================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________to__________
Commission File Number 1-9977
Meritage Corporation
(Exact Name of Registrant as Specified in its Charter)
Maryland 86-0611231
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
6613 North Scottsdale Road, Suite 200 85250
Scottsdale, Arizona (Zip Code)
(Address of Principal Executive Offices)
(480) 998-8700
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 15, 2000 the aggregate market value of common stock held by
non-affiliates of the Registrant was $33,507,271. For purposes of this
computation, all executive officers and directors of the Registrant have been
deemed to be affiliates.
The number of shares outstanding of the Registrant's common stock on March 15,
2000 was 5,563,796.
DOCUMENTS INCORPORATED BY REFERENCE
Portions from the Registrant's Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 10, 2000 have been incorporated by reference into
Part III, Items 10, 11, 12 and 13.
================================================================================
TABLE OF CONTENTS
Page No
-------
PART I
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 10
Item 3. Legal Proceedings.............................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............ 10
PART II
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters................................ 11
Item 6. Selected Financial Data........................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 22
Item 8. Financial Statements and Supplementary Data.................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant............. 39
Item 11. Executive Compensation......................................... 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 39
Item 13. Certain Relationships and Related Transactions................. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................. 40
SIGNATURES ...............................................................S-1
2
PART I
ITEM 1. BUSINESS
HISTORY OF THE COMPANY
We design, construct and sell single family homes ranging from entry-level
to semi-custom luxury in three large and growing Sunbelt states; Texas, Arizona
and California. We have recently undergone significant growth and at December
31, 1999, were actively selling homes in 46 communities. We pursue a strategy of
diversifying our product mix and the geographic scope of our operations.
We were formed in 1988 as a real estate investment trust ("REIT") and
operated under the name of Homeplex Mortgage Investments Corporation. Homeplex
invested in mortgage-related assets and selected real estate loans. On December
31, 1996, the Company acquired by merger the homebuilding operations of various
entities under the Monterey Homes name (the "merger"). Following the merger the
Company focused on the business of homebuilding, and changed its name to
Monterey Homes Corporation. On July 1, 1997, as part of our strategy to further
diversify operations, we combined with Legacy Homes (the "combination"), a group
of entities with homebuilding operations in Texas. Legacy, in business since
1988, designs, builds and sells entry-level and move-up homes. In July 1998, we
acquired Sterling Communities, a homebuilder in Northern California. In
September 1998, with shareholder approval, Meritage Corporation became the new
corporate name. Operations continue in Texas under the Legacy Homes name, in
Arizona as Monterey Homes and Meritage Homes of Arizona, and in California as
Meritage Homes of Northern California.
BUSINESS STRATEGY
We seek to distinguish ourselves from other production homebuilders and to
respond rapidly to changing market conditions through a business strategy
focused on the following:
SUPERIOR DESIGN AND QUALITY. We believe we maximize customer satisfaction
by offering homes that are built with quality materials and craftsmanship,
exhibit distinctive design features and are situated in premium locations. We
believe that we generally offer higher caliber homes in their defined price
range or category than those built by our competitors.
PRODUCT BREADTH. We design our new homes to appeal to a wide variety of
consumers. In Texas, we target entry-level and move-up buyers, offering homes at
prices that reflect the production efficiencies of a high-volume tract builder.
In Arizona, we focus on the luxury market, which is characterized by unique
communities and distinctive luxury homes, and the move-up homebuyers' market.
Continued expansion into the first and second-time move-up segments of the
Arizona market reflects our desire to increase our share of the overall housing
market in the Phoenix and Tucson metropolitan areas. In California, our focus is
on quality first and second-time move-up homes. We believe this product breadth
and geographical diversity helps to reduce exposure to variable economic cycles.
HIGHEST LEVEL OF SERVICE. We are committed to achieving the highest level
of customer satisfaction as an integral part of our competitive strategy. During
the sales process our experienced sales personnel keep customers informed of
their home's construction progress. After delivery, our customer care
departments respond to any questions or warranty matters a customer may have.
CONSERVATIVE LAND ACQUISITION POLICY. We seek to maximize our return on
capital employed by practicing a conservative land acquisition policy that
minimizes risks associated with land investment. We accomplish this by:
* focusing on development sites where we expect to have less than a
three-year lot inventory;
* generally purchasing land subject to complete entitlement, including
zoning and utility services; and
* controlling lots on a non-recourse, rolling option basis where we have
the right, but not the obligation, to buy lots at predetermined prices
based on a takedown schedule that reflects anticipated home closings.
We generally do not speculate in raw land held for investment.
3
COST MANAGEMENT. Throughout our history, we have focused on controlling
costs and minimizing overhead, and consider this a key factor in maintaining
profitability. Management seeks to reduce costs by:
* using subcontractors to carry out home construction and site
improvement on a fixed-price basis;
* obtaining favorable pricing from subcontractors through long-term
relationships and large volume jobs;
* reducing interest carry by minimizing our inventory of unsold or
speculative homes and shortening the home construction cycle;
* generally beginning construction on a home under contract only after a
satisfactory down payment and/or receipt of mortgage approval has been
received from the buyer;
* minimizing overhead by centralizing certain administrative activities;
and
* maintaining management information systems to allow the monitoring of
homebuilding production, scheduling and budgeting.
DECENTRALIZED OPERATING STRUCTURE WITH EXPERIENCED DIVISION MANAGERS. We
rely upon the expertise of divisional managers, each with significant experience
in the homebuilding industry, to serve the needs of our regional markets.
Corporate-level management provides centralized control for risk elements such
as land acquisition approval, financing, cash management, capital allocation and
risk management.
EXPANSION IN NEW AND EXISTING MARKETS. Depending on market conditions, we
may explore expansion opportunities in new or existing geographic areas where we
see an ability to exploit a competitive advantage. Expansion may take place
through strategic acquisitions of existing homebuilders, through start-up
operations or through internal growth.
MARKETS AND PRODUCTS
We operate in the Dallas/Fort Worth, Austin and Houston, Texas markets
using the Legacy Homes brand name, in the Phoenix and Tucson, Arizona markets as
Monterey Homes and Meritage Homes of Arizona and in the San Francisco Bay and
Sacramento, California markets as Meritage Homes of Northern California. We
believe that these areas represent attractive homebuilding markets with
opportunities for long-term growth. We also believe that our operations in
certain markets, such as Dallas/Fort Worth and Phoenix, are well established and
that we have developed a reputation for building distinctive quality homes
within the market segments served by these communities.
Our homes range from entry-level to semi-custom luxury, with base prices
ranging from $100,000 to $600,000. A summary of activity by market and product
type follows (dollars in thousands):
Average Units in Dollar Value Number of
Number of Homes Closing Backlog at of Backlog at Home Sites Active
Closed in 1999 Price Year End Year End Remaining(1) Subdivisions
-------------- ----- -------- -------- ------------ ------------
Texas - Move-up 835 $162.6 381 $ 67,197 1,936 19
Texas - Entry-level 300 130.4 185 26,786 886 6
Arizona - Luxury 196 419.8 127 54,179 592 7
Arizona - Move-up 204 189.4 89 18,699 1,199 7
California - Move-up 108 354.1 103 32,584 880 7
----- ------ ---- -------- ----- ---
Total Company 1,643 $203.3 885 $199,445 5,493 46
===== ====== ==== ======== ===== ===
- ----------
(1) "Home Sites Remaining" is the number of homes that could be built both on
the remaining lots available for sale and land to be developed into lots as
estimated by management.
4
LAND ACQUISITION AND DEVELOPMENT
We typically purchase land only after necessary entitlements have been
obtained so that development or construction may begin as market conditions
dictate. The term "entitlements" refers to development agreements, tentative
maps or recorded plats, depending on the jurisdiction within which the land is
located. Entitlements generally give the developer the right to obtain building
permits upon compliance with conditions that are ordinarily within the
developer's control. Even though entitlements are usually obtained before land
is purchased, we are still required to secure a variety of other governmental
approvals and permits during development. The process of obtaining such
approvals and permits can substantially delay the development process. For this
reason, we may consider purchasing unentitled property in the future when we can
do so in a manner consistent with our business strategy.
We select land for development based upon a variety of factors, including:
* internal and external demographic and marketing studies;
* project suitability, which is generally a development with fewer than
150 lots;
* suitability for development generally within a one to three year time
period from the beginning of the development process to the delivery
of the last home;
* financial review as to the feasibility of the proposed project,
including projected profit margins, return on capital employed, and
the capital payback period;
* the ability to secure governmental approvals and entitlements;
* results of environmental and legal due diligence;
* proximity to local traffic corridors and amenities; and
* management's judgment as to the real estate market, economic trends,
and experience in a particular market.
We occasionally purchase larger properties consisting of 200 to 500 lots or
more if the situation presents an attractive profit potential and acceptable
risk limitations.
We acquire land through purchases and rolling option contracts. Purchases
are financed through traditional bank financing or working capital. Rolling
options allow us to control lots and land through a third party who owns or buys
the property on which we plan to build homes. We enter into option contracts
with the third party to purchase finished lots as home construction begins.
These contracts are generally non-recourse and require non-refundable deposits
of 2% to 10% of the sales price. We acquire a majority of our land through
rolling option contracts.
Once we have acquired land, we generally initiate development through
contractual agreements with subcontractors. These activities include site
planning and engineering, as well as constructing road, sewer, water, utilities,
drainage, recreation facilities and other refinements. We often build homes in
master planned communities with home sites that are along or near a major
amenity, such as a golf course.
We develop a design and marketing concept for each project, which includes
determination of size, style and price range of homes, street layout, size and
layout of individual lots, and overall community design. The product line
offered in a particular project depends upon many factors, including the housing
generally available in the area, the needs of a particular market, and our lot
costs for the project.
Occasionally we use partnerships or joint ventures to purchase and develop
land where these arrangements are necessary to acquire the property or appear to
be otherwise economically advantageous.
5
The following table presents information regarding land owned or land under
contract or option by market as of December 31, 1999:
Land Under Contract
Land Owned (1) or Option (1)
--------------------------------------- -----------------------------
Lots Under Lots Held for Lots Under
Finished Development Development Finished Development
Lots (Estimated) (Estimated) Lots (Estimated) Total
---- ----------- ----------- ---- ----------- -----
TEXAS:
Dallas/Ft. Worth Area 501 568 340 267 250 1,926
Austin Area 129 -- -- 110 604 843
Houston Area 156 -- -- -- 160 316
----- ----- ----- ----- ----- -----
Total Texas 786 568 340 377 1,014 3,085
----- ----- ----- ----- ----- -----
ARIZONA:
Phoenix Area 88 223 43 177 673 1,204
Tucson Area 58 -- -- 175 358 591
----- ----- ----- ----- ----- -----
Total Arizona 146 223 43 352 1,031 1,795
----- ----- ----- ----- ----- -----
CALIFORNIA:
Sacramento Area 1 -- -- 199 53 253
San Francisco Bay Area -- 19 -- 83 480 582
----- ----- ----- ----- ----- -----
Total California 1 19 -- 282 533 835
----- ----- ----- ----- ----- -----
TOTAL COMPANY 933 810 383 1,011 2,578 5,715
===== ===== ===== ===== ===== =====
- ----------
(1) Excludes lots with finished homes or homes under construction
CONSTRUCTION
We are the general contractor for our projects and typically hire
subcontractors on a project-by-project or reasonable geographic proximity basis
to complete construction at a fixed price. We usually enter into agreements with
subcontractors and materials suppliers after receiving competitive bids on an
individual basis. We obtain information from prospective subcontractors and
suppliers with respect to their financial condition and ability to perform their
agreements before formal bidding begins. Occasionally, we enter into longer-term
contracts with subcontractors and suppliers if management can obtain more
favorable terms. Our project managers and field superintendents, who coordinate
and supervise the activities of subcontractors and suppliers, subject the work
to quality and cost controls, and assure compliance with zoning and building
codes.
We specify that quality, durable materials be used in construction of our
homes and we do not maintain significant inventories of construction materials,
except for work in process materials for homes under construction. When
possible, management negotiates price and volume discounts with manufacturers
and suppliers on behalf of its subcontractors to take advantage of production
volume. Usually, access to our principal subcontracting trades, materials and
supplies is readily available in each of its markets. Prices for these goods and
services may fluctuate due to various factors, including supply and demand
shortages that may be beyond the control of our vendors. We believe that our
relationships with suppliers and subcontractors are good.
We generally build and sell homes in clusters or phases within a project,
which management believes creates efficiencies in land development and
construction, and improves customer satisfaction by reducing the number of
vacant lots surrounding a completed home. A typical Meritage home is completed
within four to ten months from the start of construction, depending upon home
size and complexity. Schedules may vary depending on the availability of labor,
materials and supplies, product type, location and weather. Our homes are
usually designed to promote efficient use of space and materials, and to
minimize construction costs and time.
6
MARKETING AND SALES
We believe that we have an established reputation for developing high
quality homes, which helps generate interest in each new project. We also use
advertising and other promotional activities, including magazine and newspaper
advertisements, brochures, direct mail, and the placement of strategically
located signs in the immediate areas of our developments.
We use furnished model homes as tools in demonstrating the competitive
advantages of our home designs and features to prospective homebuyers. We
generally employ or contract with interior designers who are responsible for
creating an attractive model home for each product line within a project. We
generally build between one and four model homes for each active community,
depending upon the number of homes to be built in the project and the products
to be offered. Occasionally we sell our model homes and lease them back from
buyers who purchased the homes for investment purposes or who do not intend to
move in immediately. A summary of model homes owned or leased at December 31,
1999 follows:
Model Homes Model Homes Monthly Lease Models Under
Owned Leased Back Amount Construction
----- ----------- ------ ------------
Texas 23 -- -- 3
Arizona 13 17 $ 41,600 10
California 20 1 3,500 --
--- --- -------- ---
Total 56 18 $ 45,100 13
=== === ======== ===
Our homes generally are sold by full-time, commissioned employees who
typically work from a sales office located in the model homes for each project.
Our goal is to ensure that the sales force has extensive knowledge of our
operating policies and housing products. To achieve this goal, we train our
sales personnel and conduct periodic meetings to update them on sales
techniques, competitive products in the area, financing availability,
construction schedules, marketing and advertising plans, and the available
product lines, pricing, options, and warranties offered. Sales personnel are
licensed real estate agents where required by law. Independent brokers also sell
our homes, and are usually paid a sales commission on the base price of the
home.
Occasionally we offer various sales incentives, such as landscaping and
certain interior home improvements, to attract buyers. The use and type of
incentives depends largely on economic and competitive market conditions.
BACKLOG
Most of our home sales are made under standard sales contracts signed
before construction of the home begins. The contracts require substantial cash
deposits and are usually subject to certain contingencies such as the buyer's
ability to qualify for financing. Homes covered by such sales contracts but not
yet closed are considered "backlog". We do not recognize revenue on homes in
backlog until sales are closed, the buyer has made a minimum down payment and
other criteria for sale and profit recognition are met. We sometimes build homes
in a project before obtaining a sales contract, though these homes are excluded
from backlog until a sales contract is signed. We believe we will deliver almost
all homes in backlog at December 31, 1999 to customers during 2000.
Our backlog increased to 885 units with a value of $199.4 million at
December 31, 1999 from 688 units with a value of $145.3 million at December 31,
1998. These increases are primarily due to additional communities that opened
for sale in 1999, along with strong home sales.
CUSTOMER FINANCING
We attempt to help qualified homebuyers who require financing to obtain
loans from mortgage lenders that offer a variety of financing options. We
provide mortgage-banking services in our Dallas/Fort Worth markets through a
7
related mortgage lending company, Texas Home Mortgage Corporation, which
originates loans on behalf of third party lenders. In Tucson we provide mortgage
services through MTH Mortgage Limited Partnership, a joint venture with an
independent mortgage banking company. In our other markets we use unaffiliated
preferred mortgage lenders. We may pay a portion of the closing costs and
discount mortgage points to assist homebuyers with financing. Since many
customers use long-term mortgage financing to purchase homes, adverse economic
conditions, unemployment increases and high mortgage interest rates may deter or
reduce the number of potential homebuyers.
CUSTOMER RELATIONS, QUALITY CONTROL AND WARRANTY PROGRAMS
Management believes that positive customer relations and an adherence to
stringent quality control standards are fundamental to continued success. We
believe that our commitment to buyer satisfaction and quality control have
significantly contributed to our reputation as a high quality builder.
A Meritage project manager or project superintendent, and a customer
relations representative generally oversee compliance with quality control
standards for each development. These representatives allocate responsibility
to:
* oversee home construction;
* oversee subcontractor and supplier performance;
* review the progress of each home and conduct formal inspections as
specific stages of construction are completed; and
* regularly update buyers on the progress their homes.
We generally provide a one-year limited warranty on workmanship and
building materials with each home. Subcontractors usually provide an indemnity
and a certificate of insurance before they begin work. Claims relating to
workmanship and materials are therefore usually the subcontractors' primary
responsibility. Reserves for future warranty costs are established based on
historical experience within each division or region, and are recorded when the
homes are delivered. Reserves range from 3/10 of one per cent to 3/4 of one
percent of a home's sale price. To date, these reserves have been sufficient to
cover warranty repairs.
COMPETITION AND MARKET FACTORS
The development and sale of residential property is a highly competitive
industry. We compete for sales in each of our markets with national, regional,
and local developers and homebuilders, existing home resales, and to a lesser
extent, condominiums and available rental housing. Some competitor homebuilders
have significantly greater financial resources and/or lower costs than we do.
Competition among both small and large residential homebuilders is based on a
number of interrelated factors, including location, reputation, amenities,
design, quality and price. We believe that we compare favorably to other
homebuilders in the markets in which we operate due to our:
* experience within our geographic markets which allows us to develop
and offer new products;
* ability to reflect and adapt to changing market conditions;
* ability, from a capital and resource perspective, to respond to market
conditions;
* ability to capitalize on opportunities to acquire land on favorable
terms; and
* reputation for outstanding service and quality products.
The homebuilding industry is cyclical and is affected by consumer
confidence levels, job availability, prevalent economic conditions in general,
and interest rates. Other factors affecting the homebuilding industry and demand
for new homes are changes in costs associated with home ownership such as
increases in property taxes and energy costs, changes in consumer preferences,
demographic trends, availability of and changes in mortgage financing programs,
and the availability and cost of land and building materials. Any slowing in new
home sales would increase competition among homebuilders in our market areas.
There is no assurance that we will be able to compete successfully against other
homebuilders in our current markets in a more competitive business environment
8
resulting from a slowdown in home sales or that such increased competition will
not have a material adverse affect on our business and operating results.
GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS
We purchase most of our land with entitlements, providing for zoning and
utility services to project sites and giving us the right to obtain building
permits. Construction may begin almost immediately upon compliance with
specified conditions, which generally are within our control. The time needed to
obtain such approvals and permits affects the carrying costs of unimproved
property acquired for development and construction. The continued effectiveness
of permits already granted is subject to factors such as changes in policies,
rules and regulations, and their interpretation and application. To date, the
government approval processes discussed above have not had a material adverse
effect on our development activities, though there is no assurance that these
and other restrictions will not adversely affect future operations.
Because most of our land is entitled, construction moratoriums generally
would only adversely affect us if they arose from health, safety, and welfare
issues, such as insufficient water or sewage facilities. Local and state
governments have broad discretion regarding the imposition of development fees
for projects under their jurisdictions. These fees are normally established when
we receive recorded maps and building permits. As we expand, we may also become
increasingly subject to periodic delays or may be precluded entirely from
developing communities due to building moratoriums, "slow growth" initiatives or
building permit allocation ordinances, which could be implemented in future
operating markets.
We are also subject to a variety of local, state, and federal statutes,
ordinances, rules and regulations concerning the protection of health and the
environment. In some markets, we are subject to environmentally sensitive land
ordinances that mandate open space areas with public elements in housing
developments, and prevent development on hillsides, wetlands and other protected
areas. We must also comply with flood plain restrictions, desert wash areas,
native plant regulations, endangered species acts and view restrictions. These
and similar laws may result in delays, cause substantial compliance and other
costs, and prohibit or severely restrict development in certain environmentally
sensitive regions or areas. To date, compliance with such ordinances has not
materially affected our operations, though no assurance is given that such a
material adverse effect will not occur in the future.
We usually will condition our obligation to purchase property on, among
other things, an environmental review of the land. To date, we have not incurred
any unanticipated liabilities relating to the removal of unknown toxic wastes or
other environmental matters. However, there is no assurance that we will not
incur material liabilities in the future relating to toxic waste removal or
other environmental matters affecting land currently or previously owned.
BONDS AND OTHER OBLIGATIONS
We obtain letters of credit and performance, maintenance, and other bonds
in support of our related obligations with respect to the development of our
projects. The amount of these obligations outstanding at any time varies in
accordance with pending development activities. In the event the bonds or
letters are drawn upon, we would be obligated to reimburse the issuer of the
bond or letter of credit. At December 31, 1999 there were approximately $1.0
million in outstanding letters of credit and $16.3 million in performance bonds
for such purposes. We do not believe that any of these bonds or letters of
credit are likely to be drawn upon.
EMPLOYEES AND SUBCONTRACTORS
At December 31, 1999, we had 295 employees, including 68 in management and
administration, 101 in sales and marketing, and 126 in construction operations.
Our employees are not unionized, and we believe that employee relations are
good. We act solely as a general contractor and all construction operations are
conducted through project managers and field superintendents who manage third
party subcontractors. We use independent contractors for construction,
architectural and advertising services, and believe that our relations with
subcontractors and independent contractors are good.
9
NET OPERATING LOSS CARRYFORWARD
By December 31, 1999, our federal income tax net operating loss (NOL)
carryforward was fully utilized. Income tax payments were reduced during the
periods the NOL carryforward was available and during that time income tax
payments consisted primarily of state income taxes and the federal alternative
minimum tax.
STOCK REPURCHASE PROGRAM
In May 1999, we announced a stock repurchase program in which our Board of
Directors approved the buyback of up to $6 million of outstanding Meritage
common stock. As of December 31, 1999, 186,000 shares had been repurchased for
an aggregate price of approximately $1.9 million.
MORTGAGE ASSETS ACQUIRED PRIOR TO MERGER
Prior to the merger, we acquired a number of mortgage assets, consisting of
mortgage interests (commonly known as "residuals") and mortgage instruments.
During 1998 and 1997, we sold the mortgage assets for a gain or generated
interest income from these assets prior to sale, of approximately $5.2 and $5.1
million, respectively.
ITEM 2. PROPERTIES
We lease the following office space:
City Square Annual
Footage Lease Rate Term Expiration
------- ---------- ---- ----------
Plano, Texas* 13,000 $179,500 5 years 5/15/02
Phoenix, Arizona* 11,600 242,000 5 years 8/30/04
Tucson, Arizona 2,800 58,000 2 years 10/31/00
Walnut Creek, California 2,700 50,500 2 years 7/14/00
Austin, Texas 1,500 28,400 3 years 4/30/02
Fort Worth, Texas 1,400 18,200 3 years 6/30/02
Houston, Texas 900 9,500 1 year 7/1/00
- ----------
* Leases are with companies owned beneficially either by one our Co-Chairmen
or by one of our Co-Chairmen and a Director. Management believes lease
rates are competitive with rates for comparable space in the area and terms
of the leases are similar to those we could obtain in an arm's length
transaction.
We also lease 18 model homes at a total monthly lease amount of $45,100.
The leases are for terms ranging from three months to 36 months, with various
renewal options.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various routine legal proceedings incidental to our
business. Management believes that none of these matters, certain of which are
covered by insurance, will have a material adverse impact upon our financial
condition if decided adversely against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of shareholders during the fourth
quarter of 1999.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
GENERAL
Our common stock is publicly traded on the New York Stock Exchange ("NYSE")
under the symbol "MTH". The high and low closing sales prices of the common
stock, as reported by the NYSE, follow:
1999 1998
----------------------- -----------------------
High Low High Low
--------- ---------- ---------- ---------
First Quarter $15 11/16 $11 $19 15/16 $12 7/16
Second Quarter $13 1/2 $10 15/16 $19 1/4 $15 5/8
Third Quarter $13 1/4 $10 11/16 $19 3/4 $12 1/16
Fourth Quarter $12 $ 9 15/16 $14 11/16 $ 9 11/16
On March 15, 2000, the closing sales price of the common stock as reported
by the NYSE was $10 13/16 per share. At that date, there were approximately 280
owners of record. There are approximately 2,500 beneficial owners of common
stock.
The transfer agent for our common stock is ChaseMellon Shareholder
Services, L.L.C., Overpeck Centre, 85 Challanger Road, Ridgefield Park, NJ
07660.
We did not declare cash dividends in 1999, 1998 or 1997, nor do we intend
to declare cash dividends in the foreseeable future. Earnings will be retained
to finance the growth of the business. Future cash dividends, if any, will
depend upon our financial condition, results of operations and capital
requirements, as well as other factors considered relevant by our board of
directors.
FACTORS THAT MAY AFFECT FUTURE STOCK PERFORMANCE
The performance of our common stock depends upon several factors, including
those listed below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Results and
Financial Condition."
The market price of our common stock could be subject to significant
fluctuations in response to certain factors, such as variations in anticipated
or actual results of our operations or that of other homebuilding companies,
changes in conditions affecting the general economy, widespread industry trends
and analysts' reports, as well as other factors unrelated to our operating
results.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data for each of the years in the five-year period ended December 31, 1999. The
data for 1996 through 1999 are derived from our Consolidated Financial
Statements audited by KPMG LLP, independent auditors. The data for 1995 is
derived from the Consolidated Financial Statements audited by Ernst & Young LLP,
independent auditors. For additional information, see the Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K. The following
table should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and the Results of Operations. These historical results may
not be indicative of future results.
11
Historical Consolidated Financial Data
Years Ended December 31,
(Dollars in Thousands, Except Per Share Data)
------------------------------------------------------------
1999 1998(3) 1997(4) 1996 1995
--------- --------- --------- -------- --------
Income Statement Data:
Home and land sales revenue $ 341,786 $ 257,113 $ 149,630 N/A N/A
Cost of home and land sales (277,287) (205,188) (124,594)
--------- --------- ---------
Gross profit 64,499 51,925 25,036
Earnings from mortgage assets
and other income 2,065 5,982 5,435 $ 2,244 $ 3,564
Interest expense (6) (461) (165) (238) (868)
Commissions and other sales
costs and general and
administrative expenses (34,343) (24,925) (15,107) (1,684) (1,599)
Minority interest in net
income of consolidated
joint ventures -- (2,021) -- -- --
--------- --------- --------- -------- --------
Earnings before income taxes
and extraordinary loss 32,215 30,500 15,199 322 1,097
Income taxes(1) (13,270) (6,497) (962) (26) --
Extraordinary loss(2) -- -- -- (149) --
--------- --------- --------- -------- --------
Net earnings $ 18,945 $ 24,003 $ 14,237 $ 147 $ 1,097
========= ========= ========= ======== ========
Earnings per diluted share before effect of
extraordinary loss $ 3.14 $ 3.92 $ 2.68 $ .09 $ .34
Extraordinary loss per diluted share -- -- -- (.05) --
--------- --------- --------- -------- --------
Diluted earnings per share $ 3.14 $ 3.92 $ 2.68 $ .04 $ .34
========= ========= ========= ======== ========
Cash dividends per share (1) $ N/A $ N/A $ N/A $ .06 $ .09
========= ========= ========= ======== ========
1999 1998 1997 1996(5) 1995
--------- --------- --------- -------- --------
Balance Sheet Data:
Real estate under development $ 171,012 $ 104,759 $ 63,955 $ 35,991 $ --
Residual interests -- -- 1,422 3,909 5,457
Total assets 226,559 152,250 96,633 72,821 27,816
Notes payable 85,937 37,205 22,892 30,542 7,819
Total liabilities 136,148 79,971 50,268 45,876 9,368
Stockholders' equity 90,411 72,279 46,365 26,945 18,448
- ----------
(1) Due to the use of our net operating loss carryforward, we paid limited
income taxes during 1997 and 1998 until the NOL was fully utilized. During
1995 and 1996 we qualified and elected to be treated as a REIT under
federal tax laws and we were not subject to federal income tax on that
portion of our taxable income that was distributed to stockholders in or
with respect to that year.
(2) Reflects extraordinary loss from early extinguishment of long-term debt.
(3) Includes the accounts of Meritage Homes of Northern California from July 1,
1998, the acquisition date.
(4) Includes the accounts of Legacy Homes from July 1, 1997, the combination
date.
(5) Reflects the merger consummated on December 31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following discussion and analysis provides information regarding the
results of operations of Meritage and its subsidiaries for the years ended
December 31, 1999 and December 31, 1998. All material balances and transactions
between Meritage and its subsidiaries have been eliminated. Total results
include those of the California operations from July 1, 1998. In management's
opinion, the data reflects all adjustments, consisting of only normal recurring
adjustments, necessary to fairly present our financial position and results of
operations for the periods presented.
12
HOME SALES REVENUE
Home sales revenue is the product of the number of homes closed during the
period and the average sales price per home. Comparative 1999 and 1998 home
sales revenue follow (dollars in thousands):
Year Ended December 31, Dollar/unit Percentage
----------------------- Increase Increase
1999 1998 (Decrease) (Decrease)
-------- -------- ---------- ----------
Total
Dollars $334,007 $255,985 $ 78,022 31%
Homes closed 1,643 1,291 352 27%
Average sales price $ 203.3 $ 198.3 $ 5.0 3%
Texas
Dollars $174,850 $130,860 $ 43,990 34%
Homes closed 1,135 932 203 22%
Average sales price $ 154.1 $ 140.4 $ 13.7 10%
Arizona
Dollars $120,909 $105,942 $ 14,967 14%
Homes closed 400 317 83 26%
Average sales price $ 302.3 $ 334.2 $ (31.9) (10)%
California
Dollars $ 38,248 $ 19,183 $ 19,065 99%
Homes closed 108 42 66 157%
Average sales price $ 354.1 $ 456.7 $ (102.6) (23)%
The increase in revenue and number of homes closed in 1999 compared to 1998
resulted mainly from the inclusion of the California operations for the full
year and continued growth in our Texas and Arizona operations.
HOME SALES GROSS PROFIT
Gross profit equals home sales revenue, net of housing cost of sales, which
include developed lot costs, home construction costs, amortization of common
community costs (such as the cost of model complex and architectural, legal and
zoning costs), interest, sales tax, warranty, construction overhead and closing
costs. Comparative 1999 and 1998 home sales gross profit follows (dollars in
thousands):
Year Ended
December 31,
---------------- Dollar/percentage Percentage
1999 1998 Increase (Decrease) Increase (Decrease)
---- ---- ------------------- -----------------
Dollars $63,810 $51,576 $12,234 24%
Percent of home
sales revenue 19.1% 20.1% (1.0)% (5)%
The dollar increase in gross profit for the twelve months ended December
31, 1999 is attributable to the increase in number of homes closed due to the
inclusion of California operations for the full year, and continued growth in
our Texas and Arizona operations. The gross profit percentage decreased in 1999
due to somewhat lower profit margins in our Texas operations and a change in the
Arizona housing mix, reflecting a greater proportion of move-up home closings,
which typically have lower gross profit margins than our luxury homes.
EARNINGS FROM MORTGAGE ASSETS AND OTHER INCOME
All of our remaining mortgage securities were sold in 1998, causing the
1999 decrease in earnings from mortgage assets. Other income increased primarily
due to an increase in mortgage company income.
13
COMMISSIONS AND OTHER SALES COSTS
Commissions and other sales costs, such as advertising and sales office
expenses, were approximately $19.2 million, or 5.8% of home sales revenue, in
1999, as compared to approximately $14.3 million, or 5.6% of home sales revenue
in 1998. A greater number of communities were operating in 1999 than in 1998,
which primarily caused the increase.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately $15.1 million, or
4.4% of total revenue in 1999, as compared to approximately $10.6 million, or
4.1% of total revenue in 1998. Operating costs associated with our geographic
expansions primarily caused this increase.
MINORITY INTEREST
The minority interest recorded in 1998 is due to our acquisition of
Sterling Communities, which included two 50% owned limited partnership interests
which Meritage controlled. We recorded the minority interest partners' share of
net income as an expense. The limited partnerships' operations were concluded in
the fourth quarter of 1998.
INCOME TAXES
The increase in income taxes to $13.3 million for the year ended December
31, 1999 from $6.5 million in the prior year resulted from an increase in
pre-tax income and a higher effective tax rate. The lower 1998 effective tax
rate was caused by utilization of our net operating loss carryforward. In future
periods we expect to have an effective tax rate approximating the statutory
federal and state tax rates.
SALES CONTRACTS
Sales contracts for any period represent the number of homes ordered by
customers (net of homes canceled) multiplied by the average sales price per home
ordered. Comparative 1999 and 1998 sales contracts follow (dollars in
thousands):
Year Ended December 31, Dollar/unit Percentage
----------------------- Increase Increase
1999 1998 (Decrease) (Decrease)
--------- --------- ---------- ----------
Total
Dollars $388,158 $283,746 $104,412 37%
Homes ordered 1,840 1,466 374 26%
Average sales price $ 211.0 $ 193.6 $ 17.4 9%
Texas
Dollars $191,655 $166,020 $ 25,635 15%
Homes ordered 1,198 1,131 67 6%
Average sales price $ 160.0 $ 146.8 $ 13.2 9%
Arizona
Dollars $127,408 $115,375 $ 12,033 10%
Homes ordered 436 329 107 33%
Average sales price $ 292.2 $ 350.7 $ (58.5) (17)%
California
Dollars $ 69,095 $ 2,351 $ 66,744 *
Homes ordered 206 6 200 *
Average sales price $ 335.4 $ 391.8 $ (56.4) (14)%
- ----------
* Not meaningful
14
We do not include sales contingent upon the sale of a customer's existing
home as a sales contract until the contingency is removed. Historically, we have
experienced a cancellation rate approximating 20% of gross sales. Total sales
contracts increased in 1999 compared to 1998 due to the expansion into
California, and continued growth in our Texas and Arizona operations.
NET SALES BACKLOG
Backlog represents net sales contracts that have not closed. Comparative
1999 and 1998 net sales backlog follows (dollars in thousands):
At December 31, Dollar/unit Percentage
----------------------- Increase Increase
1999 1998 (Decrease) (Decrease)
--------- --------- ---------- ----------
Total
Dollars $199,445 $145,294 $54,151 37%
Homes in backlog 885 688 197 29%
Average sales price $ 225.4 $ 211.2 $ 14.2 7%
Texas
Dollars $ 93,983 $ 77,178 $16,805 22%
Homes in backlog 566 503 63 13%
Average sales price $ 166.0 $ 153.4 $ 12.6 8%
Arizona
Dollars $ 72,878 $ 66,379 $ 6,499 10%
Homes in backlog 216 180 36 20%
Average sales price $ 337.4 $ 368.8 $ (31.4) (9)%
California
Dollars $ 32,584 $ 1,737 $30,847 *
Homes in backlog 103 5 98 *
Average sales price $ 316.3 $ 347.4 $ (31.1) (9)%
- ----------
* Not meaningful
Total dollar backlog increased 37% over the prior year due to a
corresponding increase in homes in backlog. Homes in backlog have increased 29%
over the prior year due mainly to the increase in net orders caused by expansion
into California and continued growth in our Texas and Arizona operations. Our
backlog also increased somewhat due to extended construction times, which caused
longer periods between the time sales contracts were taken and home deliveries
were made.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total results for the comparison of the years ended December 31, 1998 and
1997 include those of the Texas operations from July 1, 1997 and of the
California operations from July 1, 1998. Texas 1997 results are pro forma in
that they are shown for the entire year, even though the Texas operations were
not acquired until July 1, 1997.
15
HOME SALES REVENUE
Comparative 1998 and 1997 home sales revenue follow (dollars in thousands):
Year Ended December 31, Dollar/unit Percentage
----------------------- Increase Increase
1998 1997 (Decrease) (Decrease)
--------- --------- ---------- ----------
Total
Dollars $255,985 $149,385 $106,600 71%
Homes closed 1,291 644 647 100%
Average sales price $ 198.3 $ 232.0 $ (33.7) (15)%
Texas*
Dollars $130,860 $ 91,190 $ 39,670 44%
Homes closed 932 633 299 47%
Average sales price $ 140.4 $ 144.1 $ (3.7) (3)%
Arizona
Dollars $105,942 $ 97,922 $ 8,020 8%
Homes closed 317 284 33 12%
Average sales price $ 334.2 $ 344.8 $ (10.6) (3)%
California
Dollars $ 19,183 ** ** **
Homes closed 42 ** ** **
Average sales price $ 456.7 ** ** **
- ----------
* Full year 1997 Texas information includes pre-combination results and is
for comparative purposes only.
** Not meaningful
The increase in revenue and number of homes closed in 1998 compared to 1997
resulted mainly from the inclusion of the Texas operations for the full year.
The lower average sales price in 1997 is also due to sales in the Texas market,
where we focus on entry-level and move-up homes.
HOME SALES GROSS PROFIT
Comparative 1998 and 1997 home sales gross profit follows (dollars in
thousands):
Year Ended December 31,
----------------------- Dollar/percentage Percentage
1998 1997 Increase Increase
---- ---- -------- --------
Dollars $51,576 $25,016 $26,560 106%
Percent of home
sales revenue 20.1% 16.7% 3.4% 20%
The dollar increase in gross profit for the twelve months ended December
31, 1998 is attributable to the increase in number of homes closed due to the
inclusion of Texas operations for the full year, along with increased closings
in highly profitable Arizona communities. The gross profit margin increased in
1998 due to generally higher margins in Texas, the addition of the California
operations in the last half of the year and an increase in sales of more
profitable custom options and upgrades with respect to Arizona home closings.
EARNINGS FROM MORTGAGE ASSETS AND OTHER INCOME
The increase in earnings from mortgage assets primarily is due to gains
from the sales of our remaining mortgage securities in 1998. These gains
exceeded 1997 gains from residual sales by approximately $2.1 million. The
increase was somewhat offset by decreased residual interest earned in 1998.
The 1998 increase in other income primarily is due to an increase in
interest income on cash accounts and overnight investments. Texas operations
were included for the full tear in 1998, which also contributed to higher income
amounts.
16
COMMISSIONS AND OTHER SALES COSTS
Commissions and other sales costs, such as advertising and sales office
expenses, were approximately $14.3 million, or 5.6% of home sales revenue, in
1998, as compared to approximately $8.3 million, also 5.6% of home sales
revenue, in 1997. Sales costs resulting from a greater number of operating
communities due to our expansions into Texas and California primarily caused the
dollar increase.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately $10.6 million, or
4.1% of total revenue in 1998, as compared to approximately $6.8 million, or 4.6
% of total revenue in 1997. Operating costs associated with our Texas and
California expansions, including the amortization of goodwill, primarily caused
the increase.
MINORITY INTEREST
The increase in minority interest in 1998 is due to our acquisition of
Sterling Communities, which included two 50% owned limited partnership interests
which Meritage controls. We recorded the minority interest partners' share of
net income as an expense. The limited partnerships' operations were concluded in
the fourth quarter of 1998.
INCOME TAXES
The increase in income taxes to $6.5 million for the year ended December
31, 1998 from $962,000 in the prior year resulted from a significant increase in
pre-tax income and a higher effective tax rate. The lower 1997 effective tax
rate was caused by a larger reduction in the valuation allowance applicable to
deferred tax assets than occurred in 1998. In future periods we expect to have
an effective tax rate approximating the statutory federal and state tax rates.
SALES CONTRACTS
Comparative 1998 and 1997 sales contracts follow (dollars in
thousands):
Year Ended December 31, Dollar/unit Percentage
----------------------- Increase Increase
1998 1997 (Decrease) (Decrease)
--------- --------- ---------- ----------
Total
Dollars $283,746 $157,479 $126,267 80%
Homes ordered 1,466 693 773 112%
Average sales price $ 193.6 $ 227.2 $ ( 33.6) (15)%
Texas*
Dollars $166,020 $102,261 $ 63,759 62%
Homes ordered 1,131 740 391 53%
Average sales price $ 146.8 $ 138.2 $ 8.6 6%
Arizona
Dollars $115,375 $112,207 $ 3,168 3%
Homes ordered 329 332 (3) **
Average sales price $ 350.7 $ 338.0 $ 12.7 4%
California
Dollars $ 2,351 ** ** **
Homes ordered 6 ** ** **
Average sales price $ 391.8 ** ** **
- ----------
* Full year 1997 Texas information includes pre-combination results and is
for comparative purposes only.
** Not meaningful
17
Total sales contracts increased in 1998 compared to 1997 due to the
expansion into Texas and California, and the economic strength of all of our
operating markets.
NET SALES BACKLOG
Comparative 1998 and 1997 net sales backlog follows (dollars in thousands):
At December 31,
----------------------- Dollar/unit Percentage
1998 1997 Increase Increase
--------- --------- ---------- ----------
Total
Dollars $145,294 $ 98,963 $46,331 47%
Homes in backlog 688 472 216 46%
Average sales price $ 211.2 $ 209.7 $ 1.5 *
Texas
Dollars $ 77,178 $ 42,018 $35,160 84%
Homes in backlog 503 304 199 65%
Average sales price $ 153.4 $ 138.2 $ 15.2 11%
Arizona
Dollars $ 66,379 $ 56,945 $ 9,434 17%
Homes in backlog 180 168 12 7%
Average sales price $ 368.8 $ 339.0 $ 29.8 9%
California
Dollars $ 1,737 * * *
Homes in backlog 5 * * *
Average sales price $ 347.4 * * *
- ----------
* Not meaningful
Total dollar backlog increased 47% over the prior year due to a
corresponding increase in homes in backlog. Homes in backlog have increased 46%
over the prior year due mainly to the increase in net orders caused by expansion
into Texas and California.
Arizona and Texas backlogs have increased due to the number of sales orders
taken in 1998, along with slight industry-wide construction delays. These delays
caused more closings to be pushed into the following year than usual.
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of working capital are land purchases, lot development
and home construction. We use a combination of borrowings and funds generated by
operations to meet our working capital requirements.
Cash flow for each of our communities depends on the status of the
development cycle, and can differ substantially from reported earnings. Early
stages of development or expansion require significant cash outlays for land
acquisitions, plat and other approvals, and construction of model homes, roads,
certain utilities, general landscaping and other amenities. Because these costs
are capitalized, income reported for financial statement purposes during those
early stages may significantly exceed cash flow. Later, cash flow can
significantly exceed earnings reported for financial statement purposes, as cost
of sales includes charges for substantial amounts of previously expended costs.
At December 31, 1999 we had short-term secured revolving construction loan
and acquisition and development facilities totaling $169.5 million of which
approximately $71 million was outstanding. An additional $35 million of
unborrowed funds supported by approved collateral were available under our
credit facilities at that date. Borrowings under the credit facilities are
subject to our inventory collateral position and a number of other conditions,
18
including minimum net worth, debt to equity and debt coverage tests. We also
have $15 million outstanding in unsecured, senior subordinated notes due
September 15, 2005, which were issued in October 1998.
Management believes that the current borrowing capacity, cash on hand at
December 31, 1999 and anticipated cash flows from operations are sufficient to
meet liquidity needs for the foreseeable future. There is no assurance, however,
that future amounts available from our sources of liquidity will be sufficient
to meet future capital needs. The amount and types of indebtedness that we incur
may be limited by the terms of the indenture governing our senior subordinated
notes and credit agreements.
SEASONALITY
We historically have closed more homes in the second half of the fiscal
year than in the first half, due in part to the slightly seasonal nature of the
market for our semi-custom luxury and move-up products. Management expects this
seasonal trend to continue, though it may vary as operations continue to expand.
YEAR 2000 COMPLIANCE
We have assessed our homebuilding and corporate operations that use
significant information technology ("IT") systems and non-IT systems
(collectively, "business systems") for what was commonly referred to as the Year
2000 ("Y2K") issue. We experienced no business disruptions due to failures of
our business systems, nor did any of our suppliers or business partners. We have
converted to new versions of substantially all of our homebuilding database
systems, and believe that the IT system is Y2K compliant in all respects. We do
not anticipate further costs or potential disruptions associated with the Y2K
issue, however there is no assurance that there will be no unforeseen Y2K events
in the future.
The remediation and testing of our business systems cost approximately
$160,000. These costs were expensed in the period incurred and funded through
cash flows from operations. The financial impact was not material to our
financial position or results of operations.
NEW ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which establishes standards for the accounting and reporting for derivative
instruments including certain derivative instruments embedded in other contracts
and hedging activities. This statement generally requires that all derivatives
are recognized as assets or liabilities in the balance sheet and measured at
fair value, and that recognition of gains and losses are required on hedging
instruments based on changes in fair value or the earnings effect of forecasted
transactions. As issued, SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133", as an amendment to SFAS No.
133, which deferred the effective date of SFAS No. 133 until June 15, 2000. We
are currently evaluating the impact of SFAS No. 133.
In June 1999, the FASB issued FASB Interpretation No. 43, "Real Estate
Sales - an Interpretation of FASB Statement No. 66", which we have adopted. The
interpretation clarified that SFAS No. 66 applies to all sales of real estate,
including sales of real estate with property improvements or integral equipment,
entered into after June 30, 1999. This pronouncement has had no effect on our
accounting policies.
In August 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 99, "Materiality" which expresses the views of
the staff that exclusive reliance on certain quantitative benchmarks to assess
materiality in preparing financial statements is inappropriate since
misstatements are not immaterial simply because they fall beneath a numerical
threshold. In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements" which summarizes the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
These pronouncements have had no effect on our accounting policies.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION
Future operating results and financial condition depend on our ability to
successfully design, develop, construct and sell homes that satisfy dynamic
customer demand patterns. Inherent in this process are factors that we must
successfully manage to achieve favorable future operating results and financial
condition. These operating and financial conditions, along with many other
factors, could affect the price of our common stock. Potential risks and
uncertainties that could affect future operating results and financial condition
could include the factors discussed below.
HOMEBUILDING INDUSTRY FACTORS. The homebuilding industry is cyclical and is
significantly affected by changes in economic and other conditions, such as
employment levels, availability of financing, interest rates, and consumer
confidence. Although management believes that many of our customers
(particularly purchasers of luxury and move-up homes) tend to be less
price-sensitive than generally is the case for other homebuilders, such
uncertainties could adversely affect our performance. Homebuilders are also
subject to various risks, many of which are outside their control, including
delays in construction schedules, cost overruns, changes in governmental
regulations, increases in real estate taxes and other local government fees, and
availability and cost of land, materials, and labor. Although the principal raw
materials used in the homebuilding industry generally are available from a
variety of sources, the materials are subject to periodic price fluctuations.
There is no assurance that the occurrence or continuation of any of the above
items will not have a material adverse effect on our business.
The homebuilding industry is subject to the potential for significant
variability and fluctuations in real estate values, as evidenced by the changes
in real estate prices in recent years in Texas, Arizona and Northern California.
Although we believe that our projects are currently reflected on our balance
sheet at appropriate values, there is no assurance that write-downs of some or
19
all of our projects will not occur if market conditions deteriorate, or that
such write-downs will not be material in amount.
FLUCTUATIONS IN OPERATING RESULTS. We historically have experienced, and
expect to continue to experience, variability in home sales and net earnings on
a quarterly basis. As a result of such variability, our historical performance
may not be a meaningful indicator of future results. Factors that contribute to
this variability include:
* timing of home deliveries and land sales;
* the ability to continue the acquisition of additional land or options
to acquire additional land on acceptable terms;
* conditions of the real estate market and the general economy in areas
where we operate;
* the cyclical nature of the homebuilding industry, changes in
prevailing interest rates and the availability of mortgage financing;
* costs or shortages of materials and labor; and
* delays in construction schedules due to strikes, adverse weather, acts
of God, and the availability of subcontractors or governmental
restrictions.
INTEREST RATES AND MORTGAGE FINANCING. We believe that many of our move-up
and luxury home customers have been less sensitive to interest rate fluctuations
than other homebuyers. However, most of our buyers finance their home purchase
through third-party lenders providing mortgage financing. In general, housing
demand is adversely affected by increases in interest rates and housing costs,
and the unavailability of mortgage financing. If mortgage interest rates
increase and the ability of prospective buyers to finance home purchases is
consequently affected adversely, home sales, gross margins and net income may
also be adversely impacted and the impact may be material. Our homebuilding
activities depend upon the availability and costs of mortgage financing for
buyers of homes owned by potential customers so those customers ("move-up
buyers") can sell their homes and purchase a Meritage home. Any limitations or
restrictions of financing availability could adversely affect home sales.
Changes in federal income tax laws may also affect demand for new homes. Various
proposals have been publicly discussed to limit mortgage interest deductions and
to eliminate or limit tax-free rollover treatment provided under current law
where the proceeds of the sale of a principal residence are reinvested in a new
principal residence. Enactment of such proposals may have an adverse effect on
the homebuilding industry in general, and on demand for our products in
particular. No prediction can be made whether any such proposals will be enacted
and, if enacted, the particular form such laws would take.
INFLATION. Meritage, as well as other homebuilders in the industry, may be
adversely affected during periods of high inflation, mainly because of higher
land and construction costs. Also, higher mortgage interest rates may
significantly affect the affordability of permanent mortgage financing to
prospective buyers. Inflation also increases our interest, material and labor
costs. We attempt to pass cost increases on to our customers through higher
selling prices. To date, inflation has not had a material adverse effect on our
results of operations; however, there is no assurance that inflation will not
have a material adverse effect on our future operating results.
COMPETITION. The single-family residential housing industry is highly
competitive. Homebuilders vie for desirable properties, financing, raw
materials, and skilled labor. We compete for residential home sales with other
developers and individual resales of existing homes. Competitors include large
homebuilding companies, some of which have greater financial resources than we
have, and smaller homebuilders, which may have lower costs. Competition is
expected to continue and become more intense, and there may be new entrants in
the markets in which we currently operate and in markets we may enter in the
future.
LACK OF GEOGRAPHIC DIVERSIFICATION. We have operations in Texas, Arizona
and Northern California. Failure to be more geographically diversified could
adversely impact us if the homebuilding business in our current markets should
decline, for there may not be a balancing opportunity in a healthier market in
other geographic regions.
20
ADDITIONAL FINANCING; LIMITATIONS. The homebuilding industry is capital
intensive and requires significant up-front expenditures to acquire land and
begin development. Accordingly, we incur substantial indebtedness to finance our
homebuilding activities. At December 31, 1999, our debt totaled approximately
$85.9 million. We may be required to seek additional capital in the form of
equity or debt financing from a variety of potential sources, including bank
financing and securities offerings. Also, lenders are increasingly requiring
developers to invest significant amounts of equity in a project both in
connection with origination of new loans as well as the extension of existing
loans. If we cannot obtain sufficient capital to fund our planned capital or
other expenditures, new projects may be delayed or abandoned, which could result
in a reduction in home sales and may adversely affect operating results. There
is no assurance that additional debt or equity financing will be available in
the future or on acceptable terms.
The terms and conditions of our current indebtedness limit the amount and
types of indebtedness that we can incur. We must comply with numerous operating
and financial maintenance covenants and there is no assurance that we will be
able to maintain compliance with these financial and other covenants. Failure to
comply with the covenants would result in default and resulting cross defaults
under our other indebtedness, and could result in an acceleration of all
indebtedness, which would have a material adverse affect on us.
GOVERNMENT REGULATIONS; ENVIRONMENTAL CONDITIONS. We are subject to local,
state, and federal statutes and rules regulating certain developmental matters,
as well as building and site design. We are subject to various fees and charges
of governmental authorities designed to defray the cost of providing certain
governmental services and improvements. We may be subject to additional costs
and delays or may be precluded entirely from building projects because of "no
growth" or "slow growth" initiatives, building permit ordinances, building
moratoriums, or similar government regulations that could be imposed in the
future due to health, safety, welfare, or environmental concerns. We must also
obtain licenses, permits, and approvals from government agencies to engage in
certain activities, the granting or receipt of which are beyond our control.
Meritage and its competitors are also subject to a variety of local, state,
and federal statutes, ordinances, rules and regulations concerning the
protection of health and the environment. Environmental laws or permit
restrictions may result in project delays, may cause substantial compliance and
other costs, and may prohibit or severely restrict development in certain
environmentally sensitive regions or areas. Environmental regulations can also
have an adverse impact on the availability and price of certain raw materials
such as lumber.
RECENT AND FUTURE EXPANSION. In 1998, we expanded into the Northern
California market, and may continue to consider growth in other areas of the
country. The magnitude, timing and nature of any future expansion will depend on
a number of factors, including suitable acquisition candidates, the negotiation
of acceptable terms, our financial capabilities, and general economic and
business conditions. New acquisitions may result in the incurrence of additional
debt and/or amortization of expenses related to goodwill and intangible assets
that could adversely affect our profitability, or result in potentially dilutive
issuances of equity securities. Acquisitions also involve numerous risks,
including difficulties in the assimilation of the acquired company's operations,
the diversion of management's attention from other business concerns, risks of
entering markets in which we have had no or only limited direct experience and
the potential loss of key employees of the acquired company. There can be no
assurance that we will be able to expand into new markets on a profitable basis
or that we can successfully manage our expansion into California or any
additional markets.
DEPENDENCE ON KEY PERSONNEL. Our success is largely dependent on the
continuing services of certain key employees, and the ability to attract new
personnel required for our favorable development. We have entered into
employment agreements with various key officers, and loss of their services
could have a material adverse affect on our business.
21
DEPENDENCE ON SUBCONTRACTORS. We conduct our business only as a general
contractor in connection with the design, development and construction of our
communities. Virtually all architectural and construction work is performed by
subcontractors. As a consequence, we are dependent upon the continued
availability and satisfactory performance by unaffiliated third parties for the
design and construction of our homes. There is no assurance that there will be
sufficient availability and satisfactory performance by unaffiliated third-party
subcontractors, and such a lack could have a material adverse affect on our
business.
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this annual report may constitute "forward-looking
statements" within the meaning of federal securities laws. Forward-looking
statements are based on management's beliefs, assumptions and expectations of
our future economic performance, taking into account the information currently
available to them. These statements are not statements of historical fact.
Forward-looking statements involve risks and uncertainties that may cause our
actual results, performance or financial condition to be materially different
from the expectations of future results, performance or financial condition
expressed or implied in any forward-looking statement.
When used in this annual report, the words "anticipate," "estimate,"
"expect," "objective," "projection," "forecast," "goal" or similar words are
intended to identify forward-looking statements. Management qualifies any
forward-looking statements entirely by these cautionary factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not trade in derivative financial instruments and at December 31,
1999 had no significant financial instruments. We do have other financial
instruments in the form of notes payable and senior debt. Our lines of credit
and credit facilities are at variable interest rates and are subject to market
risk in the form of interest rate fluctuations. The interest rate on our senior
debt is at a fixed rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements as of December 31, 1999 and 1998 and
for each of the years in the three-year period ended December 31, 1999, together
with related notes and the report of KPMG LLP, independent auditors, are on the
following pages. Other required financial information is more fully described in
Item 14.
22
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Meritage Corporation
We have audited the accompanying consolidated balance sheets of Meritage
Corporation and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion of these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly in all material respects, the financial position of Meritage
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Phoenix, Arizona
February 4, 2000
23
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------
1999 1998
------------- -------------
ASSETS
Cash and cash equivalents $ 13,422,016 $ 12,386,806
Real estate under development 171,012,405 104,758,530
Deposits on real estate under
option or contract 15,699,609 7,338,406
Other receivables 1,643,187 2,460,966
Deferred tax asset 698,634 6,935,000
Goodwill 18,741,625 14,640,712
Property and equipment, net 4,040,134 2,566,163
Other assets 1,301,286 1,163,737
------------- -------------
Total Assets $ 226,558,896 $ 152,250,320
============= =============
LIABILITIES
Accounts payable and
accrued liabilities $ 41,950,761 $ 34,068,178
Home sale deposits 8,261,000 8,587,245
Notes payable 85,936,601 37,204,845
Minority interest in
consolidated joint ventures -- 110,922
------------- -------------
Total Liabilities 136,148,362 79,971,190
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value
$.01 per share; 50,000,000
shares authorized; issued and
outstanding - 5,474,906 shares
at December 31, 1999, and 5,334,942
shares at December 31, 1998 54,749 53,349
Additional paid-in capital 100,406,745 99,319,669
Accumulated deficit (8,148,535) (27,093,888)
Less cost of shares held
in treasury (186,000 shares) (1,902,425) --
------------- -------------
Total Stockholders' Equity 90,410,534 72,279,130
------------- -------------
Total Liabilities and
Stockholders' Equity $ 226,558,896 $ 152,250,320
============= =============
See accompanying notes to consolidated financial statements
24
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
Home sales revenue $ 334,007,420 $ 255,984,499 $ 149,384,548
Land sales revenue 7,778,761 1,128,208 245,000
------------- ------------- -------------
341,786,181 257,112,707 149,629,548
Cost of home sales (270,197,356) (204,408,950) (124,368,782)
Cost of land sales (7,089,379) (778,457) (225,000)
------------- ------------- -------------
(277,286,735) (205,187,407) (124,593,782)
Home sales gross profit 63,810,064 51,575,549 25,015,766
Land sales gross profit 689,382 349,751 20,000
------------- ------------- -------------
64,499,446 51,925,300 25,035,766
Commissions and other sales
costs (19,243,248) (14,292,152) (8,294,028)
General and administrative
expense (15,099,457) (10,632,212) (6,812,171)
Interest expense (6,383) (461,475) (165,173)
Other income, net 2,064,399 750,950 346,271
Earnings from mortgage assets -- 5,230,549 5,088,693
Minority interest in net
income of consolidated
joint ventures -- (2,021,230) --
------------- ------------- -------------
Earnings before income taxes 32,214,757 30,499,730 15,199,358
Income taxes (13,269,404) (6,496,943) (961,916)
------------- ------------- -------------
Net earnings $ 18,945,353 $ 24,002,787 $ 14,237,442
============= ============= =============
Basic earnings per share $ 3.49 $ 4.51 $ 2.93
============= ============= =============
Diluted earnings per share $ 3.14 $ 3.92 $ 2.68
============= ============= =============
See accompanying notes to consolidated financial statements
25
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Additional
Number of Common Paid-in Accumulated Treasury
Shares Stock Capital Deficit Stock Total
------ ----- ------- ------- ----- -----
Balance at December 31, 1996 4,580,611 $ 45,806 $ 92,643,658 $(65,334,117) $ (410,283) $ 26,945,064
Net earnings -- -- -- 14,237,442 -- 14,237,442
Exercise of stock options 8,162 81 118,510 -- -- 118,591
Shares issued in connection with
the Legacy combination 666,667 6,667 3,393,335 -- -- 3,400,002
Stock option and contingent stock
compensation expense -- -- 1,664,081 -- -- 1,664,081
--------- -------- ------------ ------------ ----------- ------------
Balance at December 31, 1997 5,255,440 52,554 97,819,584 (51,096,675) (410,283) 46,365,180
Net earnings -- -- -- 24,002,787 -- 24,002,787
Exercise of stock options 43,660 437 513,135 -- -- 513,572
Contingent and warrant shares
issued 88,888 888 (888) -- -- --
Stock option and contingent stock
compensation expenses -- -- 1,397,591 -- -- 1,397,591
Retirement of treasury stock (53,046) (530) (409,753) -- 410,283 --
--------- -------- ------------ ------------ ----------- ------------
Balance at December 31, 1998 5,334,942 53,349 99,319,669 (27,093,888) -- 72,279,130
Net earnings -- -- -- 18,945,353 -- 18,945,353
Exercise of stock options 51,076 511 494,650 -- -- 495,161
Contingent shares issued 88,888 889 (889) -- -- --
Stock option and contingent stock
compensation expenses -- -- 593,315 -- -- 593,315
Purchase of treasury stock -- -- -- -- (1,902,425) (1,902,425)
--------- -------- ------------ ------------ ----------- ------------
Balance at December 31, 1999 5,474,906 $ 54,749 $100,406,745 $ (8,148,535) $(1,902,425) $ 90,410,534
========= ======== ============ ============ =========== ============
See accompanying notes to consolidated financial statements
26
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 18,945,353 $ 24,002,787 $ 14,237,442
Adjustments to reconcile net earnings
to net depreciation and amortization 2,528,346 1,637,474 376,916
Minority interest in net income of
consolidated joint ventures -- 2,021,230 --
Deferred tax expense 6,236,366 4,969,000 --
Stock option compensation expense 593,315 1,397,591 1,664,081
Gain on sales of residual interests -- (5,180,046) (3,067,829)
Increase in real estate under development (66,253,875) (32,045,609) (10,575,738)
Increase in deposits on real estate under
option or contract (8,361,203) (3,577,986) (1,712,139)
(Increase) decrease in other receivables
and other assets 680,230 (1,775,151) 2,313,632
Increase in accounts payable and accrued
liabilities 9,570,526 4,375,102 2,974,442
Increase (decrease) in home sale deposits (326,245) 1,809,629 465,409
------------- ------------- ------------
Net cash provided by (used in) operating
activities (36,387,187) (2,365,979) 6,676,216
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in merger/acquisition -- 785,403 1,306,998
Cash paid for merger/acquisition (6,966,890) (9,744,607) (1,952,857)
Purchases of property and equipment (2,935,205) (1,568,642) (174,257)
Principal payments received on real
estate loans -- -- 2,124,544
Real estate loans funded -- -- (428,272)
Decrease in short term investments -- -- 4,696,495
Proceeds from sales of residual interest -- 6,600,000 5,500,000
------------- ------------- ------------
Net cash provided by (used in)
investing activities (9,902,095) (3,927,846) 11,072,651
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 273,824,450 174,445,708 67,900,899
Repayment of borrowings (225,092,694) (164,524,041) (92,896,553)
Purchase of treasury shares (1,902,425) -- --
Stock options exercised 495,161 513,572 118,591
Dividends paid -- -- (194,330)
------------- ------------- ------------
Net cash provided by (used in)
financing activities 47,324,492 10,435,239 (25,071,393)
------------- ------------- ------------
Net increase (decrease) in cash and
cash equivalents 1,035,210 4,141,414 (7,322,526)
Cash and cash equivalents at beginning
of year 12,386,806 8,245,392 15,567,918
------------- ------------- ------------
Cash and cash equivalents at end of year $ 13,422,016 $ 12,386,806 $ 8,245,392
============= ============= ============
Supplemental information:
Cash paid for interest $ 5,872,607 $ 3,996,771 $ 3,801,764
Cash paid for income taxes $ 5,422,500 $ 2,332,604 $ 49,871
See accompanying notes to consolidated financial statements
27
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
BUSINESS. Meritage Corporation develops, constructs and sells new high quality,
single-family homes in the semi-custom luxury, move-up and entry-level markets.
We were formed in 1988 as a real estate investment trust ("REIT") that
invested in mortgage-related assets and real estate loans. On December 31, 1996,
the Company acquired by merger the homebuilding operations of various entities
operating under the Monterey Homes name, and has phased out the mortgage-related
operations. Monterey has been building homes in Arizona for over 14 years,
specializing in move-up and semi-custom luxury homes.
As part of our strategy to diversify operations, on July 1, 1997, we
combined with Legacy Homes, a group of entities with homebuilding operations in
Texas. Legacy has been in business since 1988, and designs, builds and sells
entry-level and move-up homes. On July 1, 1998 we acquired Sterling Communities,
now Meritage Homes of Northern California, which has homebuilding operations in
the San Francisco Bay and Sacramento metropolitan areas, and designs, builds and
sells move-up homes. In September 1998, with shareholder approval, Meritage
Corporation became the new corporate name.
BASIS OF PRESENTATION. Consolidated financial statements include the accounts of
Meritage Corporation and its subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation and certain prior period
amounts have been reclassified to be consistent with current financial statement
presentation. Results include the operations of Legacy from July 1, 1997 and of
Meritage Homes of Northern California from July 1, 1998.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS. We consider short-term investments with an initial
maturity of three months or less to be cash equivalents. Amounts in transit from
title companies for home closings of approximately $1,568,000 and $6,254,000 are
included in cash as of December 31, 1999 and 1998, respectively.
REAL ESTATE UNDER DEVELOPMENT. Amounts are carried at cost unless such costs
would not be recovered from the cash flows generated by future disposition. In
this case, amounts are carried at estimated fair value less disposal costs.
Costs capitalized include direct construction costs for homes, development
period interest and certain common costs that benefit the entire community.
Common costs are allocated on a community-by-community basis to residential lots
based on the number of lots to be built in the community, which approximates the
relative sales value method.
Deposits paid related to options and contracts to purchase land are
capitalized and classified as deposits on real estate under option or contract
until the related land is purchased. The deposits are then transferred to real
estate under development.
COST OF HOME SALES. Cost of sales includes land acquisition and development
costs, direct home construction costs, development period interest and closing
costs, and an allocation of common costs.
REVENUE RECOGNITION. Revenues and profits from sales of residential real estate
and related activities are recognized when closings have occurred and the buyer
has made a minimum down payment and other criteria for sale and profit
recognition are satisfied.
28
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PROPERTY AND EQUIPMENT. We state property and equipment at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, which range from three to seven years.
Accumulated depreciation was approximately $3,503,000 and $2,862,000 at December
31, 1999 and 1998, respectively. Maintenance and repair costs are expensed as
incurred.
GOODWILL. Goodwill represents the excess of purchase price over fair value of
net assets acquired and is being amortized on a straight-line basis over a
20-year period. Accumulated amortization was approximately $1,771,700 at
December 31, 1999 and $704,600 at December 31, 1998. Management periodically
evaluates the businesses to which the goodwill relates to insure the carrying
value of goodwill has not been impaired. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows using
a discount rate reflecting our average cost of funds. No goodwill impairment was
recorded in the accompanying statements of earnings.
RESIDUAL INTERESTS. Prior to year-end 1998, we owned residual interests in
collateralized mortgage obligations (CMOs) and in mortgage participation
certificates (MPCs) (collectively residual interests). We used the prospective
net level yield method, in which interest is recorded at cost and amortized over
the life of the related CMO or MPC issuance, to account for the residual
interests. All residual interests were sold in 1997 and 1998.
INCOME TAXES. We account for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in future years and are subsequently adjusted for changes in the
rates. The effect on deferred tax assets and liabilities of a change in tax
rates is a charge or credit to deferred tax expense in the period of enactment.
EARNINGS PER SHARE. Basic earnings per share are computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in our earnings. We adopted SFAS No. 128, "Earnings Per
Share" in 1997.
USE OF ESTIMATES. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions relating to amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of our short-term
financial instruments are reasonable approximations of fair value. Our notes
payable carry interest rates that are variable and/or comparable to current
market rates based on the nature of the loans, their terms and remaining
maturity, and therefore are stated at approximate fair value. Considerable
judgment is required in interpreting market data to develop estimates of fair
value. Accordingly, these fair value estimates are subjective and not
necessarily indicative of the amounts we would pay or receive in actual market
transactions.
29
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STOCK OPTION PLANS. We have elected to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion (APB) No. 25 as allowed by SFAS No. 123 "Accounting for Stock-Based
Compensation". As such, compensation expense would be recorded on the date of
the grant only if the market price of the stock underlying the grant was greater
than the exercise price. The pro forma disclosures that are required by SFAS No.
123 are presented in Note 6.
SEGMENT INFORMATION. The FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments for an Enterprise and Related Information"
in June 1997. FASB No. 131 establishes standards for the way that public
companies report selected information about operating segments in financial
reports issued to stockholders. We have adopted the provisions of FASB No. 131,
which caused no significant impact on our definitions of our operating segments
and related disclosures.
NOTE 3 - REAL ESTATE UNDER DEVELOPMENT AND CAPITALIZED INTEREST
The components of real estate under development at December 31 follow (in
thousands):
1999 1998
---- ----
Homes under contract, in production $ 71,987 $ 44,186
Finished lots and lots under development 63,610 43,508
Land held for development 3,618 3,050
Model homes and homes held for resale 31,797 14,015
-------- --------
$171,012 $104,759
======== ========
We capitalize certain interest costs during development and construction.
Capitalized interest is allocated to real estate under development and charged
to cost of home sales when the homes are delivered. Summaries of interest
capitalized and interest expensed follow (in thousands):
Year Ended December 31,
------------------------
1999 1998
---------- ----------
Beginning unamortized capitalized interest $ 1,982 $ 1,890
Interest capitalized 7,025 3,711
Amortized cost of home sales (5,036) (3,619)
---------- ----------
Ending unamortized capitalized interest $ 3,971 $ 1,982
========= =========
Interest incurred $ 7,031 $ 4,172
Interest capitalized (7,025) (3,711)
---------- ----------
Interest expense $ 6 $ 461
========= =========
30
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 - NOTES PAYABLE
Notes payable at December 31 consist of the following (in thousands):
1999 1998
------- -------
$70 million bank construction line of credit,
interest payable monthly approximating prime (8.5%
at December 31, 1999) or LIBOR (30 day LIBOR
5.832% at December 31, 1999), plus 1.75% payable
at December 31, 2001, secured by first deeds of
trust on real estate $37,411 $ 7,955
$80 million bank construction line of credit,
interest payable monthly approximating prime or
LIBOR plus 2.25%, payable at the earlier of close
of escrow, maturity date of individual homes
within the line or July 31, 2000, secured by first
deeds of trust on real estate 26,104 10,925
$15 million unsecured bank revolving line of
credit, interest payable monthly at prime,
maturing on January 17, 2000 6,000 --
Acquisition and development credit facilities
totaling $4.5 million, interest payable monthly,
ranging from prime to prime plus .25%; payable at the
earlier of funding of construction financing or
the maturity date of the individual projects,
secured by first deeds of trust on real estate 1,396 2,407
Senior unsecured notes, maturing September 15,
2005, annual interest of 9.1% payable quarterly,
principal payable in three equal installments on
September 15, 2003, 2004 and 2005 15,000 15,000
Other 26 918
------- -------
Total $85,937 $37,205
======= =======
The bank credit facilities and senior subordinated notes contain covenants
which require certain levels of tangible net worth, the maintenance of certain
minimum financial ratios, place limitations on the payment of dividends and
limit incurrence of indebtedness, asset dispositions and creations of liens,
among other items. As of December 31, 1999 and throughout the year, we were in
compliance with these covenants.
On October 2, 1998, we issued $15,000,000 in 9.1% Senior Unsecured Notes due
September 1, 2005 in a private placement to accredited investors under Section
4(2) of the Securities Act. Warburg Dillon Read and Dain Rauscher Wessels were
the underwriters of the issue and were paid a fee of 2.75% of the face amounts
of the notes. The notes were sold at par to four entities controlled by
Massachusetts Mutual Life Insurance Company. The proceeds of the issue were used
to pay down existing indebtedness.
31
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Scheduled maturities of notes payable as of December 31, 1999 follow (in
thousands):
Year Ended
December 31,
------------
2000 $33,526
2001 37,411
2002 --
2003 5,000
2004 5,000
Thereafter 5,000
-------
$85,937
=======
NOTE 5 - EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the years ended December 31, 1999, 1998 and 1997 follows.
(in thousands, except per share amounts):
1999 1998 1997
------- ------- -------
Net earnings $18,945 $24,003 $14,237
Basic EPS - Weighted average
shares outstanding 5,431 5,317 4,864
------- ------- -------
Basic earnings per share $ 3.49 $ 4.51 $ 2.93
======= ======= =======
Basic EPS - Weighted average
shares outstanding 5,431 5,317 4,864
Effect of dilutive securities:
Contingent shares and warrants 89 158 114
Stock options 512 641 330
------- ------- -------
Dilutive EPS - Weighted average
shares outstanding 6,032 6,116 5,308
------- ------- -------
Diluted earnings per share $ 3.14 $ 3.92 $ 2.68
======= ======= =======
Antidilutive stock options not
included in diluted EPS 279 59 4
======= ======= =======
NOTE 6 - STOCK OPTIONS AND CONTINGENT STOCK
Our Board of Directors administers our stock option plans. The plans
provide for stock option grants to key personnel and directors, and provide a
means of performance-based compensation in order to attract and retain qualified
employees.
32
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
We apply APB Opinion No. 25 and related interpretations in accounting for
our plans. Under APB 25, if the exercise price of the Company's stock options is
equal to the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
Had compensation cost for these plans been determined consistent with SFAS
123, our net earnings and earnings per share would have been reduced to the
following pro forma amounts (in thousands, except for per share amounts):
1999 1998 1997
---- ---- ----
Net earnings As reported $18,945 $24,003 $14,237
Pro forma 18,472 23,573 13,892
Basic earnings per share As reported 3.49 4.51 2.93
Pro forma 3.40 4.43 2.86
Diluted earnings per share As reported 3.14 3.92 2.68
Pro forma 3.06 3.85 2.62
The per share weighted average fair values of stock options granted during
1999, 1998 and 1997 were $7.81, $9.91 and $4.58, respectively, on the dates of
grant using the Black-Scholes pricing model based on the following weighted
average assumptions:
1999 1998 1997
---- ---- ----
Expected dividend yield 0% .5% 1.2%
Risk-free interest rate 4.76% 5.75% 6.00%
Expected volatility 52% 51% 43%
Expected life (in years) 6 7 5
THE MERITAGE PLAN
Our shareholders approved a new stock option plan at our 1997 Annual
Meeting. The plan authorizes grants of incentive stock options and non-qualified
stock options to our executives, directors, employees and consultants. A total
of 225,000 shares of Meritage common stock were reserved for issuance upon
exercise of stock options granted under this plan, with an additional 250,000
shares added to the reserve by vote of the shareholders at our 1998 Annual
Meeting. The options vest over periods from two to five years, are based on
continued employment, and expire five to ten years after the date of grant.
THE PRIOR PLAN
The 1988 Homeplex Mortgage Investments Corporation Stock Option Plan (the
prior plan) was in effect at the time of the merger. No new grants have been
issued under this plan since the merger, and 62,726 option shares were
outstanding under this plan at December 31, 1999. Accounts payable and accrued
liabilities in the accompanying 1999 and 1998 balance sheets include
approximately $253,200 and $524,800, respectively, related to options granted
under the prior plan. This liability will remain on the consolidated balance
sheets until the options are exercised, canceled or expire.
33
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OTHER OPTIONS
In connection with the merger and Legacy combination, Mssrs. Hilton, Landon
and Cleverly each received 166,667 non-qualified stock options that vest over
three years. The exercise price of the options is $5.25 per share, which was
negotiated at the time of the transactions. Mr. Hilton's and Mr. Cleverly's
options expire in December 2002 and Mr. Landon's expire in June 2003.
A current member of our board of directors who served as our president and
chairman prior to the merger holds 250,000 non-qualified stock options. The
options were granted in exchange for the director forgoing his annual salary and
bonus, and were approved by shareholders at the 1996 Annual Meeting. These
options are fully vested, have an exercise price of $ 4.50 per share and expire
on December 21, 2000.
SUMMARY OF STOCK OPTION ACTIVITY:
1999 1998 1997
--------------------- -------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- ------ ---------- ----- --------- -----
Options outstanding at beginning of year 1,028,302 $ 6.25 1,041,480 $ 5.86 732,975 $ 5.78
Options granted 264,500 14.74 57,500 16.54 150,000 7.16
Merger/combination options granted -- -- -- -- 166,667 5.25
Options exercised (51,076) 7.08 (43,660) 10.04 (8,162) 9.36
Options canceled (68,500) 14.39 (27,018) 7.22 -- --
---------- ------ --------- ----- --------- -----
Options outstanding at end of year 1,173,226 $ 7.65 1,028,302 $ 6.25 1,041,480 $ 5.86
========== ====== ========= ====== ========= ======
Options exercisable at end of year 801,669 613,579 515,090
Price range of options exercised $5.62-$11.25 $4.50-$11.25 $4.37-$6.38
Price range of options outstanding $4.50-$17.63 $4.50-$17.63 $3.62-$13.32
Total shares reserved at December 31 1,386,583 1,525,547 1,383,146
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1999 WERE:
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted Weighted
Weighted Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Options Contractual Life Price Options Price
- ------------------------ ------- ---------------- ----- ------- -----
$ 4.50 - $ 6.38 815,944 2.6 years $ 5.02 724,387 $ 4.98
$ 8.50 - $12.50 97,066 4.3 9.88 63,566 10.42
$13.37 - $17.63 260,216 6.0 15.06 13,716 16.33
--------- --------- -------- ------- ------
1,173,226 3.5 years $ 7.65 801,669 $ 5.61
========= ========= ======== ======= ======
34
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONTINGENT SHARES
In connection with the merger, 266,666 shares of contingent stock were
reserved for equal issuance to Mr. Hilton and Mr. Cleverly on the first, second
and third anniversaries of the transaction. The requirements for the release of
the contingent stock were met and Mr. Hilton and Mr. Cleverly were each issued
44,444 shares of common stock subsequent to the first, second and third
anniversaries of the merger.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
We are involved in legal proceedings and claims that arise in the ordinary
course of business. Management believes the amount of ultimate liability with
respect to these actions will not materially affect our financial statements
taken as a whole.
Also in the normal course of business, we provide standby letters of credit
and performance bonds issued to third parties to secure performance under
various contracts. At December 31, 1999 outstanding letters of credit were $1.0
million and performance bonds were $16.3 million.
We lease office facilities, model homes and equipment under various
operating lease agreements. Approximate future minimum lease payments for
noncancellable operating leases as of December 31, 1999 are as follows:
Year Ending
December 31
-----------
2000 $1,111,498
2001 768,987
2002 381,560
2003 291,882
2004 and thereafter --
----------
$2,553,927
==========
Rental expense was approximately $1,113,000 in 1999, $1,074,900 in 1998,
and $1,185,400 in 1997. Included in these amounts are $415,000 in 1999, $380,000
in 1998 and $274,000 in 1997 related to office facilities leased from companies
owned beneficially either by one of our Co-Chairmen or by a Co-Chairman and a
Director.
NOTE 8 - MERGERS/COMBINATIONS/ACQUISITIONS
LEGACY HOMES
On May 29, 1997 we signed a definitive agreement to acquire the
homebuilding and related mortgage service business of Legacy Homes, Ltd. and its
affiliates. The transaction was effective on July 1, 1997. Legacy Homes has been
building entry-level and move-up homes in Texas since 1988 and is headquartered
in the Dallas/Fort Worth metropolitan area.
Consideration consisted of approximately $1.5 million in cash, 666,667
shares of Meritage common stock valued at $3.4 million and $370,000 of
transaction costs. We used the purchase method of accounting and the purchase
price was allocated among our net assets based on their estimated fair market
value at the transaction date. Goodwill of approximately $1.5 million was
recorded, which is being amortized over 20 years. Provisions also were made to
pay additional consideration not to exceed $15 million, based on our earnings.
Additional consideration was approximately $5.2 million in 1999, $7.0 million in
1998 and $2.8 million in 1997, and was paid subsequent to each year-end. These
amounts are recorded as goodwill and are being be amortized over 20 years.
35
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STERLING COMMUNITIES
On June 15, 1998, we signed a definitive agreement with Sterling
Communities, S.H. Capital, Inc., Sterling Financial Investments, Inc., Steve
Hafener and W. Leon Pyle (together, the Sterling Entities), to acquire
substantially all of the assets of Sterling Communities. The transaction was
effective as of July 1, 1998. Assets acquired principally consist of real
property and other residential homebuilding assets located in the San Francisco
Bay and Sacramento areas of California. Operations of the Sterling Entities
continue under the name Meritage Homes of Northern California.
Consideration paid for the assets and stock acquired, and various
liabilities assumed, consisted of $6.9 million in cash and additional
consideration to be paid for up to four years after the transaction date. We
used the purchase method of accounting and the purchase price was allocated
among our net assets based on their estimated fair market value at the
transaction date. Goodwill of approximately $2.2 million was recorded, which is
being amortized over 20 years. The additional consideration will be equal to 20%
of the pre-tax income of our California division and will be expensed as earned.
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the Legacy combination and Sterling
acquisition had occurred at January 1, 1997, with pro forma adjustments together
with related income tax effects. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations that would actually have occurred had the combination been in effect
on the date indicated (in thousands except per share data).
Years Ended December 31,
------------------------
(Unaudited)
1998 1997
---- ----
Home sales revenue $274,754 $ 220,852
Net earnings $ 24,949 $ 19,835
Basic earnings per share $ 4.69 $ 3.82
Diluted earnings per share $ 4.08 $ 3.49
NOTE 9 - INCOME TAXES
Components of income tax expense are (in thousands):
1999 1998 1997
---- ---- ----
Current taxes:
Federal $ 5,748 $ 561 $222
State 1,285 967 740
------- ------ ----
7,033 1,528 962
------- ------ ----
Deferred taxes:
Federal 6,121 4,587 --
State 115 382 --
------- ------ ----
6,236 4,969 --
------- ------ ----
Total $13,269 $6,497 $962
======= ====== ====
36
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred tax assets and liabilities have been recognized in the
consolidated balance sheets due to the following temporary differences and
carryforwards (in thousands):
12/31/99 12/31/98
-------- --------
Net operating loss carryforward $ -- $ 4,360
Warranty reserve 311 67
Real estate and fixed asset basis differences 374 509
Stock options 282 --
Deductible merger/acquisition costs -- 1,163
Alternative minimum tax credit -- 782
Sale/leaseback gain deferred 154 --
Other 102 54
------- ----------
1,223 6,935
Deductible merger/acquisition costs (524) --
------- ----------
Net deferred tax asset $ 699 $ 6,935
======= ==========
Management believes it is more likely than not that the net deferred tax
asset will be realized.
RECONCILIATION OF EFFECTIVE INCOME TAX EXPENSE:
Income taxes differ for the years ended December 31, 1999, 1998 and 1997
from the amounts computed using the federal statutory income tax rate as a
result of the following (in thousands):
1999 1998 1997
-------- -------- -------
Expected taxes at current federal
statutory income tax rate $ 10,953 $ 10,678 $ 5,320
State income taxes 890 967 740
Utilization of NOL -- (5,709) (5,320)
Alternative minimum tax -- 561 222
Non-deductible merger/acquisition costs 1,565 -- --
Other (139) -- --
-------- -------- -------
Income tax expense $ 13,269 $ 6,497 $ 962
======== ======== =======
37
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 - SELECTED QUARTERLY FINANCIAL DATA SUMMARY (UNAUDITED)
Home Sales Basic Earnings Diluted Earnings
Revenue Net Earnings Per Share Per Share
------- ------------ --------- ---------
(in thousands, except per share amounts)
1999 - THREE MONTHS ENDED:
March 31 $ 51,306 $2,325 $ .43 $ .38
June 30 76,647 4,541 .83 .75
September 30 76,786 4,027 .74 .67
December 31 129,268 8,052 1.50 1.37
1998 - THREE MONTHS ENDED:
March 31 $ 36,513 $5,452 $1.03 $ .90
June 30 55,608 6,696 1.26 1.10
September 30 68,417 4,268 .80 .70
December 31 95,446 7,587 1.42 1.28
NOTE 11 - SEGMENT INFORMATION
We classify our operations into three primary geographic segments: Texas,
Arizona and California. These segments generate revenues through the sales of
homes to external customers. We are not dependent on any one major customer.
Operational information relating to the different business segments
follows. Information has been included for the Texas operations from July 1,
1997, the combination date, and for the California operations from July 1, 1998,
the acquisition date. Certain information has not been included by segment due
to the immateriality of the amount to the segment or in total. We evaluate
segment performance based on several factors, of which the primary financial
measure is earnings before interest and taxes (EBIT). The accounting policies of
the business segments are the same as those described in Notes 1 and 2. There
are no significant transactions between segments.
(in thousands )
------------------------------------
1999 1998 1997
--------- -------- --------
HOME SALES REVENUE:
Texas $ 174,850 $130,860 $ 51,463
Arizona 120,909 105,942 97,922
California 38,248 19,183 --
--------- -------- --------
Total $ 334,007 $255,985 $149,385
========= ======== ========
EBIT:
Texas $ 22,652 $ 18,300 $ 7,059
Arizona 14,515 12,918 9,744
California 4,185 1,858 --
Corporate and other (4,094) 1,504 350
--------- -------- --------
Total $ 37,258 $ 34,580 $ 17,153
========= ======== ========
38
AMORTIZATION OF CAPITALIZED INTEREST:
Texas $ 1,758 $ 1,143 $ 392
Arizona 2,777 2,410 1,397
California 501 66 --
--------- -------- --------
Total $ 5,036 $ 3,619 $ 1,789
========= ======== ========
ASSETS AT YEAR END:
Texas $ 97,832 $ 64,448 $ 32,702
Arizona 77,195 58,758 47,867
California 43,773 12,321 --
Corporate and other 7,759 16,723 16,065
--------- -------- --------
Total $ 226,559 $152,250 $ 96,634
========= ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding this item is included under the captions "Election of
Directors," "Director and Officer Information," and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our Notice and Proxy Statement relating to
our 2000 Annual Meeting of Stockholders and is incorporated by reference into
this Form 10-K Report. With the exception of the foregoing information and other
information specifically incorporated by reference into this Form 10-K Report,
our 2000 Proxy Statement is not being filed as a part of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is included under the captions "Executive
Compensation," "Compensation Committee Interlocks and Insider Participation,"
"Director Compensation" and "Employment Agreements" in our 2000 Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is included under the caption "Security
Ownership of Principal Stockholders and Management" in our 2000 Proxy Statement
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is included under the caption "Certain
Transactions and Relationships" and "Compensation Committee Interlocks and
Insider Participation" in our 2000 Proxy Statement and is incorporated herein by
reference.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page or
Method of Filing
----------------
(a) FINANCIAL STATEMENTS AND SCHEDULES
(i) Financial Statements
(1) Report of KPMG LLP Page 23
(2) Consolidated Financial Statements and Notes to Page 24
Consolidated Financial Statements of the Company,
including Consolidated Balance Sheets as of
December 31, 1999 and 1998 and related
Consolidated Statements of Earnings, Stockholders'
Equity and Cash Flows for each of the years in the
three-year period ended December 31, 1999
(ii) Financial Statement Schedules Schedules have been
omitted because of the absence of conditions under
which they are required or because the required
material information is included in the Consolidated
Financial Statements or Notes to the Consolidated
Financial Statements included herein.
(b) REPORTS ON FORM 8-K
We filed no reports on Form 8-K in the fourth quarter of 1999.
(c) EXHIBITS
Exhibit
Number Description Page or Method of Filing
- ------ ----------- ------------------------
2.1 Agreement and Plan of Reorganization, dated as of Incorporated by reference to
September 13, 1996, by and among Homeplex, the Exhibit 2 of Form S-4 2.1
Monterey Merging Companies and the Monterey Registration Statement No. 333-15937
Stockholders ("S-4 #333-15937").
2.2 Agreement of Purchase and Sale of Assets, dated Incorporated by reference to
as of May 20, 1997, by and among Monterey, Legacy Exhibit 2 of Form 8-K/A dated
Homes, Ltd., Legacy Enterprises, Inc., and John June 18, 1997.
and Eleanor Landon
2.3 Agreement of Purchase and Sale of Assets, dated Incorporated by reference to
as of June 15, 1998, by and among the Company, Exhibit 2.2 of Form 10-Q.
Sterling Communities, S.H. Capital, Inc., Sterling
Financial Investments, Inc. Steve Hafener, and W.
Leon Pyle
3.1 Restated Articles of Incorporation of the Incorporated by reference to
Company Exhibit 3.2 of Form 10-Q.
3.2 Amendment to Articles of Incorporation Incorporated by reference to
Exhibit 3.1 of Form 10-Q.
3.3 Amended and Restated Bylaws of the Company Incorporated by reference to
Exhibit 3.3 of Form S-3.
40
Exhibit
Number Description Page or Method of Filing
- ------ ----------- ------------------------
4.1 Specimen of Common Stock Certificate Incorporated by reference to
Exhibit 4 to the Form 10-K for
the year ended December 31, 1996.
4.2 Warrant Agreement dated as of October 17, 1994 Incorporated by reference to Exhibit
among Monterey and the Warrant Agent 4.2 of Registration Statement No.
333-29737, filed on June 20, 1997.
4.3 Assumption Agreement dated as of December 31, Incorporated by reference to Exhibit
1996 modifying the Warrant Agreement in certain 4.3 of Registration Statement No.
respects, and relating to the assumption of the 333-29737, filed on June 20, 1997.
Warrant Agreement by the Company and certain
other matters
4.4 Specimen Warrant Certificate Incorporated by reference to Exhibit
4.4 of Registration Statement No.
333-29737, filed on June 20, 1997.
4.5 Note Purchase Agreement Incorporated by reference to
Exhibit 4.1 of Form 10-Q for the
quarterly period ended September 30, 1998.
10.1 $70 Million Borrowing Base Loan Agreement by and Filed herewith.
among the Company, Norwest Bank, Arizona, N.A.
and California Bank and Trust, Dated as of
September 15, 1999
10.2 $15 Million Credit Agreement by and among Incorporated by reference to
Meritage Corporation and California Bank and Exhibit 10.23 of Form 10-Q.
Trust, Dated as of September 15, 1999
10.3 Modification to Guaranty Federal Bank Loan, Incorporated by reference to
Dated as of May 19, 1998 Exhibit 10.1 of Form 10-Q.
10.4 Modification to Guaranty Federal Bank Loan, Filed herewith.
Dated as of July 31, 1999
10.5 Stock Option Plan* Incorporated by reference to Exhibit 10(d)
of Form 10-K for the fiscal year ended
December 31, 1995 ("1995 Form 10-K").
10.6 Amendment to Stock Option Plan * Incorporated by reference to Exhibit 10(e
of 1995 Form 10-K.
10.7 Amendment to Stock Option Plan dated Incorporated by reference to Exhibit
December 31, 1996* 10.9 of Registration Statement No.
333-29737, filed on June 20, 1997.
10.8 Meritage Corporation Stock Option Plan Incorporated by reference to Exhibit 10.9
to the Form 10-K for the year ended
December 31, 1996.
10.9 Meritage Corporation 1997 Stock Option Plan* Incorporated by reference to Exhibit 4.1
of Registration Statement No. 333-37859,
filed on October 14, 1997.
10.10 Employment Agreement between the Company and Incorporated by reference to Exhibit 10.10
William W. Cleverly* to the Form 10-K for the year ended
December 31, 1996.
10.11 Separation and Consulting Agreement between the Incorporated by reference to Exhibit C
Company and William W. Cleverly* of the Form 8-K filed on March 23, 1999.
10.12 Employment Agreement between the Company and Incorporated by reference to Exhibit 10.11
Steven J. Hilton* to the Form 10-K for the year ended
December 31, 1996.
41
Exhibit
Number Description Page or Method of Filing
- ------ ----------- ------------------------
10.13 Employment Agreement between the Company Incorporated by reference to Exhibit C
and John R. Landon* of the Form 8-K filed on June 18, 1997.
10.14 Stock Option Agreement between the Company Incorporated by reference to Exhibit 10.12
and William W. Cleverly* of the Form 10-K for the year ended
December 31, 1996.
10.15 Stock Option Agreement between the Company Incorporated by reference to Exhibit 10.13
and Steven J. Hilton* to the Form 10-K for the year ended
December 31, 1996.
10.16 Stock Option Agreement between the Company Incorporated by reference to Exhibit C
and John R. Landon* of the Form 8-K filed on June 18, 1997.
10.17 Registration Rights Agreement between the Incorporated by reference to Exhibit 10.14
Company and William W. Cleverly* to the Form 10-K for the year ended
December 31, 1996.
10.18 Registration Rights Agreement between the Incorporated by reference to Exhibit 10.15
Company and Steven J. Hilton* to the Form to the Form 10-K for the year ended
December 31, 1996.
10.19 Registration Rights Agreement between the Incorporated by reference to Exhibit C
Company and John R. Landon* of the Form 8-K filed on June 18, 1997.
10.20 Escrow and Contingent Stock Agreement Incorporated by reference to Exhibit 10.16
of the Form 10-K for the year ended
December 31, 1996.
10.21 Amended and Restated Employment Agreement Incorporated by reference to Exhibit 10(g)
and Addendum between the Company and of the 1995 Form 10-K.
Alan D. Hamberlin*
10.22 Stock Option Agreement between the Company Incorporated by reference to Exhibit 10(h)
and Alan D. Hamberlin* of the 1995 Form 10-K.
10.23 Agreement regarding sale of residual Incorporated by reference to Exhibit 10.24
interests between the Company and to the Form to the Form 10-K for the year ended
PaineWebber December 31, 1996.
10.24 Employment Agreement between the Company Incorporated by reference to Exhibit 10.2
and Larry W. Seay* of Form 10-Q for the quarterly period
ended June 30, 1998.
10.25 Employment Agreement between the Company Filed herewith.
Steven Hafener*
10.26 Amendment to Employment Agreement between Filed herewith.
the Company and Steven Hafener*
23 Consent of KPMG LLP Filed herewith.
24 Powers of Attorney See signature page.
27 Financial Data Schedules Filed herewith.
- --------
*Indicates a management contract or compensation plan.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly cause this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 23rd
day of March 2000.
MERITAGE CORPORATION,
a Maryland Corporation
By /s/ Steven J. Hilton
----------------------------------------
Steven J. Hilton
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
By /s/ John R. Landon
----------------------------------------
John R. Landon
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven J. Hilton, John R. Landon and Larry W.
Seay, and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Form 10-K Annual Report, and to file the same, with all exhibits thereto and
other documents in connection therewith the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act of things requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to these requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the registrant and in the capacities and on the
dates indicated have signed this report on Form 10-K below:
Signature Title Date
--------- ----- ----
/s/ Steven J. Hilton Co-Chairman and March 23, 2000
- ----------------------- Chief Executive Officer
Steven J. Hilton
/s/ John R. Landon Co-Chairman and March 23, 2000
- ----------------------- Chief Executive Officer
John R. Landon
/s/ Larry W. Seay Chief Financial Officer, Vice March 23, 2000
- ----------------------- President-Finance, Secretary and
Larry W. Seay Treasurer (Principal Financial
and Accounting Officer)
/s/ William W. Cleverly Director March 23, 2000
- -----------------------
William W. Cleverly
/s/ Alan D. Hamberlin Director March 23, 2000
- -----------------------
Alan D. Hamberlin
/s/ Raymond Oppel Director March 23, 2000
- -----------------------
Raymond Oppel
/s/ Robert G. Sarver Director March 23, 2000
- -----------------------
Robert G. Sarver
/s/ C. Timothy White Director March 23, 2000
- -----------------------
C. Timothy White
S-1