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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.    20549

FORM 10-Q

(Mark One)

or

Commission File Number: 0-17442

MERITAGE HOSPITALITY GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)

(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  [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes    [   ]     No   [X]

As of July 3, 2003 there were 5,347,501 outstanding Common Shares, $.01 par value.

SAFE HARBOR STATEMENT

        Certain statements contained in this report that are not historical facts constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, and are intended to be covered by the safe harbors created by that Act. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Any forward-looking statement speaks only as of the date made. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which they are made.

        Statements concerning expected financial performance, on-going business strategies and actions which the Company intends to pursue to achieve strategic objectives constitute forward-looking information. Implementation of these strategies and the achievement of such financial performance are subject to numerous conditions, uncertainties and risk factors. Factors which could cause actual performance to differ materially from these forward looking statements include, without limitation, competition; changes in local and national economic conditions; changes in consumer tastes and views about quick-service food; severe weather; changes in travel patterns; increases in food, labor and energy costs; the availability and cost of suitable restaurant sites; the ability to finance expansion; fluctuating interest rates; fluctuating insurance rates; the availability of adequate employees; directives issued by the franchisor; the general reputation of Wendy’s restaurants; and the recurring need for renovation and capital improvements. Also, the Company is subject to extensive government regulations relating to, among other things, zoning, minimum wage, public health certification, and the operation of its restaurants. Because the Company’s operations are concentrated in smaller urban areas of Michigan, a marked decline in the Michigan economy could adversely affect its operations.

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 December 1, 2002. The results of operations for the three and six month periods ended June 1, 2003 are not necessarily indicative of the results to be expected for the full year.

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Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Balance Sheets
June 1, 2003 and December 1, 2002

ASSETS

See notes to unaudited financial statements.

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Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Balance Sheets — continued
June 1, 2003 and December 1, 2002

LIABILITIES AND STOCKHOLDERS’ EQUITY

See notes to unaudited financial statements.

4

Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Statements of Operations
For the Six Months Ended June 1, 2003 and June 2, 2002
(Unaudited)

See notes to unaudited financial statements.

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Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended June 1, 2003 and June 2, 2002
(Unaudited)

See notes to unaudited financial statements.

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Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Year Ended December 1, 2002
and the Six Months Ended June 1, 2003 (Unaudited)

See notes to unaudited financial statements.

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Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 1, 2003 and June 2, 2002
(Unaudited)

Supplemental Cash Flow Information - See Note A

See notes to unaudited financial statements.

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Meritage Hospitality Group Inc. and Subsidiaries
Notes to Unaudited Financial Statements
For the Six Months Ended June 1, 2003 and June 2, 2002

Note A — Supplemental Cash Flow Information

Schedule of Non-Cash Investing and Financing Activities

Note B – Recently Issued Accounting Pronouncements

In October 2001, the Financial Accounting Standards Board (‘FASB”) issued Statement of Financial Accounting (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, it retains many of the fundamental provisions of that statement. The Company adopted SFAS No. 144 on December 2, 2002, and the effect was not significant to the financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others. This interpretation changes current practice in accounting for, and disclosure of, guarantees and requires certain guarantees to be recorded at fair value on the Company’s balance sheet. Interpretation No. 45 also requires a guarantor to make disclosures, even when the likelihood of making payments under the guarantee is remote. These disclosures are effective immediately and are included in Note F, “Guarantees, Commitments and Contingencies.” The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company does not expect that the implementation of Interpretation No. 45 will have a material effect on its financial results.

Up-front consideration received from vendors linked to future purchases is initially deferred, and then is recognized as earned vendor allowances as the purchases occur over the term of the vendor arrangement. In November 2002, the Emerging Issues Task Force (“EITF”) reached a final consensus on EITF 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor (EITF 02-16). EITF 02-16 addresses how a reseller of a vendor’s product should account for cash consideration received from a vendor. The EITF issued guidance on the following two items: (1) cash consideration received from a vendor should be recognized as a reduction of cost of sales in the reseller’s income statement, unless the consideration is reimbursement for selling costs or payment for assets or services delivered to the vendor, and (2) performance-driven vendor rebates or refunds (e.g., minimum or specified purchase or sales volumes) should be recognized only if the payment is considered probable, in which case the method of allocating such payments in the financial statements should be systematic and rational based on the reseller’s progress in achieving the underlying performance targets. In accordance with EITF 02-16, the Company began applying item 1 beginning in fiscal 2003.

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Meritage Hospitality Group Inc. and Subsidiaries
Notes to Unaudited Financial Statements
For the Six Months Ended June 1, 2003 and June 2, 2002

Note B – Recently Issued Accounting Pronouncements (continued)

As a result of applying item 1, reclassifications were made to the 2002 financial statements to decrease the Cost of Food and Beverages by $116,000 and $270,000 for the three and six months ended June 2, 2002, respectively, and Operating Expenses were increased by the same amounts for those periods. The Company previously applied item 2. Therefore, the provisions of item 2 had no effect on the Company’s financial statements.

Note C — Earnings Per Share

Basic earnings per share is computed by dividing earnings on common shares 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.

The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share for the three and six months ended June 1, 2003 and June 2, 2002:

For the three and six months ended June 1, 2003 and June 2, 2002, convertible preferred stock was not included in the computation of diluted earnings per share because the effect of conversion of preferred stock would be antidilutive.

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Meritage Hospitality Group Inc. and Subsidiaries
Notes to Unaudited Financial Statements
For the Six Months Ended June 1, 2003 and June 2, 2002

Note D – Goodwill and Intangible Assets

Effective December 2, 2002, the Company adopted SFAS No. 142, Goodwill and Intangible Assets. This statement changed the accounting for goodwill and other intangible assets. Goodwill is no longer amortized. However, tests for impairment are performed annually and whenever there is an impairment indicator. In accordance with the transition provisions of SFAS No. 142, the Company completed the step one transitional test for impairment in the first quarter of 2003, which resulted in no impairment of goodwill. The effect of applying the non-amortization provisions of SFAS No. 142 for the three and six months ended June 1, 2003 and June 2, 2002 are as follows:

The Company has no other intangible assets subject to SFAS No. 142.

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Meritage Hospitality Group Inc. and Subsidiaries
Notes to Unaudited Financial Statements
For the Six Months Ended June 1, 2003 and June 2, 2002

Note E – Stock Option Plans

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment to FASB Statement No. 123. This statement amends SFAS No. 123, Accounting for Stock Based Compensation to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation and requires disclosure in interim financial statements about the method of accounting for stock based employee compensation and the effect of the method used on reported results. The Company accounts for its stock based employee compensation plan under APB Opinion No. 25, Accounting for Stock issued to Employees and does not intend to adopt a fair value method of accounting for stock based employee compensation. As a result, no compensation costs have been recognized. Had compensation cost been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company’s net earnings (loss) and net earnings (loss) per common share would have been as follows for the three and six months ended June 1, 2003 and June 2, 2002:

Note F – Guarantees, Commitments, and Contingencies

The Company is a 19% owner of a real estate development that is the landlord of one of the Company’s restaurants. As a 19% owner, the Company guaranteed 19% of the total loan balance of approximately $2.8 million. This loan was used to finance the acquisition and development of the real estate.

The Company has guaranteed the indebtedness of its CEO to a bank in the amount of $538,900 in connection with the CEO’s purchase of 250,000 shares of the Company’s common stock. The 250,000 shares of stock secure the bank loan. Under the terms of an indemnification agreement between the Company and the CEO, in the event that the Company becomes liable for this indebtedness, the Company would be subrogated to the bank’s rights and remedies. The indemnification agreement also provides that, if at any time during the term of the agreement the Company’s stock price closes below $3.00 per share for two consecutive trading days, the Company may order the CEO to repay the outstanding balance on the CEO’s bank loan. If the CEO fails to pay off the bank loan, the Company has the right to pay off the CEO’s bank loan and take possession of the 250,000 shares securing the bank debt. In such event, the CEO agrees to pay any costs incurred by the Company in acquiring free and clear possession of the stock.

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Meritage Hospitality Group Inc. and Subsidiaries
Notes to Unaudited Financial Statements
For the Six Months Ended June 1, 2003 and June 2, 2002

Note F – Guarantees, Commitments, and Contingencies (continued)

As of June 1, 2003, the Company has forward commitments totaling approximately $7,700,000 to finance the land and building for six additional restaurants. The commitments are for 10-year real estate mortgages (20-year amortization) at variable interest rates equal to 2.55% over the 30 day LIBOR, or fixed interest rates equal to 2.26% — 2.61% over the then current 10 year treasury rate.

In addition to the guarantees described above, the Company is party to several agreements executed in the ordinary course of business that provide for indemnification of third parties under specified circumstances. Generally, these agreements obligate the Company to indemnify the third parties only if certain events occur or claims are made, as these contingent events or claims are defined in each of these agreements. The Company is not currently aware of circumstances that would require it to perform its indemnification obligations under any of these agreements.

The Company is involved in certain routine legal proceedings which are incidental to its business. All of these proceedings arose in the ordinary course of the Company’s business and, in the opinion of the Company, any potential liability of the Company with respect to these legal actions will not, in the aggregate, be material to the Company’s financial condition or operations. The Company maintains various types of insurance standard to the industry which would cover most actions brought against the Company.

Note G – Financial Statement Presentation

Certain amounts in the 2002 financial statements have been reclassified to conform to the 2003 presentation.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

        Results of operations for the three and six months ended June 1, 2003 and June 2, 2002 are summarized in the following tables:

Revenue

        Food and beverage revenue increased 1.4% and 1.5%, respectively, for the three and six months ended June 1, 2003, compared to the same periods last year. These increases were attributable to sales from new restaurants opened for less than one year which contributed $1,276,000 and $2,823,000 for the respective periods. Average food and beverage revenue decreased for stores in operation during the first two quarters of 2003 (“same store sales”) as set forth in the following table:

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        These decreases were primarily attributable to (i) strong sales in the first six months of 2002 over the comparable periods in 2001, (ii) a harsher winter in 2003 compared to the winter of 2002 and colder than normal spring weather in 2003, (iii) continued price discounting by our competitors, (iv) the lowering of certain menu prices in January 2003 to comply with Wendy’s International’s national advertising, (v) a sluggish economic climate in West Michigan which has resulted in high unemployment (e.g., unemployment in the largest county in our market hit an eleven year high in April 2003), and (vi) a negative sales impact at certain existing stores due to the opening of new stores.

        These factors contributed to a decrease in average store customer traffic of 4.5% and 7.0% for the three and six months ended June 1, 2003 over the same period of 2002, and a decrease in average customer ticket of approximately 6% and 5% for the same periods. While 2003 sales are still below 2002 levels for the first half of the year, during the second quarter of 2003, the Company began to experience improved year-to-year same store sales and customer traffic compared to first quarter of 2003. Management cautions that it remains difficult to accurately forecast how competitor discounting, menu price adjustments, current consumer spending trends and the current economic climate in West Michigan will affect the Company’s future revenue.

Cost of Food and Beverages

        The cost of food and beverages percentage for the second quarter and six months ended June 1, 2003 were consistent with the same periods of 2002. The slight increase for the second quarter of 2003 was due to price reductions made to certain menu items in January 2003, and a slight increase in beef costs in the second quarter of 2003 compared to 2002. Meritage’s food and beverage costs were in line with guidelines established by Wendy’s International.

        As disclosed in Note A of the financial statements, beginning in fiscal 2003, the Company began accounting for vendor allowances as a reduction to Cost of Food and Beverages rather than as a reduction in Operating Expenses. Amounts were reclassified in the 2002 financial statements to conform with the 2003 presentation. This reclassification decreased Cost of Food and Beverages and increased Operating Expenses by 1.0 and 1.3 percentage points for the three and six months ended June 2, 2002, respectively.

Operating Expenses

        The following table illustrates operating expense categories with significant year-to-year fluctuations:

        The increase in labor and related expenses as a percentage of revenue was largely a function of the decrease in same store sales. Operations require minimum staffing levels of hourly crew labor regardless of sales volumes. As a result, hourly crew labor increased 1.0 and 1.1 percentage points, respectively, for the three and six months ended June 1, 2003. This was combined with a 1.9% increase in the average hourly pay rate for both the three and six months ended June 1, 2003. Store management salaries increased 1.3 and 1.4 percentage points for the same periods, again primarily due to minimum staffing requirements despite lower sales volumes. Reductions in training payroll and health insurance costs partially offset the increase in crew and management labor.

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        As a percentage of revenue, the increase in occupancy expense for the three and six months ended June 1, 2003 compared to the same periods last year was due to increases in property taxes and utility costs, including a significant increase in natural gas costs. An increase in snow plowing costs also contributed to the increase for the six months ended June 1, 2003. These increases were partially offset by lower rent expense caused by an increase in the percentage of Company owned versus leased restaurants. All seven of the new stores opened since the beginning of fiscal 2002 are owned.

        The increase in other operating expenses was due to slight increases in repairs and maintenance, cleaning supplies and smallwares expense for both the three and six months ended June 1, 2003 compared to the same periods last year.

        On a per restaurant basis, operating expenses decreased approximately 7.3%, from an average of $165,000 per restaurant in the second quarter of 2002 to $153,000 per restaurant in the second quarter of 2003. For the six months ended June 1, 2003 and June 2, 2002, operating expenses decreased approximately 6.5%, from an average of $325,000 per restaurant in 2002 to $304,000 per restaurant in 2003. The Company had the equivalent of 5.5 additional restaurants in operation for the three and six months ended June 1, 2003 compared to the same period in 2002.

General and Administrative

        Restaurant level general and administrative expense remained steady for the three and six months ended June 1, 2003 compared to the same periods in 2002. The decrease in corporate level expenses was primarily due to a reduction in executive salaries including bonus expense.

Depreciation and Amortization

        The increase in depreciation and amortization expense for both the three and six months ended June 1, 2003 compared to the same periods last year was primarily due to the depreciation of buildings and equipment associated with new restaurants. Meritage owns the buildings and equipment associated with all seven of the new stores opened since the beginning of fiscal 2002. Meritage also purchased two existing restaurant properties during fiscal 2002 that were previously leased. These restaurants were demolished and rebuilt in fiscal 2002. The increase in depreciation expense was partially offset by a reduction in goodwill amortization expense of $45,000 and $91,000 for the three and six months ended June 1, 2003 compared to the same periods of 2002. Beginning in fiscal 2003, the Company no longer amortizes goodwill in accordance with Statement on Financial Accounting Standards No. 142 (see Note C of the financial statements).

Interest Expense

        The increase in interest expense was the result of additional long-term indebtedness incurred to construct new restaurants. This increase was partially offset by a decrease in interest expense on capital leases that mature in December 2003. Because it is a fixed cost, interest expense (as a percentage of revenue) has also been negatively impacted by the decrease in same store sales.

Gain on Sale of Assets Held for Sale

        The gain on sale of assets held resulted from the sale of surplus real estate located adjacent to three restaurants that opened in fiscal 2002.

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Liquidity and Capital Resources

Cash Flows

        Cash and cash equivalents (“cash”) increased $328,000, to $1,229,000 as of June 1, 2003 as set forth below:

        Excluding the non-operating gain on the sale of assets held for sale of $751,000, net earnings decreased $818,000 which, combined with a $146,000 decrease in the change in working capital other than cash, were the primary reasons for the decrease in net cash provided by operating activities of $825,000. These decreases were partially offset by an increase in depreciation and amortization expense of $104,000.

        Net cash used in investing activities decreased $3,791,000 and included $1,705,000 used to develop new restaurants and $150,000 used to upgrade and remodel existing restaurants. This compares to (i) $2,856,000 invested in 2002 in connection with the development of new restaurants, (ii) $867,000 used to purchase and develop new restaurants that were previously leased (two previously leased sites were purchased on May 30, 2002), and (iii) $920,000 used to upgrade and remodel existing restaurants. In 2003, these investments in property and equipment were offset by proceeds from the sale of surplus land for $1,070,000.

        Net cash provided by financing activities decreased $2,112,000 due to (i) a 1,377,000 decrease in net loan proceeds (after reductions to the Company’s line of credit) used to finance new store development, (ii) proceeds of $539,000 from a note receivable in the first quarter of 2002, and (iii) an increase in principal payments on long-term obligations including capital leases of $188,000.

Financial Condition

        As of June 1, 2003, Meritage’s current liabilities exceeded its current assets by $2,416,000 compared to December 1, 2002, when current liabilities exceeded current assets by $3,178,000. Excluding the current portion of occupancy related long-term obligations and capital leases, current liabilities exceeded current assets by $905,000 at June 1, 2003, and by $1,694,000 at December 1, 2002. At these dates, the ratios of current assets to current liabilities were 0.44:1 and 0.32:1, respectively. The primary reason for the improvement in working capital was the proceeds from the sale of surplus real estate. The above discussion of cash flows provides additional details of the net increase in cash as well as the most significant reasons for the improvement in working capital.

        In fiscal 2002, Meritage experienced improved operating results, and cash flow provided by operations was sufficient to meet the Company’s obligations from existing operations, including debt service and necessary capital improvements to existing restaurants. However, during the second half of fiscal 2002 and the first half of 2003, Meritage experienced a downward sales trend. In response to this trend, the Company has reduced prices on certain menu items and is considering other sales promotions to compete with the intense competition currently impacting the quick-service restaurant industry. Meritage has also implemented various cost cutting measures and will continue to emphasize cost containment while evaluating additional cost cutting measures.

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        Offsetting the reduction in cash flow generated from operations was proceeds of $1,070,000 from non-operating gains from the sale of surplus real estate in the first six months of 2003. In connection with one of these sales, the Company obtained a note receivable in the amount of $257,000 that is due July 10, 2003. Cash from this note receivable, plus future sales of remaining surplus real estate with no underlying debt, should provide an additional $750,000 to $1,000,000 of cash over the next year. While the current sales trend makes it increasingly difficult to accurately forecast future cash flow, management anticipates that given the factors noted above, Meritage can meet its obligations from existing operations, including debt service and necessary capital improvements to existing restaurants.

        The Company has slowed its new store development plans in fiscal 2003 compared to prior years. The Company has opened two new restaurants in fiscal 2003 (the most recent opened June 23, 2003), and plans to open up to two additional stores during the remainder of fiscal 2003. One of these restaurants is presently under construction and is expected to open in August 2003. New store development for 2004 will depend on the adequacy of new store sites and the availability of capital. New restaurants require an investment in real estate and equipment. Investments average approximately $1.25 to $1.5 million per restaurant, of which Meritage typically invests $250,000 to $300,000 of equity per restaurant. Any remaining investment will be funded through long-term financing.

        Meritage has an existing financing commitment from GE Capital Franchise Finance Corporation to build five new restaurants. The commitment requires a minimum 18% equity investment by Meritage. Borrowings will be secured with mortgages maturing in ten years with monthly payments based on a 20-year amortization schedule that permits Meritage to select either a fixed or variable interest rate. The restaurant presently under construction, along with four previous restaurants were financed with loans from GE Capital containing similar terms as those contained in the current five-store commitment. The variable interest rates under these loans are equal to 2.55% plus the one-month LIBOR rate (presently 3.9%, adjusted monthly). The commitment for the next five restaurants expires in September 2003, but Meritage intends to renew or extend this commitment to provide financing for future restaurants.

        Meritage’s various loan and franchise agreements contain covenants requiring the maintenance of certain financial ratios including:

At June 1, 2003, Meritage was in compliance with these covenants.

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        In addition to capital requirements related to new stores, the company has entered into purchase contracts to acquire two currently leased restaurants for a total of $966,000. The Company expects to close on the purchase of these properties by December 31, 2003. One of the restaurants will be demolished and rebuilt. The new restaurant and equipment package is expected to be financed under the GE Capital commitment described above. The other restaurant will be remodeled at an estimated cost of approximately $230,000. The funds to acquire the property and remodel the restaurant may come from a combination of (i) cash generated from existing operations, (ii) proceeds generated from the sale of surplus real estate as discussed above, (iii) long-term financing, or (iv) the use of the Company’s line of credit.

        In the second quarter, Meritage restructured a multi-store lease covering five of its older sites. Under the amendment, the monthly rent will be reduced from 8.5% of sales to 7.5% of sales, and the lessor will spend in excess of $800,000 for capital improvements to the five restaurants. The Company intends to invest approximately $150,000 in additional capital improvements at these restaurants. Meritage also plans to invest approximately $500,000 for capital expenditures directed at other older restaurants. Again, it is anticipated that the funds to undertake these investments will come from (i) cash generated from existing operations, (ii) proceeds generated from the sale of surplus investment real estate as discussed above, (iii) long-term financing, or (iv) the use of the Company’s line of credit.

        In addition to cash generated from operations and from the sale of surplus investment real estate, Meritage could use the following other sources to meet its current obligations over the next twelve months:

There can be no assurances, however, that Meritage will be able to complete the above activities or that completion would yield the results expected.

Critical Accounting Policies

        The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles accepted in the United States. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The significant accounting policies are discussed in Note A of the Company’s consolidated financial statements and footnotes thereto included in Meritage’s Annual Report on Form 10-K for the fiscal year ended December 1, 2002. These critical accounting policies are subject to judgments and uncertainties, which affect the application of these policies. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. On an on-going basis, the Company evaluates its estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

        Because all of Meritage’s operations are in the United States, currency exposure is eliminated. All of Meritage’s debt is in U.S. dollars and approximately 80% of its debt is at fixed interest rates which limits financial instrument risk. The remaining debt is at variable interest rates. Most variable rate loans contain provisions that permit conversion to a fixed interest rate between the seventh and twenty-fourth month after the loan closing date. This would allow the company to continue to limit exposure to interest rate fluctuations. Accordingly, Meritage does not utilize any derivatives to alter interest rate risk. In the normal course of business, Meritage purchases certain products (primarily food items) that can be affected by fluctuating commodity prices. Most of these products are purchased under agreements negotiated by Wendy’s International that are outside Meritage’s control. It is the Company’s understanding that Wendy’s utilizes various purchasing and pricing techniques in an effort to minimize volatility. As a result, Meritage does not make use of financial instruments to hedge commodity prices. While fluctuating commodity prices may impact the Company’s cost of food, Meritage retains some ability to adjust its menu pricing to offset these increases.

Item 4.    Controls and Procedures.

        As of June 1, 2003, an evaluation was completed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, President, General Counsel and Controller, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management including the Chief Executive Officer, President, General Counsel and Controller, concluded that the Company’s disclosure controls and procedures were effective as of June 1, 2003. There have been no significant changes to the Company’s internal controls or other factors that could significantly affect internal controls subsequent to June 1, 2003.

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PART II
OTHER INFORMATION

Item 4.     Submission of Matters to a Vote of Security Holders.

        The 2003 Annual Meeting of Shareholders was held at Meritage’s offices in Grand Rapids, Michigan, at 9:00 a.m. on Tuesday, May 20, 2003. The Company solicited proxies for the matters brought before the shareholders pursuant to a definitive proxy statement that was filed with the Securities and Exchange Commission on April 9, 2003. 4,817,614 common shares were present in person or by proxy at the meeting, representing 90% of the total shares outstanding.

        The shareholders elected the following six members to the Company’s Board of Directors to serve until the 2004 Annual Meeting: James P. Bishop (4,801,720 shares in favor), Joseph L. Maggini (4,801,720 shares in favor), Robert E. Riley (4,738,232 shares in favor), Jerry L. Ruyan (4,801,720 shares in favor), Robert E. Schermer, Sr. (4,738,232 shares in favor) and Robert E. Schermer, Jr. (4,801,720 shares in favor). Each director received no less than 98.4% of the total shares voted.

        The shareholders also ratified the appointment of Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending November 30, 2003. The following are the results of the vote: In Favor: 4,801,300; Opposed: 200; Abstentions: 16,114.

Item 5.    Other Information.

        On May 20, 2003, the Board of Directors appointed the following officers of Meritage: Robert E. Schermer, Jr. – Chief Executive Officer; Robert E. Riley – President, Robert H. Potts – Vice President of Real Estate; and James R. Saalfeld – Vice President, General Counsel, Secretary and Treasurer. Robert E. Schermer, Sr. was reappointed Chairman of the Board of Directors. The Board also reestablished the Executive, Audit, and Compensation Committees as standing committees of the Board of Directors.

Item 6.    Exhibits and Reports on Form 8-K.

           (a)    Exhibit List.

Exhibit filed herewith.

          (b)       Reports on Form 8-K.

        The Company did not file a Form 8-K during the second fiscal quarter.

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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.

Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427

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Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427

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EXHIBIT INDEX

Exhibit filed herewith.

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