SOURCE: Meritage Hospitality Group Inc.

January 24, 2007 11:44 ET

Meritage Completes "Going Private" Transaction

GRAND RAPIDS, MI -- (MARKET WIRE) -- January 24, 2007 --

Dear Shareholders,

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 As a result, Meritage has withdrawn its listing (MHG) on the American Stock Exchange and terminated the registration of its common shares with the U.S. Securities and Exchange Commission.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.

Operations Review

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

Certain statements contained in this news release 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. Forward-looking statements may be identified by words such as "estimates," "anticipates," "projects," "plans," "expects," "believes," "should," and similar expressions, and by the context in which they are used. Such statements are based only upon current expectations of the Company. Any forward-looking statement speaks only as of the date made. 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. Meritage 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, business strategies and action which Meritage intends to pursue to achieve its strategic objectives, constitute forward-looking information. Implementation of these strategies and achievement of such financial performance are subject to numerous conditions, uncertainties and risk factors, which could cause actual performance to differ materially from the forward-looking statements. These include, without limitation: competition; changes in the national or local economy; changes in consumer tastes and eating habits; concerns about the nutritional quality of our restaurant menu items; concerns about consumption of beef or other menu items due to diseases including E. coli, hepatitis, and mad cow; promotions and price discounting by competitors; severe weather; changes in travel patterns; road construction; demographic trends; the cost of food, labor and energy; the availability and cost of suitable restaurant sites; the ability to finance expansion; interest rates; insurance costs; the availability of adequate managers and hourly-paid employees; directives issued by the franchisor regarding operations and menu pricing; the general reputation of Meritage's and its franchisors' restaurants; the relationship between Meritage and its franchisors; legal claims; and the recurring need for renovation and capital improvements. In addition, Meritage's expansion into the casual dining restaurant segment as a franchisee of O'Charley's will subject Meritage to additional risks including, without limitation, unanticipated expenses or difficulties in securing market acceptance of the O'Charley's restaurant brand, the ability of our management and infrastructure to successfully implement the O'Charley's development plan in Michigan, and our limited experience in the casual dining segment. Also, Meritage is subject to extensive government regulations relating to, among other things, zoning, public health, sanitation, alcoholic beverage control, environment, food preparation, minimum and overtime wages and tips, employment of minors, citizenship requirements, working conditions, and the operation of its restaurants. Because Meritage's operations are concentrated in certain areas of Michigan, a marked decline in Michigan's economy, or in the local economies where our restaurants are located, could adversely affect our operations.

Contact Information

    James R. Saalfeld
    Vice President & Chief Administrative Officer
    Meritage Hospitality Group Inc.