<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended February 28, 1998.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------------- ----------------
Commission File Number: 0-17442
MERITAGE HOSPITALITY GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-2730460
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
40 PEARL STREET, N.W., SUITE 900
GRAND RAPIDS, MICHIGAN 49503
(Address of Principal Executive Offices) (Zip Code)
(616) 776-2600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of April 10, 1998 there were 4,993,549 outstanding Common Shares, $.01 par
value.
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) considered necessary for a fair
presentation of the financial position, results of operations, stockholders'
equity and cash flows of the Company have been included. For further
information, please refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1997. The results of operations for the three month period
ended February 28, 1998 are not necessarily indicative of the results to be
expected for the full year.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
2
<PAGE> 3
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1998 AND NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
FEBRUARY 28,
1998 NOVEMBER 30,
(UNAUDITED) 1997
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 879,457 $ 1,061,475
Trade accounts receivable, less allowance for
doubtful accounts of $65,000 426,298 631,732
Receivable from sale of hotel assets -- 3,601,063
Inventories 262,774 255,750
Deferred income taxes 22,000 22,000
Prepaid expenses and other current assets 300,610 282,243
----------- -----------
Total Current Assets 1,891,139 5,854,263
PROPERTY, PLANT AND EQUIPMENT, NET 20,183,817 18,979,313
DEFERRED INCOME TAXES 550,000 550,000
OTHER ASSETS
Goodwill, net of amortization of $131,602 and
$2,278,454 respectively 4,335,446 3,586,177
Land held for expansion 697,313 697,313
Financing costs, net of amortization of $126,385
and $108,014 respectively 431,150 449,520
Cash surrender value of life insurance, net of policy
loans of $259,893 22,943 14,059
Marina development costs 1,107,639 1,152,772
Sundry 693,077 189,849
----------- -----------
Total Other Assets 7,287,568 6,089,690
----------- -----------
Total Assets $29,912,524 $31,473,266
=========== ===========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
3
<PAGE> 4
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
FEBRUARY 28, 1998 AND NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FEBRUARY 28,
1998 NOVEMBER 30,
(UNAUDITED) 1997
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 1,586,563 $ 4,565,928
Current portion of obligations under capital lease 271,619 264,372
Trade accounts payable 1,789,543 2,035,220
Accrued expenses 1,055,333 1,111,310
Other 589,334 61,001
------------ ------------
Total Current Liabilities 5,292,392 8,037,831
LONG-TERM DEBT 19,291,466 19,374,431
OBLIGATIONS UNDER CAPITAL LEASE 1,618,944 1,689,628
DEFERRED INCOME TAXES 740,000 740,000
MINORITY INTEREST -- 1,601,415
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 138,387 shares in 1998 and 1997 (liquidation
value - $1,383,870) 1,384 1,384
Common stock - $0.01 par value; authorized 30,000,000
shares; issued and outstanding 4,992,832 and 3,218,778
respectively 49,929 32,188
Additional paid in capital 17,288,695 12,982,295
Note receivable from the sale of shares (5,854,084) (5,700,645)
Accumulated deficit (8,516,202) (7,285,261)
------------ ------------
Total Stockholders' Equity 2,969,722 29,961
------------ ------------
Total Liabilities and Stockholders' Equity $ 29,912,524 $ 31,473,266
============ ============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
4
<PAGE> 5
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED FEBRUARY 28, 1998 AND 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET REVENUE
Room rents $ 718,792 $ 1,135,011
Food and beverages 7,171,375 7,451,794
Sundry 187,436 110,412
Telephone 33,885 65,691
----------- -----------
Total revenue 8,111,488 8,762,908
COSTS AND EXPENSES
Cost of food and beverages 2,102,502 2,281,742
Operating expenses 5,102,423 5,803,120
General and administrative expenses 1,092,461 1,015,997
Depreciation and amortization 478,784 530,925
----------- -----------
Total costs and expenses 8,776,170 9,631,784
LOSS FROM OPERATIONS (664,682) (868,876)
OTHER INCOME (EXPENSE)
Interest expense (717,254) (699,737)
Interest income 156,455 141,326
Minority interest 25,677 102,352
----------- -----------
(535,122) (456,059)
----------- -----------
Net Loss (1,199,804) (1,324,935)
DIVIDENDS ON PREFERRED STOCK 31,137 12,760
----------- -----------
NET LOSS ON COMMON SHARES $(1,230,941) $(1,337,695)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.32) $ (0.42)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 3,810,574 3,209,679
=========== ===========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
5
<PAGE> 6
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED NOVEMBER 30, 1997 AND THE
THREE MONTH PERIOD ENDED FEBRUARY 28, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A NOTE
CONVERTIBLE ADDITIONAL RECEIVABLE
PREFERRED COMMON PAID-IN SALE OF ACCUMULATED
STOCK STOCK CAPITAL SHARES DEFICIT TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 1, 1996 $1,084 $32,045 $12,616,727 $(5,135,716) $(5,492,697) $ 2,021,443
Issuance of 14,295 shares of
common stock -- 143 65,868 -- -- 66,011
Issuance of 30,000 shares of
preferred stock 300 -- 299,700 -- -- 300,000
Dividends paid - preferred stock -- -- -- -- (101,714) (101,714)
Recognition of interest income
on note receivable from sale
of shares -- -- -- (564,929) -- (564,929)
Net loss -- -- -- -- (1,690,850) (1,690,850)
------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 30, 1997 $1,384 $32,188 $12,982,295 $(5,700,645) $(7,285,261) $ 29,961
Issuance of 1,774,054 shares of
common stock -- 17,741 4,306,400 -- -- 4,324,141
Dividends paid - preferred stock -- -- -- -- (31,137) (31,137)
Recognition of interest income
on note receivable from sale
of shares -- -- -- (153,439) -- (153,439)
Net loss -- -- -- -- (1,199,804) (1,199,804)
------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1998 $1,384 $49,929 $17,288,695 $(5,854,084) $(8,516,202) $ 2,969,722
====================================================================================
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
6
<PAGE> 7
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED FEBRUARY 28, 1998 AND 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,199,804) $(1,324,935)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 478,784 530,925
Compensation and fees paid by issuance of common shares 1,691 49,083
Minority interest in net loss of consolidated subsidiaries (25,677) (102,352)
Interest income on note receivable from sale of shares (153,439) (138,234)
Interest expense refinanced as long-term debt 5,299 --
(Increase) decrease in assets
Accounts receivable 205,434 158,611
Inventories (7,024) 25,089
Prepaid expenses and other current assets (18,367) (110,373)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 226,679 (704,708)
----------- -----------
Net cash used in operating activities (486,424) (1,616,894)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of hotel assets 3,601,063 --
Purchase of property, plant and equipment (95,650) (423,175)
Decrease in other assets (41,128) (52,051)
----------- -----------
Net cash provided by (used in) investing activities 3,464,285 (475,226)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 475,000 317,450
Principal payments of long-term debt (3,542,630) (111,361)
Payments on obligations under capital leases (63,437) (52,106)
Proceeds from issuance of common shares 2,325 --
Proceeds from issuance of preferred shares -- 300,000
Dividends paid (31,137) (12,760)
----------- -----------
Net cash (used in) provided by financing activities (3,159,879) 441,223
----------- -----------
Net decrease in cash (182,018) (1,650,897)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,061,475 2,265,497
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 879,457 $ 614,600
=========== ===========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION - SEE NOTE A
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS.
7
<PAGE> 8
MERITAGE HOSPITALITY GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED FEBRUARY 28, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Cash paid for interest expense $ 530,490 $701,297
Schedule of non-cash investing and financing transactions
Acquisition of remaining 46% interest in Wendy's of
West Michigan Limited Partnership, including assets
acquired and liabilities assumed
Fair value of tangible and intangible assets acquired $2,744,387
Reduction of minority interest 1,575,738
----------
1,772,359 common shares issued $4,320,125
==========
Acquisition of equipment
Cost of equipment $244,637
Equipment loan 244,637
--------
Cash down payment for equipment $ --
========
</TABLE>
NOTE B - LOSS PER SHARE
Beginning in fiscal 1998, the Company adopted Financial Accounting
Standards Number 128 - "Earnings Per Share". Prior year earnings per share
amounts reflect this new pronouncement.
Basic earnings per common share are computed by dividing net earnings
available to common shareholders by the weighted average number of common shares
outstanding during each period. Diluted earnings per share reflect per share
amounts that would have resulted if dilutive potential common stock had been
converted to common stock. As of February 28, 1998 and 1997, the Company had
138,387 and 108,387 shares of Series A convertible cumulative preferred stock
outstanding, respectively. Each share of preferred stock is convertible into
1.43 shares of common stock. The convertible preferred stock was not included in
the computation of diluted loss per common share because the effect of
conversion would be antidilutive.
NOTE C - ACQUISITION
On January 30, 1998, the Company acquired the remaining 46% of the
Wendy's Partnership in exchange for 1,772,359 common shares, which had a value
of $4,320,125. As a result of this transaction, assets were recorded at their
fair value (a $2,744,387 increase) and minority interest was eliminated (a
$1,575,738 reduction).
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
FOOD SERVICE GROUP
The following summarizes the Company's results of operations for the
Food Service Group for the periods ended February 28, 1998 and 1997.
<TABLE>
<CAPTION>
Statements of Operations
-----------------------------------------------------
$ in Thousands % of Revenue
-------------------- ---------------------
1998 1997 1998 1997
-------------------- ---------------------
<S> <C> <C> <C> <C>
Net revenue
Food and beverage revenue $6,023 $5,830 99.2% 99.2%
Other revenue 48 47 0.8 0.8
------ ------ ---- ----
Total revenue 6,071 5,877 100.0% 100.0%
Costs and expenses
Cost of food and beverages 1,715 1,692 28.2 28.8
Operating expenses 3,777 3,742 62.2 63.7
General and administrative expenses 358 331 5.9 5.6
Depreciation and amortization 235 227 3.9 3.9
------ ------ ---- ----
Total costs and expenses 6,085 5,992 100.2% 102.0%
Loss from operations (14) (115) (0.2) (2.0)
Other income (expense)
Interest expense (102) (111) (1.7) (1.9)
Interest income 3 3 0.1 0.1
------ ------ ---- ----
(99) (108) (1.6) (1.8)
------ ------ ---- ----
Net Loss $ (113) $ (223) (1.8%) (3.8%)
====== ====== ==== ====
</TABLE>
REVENUE
Food and beverage revenue (excluding other income) for the Food Service
Group increased 3.3%, from $5,830,245 for the three months ended February 28,
1997 to $6,023,116 for the same period of 1998. Excluding the store that was
closed in August 1997, same store sales increased 4.4% for the first quarter of
1998. Price increases during the first quarter of 1998 were less than 1% over
the prices in effect during the first quarter of 1997. Mild winter weather
conditions helped produce the increase in sales. The 4.4% same store sales
increase was achieved despite the closing of the hot bar portion of the
restaurants' "Superbars" in August 1997. The "all-you-can-eat" "Superbars"
accounted for approximately 6.3% of sales in the first quarter of 1997.
However, sales increases were less than expected due to the intense discounting
strategy employed by competitors in the Company's market area. The Company and
Wendy's International continue to resist engaging in deep discounting as a
means of increasing sales and continue to rely on the 99 cent value menu to
reach bargain conscious customers.
9
<PAGE> 10
COST OF FOOD AND BEVERAGES
Cost of food and beverages increased $23,066 for the three months ended
February 28, 1998 compared to the same period of 1997, while revenue increased
$192,871 for the same period. This resulted in a .6 percentage point decrease in
the Company's food and beverage cost percentage (from 28.8% of revenue for the
three months ended February 28, 1997, to 28.2% of revenue for the same period of
1998). The decrease in the Company's cost of food and beverage percentage was
primarily the result of relatively stable food costs throughout the three months
ended February 28, 1998, and effective cost controls including the closing of
the hot bar portion of the "Superbars" which had a higher food cost than their
menu replacement - pita sandwiches.
OPERATING EXPENSES
As a percentage of revenue, operating expenses decreased 1.5 percentage
points for the three months ended February 28, 1998 compared to the same period
of 1997 (from 63.7% of sales in 1997 to 62.2% in 1998). A decrease in payroll
costs of 1.0 percentage points was the primary reason for the decrease in
operating costs. The decrease in payroll costs was achieved despite an increase
in hourly labor rates of approximately 10 cents per hour, a 1.7% increase for
the three months ended February 28, 1998 compared to the same period of 1997. On
a per restaurant basis, restaurant operating expenses increased an average of
only $7,000 (5.0%) from the same period last year, which is consistent with the
increase in same store sales.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $26,980 for the three
months ended February 28, 1998 compared to the same period of 1997 (from
$330,771 to $357,751). As a percentage of revenue, general and administrative
expenses increased from 5.6% of revenue for the three months ended February 28,
1997, to 5.9% of revenue for the same period of 1998. Slight increases in
administrative salaries and recruiting costs accounted for the increase in
general and administrative expenses.
LODGING GROUP
The Company's lodging group consisted of three hotel properties for the
three month period ended February 28, 1997 (i) the Thomas Edison Inn, (ii) the
Grand Harbor Resort, and (iii) the St. Clair Inn. The Company sold the St. Clair
Inn on November 30, 1997. Therefore, to facilitate a comparative discussion of
operations for the three months ended February 28, 1997 and 1998, the following
pro forma financial information represents the operating results of the Lodging
Group for the first quarter of 1997 excluding the operating results of the St.
Clair Inn.
10
<PAGE> 11
The following summarizes the Company's results of operations for the
Lodging Group for the periods ended February 28, 1998 and 1997.
<TABLE>
<CAPTION>
Statements of Operations
---------------------------------------------------------
$ in Thousands % of Revenue
---------------------------------------------------------
(Pro Forma) (Pro Forma)
1998 1997 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue
Room rents $ 719 $ 839 36.8% 40.6%
Food and beverage revenue 1,149 1,148 58.7 55.5
Telephone and sundry revenue 88 81 4.5 3.9
------- ------- ------- -------
Total revenue 1,956 2,068 100.0% 100.0%
Costs and expenses
Cost of food and beverages 387 420 19.8 20.3
Operating expenses 1,253 1,441 64.1 69.7
General and administrative expenses 734 614 37.5 29.7
Depreciation and amortization 244 221 12.5 10.7
------- ------- ------- -------
Total costs and expenses 2,618 2,696 133.9 130.4
Loss from operations (662) (628) (33.9) (30.4)
Other income (expense)
Interest expense (597) (502) (30.5) (24.3)
Interest income 153 138 7.9 6.7
------- ------- ------- -------
(444) (364) (22.6) (17.6)
------- ------- ------- -------
Net loss $(1,106) $ (992) (56.5%) (48.0%)
======= ======= ======= =======
</TABLE>
REVENUE
Total revenue for the Lodging Group was $1,955,813 for the first
quarter of 1998 compared to $2,067,991 for the first quarter of 1997. The
following table outlines revenues (excluding sundry and telephone) by category:
<TABLE>
<CAPTION>
%
(Pro Forma) Increase Increase
1998 1997 (Decrease) (Decrease)
------------------------------------------------------------
<S> <C> <C> <C> <C>
Room revenue $ 718,792 $ 838,937 $(120,145) (14.3%)
Food and beverage revenue 1,148,645 1,147,643 1,002 0.1
------------------------------------------------
Total $1,867,437 $1,986,580 $(119,143) (6.0%)
================================================
</TABLE>
Room revenue declined $120,145 due to a decline in occupied rooms from
12,135 for the three months ended February 28, 1997 compared to 10,212 for the
same period in 1998. This decline in occupied rooms was responsible for a
revenue decline of $132,937, which was offset somewhat by a $1.26 (1.8%)
increase in the average room rate. Approximately 70% of the occupied room
decline (or 1,333 rooms) was experienced at the Grand Harbor Resort. This
decline was primarily an expected result of the transition from a franchised
property (Holiday Inn) to an independent
11
<PAGE> 12
property in October 1997. The decline of 590 rooms for the comparative three
months at the Thomas Edison Inn was the result of increased competition from new
limited service hotels in the area that charge lower room rates, and the
completion in 1997 of an ongoing training program conducted by a major customer
at the Thomas Edison Inn during the past seven years.
The properties have experienced a slight increase in food and beverage
revenue ($1,002) for the three months ended February 28, 1998 compared to the
same period in 1997. Management has successfully implemented several programs
which have offset the decline in food and beverage revenues from in-house
guests. These include (i) serving a Friday night seafood buffet and holding
Wednesday night theme parties in the lounge at the Thomas Edison Inn, and (ii)
booking popular weekend entertainment and holding theme parties in the lounge of
the Grand Harbor Resort.
COST OF FOOD AND BEVERAGES
Cost of food and beverages (as a percentage of food and beverage
revenue) for the first quarter of 1998 was 33.7% compared to 36.6% for the same
period of 1997. The decrease was attributable to a significant reduction in the
cost of food and beverages at the Grand Harbor Resort due to the implementation
of more effective cost controls than those in place during the first quarter of
1997. Cost of food and beverages at the Thomas Edison Inn increased slightly (.8
percentage points) for the first quarter of 1998 compared to the same period of
1997.
OPERATING EXPENSES
Operating expenses for the first quarter of 1998 and 1997 were
$1,253,071 and $1,441,272 respectively, a decrease of $188,201 (13.1%). As a
percentage of total revenue, operating expenses decreased 5.6 percentage points,
from 69.7% for the first quarter of 1997 to 64.1% for the first quarter of 1998.
The decrease in operating expenses was primarily attributable to decreased
operating expenses at the Grand Harbor Resort of approximately $171,000. These
included significant decreases in payroll, advertising and maintenance costs.
The decrease in occupied rooms for the first quarter of 1998 at the Grand Harbor
Resort also contributed to the decrease in operating expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $120,022 for the first
quarter of 1998 compared to the same period of 1997. The increase in general and
administrative expenses for the first quarter of 1998 was primarily the result
of an increase in legal fees of approximately $153,000 due to the ongoing
litigation between the Company and the former general partner of the now
dissolved Wendy's of West Michigan Limited Partnership.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $22,354 (10.1%) for the
first quarter of 1998 compared to the same period last year. The increase in
depreciation and amortization expense was the result of depreciation on 1997
property and equipment additions.
INTEREST EXPENSE
Interest expense for the first quarter of 1998 and 1997 was $597,049
and $501,822 respectively. The increase of $95,227 was due to additional
borrowings in fiscal 1997 and an increase in interest rates. See "Liquidity and
Capital Resources" for details about the Company's long-term debt.
12
<PAGE> 13
INTEREST INCOME
Interest income increased $15,088 for the first quarter of 1998
compared to the same period of 1997. The increase was attributable to the
increase in interest income from the note receivable from the sale of stock.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS - THREE MONTHS ENDED FEBRUARY 28, 1998
Cash and cash equivalents ("cash") decreased $182,018, from $1,061,475
as of November 30, 1997 to $879,457 as of February 28, 1998. The decrease in
cash was the result of the following:
<TABLE>
<CAPTION>
<S> <C>
Net cash used in operating activities $ (486,424)
Net cash provided by investing activities 3,464,285
Net cash used in financing activities (3,159,879)
------------
Net decrease in cash $ (182,018)
============
</TABLE>
Net cash used in operating activities of $486,424 was due to a net loss
before depreciation and amortization and minority interest of $746,697, plus
other non-cash effects on net income and net cash used in operating activities
which totaled $146,449. This cash used in operating activities was offset by the
net change in current non-cash assets and liabilities of $406,722 which provided
cash from operating activities.
Net cash provided from investing activities of $3,464,285 was the
result of $3,601,063 of proceeds from the sale of the St. Clair Inn and
associated assets being offset by $95,650 of property and equipment purchases
and a $41,128 change in other assets.
Net cash used in financing activities of $3,159,879 was the result of
$3,606,067 in payments to reduce long term debt and capital lease obligations,
as well as $31,137 of preferred dividends paid. These payments were offset by
long term borrowings of $475,000, and $2,325 received from issuance of common
shares.
FINANCIAL CONDITION
At February 28, 1998, the Company's current liabilities exceeded its
current assets by $3,401,253, compared to November 30, 1997 when current
liabilities exceeded current assets by $2,183,568. At these dates, the ratios of
current assets to current liabilities were 0.36:1 and 0.73:1 respectively. See
"Cash Flows - Three months ended February 28, 1998" for an explanation of the
decrease in cash and working capital. Another significant reason for the
decrease in working capital was an increase in the current portion of long term
debt of approximately $260,000.
13
<PAGE> 14
As of February 28, 1998, the Company's long-term debt consisted primarily
of the following:
1) $11,126,868 Loan I requiring monthly payments of $118,724, including
interest at 11.25% through December 1, 2003, at which time the
remaining unpaid principal will be due.
2) $5,369,543 Loan II requiring monthly principal payments of $50,000,
plus interest at 8% over the prime rate 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. (A)
3) $785,336 Loan III (marina) requiring monthly payments of interest only
at 11.25%. Principal payments of $35,000 are required at the time of
the sale of any of the marina condominium units. Any remaining
outstanding balance of principal and accrued interest is due September
1, 2000. As of February 28, 1998, the loan balance was $785,336 and
the Company had $75,000 of available borrowings under the loan.
4) $2,423,485 revolving term loan requiring monthly payments of a minimum
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 borrowings.
The Company had $236,630 of available unused borrowings at February
28, 1998. The loan is secured by substantially all of the assets used
in the Company's Wendy's operation and guaranteed by the Company.
5) $242,225 equipment note payable requiring monthly payments of $8,774,
including interest at 8.8%, through October 2000.
6) $776,067 note payable to the Company's Chairman of the Board of
Directors. The loan requires the Company to make monthly payments of
interest only at the prime rate plus 8% provided the Company is not in
default under its long-term debt with its primary lender. Unpaid
principal and accrued interest must be paid 91 days after Loans I, II
and III are paid off.
(A) The Company's primary lender has deferred $50,000 of principal
payments due April 1, 1998 and May 1, 1998 until June 30, 1998.
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
February 28, 1998 the Company failed to meet certain of these financial
covenants. However, a waiver has been obtained through June 30, 1999.
14
<PAGE> 15
A summary of the financial covenants as well as the Company's
compliance with them is as follows:
<TABLE>
<CAPTION>
COVENANT FEBRUARY 28, 1998 COVENANT
COVENANT DESCRIPTION REQUIREMENT ACTUAL CONDITION COMPLIANCE
<S> <C> <C> <C>
Waiver obtained
through
Minimum Net Worth $8,000,000 $2,969,722 June 30,1999
Coverage Ratio -
Earnings before interest, taxes Waiver obtained
depreciation and amortization through
("EBITDA") of hotels : 1.75 : 1 .88 : 1 June 30, 1999
Debt Service
Coverage Ratio - Waiver obtained
EBITDA of hotels less capital through
expenditures : .70 : 1 .67 : 1 June 30, 1999
Debt Service
</TABLE>
The following schedule details the financial covenant requirements as
contained in the Company's amended loan agreement following the expiration of
its waiver:
<TABLE>
<CAPTION>
Financial Covenant - Minimum Net Worth
<S> <C>
August 31, 1999 - October 31, 1999 $9,250,000
November 30, 1999 - October 31, 2000 $10,750,000
November 30, 2000 - October 31, 2001 $12,500,000
November 30, 2001 - October 31, 2002 $14,500,000
November 30, 2002 - October 31, 2003 $16,500,000
Financial Covenant - Coverage Ratio - EBITDA of Hotels : Debt Service
August 31, 1999 - August 31, 2000 1.9 : 1
November 30, 2000 2.0 : 1
February 28, 2001 2.1 : 1
May 31, 2001 2.2 : 1
August 31, 2001 2.3 : 1
Financial Covenant - Coverage Ratio - EBITDA of Hotels Less Capital
Expenditures : Debt Service
August 31, 1999 1.4 : 1
November 30, 1999 - February 28, 2001 1.6 : 1
May 31, 2001 - August 31, 2001 1.7 : 1
November 30, 2001 and thereafter 1.8 : 1
</TABLE>
15
<PAGE> 16
The Company continues to face cash flow and liquidity issues that are
typical in a seasonal business. Due to the high level of fixed costs required to
operate the hotels, significant expenditures necessary to the hotel operations
cannot be reduced at the same rate that the revenues decrease during the
off-season. As such, the Company is in a cash flow situation that requires it to
manage relationships with vendors to allow for extension of credit terms during
the off-season, with the Company bringing its accounts current during the high
season (summer) months. In addition to the cash flow and liquidity issues faced
due to the seasonal nature of the business, the Company is in a situation where
it has been forced to carry the high-interest rate (prime plus 8%) Loan II with
its primary lender for a much longer period of time than was originally
contemplated. As a result, the outstanding balance of Loan II is greater than
anticipated and, thus, carries greater debt service than was planned. However,
the Company anticipates that it will be able to meet its current obligations
over the next twelve months by:
o Attempting to sell the vacant land held for expansion valued at
approximately $1,200,000.
o Continuing its efforts to sell one or more of the Company's hotel
properties.
o Borrowing on the available revolving term loan, which was approximately
$237,000 as of February 28, 1998.
o Deferring $100,000 of principal payments due to its primary lender on April
1 and May 1 until June 30 in order to better match payments with the
increased seasonal cash flow.
o Deferring the payment of the $160,000 annual general partner fee owed to
MCC Food Service, Inc., the general partner of Wendy's of Michigan.
o Attempting to refinance the mortgage loan on the real estate owned by
Wendy's of Michigan which would net the Company approximately $2,000,000
from the transaction after closing costs and retirement of the underlying
mortgage loans on the Wendy's properties. The $2,000,000 would be used to
replace a portion of the Company's high interest rate Loan II which would
result in a reduction in the Company's annual debt service.
o Exploring the financing of certain of the planned capital expenditures as
opposed to a cash payment for the capital improvements, specifically with
respect to planned renovations at the Wendy's restaurants.
o Managing relationships with vendors during the off-season to obtain an
extension of the credit terms.
o Reducing or deferring capital expenditures described below.
There can be no assurances, however, that the Company will be able to
complete the above activities or that completion would yield the results
expected.
The Company estimates capital expenditures for the next twelve months
to be approximately $900,000 for building improvements and furniture, fixtures
and equipment purchases at its existing hotels and Wendy's restaurants. The
Company has received various proposals to finance (through debt or lease) both
the real estate and furniture, fixtures and equipment of any new Wendy's
restaurants. Of the total expected amount of capital expenditures, the Company
estimates expenditures at its full service hotels to be approximately $300,000.
16
<PAGE> 17
INFLATION AND CHANGING PRICES
Both the lodging and food service industries have been affected by the
increase in the minimum wage and the availability of management and hourly
employees. Increases in labor costs, along with periodic increases in food and
other operating expenses, are normally passed on to customers in the form of
price increases. However, highly competitive market conditions have minimized
the Company's ability to offset higher costs through price increases to its
customers.
COMPUTER SYSTEMS - YEAR 2000 IMPACT
The Company and its vendors have become increasingly reliant on
computer systems to process transactions and to provide relevant business
information. The majority of computer systems designed prior to the mid-1990's
are susceptible to a well publicized problem associated with an inability to
process date related information beyond the year 2000. Almost all of the
Company's computer hardware was acquired within the past two years. The Company
is in the process of reviewing its computer software with the assistance of the
software designers to insure that all significant software applications are year
2000 compliant, and anticipates completing its review during fiscal 1998.
However, the Company can make no assurance that all year 2000 risks to the
Company and to its critical vendor systems can be identified and successfully
negated through modification of existing programs. The Company does not expect
to incur significant costs to review its computer systems to determine what
measures, if any, are required to be year 2000 compliant. However, the Company
cannot determine what, if any, costs may be required to ensure that the computer
systems are year 2000 compliant.
17
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On February 26, 1998, the Board of Directors authorized an agreement
whereby Meritage Capital Corp. and its principals (Christopher B. Hewett and
Robert E. Schermer, Jr.) will be indemnified by the Company for any losses or
expenses that they may incur as guarantors of the Company's obligations under
the $750,000 business loan note with the Company's Chairman of the Board, Robert
E. Schermer, Sr.
On March 12, 1998, the Board of Directors amended the Company's Bylaws
to adopt measures designed to protect the Company and its shareholders against
potentially disruptive and destructive actions that could be brought by
dissident shareholders and others. These measures included (i) changing the
required shareholder vote to call a special shareholders' meeting to not less
than 45% of shares entitled to vote at such meeting, (ii) changing the
requirements for attendance and participation at a meeting of shareholders so
that attendance and participation by telephone or similar communication is not
allowed, and (iii) changing the right of shareholders to amend, repeal or adopt
new bylaws so that such action may be taken at a meeting of shareholders but not
by written consent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit List.
------------
<TABLE>
<CAPTION>
Exhibit No. Description of Document
----------- ---------------------------------------------------------------
<S> <C>
3.2 Restated and Amended Bylaws of Meritage Hospitality Group Inc.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
On April 2, 1998, the Company filed Amendment No. 1 to the
Form 8-K originally filed on February 10, 1998 which reported
that a contract to sell real and personal property comprising,
among other things, one the Company's hotel properties for
$12.2 million did not close by the closing deadline of
April 1, 1998.
</TABLE>
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 10, 1998 MERITAGE HOSPITALITY GROUP INC.
By /s/ Christopher B. Hewett
-------------------------------------
Christopher B. Hewett
President and Chief Executive Officer
By /s/ Pauline M. Krywanski
-------------------------------------
Pauline M. Krywanski
Vice President and Treasurer
(Chief Financial Officer)
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- ----------- --------------------------------------------------------------
<S> <C>
3.2 Restated and Amended Bylaws of Meritage Hospitality Group Inc.
27 Financial Data Schedule.
</TABLE>
20
<PAGE> 1
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. 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.
-1-
<PAGE> 2
Section 3. Order of Business at Annual Meeting. The order of business
at the annual meeting of the shareholders shall be as follows:
(a) Reading of notice and proof of mailing,
(b) Reports of Officers,
(c) Election of Directors,
(d) Transaction of other business mentioned in the notice,
(e) Adjournment,
provided that, in the absence of any objection, the presiding officer may vary
the order of business at his discretion.
Section 4. Notice of Meeting of Shareholders. Except as otherwise
provided in the Michigan Business Corporation Act (herein called the "Act"),
written notice of the time, place, and purpose of a meeting of shareholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting, either personally or by mail, to each shareholder of record
entitled to vote at the meeting. When a meeting is adjourned to another time or
place, it is not necessary to give notice of the adjourned meeting if the time
and place to which the meeting is adjourned are announced at the meeting at
which the adjournment is taken and at the adjourned meeting only such business
is transacted as might have been transacted at the original meeting. However, if
after the adjournment the board of directors fix a new record date for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record on the new record date entitled to vote at the meeting.
Section 5. List of Shareholders Entitled to Vote. The officer or agent
having charge of the stock transfer books for shares of the corporation shall
make and certify a complete list of the shareholders entitled to vote at a
shareholders' meeting or any adjournment thereof. The list shall:
(a) Be arranged alphabetically within each class and series,
with the address of, and the number of shares held by, each
shareholder.
(b) Be produced at the time and place of the meeting.
(c) Be subject to inspection by any shareholder during the
whole time of the meeting.
(d) Be prima facie evidence as to who are the shareholders
entitled to examine the list or to vote at the meeting.
-2-
<PAGE> 3
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 forty-five percent (45%) of all the shares entitled to vote at
such special meeting. The method by which such meeting may be called is as
follows: Upon receipt of a specification in writing setting forth the date and
objects of such proposed special meeting, signed by the chief executive officer,
or by a majority of the members of the board of directors then in office, or by
shareholders as above provided, the secretary of this corporation shall prepare,
sign, and mail the notices requisite to such meeting.
Section 7. Quorum of Shareholders. Unless a greater or lesser quorum is
provided in the articles of incorporation, in a bylaw adopted by the
shareholders, or in the Act, shares entitled to cast a majority of the votes at
a meeting constitute a quorum at the meeting. The shareholders present in person
or by proxy at such meeting may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum. Whether or not a quorum is present, the meeting may be adjourned by a
vote of the shares present.
Section 8. Vote of Shareholders. Each outstanding share is entitled to
one (1) vote on each matter submitted to a vote, unless otherwise provided in
the articles of incorporation. A vote may be cast either orally or in writing.
When an action, other than the election of directors, is to be taken by vote of
the shareholders, it shall be authorized by a majority of the votes cast by the
holders of shares entitled to vote thereon, unless a greater plurality is
required by the articles of incorporation or the Act. Directors shall be elected
by a plurality of the votes cast at an election.
Section 9. Record Date for Determination of Shareholders. For the
purpose of determining shareholders entitled to notice of and to vote at a
meeting of shareholders or an adjournment thereof, or to express consent or to
dissent from a proposal without a meeting, or for the purpose of determining
shareholders entitled to receive payment of a dividend or allotment of a right,
or for the purpose of any other action, the board may fix, in advance, a date as
the record date for any such determination of shareholders. The date shall not
be more than sixty (60) nor less than ten (10) days before the date of the
meeting, nor more than sixty (60) days before any other action. If a record date
is not fixed (a) the record date for determination of shareholders entitled to
notice of or to vote at a meeting of shareholders shall be the close of business
on the day next preceding the day on which notice is given, or, if no notice is
given, the day next preceding the day on which the meeting is held, and (b) the
record date for determining shareholders for any purpose other than that
specified in subdivision (a) shall be the close of business on the day on which
the resolution of the board relating thereto is adopted. When a determination of
shareholders of record entitled to notice of or to vote at a meeting of
shareholders has been made as provided in this Section, the determination
applies to any adjournment of the meeting, unless the board fixes a new record
date under this Section for the adjourned meeting.
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.
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<PAGE> 4
A proxy shall be signed by the shareholder or his authorized agent or
representative. A proxy is not valid after the expiration of three (3) years
from its date unless otherwise provided in the proxy.
Section 11. Inspectors of Election. The board of directors, in advance
of a shareholders' meeting, may appoint one (1) or more inspectors of election
to act at the meeting or any adjournment thereof. If inspectors are not so
appointed, the person presiding at a shareholders' meeting may, and on request
of a shareholder entitled to vote thereat shall, appoint one (1) or more
inspectors. In case a person appointed fails to appear or act, the vacancy may
be filled by appointment made by the board of directors in advance of the
meeting or at the meeting by the person presiding thereat. The inspectors shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the validity and
effect of proxies, and shall receive votes, ballots or consents, hear and
determine challenges and questions arising in connection with the right to vote,
count and tabulate votes, ballots or consents, determine the result, and do such
acts as are proper to conduct the election or vote with fairness to all
shareholders. On request of the person presiding at the meeting or a shareholder
entitled to vote thereat, the inspectors shall make and execute a written report
to the person presiding at the meeting of any of the facts found by them and
matters determined by them. The report is prima facie evidence of the facts
stated and of the vote as certified by the inspectors.
Section 12. Repealed.
Section 13. Repealed.
Section 14. Nominations and Other Business.
(a) Annual Meeting of Shareholders. (1) Nominations of persons for
election to the Board of Directors of the corporation and proposals of business
to be considered by the shareholders may be made at an annual meeting of
shareholders (i) pursuant to the corporation's notice of meeting, (ii) by or at
the direction of the Board of Directors or (iii) by a shareholder of the
corporation who was a shareholder of record at the time of giving of notice
provided for in this bylaw, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this bylaw.
(2) For nominations or other business to be properly brought
before an annual meeting by a shareholder pursuant to clause (iii) of paragraph
(a) (1) of this bylaw, the shareholder must have given timely notice thereof in
writing to the Secretary of the corporation. To be timely, a shareholder's
notice shall be delivered to the Secretary at the principal executive offices of
the corporation not less than 60 days prior to the annual meeting. Such
shareholder's notice shall set forth (i) as to each person whom the shareholder
proposes to nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (ii)
as to any other business that the shareholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the
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<PAGE> 5
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 the 10th day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting.
(c) General. (1) Only such persons who are nominated in accordance with
the procedures set forth in this bylaw shall be eligible to serve as directors
and only such shareholder proposals shall be considered at a meeting of
shareholders as shall have been brought before the meeting in accordance with
the procedures set forth in this bylaw. The chairman of the meeting shall have
the power and duty to determine whether a nomination or any business proposed to
be brought before the meeting was made in accordance with the procedures set
forth in this bylaw and, if any proposed nomination or business is not in
compliance with this bylaw, to declare that such defective proposal shall be
disregarded.
(2) For purposes of this bylaw, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national new service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Sections 13, 14, or 15(d) of the Exchange Act.
-5-
<PAGE> 6
(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.
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
-6-
<PAGE> 7
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 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.
-7-
<PAGE> 8
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 thereof may take action after notice
to any person or after lapse of a prescribed period of time, the action may be
taken without notice and without lapse of the period of time, if at any time
before or after the action is completed the person entitled to notice or to
participate in the action to be taken or, in case of a shareholder, by his
attorney-in-fact, submits a signed waiver of such requirements. Neither the
business to be transacted at, nor the purpose of, a regular or special meeting
of the board of directors need be specified in the waiver of notice of the
meeting. Attendance of a person at a meeting of shareholders, in person or by
proxy, or of a director at a meeting constitutes a waiver of notice of such
meeting, except when the person or director attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
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<PAGE> 9
ARTICLE V
OFFICERS
Section 1. Selection. The board of directors, at its first meeting and
at each meeting following the annual meeting of shareholders, shall elect or
appoint a president, a secretary, and a treasurer. The board of directors may
also elect or appoint a chairman of the board, one (1) or more vice presidents
and such other officers, employees, and agents as it shall deem necessary who
shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the board. Two
(2) or more offices may be held by the same person but an officer shall not
execute, acknowledge, or verify an instrument in more than one (1) capacity.
Section 2. Compensation. The salaries of all officers, employees, and
agents of the corporation shall be fixed by the board of directors; provided,
however, that the board may delegate to the officers the fixing of compensation
of assistant officers, employees, and agents.
Section 3. Term, Removal, and Vacancies. Each officer of the
corporation shall hold office for the term for which he is elected or appointed
and until his successor is elected or appointed and qualified, or until his
resignation or removal. An officer elected or appointed by the board of
directors may be removed by the board with or without cause at any time. An
officer may resign by written notice to the corporation. The resignation is
effective upon its receipt by the corporation or at a subsequent time specified
in the notice of resignation. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
Section 4. Chief Executive Officer. At the first meeting of each
newly-elected board of directors, the board shall designate the chairman of the
board or president as the chief executive officer of the corporation; provided,
however, that if a motion is not made and carried to change the designation, the
designation shall be the same as the designation for the preceding year;
provided, further, that the designation of the chief executive officer may be
changed at any special meeting of the board of directors. The president shall be
the chief executive officer whenever the office of chairman of the board is
vacant. The chief executive officer shall be responsible to the board of
directors for the general supervision and management of the business and affairs
of the corporation and shall see that all orders and resolutions of the board
are carried into effect. The chairman of the board or president who is not the
chief executive officer shall be subject to the authority of the chief executive
officer, but shall exercise all of the powers and discharge all of the duties of
the chief executive officer, during the absence or disability of the chief
executive officer.
Section 5. Chairman of the Board of Directors. If the board of
directors elects or appoints a chairman of the board, he shall be elected or
appointed by, and from among, the membership of, the board of directors. He
shall preside at all meetings of the shareholders, of the board of directors and
of any executive committee. He shall perform such other duties and functions as
shall be assigned to him from time to time by the board of directors. He shall
be, ex officio, a member of all standing
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<PAGE> 10
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.
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,
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<PAGE> 11
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, 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
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<PAGE> 12
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.
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
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<PAGE> 13
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 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.
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<PAGE> 14
(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.
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,
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<PAGE> 15
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.
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.
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<PAGE> 16
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. A majority of shareholders or the board of directors may
amend or repeal the bylaws or adopt new bylaws unless the power to do so is
reserved exclusively to the shareholders by the articles of incorporation. If
such action is being taken by the shareholders, it must be taken only at a duly
called meeting of shareholders; 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.
-16-
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