I am pleased to report that based on a majority vote of outstanding shareholders, Meritage successfully completed a “Going Private” transaction on January 23, 2007. As a result, Meritage has withdrawn its listing (MHG) on the American Stock Exchange and terminated the registration of its common shares with the U.S. Securities and Exchange Commission. This move allows the Company to avoid the ever-increasing SEC costs (including Sarbanes Oxley Act costs) that disproportionately affect smaller public companies like Meritage.
I am also pleased to report that our common shares are now trading on the Pink Sheets under the symbol (PINKSHEETS: MHGP) and that Meritage intends to be one of the founding issuers listed on a new premium listing service known as the OTCQX which is scheduled to start trading on March 5, 2007. The completion of this transaction is a major step in our plans to return Meritage to profitability, and to continue to provide liquidity to our shareholders through the new OTCQX listing.
Over the past several years, the Michigan economy (where all of our existing operations are located) has significantly underperformed compared to the rest of the nation -- ranking last among state economies for nearly six consecutive years. This has presented a difficult and challenging environment for our fixed-location retail businesses.
Our casual dining concept, O'Charley's, has been a financial disappointment due in part to a lack of brand awareness and unit concentration. However, we are undertaking a major restructuring of our O'Charley's development plans and operational relationship with our franchisor that will hopefully lead to a financially viable operation.
During 2006, the Wendy's franchise system went through many substantive changes. In December 2006, Meritage opened its 49th Wendy's restaurant in Muskegon, Michigan. Throughout fiscal 2006, our Wendy's restaurant portfolio demonstrated improvement from fiscal 2005, including seven straight months of same store sales increases that resulted in earnings before taxes of $754,000 in 2006 compared to a loss of $344,000 in 2005. We estimate that Wendy's has the potential for 6 to 8 more restaurants in the West Michigan market provided we experience a stable economic environment.
In fiscal 2007, we are focusing on:
-- maintaining a 100% “Sparkle Certified” Wendy's restaurant system;
-- a same store sales increase of 4.5%;
-- opening one or two new Wendy's restaurants; and
-- increased restaurant operating income through continued margin
In the last period of 2006 and the first period of 2007, our Wendy's restaurants have experienced the strongest same store sales improvements in six years. In addition, restaurant level margins have improved despite newly imposed Michigan minimum wage levels -- due largely to major reductions in labor and commodity costs.
2007 Business Optimization Plan
Our top priority in 2007 is to return Meritage to sustained profitability, and to provide liquidity and cash distributions to you -- our shareholders. We have already reduced overhead by approximately $1.0 million which should be fully realized in fiscal 2007. Meritage has historically created the greatest economic value added through the development of hospitality related real estate properties (including hotels, marinas and restaurant real estate). In fiscal 2007, we intend to develop real estate with high economic value added through new hospitality opportunities.
These development plans include acquiring three “strategic” oceanfront properties on the Bahamian Island of Eleuthera. These developments are subject to obtaining the required governmental permits and entitlements. Our investment thesis for Eleuthera is centered on the fact that Eleuthera, a pristine Bahamian out-island, is in the early stages of a development cycle. Regarding the Bahamian economy, the International Monetary Fund (IMF) reports that “the medium-term appears broadly favorable” with 2007 economic growth of +6.5% and 2008-09 economic growth of +5.6%.
The acquisition of these properties would position Meritage for a “graduated development opportunity” in terms of the size and scale of the hospitality real estate projects. Accordingly, we intend to partner with a broad spectrum of financially strong and experienced development partners and hospitality brands. This includes:
-- proven construction and design partners;
-- strong brand operators and management companies; and
-- capable real estate capital partners.
Our development opportunities in Eleuthera are significant. While Meritage's role will vary from project-to-project, we hope these developments will provide future opportunities to generate (i) development fees, (ii) real estate sales and marketing fees, and (iii) land inventory appreciation. The total land inventory is estimated to cover 8-10 years of development, subject to absorption rates.
We believe that the Island of Eleuthera is in its development infancy, similar to Hawaii 50 years ago. The properties available to us represent one of the finest opportunities in the Caribbean. Today, Meritage is presented with a truly unique, world-class growth opportunity. These hospitality opportunities, coupled with improving restaurant operating margins, will work to the ongoing future benefit of the Company and its shareholders.
We will keep you informed of our progress. Thank you for your continued support.
Very truly yours,
Robert E. Schermer, Jr.
President & CEO