Meritage Reports First Quarter 2005 Sales Increase of 7.8%; 26th Consecutive Quarter of Sales Growth

Meritage reported a net loss for the quarter of $1,804,000 or $0.38 per share, compared to a net loss of $480,000 or $0.11 per share for the same period last year.

Meritage's Chief Executive Officer, Robert E. Schermer, Jr., stated, "We are very pleased with our continued sales increases which represents the 26th consecutive quarter of sales increases for Meritage. This underscores Meritage's long-term commitment to new restaurant growth. As expected, however, we experienced a decline in earnings due to a number of factors including our strategy of rapid expansion in the O'Charley's restaurant brand. Pre-opening costs combined with the operational inefficiencies of immature stores resulted in a net loss of $398,000 in the O'Charley's business segment. Also, as detailed below, our Wendy's operations continues to experience margin pressure as commodity prices remain high and menu pricing remains relatively unchanged. We also had no gain from the sale of surplus non-operating property in the first quarter compared to a gain of $137,000 for the same period last year. Finally, our strategy of funding a portion of the O'Charley's expansion with sale-leaseback transactions has mixed effects. On the positive side, the sale-leaseback transactions generated cash proceeds of $9.9 million in the first quarter, permitted the Company to pay down $5.9 million of long-term debt, and resulted in deferred long-term gains of $3.9 million. These transactions also result in the immediate recognition of pre- payment expenses as well as much higher state tax expense. Therefore, I believe our current results paint an incomplete picture of the Company's progress in establishing the basis for continued revenue growth and earnings improvements in the future."

WENDY'S RESTAURANT OPERATIONS

Food costs remain the number one concern for the entire Wendy's franchise system. Where it maintains control, Meritage has been successful in controlling costs (e.g., food, labor, energy, repairs, insurance, etc.). However, Meritage has little control over certain areas of its food costs as many products (in particular beef) are purchased under contracts negotiated by Wendy's International. Jack Schuessler, the CEO of Wendy's International, commented on the high beef costs at the Reuters Food Summit in Chicago earlier this month. According to Schuessler, beef costs have pushed to historical highs for the past two years, but will likely soften in 2006 and 2007 due to imports from Australia and Canada, and U.S. producers enlarging their herds. Schuessler noted that two years ago, Wendy's was paying 99¢ per pound for ground beef and is now paying $1.41 per pound.

Meritage believes that Wendy's advertised menu pricing has not kept up with these rising costs. Wendy's International has indicated that they may address menu-pricing changes in the second half of 2005, along with the introduction of new products such as the Frescata deli-style sandwiches. But Schuessler said he does not see any significant change to menu pricing. Mr. Schermer stated that Wendy's International needs to be proactive in addressing menu pricing. "Meritage will continue to operate our Wendy's restaurants at or near the optimal level of controllable costs. Our pricing strategy is to maintain the value proposition, and only increase prices as a last resort to protect margins," Mr. Schermer stated.

O'CHARLEY'S RESTAURANT OPERATIONS

One way to better withstand the specific cost issues experienced in our Wendy's operations is through segment diversification. Fortunately, management previously engaged this strategy with the rollout of the O'Charley's casual dining brand. Through its O'Charley's restaurants, Meritage is developing a more diversified menu that is creating a hedge against isolated increases in commodity costs. The Company opened its second O'Charley's restaurant in February, and will be opening its third store in May. We will continue to invest in the infrastructure that will permit us to accelerate expansion of the O'Charley's brand.

The Company is the only publicly held Wendy's franchisee, operating 48 "Wendy's Old Fashioned Hamburgers" restaurants throughout Western and Southern Michigan and serving more than nine million customers annually. Meritage has been one of the fastest growing Wendy's franchisees within the Wendy's franchise system over the past five years. Meritage is also the nation's first and only publicly held O'Charley's franchisee. Meritage holds the exclusive right to develop O'Charley's restaurants in the State of Michigan.



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