SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
and 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 Rule 14a-11(c) or Rule 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)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify 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 this filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
MERITAGE HOSPITALITY GROUP INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 18, 1999
Dear Shareholder:
We invite you to attend our Annual Meeting of Shareholders at 9:00 a.m. Eastern
Time on May 18, 1999 at the Peninsular Club, 120 Ottawa N.W., Grand Rapids,
Michigan. At the meeting, you will hear a report on our operations and have a
chance to meet your directors and executives.
This booklet includes the formal notice of the Annual Meeting and the Proxy
Statement. The Proxy Statement tells you more about the agenda and procedures
for the meeting. It also describes how the Board of Directors operates and
provides personal information about our directors and officers.
Even if you own only a few shares, we want your shares to be represented at the
meeting. I urge you to complete, sign, date and return your Proxy Card promptly
in the enclosed envelope.
Very truly yours,
/s/ Robert E. Schermer, Sr.
Robert E. Schermer, Sr.
Chairman of the Board of Directors
Dated: March 26, 1999
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 18, 1999
INTRODUCTION
The Board of Directors of Meritage Hospitality Group Inc. is requesting your
Proxy for use at the Annual Meeting of Shareholders on May 18, 1999 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 12, 1999.
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 director nominees named herein,
"FOR" the ratification of Grant Thornton LLP as the Company's independent public
accountants for fiscal 1999, 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 22, 1999, the record date for determining shareholders entitled to
notice of and to vote at the Annual Meeting, the Company had 5,748,421 common
shares outstanding. Each share is entitled to one vote. Only shareholders of
record at the close of business on March 22, 1999 will be entitled to vote at
the Annual Meeting.
PRINCIPAL SHAREHOLDERS
The following persons are the only shareholders known by the Company to own
beneficially 5% or more of its outstanding common shares as of March 22, 1998:
Name of Beneficial Owner Amount and Nature of Percent of Class
Beneficial Ownership
Robert E. Schermer, Sr. 475,514 (1) 8.3%
James R. Saalfeld 1,417,245 (2) 24.6%
(1) Includes options for 7,000 common shares which are immediately exercisable
and 2,000 common shares owned by Mr. Schermer's wife.
(2) Includes options for 16,500 common shares which are either vested or
exercisable within 60 days, and 1,392,868 common shares which are owned by
CBH Capital Corp. but for which Mr. Saalfeld holds an irrevocable proxy to
vote the shares.
<PAGE>
The business address of Mr. Schermer is 333 Bridge Street, N.W., Suite
1000, Grand Rapids, Michigan 49504. The business address of Mr. Saalfeld 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 six. The Board is nominating for reelection
the following directors: James P. Bishop, Christopher P. Hendy, 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.
RATIFICATION OF APPOINTMENT OF ACCOUNTANTS
The Board of Directors appointed Grant Thornton LLP as the Company's
independent public accountants for the fiscal year ending November 30, 1999.
Grant Thornton LLP has been the independent accounting firm for the Company
since fiscal 1993. Although not required by law, the Board of Directors is
seeking shareholder ratification of this selection. The affirmative vote of a
majority of shares voting at the Annual Meeting is required for ratification.
Representatives of Grant Thornton LLP are expected to be present at the
Annual Meeting and will be given an opportunity to comment, if they so desire,
and to respond to appropriate questions that may be asked by shareholders.
OTHER MATTERS
Any other matters considered at the Annual Meeting 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" ratification of the selection of independent
public accountants. If any other matters come before the Annual Meeting or any
adjournment thereof, each Proxy will be voted in the discretion of the
individual named as proxy.
SHAREHOLDER PROPOSALS
Shareholders who desire to include proposals in the Notice for the 2000
Annual Shareholders' Meeting must submit the written proposals to the Company's
Secretary no later than December 16, 1999.
<PAGE>
The form of Proxy for this meeting grants authority to the designated
proxies to vote in their discretion on any matters that come before the meeting
except those set forth in the Company's Proxy Statement and except for matters
as to which adequate notice is received. For notice to be deemed adequate for
the 2000 Annual Shareholders' Meeting, it must be received prior to February 25,
2000. If there is a change in the anticipated date of next year's Annual
Shareholders' Meeting or these deadlines by more than 30 days, we will notify
you of this change through our Form 10-Q filings.
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 22, 1999:
COMMON SHARES
BENEFICIALLY OWNED
NAME AND AGE (1) POSITION AMOUNT (2) PERCENTAGE
Robert E. Schermer, Sr. Chairman of the Board 476,903 8.29%
(3)(4)(5) of Directors
63
Robert E. Schermer, Jr. President, Chief Executive 202,443 3.49%
(3)(6)(7) Officer and Director
40
Ray E. Quada (6) Senior Vice President & 24,500 *
54 Chief Operating Officer
Pauline M. Krywanski (6) Vice President, Treasurer & 7,750 *
38 Chief Financial Officer
James R. Saalfeld (6)(8) Vice President, Secretary 1,417,245 24.58%
31 and General Counsel
James P. Bishop (4) (9) Director 10,959 *
58
Christopher P. Hendy (9) Director 5,910 *
41
Joseph L. Maggini Director 175,354 3.05%
(3) (4) (10
59
Jerry L. Ruyan (9) Director 230,592 4.0%
52
All Current Executive 2,551,656 43.56%
Officers and Directors
as a Group (9 persons)
(1) Unless otherwise indicated, the persons named have sole voting and
investment power and beneficial ownership of the securities.
(2) Includes options held by all non-employee directors to acquire 5,000 or
7,000 common shares pursuant to the 1996 Directors' Share Option Plan.
(3) Executive Committee Member
(4) Compensation Committee Member
(5) Includes 2,000 shares held directly by Mr. Schermer, Sr.'s wife.
(6) Includes options presently exercisable, or exercisable within 60 days, for
Mr. Schermer, Jr. of 54,000 shares, Mr. Quada of 2,500 shares, Ms.
Krywanski of 6,000 shares, and Mr. Saalfeld of 16,500 shares.
(7) Includes 600 shares held by Mr.Schermer, Jr. as a custodian for his minor
child.
(8) Includes 1,392,868 common shares owned by CBH Capital Corp. but for which
Mr. Saalfeld holds an irrevocable proxy to vote the shares.
(9) Audit Committee Member
(10) 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%
<PAGE>
Robert E. Schermer, Sr. has been a director of the Company since January
25, 1996. He is currently Senior Vice President and a Managing Director of
Robert W. Baird & Co. Incorporated, an investment banking and securities
brokerage firm headquartered in Milwaukee, Wisconsin. Mr. Schermer has held this
position for more than five years. He is the father of Robert E. Schermer, Jr.
Robert E. Schermer, Jr. has been President, Chief Executive Officer and a
director of the Company since October 6, 1998. Mr. Schermer served as Treasurer
of the Company from January 1996 until September 1996, and as Executive Vice
President from January 1996 until October 1998. 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.
Ray E. Quada has been the Senior Vice President and Chief Operating Officer
of the Company since May 19, 1998. From 1990 through 1998, Mr. Quada was the
Chief Executive Officer of the previous owner of the Company's Wendy's
operations. From 1994 through 1997, Mr. Quada was a director of First Michigan
Bank.
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 with
Dykema Gossett PLLC, a law firm headquartered in Detroit, Michigan. Mr. Saalfeld
is admitted to practice law in Michigan.
James P. Bishop has been a director of the Company since July 16, 1998. Mr.
Bishop is a CPA and the President and majority owner of the Bishop, Gasperini &
Flipse, P.C. accounting firm in Kalamazoo, Michigan, where he has worked since
1973. He is also a director and officer of the Mill Point Condominium
Association, and a director the Village Cove Marina Association. Mr. Bishop was
appointed by Michigan's Governor to the Administrative Committee on Public
Accountancy in 1993.
Christopher P. Hendy has been a director of the Company since July 16,
1998. Since August 1996, Mr. Hendy has been a partner in Redwood Ventures, LLC,
an investment/venture capital company located in Cincinnati, Ohio. Between 1991
and August, 1996, Mr. Hendy was the Vice President Manager - Asset Based Lending
with Fifth Third Bank. Mr. Hendy is also a director of Schonstedt Instrument
Company, a manufacturer of magnetic field detecting and measuring instruments.
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. 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
Schonstedt Instrument Company and of Cafe Odyssey Inc. (CODY:NAS), an owner and
operator of upscale theme restaurants.
<PAGE>
BOARD ACTIONS
During fiscal 1998, the Board of Directors met five times and took
action in writing on six occasions.
The Executive Committee, presently comprised of Messrs. Schermer, Sr.
(Chairman), Maggini 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 Company to the extent permitted by law. The Executive Committee took
action in writing on thirteen occasions during fiscal 1998.
The Audit Committee, comprised of Messrs. Ruyan (Chairman), Bishop and
Hendy, 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 1998.
The Compensation Committee, comprised of Messrs. Maggini (Chairman), Bishop
and Schermer, Sr., all of whom are non-employee directors (i) establishes the
Company's general compensation policies, (ii) recommends and establishes the
compensation and incentives awards for management, and (iii) administers the
1996 Management Equity Incentive Plan, the 1996 Directors' Share Option Plan,
and the Directors' Compensation Plan. The Compensation Committee met twice, and
took action in writing on one occasion, during fiscal 1998.
The Nominating Committee, comprised of Messrs. Schermer, Sr. (Chairman),
Maggini and Ruyan, evaluated and recommended 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 took action in writing once during fiscal
1998. The Nominating Committee has since been disbanded because of the smaller
size of the Board of Directors.
Directors who are not employed by the Company receive a retainer of $1,000
for each meeting of the Board of Directors attended, and $500 for each committee
meeting attended. These fees are reduced by 50% if participation is by
telephone. Compensation is paid by the Company quarterly in arrears, in the form
of Company common shares which are priced at the average fair market value
during the five trading days prior to the end of each fiscal quarter. In
addition to the above fees, Messrs. Bishop and Hendy received $6,330 and $5,450
respectively for time and expenses incurred as members of an investigative
committee of the Board of Directors.
Each non-employee director is also granted an option for 5,000 common
shares upon initial election to the Board of Directors, and another option for
1,000 shares upon each subsequent election. The exercise price of options
granted pursuant to the 1996 Directors' Share Option 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.
In fiscal 1998, each incumbent director attended all of the meetings of the
Board of Directors and the committees on which the director served, except for
former director David S. Lundeen who was absent for one Board meeting.
<PAGE>
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
1998 all filing requirements were met.
EXECUTIVE COMPENSATION
This table sets forth information regarding compensation paid to the to
Company's Chief Executive Officer and the executive officers or significant
employees earning in excess of $100,000 in fiscal 1998:
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
Securities
Name and Principal Underlying All Other
Position Year Salary Bonus Options Compensation
Robert E. Schermer, Jr. 1998 $164,773(1) $ 25,000 45,000 --
President & Chief 1997 $157,500 $ 17,500 45,000 --
Executive Officer 1996 $114,961 $100,000(2) 45,000 --
Ray E. Quada 1998 $120,941 $ 36,649 12,500 --
Senior Vice President & 1997 $105,666 $ 20,707 (3) --- --
Chief Operating Officer 1996 $ --- $ --- --- --
Pauline M. Krywanski 1998 $ 98,958 $ 20,000 (4) 10,000 --
Vice President, 1997 $ 59,564 $ 0 10,000 --
Treasurer & Chief 1996 $ --- $ --- --- --
Financial Officer
James R. Saalfeld 1998 $ 87,917 $ 20,000 (4) 10,000 --
Vice President, General 1997 $ 80,000 $ 0 10,000 --
Counsel & Secretary 1996 $ 48,591 $ 15,000 (5) 17,500 --
Christopher B. Hewett 1998 $ 160,568 0 50,000 (6) $101,606(7)
Former President and 1997 $ 157,500 $ 37,500 50,000 (6) --
Chief Executive Officer 1996 $ 127,735 $110,000 (2) 50,000 (6) --
(1) Mr. Schermer voluntarily reduced his base salary to $125,000 on September
17, 1998.
(2) Represents Series A Convertible Preferred Stock which Messrs. Hewett and
Schermer elected to receive in lieu of a cash bonus.
(3) Includes 2,000 shares of Meritage Common Stock valued at $10,000.
(4) Includes $10,000 for fiscal 1997 performance that was not approved and paid
until fiscal 1998.
(5) Includes $10,700 in Series A Convertible Preferred Stock which Mr. Saalfeld
elected to receive in lieu of a cash bonus.
(6) Options granted to Mr. Hewett were returned to the Company after Mr.
Hewett's employment with the Company ceased in October 1998.
(7) Includes severance payment accrued in 1998 after Mr. Hewett's employment
with the Company ceased in October 1998.
<PAGE>
STOCK OPTIONS
The following tables contain information concerning the grant of stock
options to the executives and employees identified in the Summary Compensation
Table and the appreciation of such options:
OPTION GRANTS IN FISCAL 1998
Potential
Realizable
Value at
Assumed Rates
of Stock Price
Appreciation
for Option Term
% of Total
Options
Number of Granted
Securities to Exercise
Underlying Employees Price
Options in Fiscal ($ per Expiration
Name Granted 1998 share) Date 5% 10%
Robert E. Schermer, Jr. 45,000 30.5% $7.00 2/16/2008 $0 $0
Ray E. Quada 12,500 8.5% $3.50 2/16/2008 $0 $4,887
Pauline M. Krywanski 10,000 6.8% $3.50 2/16/2008 $0 $3,910
James R. Saalfeld 10,000 6.8% $3.50 2/16/2008 $0 $3,910
Christopher B. Hewett 50,000 33.9% $7.00 2/16/2008 $0 $0
(1) Options granted to Mr. Hewett were returned to the Company after Mr.
Hewett's employment with the Company ceased in October 1998.
<PAGE>
FISCAL 1998 OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options at
Options at Fiscal
Fiscal Year End
Year End
Shares
Acquired
on Value Exercisable/ Excercisable/
Name Exercise Realized Unexercisable Unexercisable
Robert E. Schermer, Jr. -- -- 27,000/108,000 $0/$0 (1)
Ray E. Quada -- -- 0/12,500 $0/$0 (1)
Pauline M. Krywanski -- -- 2,000/18,000 $0/$0 (1)
James R. Saalfeld -- -- 9,000/28,500 $0/$0 (1)
Christopher B. Hewett -- -- 0/0 $0/$0 (2)
(1) The Compensation Committee established the exercise price as either $3.50
or $7.00 per share. Because the stock at fiscal year end was trading for
less than $3.50 per share, no value for the options is shown.
(2) Options granted to Mr. Hewett were returned to the Company after Mr.
Hewett's employment with the Company ceased in October 1998.
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.
<PAGE>
At a meeting held on February 16, 1998, the Committee established base
salaries and bonus ranges for the Company's executive officers for fiscal 1998.
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. The President's salary and bonus range
was determined separately but in the same manner as all other executives
officers of the Company (but without the President's participation).
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): Christopher B. Hewett (former
President and Chief Executive Officer): 50,000 shares; Robert E. Schermer, Jr.
(current President and Chief Executive Officer): 45,000 shares, James R.
Saalfeld (Vice President, General Counsel and Secretary): 10,000 shares, and
Pauline M. Krywanski (Vice President, Chief Financial Officer and Treasurer):
10,000 shares. The options granted to Messrs. Hewett and Schermer had an
exercise price of $7.00 per share. The options granted to Mr. Saalfeld and Ms.
Krywanski had an exercise price of $3.50 per share. All options 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. Due to Mr. Hewett's
resignation as an officer of the Company in October 1998, all options previously
granted to Mr. Hewett under the 1996 Management Equity Incentive Plan (including
options granted in the 1996 and 1997) were returned to the Company. Ray E.
Quada, who was appointed Senior Vice President and Chief Operating Officer in
May 1998, was granted 12,500 options on February 16, 1998 on the same terms as
those described for Mr. Saalfeld and Ms. Krywanski above.
Pursuant to written action taken on December 17, 1998, the Committee
awarded bonuses to the executive officers based on the bonus ranges established
at the February 16, 1998 meeting. The bonus awards ranged from 0% to 50% of the
target bonuses established at the February 16, 1998 meeting. The Committee's
decision regarding the bonuses awarded was based on each executive officer's
performance, level of responsibility, contributions in conjunction with the
Company's accomplishments during the fiscal year, and potential for future
contributions to the Company.
The salaries, bonus awards and options granted by the Committee to the
executive officers in fiscal 1998 were ratified by the entire Board of
Directors. All salaries and bonuses were fully deductible for federal income tax
purposes for 1998.
Compensation Committee of the
Board of Directors
Joseph L. Maggini, Chairman
James P. Bishop
Robert E. Schermer, Sr.
<PAGE>
CORPORATE PERFORMANCE GRAPH
The following graph demonstrates the yearly percentage change in
Meritage's cumulative total shareholder return on its common shares (as measured
by dividing (i) the sum of (a) the cumulative amount of dividends, assuming
dividend reinvestment during the periods presented, plus (b) the difference
between Meritage's share price at the beginning and end of the periods
presented; by (ii) the share price at the beginning of the periods presented)
from October 18, 1995 through November 30, 1998, with the cumulative total
return on the S & P Restaurants Index, the S & P 500 Index, the Russell 2000
Index and a Peer Group 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 removed the S & P Lodging-Hotels Index from its performance
graph for fiscal 1998 because the Company disposed of its hotel properties in
fiscal 1998 and now accounts for its former lodging business as discontinued
operations. In addition, the Company added the Russell 2000 Index and a Peer
Group Index to compare the Company with businesses that are more similar to the
Company in type and size of operation. The Peer Group members include BAB
Holdings Inc., Back Yard Burgers Inc., Big City Bagels Inc., Boston Restaurants
Assocs. Inc., Cafe Odyssey Inc., Chicago Pizza and Brewery Inc., DenAmerica
Corp., Family Steak Houses of Florida Inc., Flanigans Enterprises Inc., Grill
Concepts Inc., Minnesota Brewing Co., Morgans Foods Inc. and Tubby's Inc.
Meritage intends to replace the S & P Index and the S & P Restaurants Index with
these new indexes next year.
COMPARISON OF CUMULATIVE TOTAL RETURN
Cumulative Total Return
----------------------------------------------
10/18/95 11/95 11/96 11/97 11/98
Meritage Hospitality Group Inc. 100 90 94 39 21
Peer Group 100 98 102 96 90
S & P 500 100 104 133 171 211
S & P Restaurants 100 114 118 124 175
Russell 2000 100 100 116 143 136
<PAGE>
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.
In March 1997, the Company borrowed $750,000 from Robert E. Schermer, Sr.
The note was unsecured and required monthly payments of interest only at prime
plus 8% (the same rate the Company was paying on certain of its loans with its
former long-term lender). In October, 1998, the note (which then had a
outstanding principal balance of $776,000 due to prior interest payments being
deferred and added to the principal balance) was paid in full as part of a
larger transaction. The $1,375,000 note receivable from the sale of the Grand
Harbor Resort & Yacht Club was assigned (with recourse) to Mr. Schermer in
exchange for (i) payment in full of the $776,000 note payable, (ii) cancellation
of $200,000 of preferred stock owned by Mr. Schermer, and (iii) a cash payment
of $399,000 from Mr. Schermer.
In February 1998, the Board of Directors authorized an agreement whereby
Meritage Capital Corp. ("MCC") and its principals (Messrs. Hewett and Schermer,
Jr.) would be indemnified by the Company for any losses or expenses that they
might incur as guarantors of the Company's obligations under the $776,000 note
payable to Mr. Schermer, Sr. Because the note payable has been paid in full, the
indemnification agreement is no longer effective.
In October 1998, the Board of Directors authorized the Company to sell
participation interests (with recourse) in the $1,844,617 note payable received
from the sale of the Thomas Edison Inn. The Company sold $1,100,000 in total
participation interests, including a $500,000 sale to Joseph L. Maggini. Mr.
Maggini entered into a participation agreement which contained the same terms as
the agreements entered into with third parties that purchased interests.
In September 1998, the Board of Directors authorized the Company and its
subsidiary to appoint S & Q Management, LLC (owned jointly by Messrs. Schermer,
Jr. and Quada) as the new general partner of Wendy's of Michigan to replace MCC
Food Service Inc. (a wholly-owned subsidiary of MCC). The Company and its
subsidiary indemnified S & Q Management and its principals upon its appointment
as general partner, and agreed to reimburse only normal and reasonable
out-of-pocket expenses incurred by S & Q Management in carrying out its
obligations as a general partner.
In May 1997, the Company and its subsidiary appointed MCC Food Service Inc.
as the general partner of the now dissolved Wendy's of West Michigan Limited
Partnership and its successor (Wendy's of Michigan). The Company and its
subsidiary indemnified MCC Food Service, and MCC Food Service was paid an annual
partnership administration fee of $160,000 by the Partnership. In October 1998,
the Company replaced MCC Food Service as general partner and terminated the
indemnification agreement. MCC Food Service was paid its pro rata portion of the
partnership administration fee for 1998. Mr. Schermer, Jr. had previously
divested himself of his interest in MCC and MCC Food Service.
<PAGE>
At November 30, 1998, MCC (which has been renamed CBH Capital Corp. and is
now owned solely by Mr. Hewett) 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 issued in September 1995.
The note was analyzed by Roney & Co., a nationally recognized investment banking
firm, before delivering its fairness opinion regarding the transaction. The note
and corresponding pledge agreement were amended in February 1999, such that the
principal amount of the note is due and payable on the expiration of the note
(September 19, 2000), rather than in installment payments over a five year
period. This amendment was part of a larger settlement agreement between Mr.
Hewett and CBH Capital Corp. (on the one hand) and the Company (on the other
hand). Under the settlement agreement, 1,392,868 common shares owned of record
by CBH Capital Corp. are held by the Company as collateral pursuant to the note
and pledge agreement, recovery of which is the sole remedy in the event of a
default. Also as part of the settlement agreement, CBH Capital Corp. granted an
option to the Company to purchase the collateralized shares for $9,750,000 if
CBH Capital Corp. obtains the collateralized shares by making the full payment
under the note. Also, Mr. Hewett and CBH Capital Corp. entered into a voting
agreement with James R. Saalfeld (Vice President and Secretary of the Company),
pursuant to which Mr. Saalfeld received an irrevocable proxy from Mr. Hewett and
CBH Capital Corp. to vote the 1,392,868 common shares owned by CBH Capital Corp.
These shares, combined with the 7,877 common shares owned of record by Mr.
Saalfeld, shall be voted in accordance with the recommendation of the Company's
Board of Directors on all matters submitted to a vote of the Company's
shareholders or, if the Board fails to make a recommendation, as Mr. Saalfeld
deems proper. To facilitate these transactions, the Board (i) opted out of
Chapter 7A of the Michigan Business Corporation Act such that Chapter 7A did not
apply to the transactions, and (ii) amended the Company's Bylaws to temporarily
opt out of the Chapter 7B of the Michigan Business Corporation Act such that
Chapter 7B would not apply to any control share acquisitions involving the
Company's common shares between February 8, 1999 and February 11, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None.
OTHER MATTERS
Since 1993, the Company has retained the accounting firm of Grant
Thornton, LLP ("Grant Thornton") to perform the annual audit of the financial
statements for the Company and its wholly-owned subsidiaries. In January 1998,
the Company acquired all the interests of the Wendy's of West Michigan Limited
Partnership (the "Partnership"), dissolved the Partnership, and transferred the
Wendy's business to a newly formed limited partnership ("Wendy's of Michigan")
which is owned by the Company's wholly-owned subsidiary. The Partnership had
used the accounting firm of BDO Seidman, LLP ("BDO Seidman") to perform the
annual audit of its financial statements. The Company and Wendy's of Michigan
continued using BDO Seidman for the Wendy's business following the acquisition
and dissolution of the Partnership.
<PAGE>
The Company subsequently determined that it was most efficient to use
one accounting firm to perform the annual audit of the financial statements for
the Company and its subsidiaries. Accordingly, on November 4, 1998, Wendy's of
Michigan dismissed BDO Seidman (effective August 31, 1998), and the Company
formally retained Grant Thornton to perform all aspects of the annual audit of
the financial statements for the Company and its subsidiaries.
During the fiscal years ended November 30, 1996 and 1997, and through
November 4, 1998, there were no disagreements with BDO Seidman on any matter of
accounting principles or practices, financial statement disclosure, auditing
scope or procedure, or any reportable events. BDO Seidman's reports on the
financial statements of the Wendy's business for fiscal years ended November 30,
1996 and 1997 contained no adverse opinion or disclaimer of opinion, and were
not qualified or modified as to uncertainty, audit scope or accounting
principles.
Meritage is not aware of any other matters to be presented at the Annual
Meeting other than those specified in the Notice. If you have questions or need
more information about he Annual Shareholders' Meeting, please write or call:
James R. Saalfeld, Secretary
Meritage Hospitality Group Inc.
40 Pearl Street, N.W., Suite 900
Grand Rapids, Michigan 49503
(616) 776-2600
For more information about your record holdings, you may contact Fifth
Third Bank Shareholder Services at (800) 837-2755.
By Order of the Board of Directors,
/s/ James R. Saalfeld
James R. Saalfeld
Secretary
March 26, 1999
<PAGE>
MERITAGE HOSPITALITY GROUP INC.
The undersigned hereby appoints ROBERT E. SCHERMER, JR. and JAMES
PROXY R. SAALFELD, or either of them, proxies of the undersigned, each
FOR with the power of substitution, to vote all common shares which
ANNUAL the undersigned would be entitled to vote on the matters
MEETING 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
18, 1999 at 9:00 a.m. Eastern Time at the Peninsular Club, 120
Ottawa N.W., Grand Rapids, 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 six nominees listed below.
FOR _______ WITHHOLD AUTHORITY _______
JAMES P. BISHOP, CHRISTOPHER P. HENDY, 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. Ratify the appointment of Grant Thoronton LLP as the Company's independent
public accountants for the fiscal year ending November 30, 1999.
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>
Meritage Hospitality Group, Inc.
c/o Corporate Trust Services
Mail Drop 10AT66 - 4129
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Date ___________________, 1999
-------------------------------
-------------------------------
(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
