granted to Option Term
Options Employees in Exercise Price --------------------------
Name Granted Fiscal 1997 ($ per share) Expiration Date 5% 10%
- ---------------------- --------- ------------ -------------- --------------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Christopher B. Hewett 50,000 37.5 % $7.00 12/1/2006 $98,000 $363,500
Robert E. Schermer, Jr. 45,000 33.7 % $7.00 12/1/2006 $88,200 $327,150
</TABLE>
FISCAL 1997 OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Acquired Options at Fiscal Year End at Fiscal Year End
Name on Exercise Value Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------------- --------------- -------------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Christopher B. Hewett --- --- 10,000/90,000 $0/$0 (1)
Robert E. Schermer, Jr. --- --- 9,000/81,000 $0/$0 (1)
<FN>
(1) The Compensation Committee established the exercise price as $7.00 per
share. Because the stock at fiscal year end was trading for less than $7.00
per share, no value for the options is shown.
</FN>
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee establishes compensation for executive officers
by setting salaries, establishing bonus ranges, making bonus awards and granting
stock options on an annual basis. The Committee believes it is important to
provide competitive levels of compensation that will enable the Company to
attract and retain the most qualified executives and to provide incentive plans
that emphasize stock ownership, thereby aligning the interests of management
with the shareholders of the Company.
At a meeting held on January 10, 1997, the Committee established base
salaries and bonus ranges for the Company's executive officers for fiscal 1997.
Each executive officer's bonus range represented a specific percentage of that
officer's base salary. The salaries and bonus ranges were not tied to any
specific or quantifiable performance objectives. Instead, the salaries and bonus
ranges were based on the Committee's subjective judgment of each executive
officer's (i) performance, (ii) level of responsibility, (iii) potential for
continued employment, (iv) duties for the upcoming fiscal year, and (v)
contribution in conjunction with the Company's accomplishments during the past
year. The Committee took into account the recommendations of the President and
Chief Executive Officer in establishing the salaries and bonus ranges for
executive officers other than himself.
Mr. Hewett's salary and bonus range, as President and Chief Executive
Officer, was determined s separately but in the same manner as all other
executives officers of the Company (but without Mr. Hewett's participation).
<PAGE>
The Committee also authorized a grant of options to the executive officers
under the 1996 Management Equity Incentive Plan as follows (amounts indicate
number of shares underlying the options granted): Mr. Hewett: 50,000 shares; Mr.
Schermer, Jr.: 45,000 shares, Ms. Krywanski: 10,000 shares, and Mr. Saalfeld:
10,000 shares. The options granted to the officers have an exercise price of
$7.00 per share, vest over a five-year period at a rate of 20% per year
commencing with the first anniversary of the grant date, and expire ten years
from the grant date.
The salaries established, bonuses awarded and options granted by the
Committee to the executive officers in fiscal 1997 were ratified by the entire
Board of Directors. All salaries and bonuses were fully deductible for federal
income tax purposes for 1997.
Compensation Committee of the
Board of Directors
Robert E. Schermer, Sr., Chairman
Gary R. Garrabrant
Joseph L. Maggini
CORPORATE PERFORMANCE GRAPH
The following graph demonstrates the yearly percentage change in Meritage's
cumulative total e shareholder return on its Common Shares (as measured by
dividing (i) the sum of (a) the cumulative e amount of dividends, assuming
dividend reinvestment during the periods presented, plus (b) the e difference
between Meritage's share price at the beginning and end of the periods
presented; by (ii) e the share price at the beginning of the periods presented)
from October 18, 1995 through November 30, 1997, with the cumulative total
return on the S & P Restaurants Index, the S & P Lodging-Hotels Index and the S
& P 500 Index. Because the Company's stock price was not published from May 1989
through October 18, 1995, the graph does not reflect cumulative shareholder
return prior to October 18, 1995. The comparison assumes $100 was invested on
October 18, 1995 in the Company's Common Shares and in each of the indexes
presented.
The Company added the S & P Restaurants Index to its performance graph for
fiscal 1997 due to the fact that, throughout fiscal 1997, the Company owned a
majority of the entity that operated 25 "Wendy's Old Fashioned Hamburgers"
restaurants throughout Western and Southern Michigan.
<PAGE>
COMPARISON OF CUMULATIVE TOTAL RETURN
Meritage
Measurement Period Hospitality S&P Lodging-
(Fiscal Year Covered) Group Inc. Hotels S&P 500 S&P Restaurants
- --------------------- ------------ ------------ ------- ---------------
Measurement Pt.-10/18/95 $100 $100 $100 $100
11/30/95 90 96 104 114
11/30/96 94 124 133 118
11/30/97 39 164 171 124
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 1997, MCC (which is 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. The note was analyzed by Roney & Co., a nationally
recognized investment banking firm, as part of its review in delivering a
fairness opinion in 1996 regarding this transaction.
In March 1997, the Company borrowed $750,000 from Robert E. Schermer, Sr.
The note is unsecured and requires monthly payments of interest only at prime
plus 8% provided the Company is not in default under its loan agreement with its
long-term lender, Great American Life Insurance Company ("GALIC"). Unpaid
principal and accrued interest must be paid 91 days after the long-term
indebtedness is paid off. Effective October 1, 1997, the Company obtained a
moratorium on payments due in the last three months of 1997 on its long-term
indebtedness with GALIC. Based on the terms of the loan agreement, the principal
and interest payment moratorium extended to the payments due on the note payable
<PAGE>
to Mr. Schermer, and were added to the outstanding principal balance of the
loan. The loan had an outstanding principal balance of $770,767 as of November
30, 1997.
In January and May 1997, the Board of Directors authorized agreements
whereby MCC, its principals and its subsidiary, will be indemnified by the
Company and its applicable subsidiaries for any losses or expenses that they may
incur as guarantors of the Company's obligations to (i) its primary financing
institutions and (ii) its past and present franchisors.
In May 1997, the Company and its subsidiary indemnified MCC Food Service
Inc. (a wholly-owned subsidiary of MCC) upon its appointment as general partner
of the now dissolved Wendy's of West Michigan Limited Partnership (the
"Dissolved Partnership"). MCC Food Service and the Company agreed that MCC Food
Service would be entitled to receive the Partnership Administration Fee of
$160,000 per year provided, however, that the Company shall hold this fee and
not remit it to MCC Food Service until such time as certain portions of the
Company's long-term indebtedness with GALIC is repaid or GALIC agrees that the
fee should be released to MCC Food Service. Also, the Company's subsidiary
indemnified Ray E. Quada, the President of MCC Food Service, regarding the
removal and replacement of the former general partner of the Dissolved
Partnership.
While former Board of Director member Raymond A. Weigel, III served as a
director of the Company (until May 20, 1997), he was also a shareholder of the
former general partner of the Dissolved Partnership. During fiscal 1997, the
Dissolved Partnership paid management fees to the former general partner of
approximately $75,000. In addition, the former general partner also served as
general partner of a limited partnership that leased property to the Dissolved
Partnership for use in its restaurant operations. During the period in fiscal
1997 that Mr. Weigel served as a director of the Company, the Dissolved
Partnership made lease payments of approximately $205,000 to this entity
affiliated with Mr. Weigel.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None.
OTHER MATTERS
Meritage is not aware of any other matters to be presented at the Annual
Meeting other than those specified in the Notice.
By Order of the Board of Directors,
/s/ James R. Saalfeld
-----------------------------------
James R. Saalfeld
Secretary
April 13, 1998
<PAGE>
MERITAGE HOSPITALITY GROUP INC.
PROXY The undersigned hereby appoints ROBERT E. SCHERMER, SR. and
FOR CHRISTOPHER B. HEWETT, or either of them, proxies of the undersigned,
ANNUAL each with the power of substitution, to vote all shares of Common
MEETING Stock which the undersigned would be entitled to vote on the matters
specified below and in their discretion with respect to such other
business as may properly come before the Annual Meeting of
Shareholders of Meritage Hospitality Group Inc. to be held on May 19,
1998 at 10:00 a.m. Eastern Time at the Thomas Edison Inn, 500 Thomas
Edison Parkway, Port Huron, Michigan or any adjournment of such Annual
Meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING
PROPOSALS:
1. Authority to elect as directors the seven (7) nominees listed
below.
FOR _______ WITHHOLD AUTHORITY _______
GARY R. GARRABRANT, CHRISTOPHER B. HEWETT, DAVID S. LUNDEEN,
JOSEPH L. MAGGINI, JERRY L. RUYAN, ROBERT E. SCHERMER, SR. AND
ROBERT E. SCHERMER, JR.
WRITE THE NAME OF ANY NOMINEE(S) FOR WHOM AUTHORITY TO VOTE IS
WITHHELD
-----------------------------------------------------------------
2. Amendment of the 1996 Management Equity Incentive Plan increasing
the number of shares of Common Stock in the Plan by 250,000.
FOR _______ AGAINST _______ ABSTAIN _______
THIS PROXY WILL BE VOTED AS RECOMMENDED BY THE BOARD OF DIRECTORS
UNLESS A CONTRARY CHOICE IS SPECIFIED.
(This proxy is continued and is to be signed on the reverse side)
<PAGE>
Date , 1998
----------------
----------------------------------------
----------------------------------------
(Important: Please sign exactly
as name appears hereon
indicating, where proper, official
position or representative capacity.
In the case of joint holders, all
should sign.)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
