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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, 2002
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 OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8501 E. Princess Drive, Suite 290 85255
Scottsdale, Arizona (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(480) 609-3330
(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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
The aggregate market value of common stock held by non-affiliates of the
registrant (10,215,050 shares) as of June 28, 2002, was $466,317,033, based on
the closing sales price per share as reported by the New York Stock Exchange on
such date. The aggregate market value of common stock held by non-affiliates of
the registrant (9,590,758 shares) as of March 14, 2003, was $309,877,391, based
on the closing sales price per share as reported by the New York Stock Exchange
on such date. For purposes of these computations, 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 14,
2003 was 12,938,634.
DOCUMENTS INCORPORATED BY REFERENCE
Portions from the registrant's Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 21, 2003 have been incorporated by reference into
Part III, Items 10, 11, 12 and 13.
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MERITAGE CORPORATION
FORM 10-K
TABLE OF CONTENTS
PAGE
NUMBER
PART I
Item 1. Business.........................................................3
Item 2. Properties......................................................10
Item 3. Legal Proceedings...............................................11
Item 4. Submission of Matters to a Vote of Security Holders.............11
PART II
Item 5. Market For the Registrant's Common Stock
and Related Stockholder Matters.................................11
Item 6. Selected Financial Data.........................................12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......26
Item 8. Financial Statements and Supplementary Data.....................26
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure........................................46
PART III
Item 10. Directors and Executive Officers of the Registrant..............47
Item 11. Executive Compensation..........................................47
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters......................47
Item 13. Certain Relationships and Related Transactions..................47
Item 14. Controls and Procedures.........................................48
Item 15. Principal Accountant Fees and Services..........................48
PART IV
Item 16. Exhibits, Financial Statement Schedules and Reports on
Form 8-K........................................................48
SIGNATURES ...............................................................S-1
2
PART I
ITEM 1. BUSINESS
We are a leading designer and builder of single-family homes in the rapidly
growing Sunbelt states of Texas, Arizona, California and Nevada. We focus on
providing a broad range of first-time, move-up and luxury homes to our targeted
customer base. We and our predecessors have operated in Arizona since 1985, in
Texas since 1987 and in Northern California since 1989. We expanded our presence
in Texas with the July 2002 acquisition of Hammonds Homes (Hammonds), a builder
that focuses on the move-up market in the Houston, Dallas/Ft. Worth and Austin
areas. We entered the Las Vegas, Nevada market in October 2002 with our
acquisition of Perma-Bilt Homes (Perma-Bilt), another move-up builder.
We operate in Texas as Legacy Homes, Monterey Homes and Hammonds Homes, in
Arizona as Monterey Homes, Meritage Homes and Hancock Communities, in Northern
California as Meritage Homes and in Nevada as Perma-Bilt Homes. At December 31,
2002, we were actively selling homes in 128 communities, with base prices
ranging from $92,000 to $910,000. We have four primary segments: Texas, Arizona,
California and Nevada. See Note 10 to our consolidated financial statements
included in this report for information regarding our segments.
AVAILABLE INFORMATION
Information about our company and communities is provided through our
Internet web site at WWW.MERITAGEHOMES.COM. Our periodic and current reports and
amendments to those reports filed or furnished pursuant to section 13(a) or
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") are available,
free of charge, on our website as soon as reasonably practicable after
electronically filing such reports with the Securities and Exchange Commission
("SEC"). The information on our website is not considered part of this report.
COMPETITIVE STRENGTHS
We believe we possess the following competitive strengths:
CONSERVATIVE INVENTORY MANAGEMENT. We seek to minimize land and inventory
risk in order to optimize our use of capital and maintain moderate leverage
ratios. We accomplish this by:
* generally purchasing land subject to complete entitlements, including
zoning and utility services;
* developing smaller parcels, generally projects that can be completed
within a three-year period;
* controlling approximately 81% of our land inventory through rolling
options with initial deposit requirements typically between 2% and 15%
of the land price;
* managing housing inventory by pre-selling and obtaining substantial
customer deposits on our homes prior to starting construction;
* limiting unsold home construction; and
* minimizing home construction cycles.
DISCIPLINED FINANCIAL MANAGEMENT. We believe that our disciplined financial
management policies enable us to achieve above-average returns on assets
compared to our competitors in the homebuilding industry and maintain reasonable
leverage ratios. Our rigorous investment requirements for the acquisition of
land enable us to deploy capital efficiently and to generate strong cash flows
to fund the acquisition of additional land or homebuilding operations.
STRONG MARGINS. Our focus on achieving high margins results in greater
profitability during strong economic periods and also enables us to realize
lower break-even points and higher pricing flexibility during slower economic
periods. In addition to maintaining low overhead costs, we actively manage
construction costs and pricing and marketing strategies in order to maximize
margins. We seek to optimize our mix of available housing upgrades and
customization features to offer the highest value to customers at the lowest
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cost. Within our pricing structure we provide our sales and marketing
professionals with the autonomy and flexibility to respond rapidly to changing
market dynamics by customizing our sales programs.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY OWNERSHIP. Members of
our senior management team have extensive experience in the homebuilding
industry as well as in each of the local markets that we serve. Our co-chief
executive officers and senior executives average over 17 years of homebuilding
experience and each has a successful track record of delivering superior results
in varying homebuilding cycles. In addition, our co-chief executive officers
together beneficially own approximately 22% of our outstanding common stock.
PRODUCT BREADTH. We believe that our product breadth and geographic
diversity enhance our growth potential and help to reduce exposure to economic
cycles. In Arizona, we serve the first-time and move-up markets, and in 2002, we
began delivering homes in the age-restricted active adult community market. We
also build within the Arizona, and beginning in 2002, the Texas and California
luxury markets, characterized by unique communities and distinctive luxury
homes. In Texas, we mainly target the first and second-time move-up markets, and
in Northern California and Nevada, we focus primarily on move-up homes.
BUSINESS STRATEGY
We seek to distinguish ourselves from other production homebuilders through
business strategies focused on the following:
FOCUS ON HIGH GROWTH MARKETS. Our housing markets are located in four
rapidly growing Sunbelt states; Texas, Arizona, California and Nevada. These
areas are generally characterized by high job growth and in-migration trends,
creating strong demand for new housing. We believe they represent attractive
homebuilding markets with opportunities for long-term growth. We believe our
operations in these markets are well established and that we have developed a
reputation for building distinctive quality homes within our markets.
EXPAND INTO NEW AND WITHIN EXISTING MARKETS. We continuously evaluate
expansion opportunities through strategic acquisitions of other homebuilders and
internal growth through expansion of our product offering in existing markets or
start-up operations in new geographic markets. In pursuing expansion, we explore
markets with demographic and other growth characteristics similar to our current
markets and seek the acquisition of entities with operating policies, cash flow
and earnings-focused philosophies similar to ours.
In the past six years we have successfully completed five acquisitions.
They have enabled us to substantially increase our revenues and earnings, expand
into new markets, increase our market share in existing markets and add new
product lines, such as age-restricted housing for the Arizona retirement market.
MAINTAIN LOW COST STRUCTURE. Throughout our history, we have focused on
minimizing construction costs and overhead, and we believe this attention is a
key factor in maintaining high margins and profitability. We reduce costs by:
* using subcontractors for home construction and site improvement on a
fixed-price basis;
* obtaining favorable pricing from subcontractors through long-term
relationships and high volume;
* reducing interest carry by minimizing our inventory of unsold or
speculative homes and shortening the home construction cycle;
* generally beginning construction on a home once it is under contract,
we have received a satisfactory earnest money deposit and the buyer
has obtained preliminary approval for a mortgage loan;
* minimizing overhead by centralizing certain administrative activities;
and
* monitoring homebuilding production, scheduling and budgeting through
management information systems.
SUPERIOR DESIGN, QUALITY AND CUSTOMER SERVICE. 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 compared to those built by our
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competitors. In addition, we are committed to achieving the highest level of
customer satisfaction as an integral part of our competitive strategy. As part
of the sales process, our experienced sales personnel keep customers informed of
their home's construction progress. After delivery, our customer care
departments respond to homebuyers' questions and warranty matters.
PRODUCTS
Our homes range from first-time purchases to semi-custom luxury, with base
prices ranging from $92,000 to $910,000. A summary of activity by state and
product type as of and for the year ended December 31, 2002, follows (dollars in
thousands):
NUMBER AVERAGE NUMBER OF
OF HOMES CLOSING HOMES IN DOLLAR VALUE HOME SITES ACTIVE
CLOSED PRICE BACKLOG OF BACKLOG REMAINING(1) COMMUNITIES
-------- -------- -------- ---------- ------------ -----------
Texas - First-time -- $ -- 5 $ 844 264 1
Texas - Move-up 2,073 183 1,055 207,421 8,462 80
Texas - Luxury 17 428 25 10,634 97 3
Arizona - Age Restricted 107 203 76 15,776 7,508 4
Arizona - First-time 445 110 7 838 338 1
Arizona - Move-up 1,061 279 326 88,194 3,573 18
Arizona - Luxury 122 641 57 39,347 282 6
California - Move-up 540 397 279 108,620 1,745 7
California - Luxury 54 574 54 28,307 654 3
Nevada - Move-up 155 221 186 37,783 2,143 5
-------- -------- -------- -------- --------
Total 4,574 $ 243 2,070 $537,764 25,066 128
======== ======== ======== ======== ========
(1) "Home Sites Remaining" is the estimated number of homes that could be built
both on the remaining lots available for sale and land to be developed into
lots.
LAND ACQUISITION AND DEVELOPMENT
We typically option or 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, on a limited basis, purchasing unentitled property in
the future when we can do so in a manner consistent with our business strategy.
Although historically we have generally developed parcels ranging from 100 to
300 lots, in order to achieve and maintain an adequate inventory of lots, we are
beginning to purchase larger parcels, in some cases with a joint venture
partner.
We select land for development based upon a variety of factors, including:
* internal and external demographic and marketing studies;
* project suitability, which generally means developments with fewer
than 300 lots;
* suitability for development generally within a one to four-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, returns 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 and economic
trends, and our experience in particular markets.
5
We acquire land through purchases and rolling option contracts. Purchases
are financed through our revolving credit facility or working capital. Acquiring
our land through rolling option contracts allows us to control lots and land
through third parties who own or buy properties on which we plan to build homes.
We enter into option contracts to purchase finished lots from these third
parties as home construction begins. These contracts are generally non-recourse
and generally require non-refundable deposits of 2% to 15% of the sales price.
At December 31, 2002, we had approximately $77.5 million in deposits and $15.1
million in letters of credit on real estate under option or contract.
Once we acquire 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. For these projects, we
also determine street layout, individual lot size and layout, and overall
community design. The product line offered in each 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; though we are sometimes
able to use standardized design plans for a product line.
To a limited extent, we may use joint ventures to purchase and develop land
where such arrangements are necessary to acquire the property or appear to be
otherwise economically advantageous. At December 31, 2002, we were involved in
five such joint ventures which are accounted for using the equity method. Our
investment in these entities of approximately $9.3 million is classified within
other assets on our December 31, 2002 consolidated balance sheet.
The following table presents information regarding land owned or land under
contract or option by market as of December 31, 2002:
LAND OWNED(1) LAND UNDER CONTRACT OR OPTION (1)
--------------------------------------- ----------------------------------------
LOTS HELD LOTS HELD
LOTS UNDER FOR LOTS UNDER FOR
FINISHED DEVELOPMENT DEVELOPMENT FINISHED DEVELOPMENT DEVELOPMENT
LOTS (ESTIMATED) (ESTIMATED) LOTS (ESTIMATED) (ESTIMATED) TOTAL
------- ----------- ----------- ------- ----------- ----------- -------
TEXAS:
Dallas/Ft. Worth 955 228 874 591 895 -- 3,543
Houston 616 258 -- 596 955 810 3,235
Austin 313 56 45 611 989 -- 2,014
San Antonio -- -- -- -- -- 370 370
------ ------ ------ ------ ------ ------ ------
Total Texas 1,884 542 919 1,798 2,839 1,180 9,162
------ ------ ------ ------ ------ ------ ------
ARIZONA:
Phoenix/Scottsdale 701 -- -- -- 6,003 1,343 8,047
Tucson 137 -- -- 415 2,293 744 3,589
------ ------ ------ ------ ------ ------ ------
Total Arizona 838 -- -- 415 8,296 2,087 11,636
------ ------ ------ ------ ------ ------ ------
CALIFORNIA:
Sacramento 47 -- 185 444 -- 676
East San Francisco Bay 62 340 20 203 1,152 -- 1,777
------ ------ ------ ------ ------ ------ ------
Total California 109 340 20 388 1,596 -- 2,453
------ ------ ------ ------ ------ ------ ------
NEVADA:
Las Vegas -- 181 -- -- 505 1,457 2,143
------ ------ ------ ------ ------ ------ ------
TOTAL 2,831 1,063 939 2,601 13,236 4,724 25,394
====== ====== ====== ====== ====== ====== ======
(1) Excludes lots with finished homes or homes under construction.
6
CONSTRUCTION OPERATIONS
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 we can obtain more favorable
terms. Our project managers and field superintendents coordinate and supervise
the activities of subcontractors and suppliers, subject the development and
construction work to quality and cost controls, and assure compliance with
zoning and building codes. At December 31, 2002, we employed 406 construction
operations personnel.
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, we negotiate price and volume discounts with manufacturers and
suppliers on behalf of our subcontractors to take advantage of production
volume. Historically, access to our principal subcontracting trades, materials
and supplies has been readily available in each of our 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
we have strong relationships with our suppliers and subcontractors.
We generally build and sell homes in clusters or phases within our larger
projects, which we believe creates efficiencies in land development and
construction, and improves customer satisfaction by reducing the number of
vacant lots surrounding a completed home. Our homes are typically completed
within four to nine months from the start of construction, depending upon home
size and complexity. Construction 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. We do not enter into any
weather or materials commodity futures derivative contracts.
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 our website at
www.MERITAGEHOMES.COM, magazine and newspaper advertisements, brochures, direct
mailings, 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 various features to prospective homebuyers.
We generally employ or contract with interior and landscape 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. Often, we lease our model homes from institutional
investors who own the homes for investment purposes or from buyers who do not
intend to occupy the home immediately. A summary of model homes owned or leased
at December 31, 2002, follows:
MODEL HOMES MODEL HOMES MONTHLY LEASE MODELS UNDER
OWNED LEASED AMOUNT CONSTRUCTION
-------- -------- -------- ------------
Texas 53 58 $ 53,002 16
Arizona 14 64 130,028 20
California -- 38 52,720 14
Nevada 1 19 22,533 --
-------- -------- -------- --------
Total 68 179 $258,283 50
======== ======== ======== ========
Our homes generally are sold by full-time, commissioned employees who
typically work from a sales office located in one of the model homes for each
project. At December 31, 2002, we had 248 sales and marketing employees. Our
goal is to ensure that our sales force has extensive knowledge of our operating
policies and housing products. To achieve this goal, we train our sales
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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 based on the price of the home. Our
sales personnel assist our customers in selecting upgrades or in adding
available customization features to their homes. We attempt to present our
available upgrade and customization options to appeal to local consumer demands
while at the same time minimizing our costs. 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." Sales contingent upon the sale of a
customer's existing home are not included as new sales contracts until the
contingency is removed. We do not recognize revenue upon the sale of a home
until it is delivered to the homebuyer and other criteria for sale and profit
recognition are met. We sometimes build homes before obtaining a sales contract,
however, these homes are excluded from backlog until a sales contract is signed.
At December 31, 2002, 11% of our inventory was comprised of homes under
construction without sales contracts, and 5% of inventory were completed homes
without sales contracts. We believe that we will deliver substantially all homes
in backlog at December 31, 2002 to customers during 2003.
Our backlog increased to 2,070 units with a value of $537.8 million at
December 31, 2002 from 1,602 units with a value of $375.0 million at December
31, 2001. These increases are primarily due to our acquisition of two
homebuilders during the year, additional communities that opened for sale in
2002, along with continued buyer demand for homes.
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-broker services in some of our markets through investments in
mortgage brokers which originate loans on behalf of third party lenders. In
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. We do not fund or service the mortgages obtained by our home
buyers, and therefore do not assume the risks associated with a mortgage banking
business. Since many customers use long-term mortgage financing to purchase
homes, adverse economic conditions, increases in unemployment and rising
mortgage interest rates may deter or reduce the number of potential homebuyers.
CUSTOMER RELATIONS, QUALITY CONTROL AND WARRANTY PROGRAMS
We believe that positive customer relations and an adherence to stringent
quality control standards are fundamental to our continued success, and that our
commitment to buyer satisfaction and quality control has 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 community. These representatives perform the following tasks:
* 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 of their homes.
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We generally provide a one-year limited warranty on workmanship and
building materials with each home. As subcontractors usually provide an
indemnity and a certificate of insurance before beginning work, claims relating
to workmanship and materials are generally the subcontractors' 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 generally range from 0.45% to 0.75% of a home's sale price.
Historically, 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 rental housing. Some of our competitors have
significantly greater financial resources, lower costs and/or more favorable
land positions 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 recognize and adapt to changing market conditions,
including from a capital and human resource perspective;
* ability to capitalize on opportunities to acquire land on favorable
terms; and
* reputation for outstanding service and quality products.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
We option or purchase most of our land after entitlements have been
obtained, which provide for zoning and utility services to project sites and
give us the right to obtain building permits. Construction may begin almost
immediately on such entitled land upon compliance with and receipt of specified
permits, approvals and other 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 government 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, although there is
no assurance that these and other restrictions will not adversely affect future
operations.
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. In
addition, communities occasionally impose construction moratoriums. Because most
of our land is entitled, construction moratoriums generally would affect us if
they arose from health, safety or welfare issues, such as insufficient water,
electric or sewage facilities. We could become subject to delays or may be
precluded entirely from developing communities due to building moratoriums, "no
growth" or "slow growth" initiatives or building permit allocation ordinances,
which could be implemented in the future.
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 area
restrictions, 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, although it may do
so in the future.
We usually will condition our obligation to option or 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
9
will not incur material liabilities in the future relating to toxic waste
removal or other environmental matters affecting land currently or previously
owned.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (SOA) was signed into law.
The stated goals of the SOA are to increase corporate responsibility, to provide
for enhanced penalties for accounting and auditing improprieties at publicly
traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws.
The SOA is the most far-reaching U.S. securities legislation enacted in
some time. The SOA generally applies to all companies that file or are required
to file periodic reports with the SEC under the Exchange Act. Given the
extensive SEC role in implementing rules relating to many of the SOA's new
requirements, the final scope of some of these requirements remains to be
determined.
The SOA includes very specific additional disclosure requirements and new
corporate governance rules, requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance and other related rules,
and mandates further studies of certain issues by the SEC and the Comptroller
General. The SOA represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
The SOA addresses, among other matters, audit committees; certification of
financial interests by the chief executive officer and the chief financial
officer; the forfeiture of bonuses and profits made by directors and senior
officers in the twelve month period covered by restated financial statements; a
prohibition on insider trading during pension plan black-out periods; disclosure
of off-balance sheet transactions; a prohibition on personal loans to directors
and officers; expedited filing requirements for stock transaction reports by
officers and directors; disclosure of a code of ethics and filing a Form 8-K for
a change or waiver of such code; "real time" filing of periodic reports; the
formation of a public accounting oversight board; auditor independence; and
various increased criminal penalties for violations of securities laws.
The SOA contains provisions that became effective upon enactment on July
30, 2002 and other provisions that will become effective within one year from
enactment. The SEC has been delegated the task of enacting rules to implement
various of the provisions with respect to, among other matters, disclosure in
periodic filings pursuant to the Exchange Act.
EMPLOYEES AND SUBCONTRACTORS
At December 31, 2002, we had 869 employees, including 215 in management and
administration, 248 in sales and marketing, and 406 in construction operations.
Our employees are not unionized, and we believe that we have good employee
relationships. We act solely as a general contractor and all construction
operations are conducted by our project managers and field superintendents who
manage third party subcontractors. We use independent contractors for
construction, architectural and advertising services, and we believe that we
have good relationships with our subcontractors and independent contractors.
ITEM 2. PROPERTIES
Our corporate offices are leased properties located in Scottsdale, Arizona,
and Plano, Texas. The Scottsdale lease expires in February 2006. The Plano lease
expires in May 2005 and the building is leased from a company owned beneficially
by one of our co-chairmen. We believe that the Plano lease rate is competitive
with rates for comparable space in the area and the terms of the lease are
similar to those we could obtain in an arm's length transaction. We lease an
aggregate of approximately 92,800 square feet of office space in our markets for
our operating divisions and corporate and executive offices. These leases expire
between May 2003 and March 2007.
10
As of December 31, 2002, we also had leases for 179 model homes and lots
with terms ranging from three months to 36 months, with various renewal options.
Our aggregate monthly lease amount is approximately $258,000.
The following schedule summarizes leased real estate for each of our
operating segments.
MONTHLY OFFICE APPROXIMATE MONTHLY MODEL NUMBER OF
LEASE AMOUNT SQUARE FOOTAGE LEASE AMOUNT MODEL HOMES
------------ -------------- ------------ -----------
Texas $ 56,700 41,300 $ 53,002 58
Arizona 71,700 32,600 130,028 64
California 15,000 7,400 52,720 38
Nevada 8,900 7,000 22,533 19
Corporate 9,200 4,500 -- --
-------- -------- -------- --------
Total $161,500 92,800 $258,283 179
======== ======== ======== ========
ITEM 3. LEGAL PROCEEDINGS
We are involved in various routine legal proceedings incidental to our
business, some of which are covered by insurance. With respect to all pending
litigation matters, our ultimate legal and financial responsibility, if any,
cannot be estimated with certainty and, in most cases, any potential losses
related to these matters are not considered probable. We have accrued
approximately $937,000 for losses related to potential litigation where our
ultimate exposure is considered probable and the potential loss can be
reasonably estimated, which is classified in accrued liabilities on our December
31, 2002 balance sheet. We believe that none of these matters will have a
material adverse impact upon our consolidated financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of stockholders during the fourth
quarter of 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
GENERAL
Our common stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "MTH". The high and low sales prices of the common stock for the
periods indicated, as reported by the NYSE, follow. All amounts reflect a
2-for-1 stock split in the form of a stock divided that occurred in April 2002.
2002 2001
------------------ ------------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter $35.12 $23.28 $24.00 $13.70
Second Quarter $47.10 $31.22 $26.88 $13.05
Third Quarter $46.25 $26.38 $29.98 $13.75
Fourth Quarter $42.20 $28.90 $26.49 $17.00
On March 14, 2003, the closing sales price of the common stock as reported
by the NYSE was $32.31 per share. At that date, there were approximately 213
owners of record. There are approximately 3,200 beneficial owners of common
stock.
The transfer agent for our common stock is Mellon Investor Services LLC, 85
Challenger Road, Ridgefield Park, NJ 07660. (WWW.MELLONINVESTOR.COM)
We did not declare cash dividends in 2002, 2001 or 2000, nor do we intend
to declare cash dividends in the foreseeable future. Earnings will be retained
11
to finance the continuing development of the business. Future cash dividends, if
any, will depend upon our financial condition, results of operations, capital
requirements, compliance with debt covenants, 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 many factors, including
those listed below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Our 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, war or other hostilities
involving the United States, including the armed conflict with Iraq, widespread
industry trends and analysts' reports, changes in interest rates, as well as
other factors unrelated to our operating results.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial and
operating data of Meritage Corporation and subsidiaries as of and for each of
the last five years ended December 31, 2002. The financial data has been derived
from our consolidated financial statements and related notes audited by KPMG
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.
The data below includes the operations of Meritage Homes of California,
Hancock Communities, Hammonds Homes and Perma-Bilt Homes since their respective
dates of acquisition. Those dates are: Meritage Homes of California, acquired
July 1998; Hancock Communities, acquired May 2001; Hammonds Homes, acquired July
2002; and Perma-Bilt Homes, acquired October 2002.
HISTORICAL CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
STATEMENT OF EARNINGS DATA:
Total sales revenue $ 1,119,817 $ 744,174 $ 520,467 $ 341,786 $ 257,113
Total cost of sales (904,921) (586,914) (415,649) (277,287) (205,188)
----------- ----------- ----------- ----------- -----------
Gross profit 214,896 157,260 104,818 64,499 51,925
Earnings from mortgage assets and other
income, net(1) 5,435 2,884 1,847 2,064 3,961
Commissions and other sales costs (65,291) (41,085) (28,680) (19,243) (14,292)
General and administrative expenses (41,496) (35,723) (21,215) (15,100) (10,632)
Interest expense -- -- (8) (6) (462)
----------- ----------- ----------- ----------- -----------
Earnings before income taxes and
extraordinary items 113,544 83,336 56,762 32,214 30,500
Income taxes(2) (43,607) (32,444) (21,000) (13,269) (6,497)
Extraordinary items, net of tax effects(3) -- (233) -- -- --
----------- ----------- ----------- ----------- -----------
Net earnings $ 69,937 $ 50,659 $ 35,762 $ 18,945 $ 24,003
=========== =========== =========== =========== ===========
Net earnings per common share:(4) (5)
Basic $ 5.64 $ 4.78 $ 3.46 $ 1.75 $ 2.26
Diluted $ 5.31 $ 4.30 $ 3.13 $ 1.57 $ 1.96
BALANCE SHEET DATA (END OF YEAR):
Real estate $ 484,970 $ 330,238 $ 211,307 $ 171,012 $ 104,759
Total assets 691,788 436,715 267,075 226,559 152,250
Notes payable 264,927 177,561 86,152 85,937 37,205
12
Total liabilities 374,480 260,128 145,976 136,148 79,971
Stockholders' equity 317,308 176,587 121,099 90,411 72,279
SUPPLEMENTAL FINANCIAL DATA:
Cash provided by (used in):
Operating activities $ (5,836) $ (17,137) $ 6,252 $ (36,387) $ (2,366)
Investing activities (142,805) (75,739) (8,175) (9,902) (3,928)
Financing activities 151,858 91,862 (7,102) 47,324 10,436
(1) Earnings from mortgage assets that were obtained from our predecessor and
disposed of in 1998 are applicable only to that year.
(2) Prior to the full utilization in 1998 of our net operating loss
carryforward obtained from our predecessor, we paid limited income taxes.
(3) The 2001 amount reflects the net effect of extraordinary items from early
extinguishments of long-term debt.
(4) 2001 earnings per share are shown after a $0.02 loss from the extraordinary
items. Basic and diluted earnings per share before the extraordinary items
were $4.80 and $4.32, respectively. We did not pay cash dividends in the
years 1998 through 2002.
(5) All amounts reflect a 2-for-1 stock split in the form of a stock dividend
that occurred in April 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America.
CRITICAL ACCOUNTING POLICIES
We have established various accounting policies which govern the
application of accounting principles generally accepted in the United States of
America in the preparation and presentation of our consolidated financial
statements. Our significant policies are described in Note 1 of the consolidated
financial statements. Certain accounting policies involve significant judgments,
assumptions and estimates by management that have a material impact on the
carrying value of certain assets and liabilities, and revenues and costs which
we consider to be critical accounting policies. The judgments, assumptions and
estimates we use are based on historical experience, knowledge of the accounts
and other factors which we believe to be reasonable under the circumstances, and
we evaluate our judgments and assumptions on an on-going basis. Because of the
nature of the judgments and assumptions we have made, actual results could
differ from these judgments and estimates, which could have a material impact on
the carrying values of assets and liabilities and the results of our operations.
The accounting policies that we deem most critical to us, and involve the
most difficult, subjective or complex judgments, include our estimates of costs
to complete our individual projects, the ultimate recoverability (or impairment)
of these costs, goodwill impairment, the likelihood of closing lots held under
option or contract and the ability to estimate expenses and accruals, including
legal and warranty reserves. Should we under or over estimate costs to complete
individual projects, gross margins in a particular period could be misstated and
the ultimate recoverability of costs related to a project from home sales may be
uncertain. Furthermore, non-refundable deposits paid for land options or
contracts may have no economic value to us if we do not ultimately purchase the
land. Our inability to accurately estimate expenses, accruals, or an impairment
of real estate or goodwill could result in charges, or income, in future
periods, which relate to activities or transactions in a preceding period.
We acquired Hancock Communities (Hancock), a homebuilder in the Phoenix,
Arizona metropolitan area, effective May 31, 2001, Hammonds Homes, a builder in
Houston, Austin and Dallas, Texas, effective July 1, 2002, and Perma-Bilt Homes,
which builds in the Las Vegas, Nevada area, effective October 1, 2002. The
13
results presented below include the operations of these three acquisitions since
their dates of purchase and are not necessarily indicative of results to be
expected in the future.
HOME SALES REVENUE, SALES CONTRACTS AND NET SALES BACKLOG
The tables provided below show operating and financial data regarding our
homebuilding activities (dollars in thousands).
YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
HOME SALES REVENUE
TOTAL
Dollars $1,112,439 $ 742,576 $ 515,428
Homes closed 4,574 3,270 2,227
Average sales price $ 243.2 $ 227.1 $ 231.4
TEXAS
Dollars $ 387,264 $ 259,725 $ 214,472
Homes closed 2,090 1,518 1,239
Average sales price $ 185.3 $ 171.1 $ 173.1
ARIZONA
Dollars $ 445,275 $ 325,918 $ 175,674
Homes closed 1,735 1,343 623
Average sales price $ 256.6 $ 242.7 $ 282.0
CALIFORNIA
Dollars $ 245,640 $ 156,933 $ 125,282
Homes closed 594 409 365
Average sales price $ 413.5 $ 383.7 $ 343.2
NEVADA
Dollars $ 34,260 -- --
Homes closed 155 -- --
Average sales price $ 221.0 -- --
SALES CONTRACTS
TOTAL
Dollars $1,161,899 $ 700,104 $ 604,444
Homes ordered 4,504 3,016 2,480
Average sales price $ 258.0 $ 232.1 $ 243.7
TEXAS
Dollars $ 417,158 $ 255,811 $ 240,054
Homes ordered 2,134 1,516 1,368
Average sales price $ 195.5 $ 168.7 $ 175.5
ARIZONA
Dollars $ 383,445 $ 309,170 $ 196,567
Homes ordered 1,425 1,165 643
Average sales price $ 269.1 $ 265.4 $ 305.7
CALIFORNIA
Dollars $ 329,252 $ 135,123 $ 167,823
Homes ordered 794 335 469
Average sales price $ 414.7 $ 403.4 $ 357.8
14
NEVADA
Dollars $ 32,044 -- --
Homes ordered 151 -- --
Average sales price $ 212.2 -- --
YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
NET SALES BACKLOG
TOTAL
Dollars $ 537,764 $ 374,951 $ 309,901
Homes in backlog 2,070 1,602 1,246
Average sales price $ 259.8 $ 234.1 $ 248.7
TEXAS
Dollars $ 218,899 $ 115,651 $ 119,564
Homes in backlog 1,085 693 695
Average sales price $ 201.8 $ 166.9 $ 172.0
ARIZONA
Dollars $ 144,155 $ 205,985 $ 115,211
Homes in backlog 466 776 344
Average sales price $ 309.3 $ 265.4 $ 334.9
CALIFORNIA
Dollars $ 136,927 $ 53,315 $ 75,126
Homes in backlog 333 133 207
Average sales price $ 411.2 $ 400.9 $ 362.9
NEVADA
Dollars $ 37,783 -- --
Homes in backlog 186 -- --
Average sales price $ 203.1 -- --
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
HOME SALES REVENUE. The increases in total home sales revenue in 2002
compared to 2001 resulted mainly from a 40% increase in the number of homes
closed and an increase in our average sales price from $227,100 in 2001 to
$243,200 in 2002. The number of closings increased as a result of continued
growth in our mid-priced communities in Arizona and growth from the acquisitions
of Hammonds and Perma-Bilt. The number of homes closed in Texas during 2002
included 442 Hammonds closings. The increases were offset to some degree by
decreases in closings in our Austin division due to an overall weaker economy in
that market and in Monterey Phoenix because of a slowing in demand for our
luxury priced homes.
SALES CONTRACTS. Sales contracts for any period represent the aggregate
sales price of all homes ordered by customers, net of cancellations. We do not
include sales contingent upon the sale of a customer's existing home as a sales
contract until the contingency is removed. Contributing to the increase in sales
contracts for the year 2002 from the previous year were the addition of the
Hammonds and Perma-Bilt operations along with strong markets in 2002. The number
of new orders in Texas during 2002 includes 466 orders from our Hammonds
operations. As a whole, we benefited from positive demographic factors,
historically high home ownership rates, relatively low mortgage interest rates
and generally low unemployment figures. We saw declines in new orders in our
Monterey Phoenix and Austin divisions in 2002, which we believe is due to a
slowing in demand for luxury homes in Phoenix and a weaker local economy in
Austin. Historically, we have experienced a cancellation rate of approximately
25% of gross sales, which we believe is consistent with industry norms.
NET SALES BACKLOG. Backlog represents net sales contracts that have not
closed. Total dollar backlog at December 31, 2002 increased 43% over the 2001
amount due to a 29% increase in the number of homes in backlog and an 11%
15
increase in the average sales prices of those homes. The increase in the number
of homes resulted mainly from our acquisitions, which contributed 558 homes with
a sales value of approximately $117.3 million to our December 31, 2002 backlog.
Backlog in our Monterey Phoenix and Austin divisions decreased in 2002 due to a
slowing in demand for luxury homes in Phoenix and a weaker local economy in
Austin.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
HOME SALES REVENUE. The increases in total home sales revenue and the
number of homes closed in 2001 compared to 2000 resulted mainly from the strong
market activity at the time the orders for these closings were taken in some of
our divisions, continued growth in our mid-priced communities in Arizona and the
May 2001 addition of Hancock to our Phoenix operations. These increases were
somewhat offset by decreases in closings in our Monterey Phoenix and Austin
divisions in 2001, due to weaker demand in the luxury price segment and a weaker
local economy, respectively. Hancock contributed 673 closings with a sales value
of approximately $122.5 million to our 2001 results. The decreases in average
home sales prices in Arizona for the year 2001 reflect a change in our product
mix, as we are now selling more first-time and first and second time move-up
homes than in 2000, due in large part to the Hancock acquisition.
SALES CONTRACTS. As a whole, we benefited from low mortgage interest rates,
generally low employment figures and improved home affordability in 2001.
Contributing to the increase in sales contracts for the year 2001 from the
previous year were 484 new contracts from the Hancock acquisition along with
strong markets early in the year. As a whole, we benefited from low mortgage
interest rates, generally low unemployment figures and improved home
affordability early in 2001. We saw declines in new orders in our Monterey
Phoenix, Northern California and Austin divisions in 2001, and believe this is
due to a slowing in demand for luxury homes and weaker local economies in the
Northern California and Austin markets.
NET SALES BACKLOG. Total dollar backlog at December 31, 2001 increased 21%
over the 2000 amount due to a 29% increase in the number of homes in backlog
from increased home sales over last year and increased sales prices in some of
our markets. The increase in the number of homes resulted mainly from our
Hancock acquisition, which contributed 421 homes with a sales value of
approximately $84.9 million to our December 31, 2001, backlog. Backlog in our
Monterey Phoenix, Northern California and Austin divisions decreased in 2001 due
to a slowing in demand for higher-priced homes and weaker local economies in the
Northern California and Austin markets.
OTHER OPERATING INFORMATION
YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
HOME SALES GROSS PROFIT ($ IN THOUSANDS)
Dollars $ 214,096 $ 157,136 $ 104,225
Percent of home sales revenue 19.3% 21.2% 20.2%
COMMISSIONS AND OTHER SALES COSTS
Dollars $ 65,291 $ 41,085 $ 28,680
Percent of home sales revenue 5.9% 5.5% 5.6%
GENERAL AND ADMINISTRATIVE EXPENSES
Dollars $ 41,496 $ 35,723 $ 21,215
Percent of total revenue 3.7% 4.8% 4.1%
INCOME TAXES
Dollars $ 43,607 $ 32,444 $ 21,000
Percent of earnings before income
taxes and extraordinary items 38.4% 38.9% 37.0%
16
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
HOME SALES GROSS PROFIT. Home sales gross profit represents home sales
revenue less cost of home sales. Cost of home sales include developed lot costs,
direct home construction costs, an allocation of common community costs (such as
model complex costs and architectural, legal and zoning costs), interest, sales
tax, warranty, construction overhead and closing costs. The dollar increase in
gross profit for the year ended December 31, 2002, is attributable to the 40%
increase in home sales revenue for reasons previously described in that section
of management's discussion and analysis of financial condition and results of
operations. The gross profit margin on home sales decreased to 19.3% in 2002,
primarily due to the effect of writing up certain assets acquired in conjunction
with purchase accounting for the Hammonds and Perma-Bilt acquisitions. This
effectively increased cost of sales by $5.5 million in the current year, due to
the lower gross profit margins generally achieved by Hammonds in comparison to
the Company as a whole and to increased competitive pressures in some of our
markets.
LAND SALES. The sale of land is not a significant component of our business
plan, and takes place infrequently. During 2002, we sold three parcels of land
in Arizona at a price of $7.4 million, resulting in a gross profit of $800,000.
During 2001, land sales of $1.6 million provided gross profit of $124,000 and
resulted from the sales of lots in Texas and Arizona.
COMMISSIONS AND OTHER SALES COSTS. Commissions and other sales costs, such
as advertising and sales office expenses, were approximately $65.3 million, or
5.9% of home sales revenue in 2002, as compared to approximately $41.1 million,
or 5.5% of home sales revenue in 2001. The increase in these expenses as a
percentage of home sales revenue reflects marketing costs in some of our
communities that were not yet closing homes in 2002.
OTHER INCOME. Other income consists primarily of mortgage company income,
forfeiture of customer deposits, management fees and rebates made under
volume-based purchasing programs. The increase in other income from the year
ended December 31, 2001 to the year ended December 31, 2002 is primarily due to
increased volume in all of our divisions, resulting in additional income, fees
and forfeitures of approximately $2.5 million.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were approximately $41.5 million, or 3.7% of total revenue in 2002, as compared
to approximately $35.7 million, or 4.8% of total revenue in 2001. The lower
expense as a percentage of total revenue in 2002 in comparison to 2001 resulted
partly from the June 2002 end to the California earn-out payment per the terms
of the purchase contract when we acquired the division. The earn-out was based
on 20% of the pre-tax earnings of the Northern California region after reduction
for a capital charge. Company-wide, we were also able to benefit from expanding
revenue while holding down increases in overhead costs.
INCOME TAXES. The increase in income taxes to $43.6 million for the year
ended December 31, 2002, from $32.4 million in the prior year resulted from an
increase in pre-tax income. The tax benefit associated with the exercise of
employee stock options reduced taxes currently payable by approximately $5.2
million for the year ended December 31, 2002, which resulted in a more favorable
tax rate. The tax benefit was credited to additional paid-in capital.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
HOME SALES GROSS PROFIT. The dollar increase in gross profit for the year
ended December 31, 2001, was attributable to the 44% increase in home sales
revenue for reasons previously described in that section of management's
discussion and analysis of financial condition and results of operations. Home
sales gross margins expanded to 21.2% due in part to the strong housing demand
in late 2000 and early 2001, which is the period when many of the purchase
contracts for homes closed in 2001 were entered into with our customers. We were
also able to benefit from a reasonably favorable market for home construction
materials, which resulted in lower construction cost increases than had incurred
in prior years.
COMMISSIONS AND OTHER SALES COSTS. Commissions and other sales costs were
approximately $41.1 million, or 5.5% of home sales revenue in 2001, as compared
to approximately $28.7 million, or 5.6% of home sales revenue in 2000. The
slight decrease in these expenses as a percentage of home sales revenue
reflected greater efficiencies in controlling costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were approximately $35.7 million, or 4.8% of total revenue in 2001, as compared
to approximately $21.2 million, or 4.1% of total revenue in 2000. The higher
expense as a percentage of total revenue in 2001 in comparison to 2000 resulted
from an increase in insurance costs and the increased overhead related to our
Hancock acquisition. In addition, the increase in the number of closings in our
Northern California region in 2001 resulted in a greater earn-out payment per
the terms of the purchase contract. The earn-out was calculated based on 20% of
the pre-tax earnings of the Northern California region after reduction for a
capital charge.
INCOME TAXES. The increase in income taxes to $32.4 million for the year
ended December 31, 2001, from $21.0 million in the prior year resulted from an
increase in pre-tax income. The tax benefit associated with the exercise of
17
employee stock options reduced taxes payable by approximately $2.5 million for
the year ended December 31, 2001, which resulted in a more favorable tax rate.
The tax benefit was credited to additional paid-in capital.
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of capital for the year ended December 31, 2002 were
operating expenses, land purchases, lot development, home construction, the
repurchase of common stock, and the acquisition of Hammonds and Perma-Bilt. We
used a combination of borrowings and funds generated by operations to meet our
short-term working capital requirements and in June 2002 we completed an equity
offering, resulting in net proceeds of approximately $80 million, in order to
meet long-term capital requirements.
Cash flows 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,
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 flows may significantly
exceed earnings reported for financial statement purposes, as cost of sales
includes charges for substantial amounts of previously expended costs.
In December 2002 we entered into a credit agreement which provides for a
$250 million senior unsecured revolving credit facility with a $40 million
letter of credit sublimit. Guaranty Bank is the administrative agent for the
facility, which matures on December 12, 2005, subject to extension provisions.
The new senior unsecured credit facility replaced our two secured credit
facilities totaling $190 million, of which approximately $123 million was
outstanding when they were repaid on December 12, 2002. These credit agreements
were repaid with the initial loan proceeds of the unsecured facility.
At December 31, 2002, $107.6 million of borrowings were outstanding under
our senior unsecured revolving credit facility with unborrowed availability
under the bank credit facility of approximately $86.0 million.
This credit facility contains certain financial and other covenants,
including:
* requiring the maintenance of tangible net worth;
* requiring the maintenance of a minimum interest coverage ratio;
* establishing a maximum permitted total leverage ratio;
* imposing limitations on the incurrence of additional indebtedness and
liens;
* imposing restrictions on investments, dividends and certain other
payments;
* imposing restrictions on sale and leaseback transactions and the
incurrence of off-balance sheet liabilities; and
* imposing limitations on the maximum net book value of specified land
holdings as a percentage of consolidated tangible net worth.
As of and for the year ended December 31, 2002, we were in compliance with
these covenants.
In May 2001, we issued $165 million in principal amount of 9.75% senior
notes due June 1, 2011. Approximately $66 million of this offering was used to
complete the acquisition of Hancock, approximately $78 million was used to pay
down existing bank debt, approximately $5.1 million was used to pay costs
related to the senior notes offering and approximately $15.9 million was used to
repay previously existing senior notes. This early repayment of debt resulted in
prepayment fees of approximately $731,000, which, net of the related income tax
benefit, resulted in an extraordinary loss of approximately $445,000 in the
second quarter of 2001.
In September 2001, we purchased and retired $10 million in principal amount
of our outstanding 9.75% senior notes. The purchases were made at 93.25% of par
at a gain of approximately $348,000, which net of related income tax effect of
$136,000, resulted in an extraordinary gain of $212,000.
18
In February 2003, we completed an add-on offering of $50 million in
aggregate principal amount of our 9.75% senior notes due June 1, 2001, the
proceeds of which were used to pay down our senior unsecured credit facility.
The notes were issued at a price of 103.25% of their face amount to yield
9.054%, and together with the May 2001 offering, constitute a single series of
notes.
Our senior notes require us to comply with a number of covenants that
restrict certain transactions, including:
* limitations on additional indebtedness;
* limitations on the payment of dividends, redemption of equity
interests and certain investments;
* maintenance of a minimum level of consolidated tangible net worth;
* limitations on liens securing certain obligations; and
* limitations on the sale of assets, mergers and consolidations and
transactions with affiliates.
As of and for the year ended December 31, 2002, we were in compliance with
these covenants.
We believe that our current borrowing capacity, cash on hand at December
31, 2002, and anticipated net cash flows are and will be sufficient to meet
liquidity needs for the foreseeable future. There is no assurance, however, that
future cash flows 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 notes and by the terms of the credit agreement
governing our senior unsecured credit facility.
In May 1999, we announced a stock repurchase program in which our Board of
Directors approved the buyback of up to $6 million of our outstanding common
stock, and in July 2001 this amount was increased to $20 million. In August
2002, we announced a second stock repurchase program in which the board of
directors approved the buyback of up to $32 million of our outstanding stock. In
2002, we repurchased 500,000 shares of our common stock at an average price of
$34.30 per share. Under both programs, we had repurchased 2,137,926 shares for
an aggregate price of approximately $28.4 million as of December 31, 2002.
CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at December 31, 2002,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods (in thousands):
PAYMENTS DUE BY PERIOD
---------------------------------------------------------
LESS THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
-------- -------- --------- --------- -------------
Senior notes $155,000 -- -- -- $155,000
Revolving construction facilities 107,565 $107,565 -- -- --
Other borrowing obligations 2,362 1,808 $ 554 -- --
Operating lease obligations 7,127 3,645 3,463 $ 19 --
Recourse option obligations 30,915 22,214 8,701 -- --
-------- -------- -------- -------- --------
Total $302,969 $135,232 $ 12,718 $ 19 $155,000
======== ======== ======== ======== ========
We do not engage in commodity trading or other similar activities. We had
no derivative financial instruments at December 31, 2002 or 2001.
As a part of our model home construction activities, we enter into lease
transactions with third parties. The total cost, including land, and
construction costs of model homes leased by us under these lease agreements is
$38.6 million, all of which is excluded from our balance sheet as of December
31, 2002. Our rent obligations under these leases are included in the table
above within operating lease obligations. See Notes 2 and 11 to our consolidated
financial statements included in this report for additional information
regarding our contractual obligations.
LETTER OF CREDIT AND BOND OBLIGATIONS
We obtain letters of credit, mainly in lieu of cash deposits to support our
option agreements, and performance, maintenance, and other bonds in support of
our related obligations with respect to the development of our projects. The
19
amount of these obligations outstanding at any time varies in accordance with
pending development activities. In the event the letters of credit or bonds are
drawn upon, we would be obligated to reimburse the issuer of the letter of
credit or bond. At December 31, 2002, we had approximately $16.2 million in
outstanding letters of credit and $72.9 million in performance bonds for such
purposes. We do not believe it is probable that any of these letters of credit
or bonds will be drawn upon.
CONSOLIDATED CASH FLOW
Our cash and cash equivalents at December 31, 2002 increased by $3.2
million from the balance at the end of the prior year. This increase reflects a
net usage of cash in operating activities of $5.8 million and investing
activities of $142.8 million, offset by increases resulting from financing
activities of $151.9 million. Our main uses of cash for investing activities
were for our acquisitions of Hammonds and Perma-Bilt which totaled $129.6
million, while our main sources of cash from financing activities were net
borrowings under our credit facilities of $86.3 million and the proceeds from
our common stock offering in June 2002 of $79.7 million, which was offset by
$17.2 million of cash used for repurchases of our common stock.
We used cash in operations of $5.8 million in 2002, compared with $17.1
million in 2001. Net cash provided by operating activities in 2000 was $6.3
million. The decrease in cash used in operations in 2002 resulted mainly from
the $19.3 million increase in net earnings. The change in cash used of $17.1
million in 2001 over $6.3 million provided in 2000 resulted from increases in
our real estate, option deposits and homebuilding assets in conjunction with our
increased homebuilding operations.
We used cash in investing activities of $142.8 million in 2002, compared
with $75.7 million and $8.2 million in 2001 and 2000, respectively. The increase
in cash used in 2002 over 2001 was primarily due to our acquisition of Hammonds
and Perma-Bilt, which used cash of approximately $129.6 million. The increase in
cash used in 2001 over 2000 was primarily due to our acquisition of Hancock,
which used cash of approximately $66 million.
Financing activities generated cash of $151.9 million in 2002 and $91.9
million in 2001. In 2000 we used $7.1 million in cash from financing activities.
The increase in cash provided by financing activities in 2002 resulted mainly
from the proceeds from the sale of our common stock in a public offering, offset
by increased purchases of treasury shares. The increase in cash generated in
2001 over 2000 mainly was due to the issuance of our 9.75% senior notes. In
2000, we did not engage in any significant capital raising activities other than
the borrowing and repayment of our credit facilities and we used $9.1 million to
acquire treasury shares.
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 move-up and semi-custom luxury products. We expect this seasonal
trend to continue, although it may vary as our operations continue to expand.
NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities".
This interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", addresses consolidation by business enterprises of
variable interest entities (selected entities with related contractual,
ownership, voting or other monetary interests, including certain special purpose
entities), and requires certain additional disclosure with respect to these
entities. The provisions of FIN 46 are applicable immediately to variable
interest entities created after January 31, 2003. A public entity with a
variable interest in a variable interest entity created before February 1, 2003,
shall apply the provisions of FIN 46 to that entity no later than the beginning
of the first interim or annual reporting period beginning after June 15, 2003.
We do not expect the requirements of FIN 46 to have a material impact on our
consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure." This amendment to FASB Statement No. 123 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
20
amends the disclosure requirements of FASB Statement No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions of this statement are effective
for financial statements of interim or annual periods after December 15, 2002.
We do not intend to change to the fair value method of accounting. The required
disclosures are included in the stock-based compensation section of Note 1 to
the consolidated financial statements appearing in this document.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to guarantees. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes that are related to an asset,
liability, or equity security of the guaranteed party. Certain guarantee
contracts are excluded from both the disclosure and recognition requirements of
this interpretation, including, among others, guarantees relating to employee
compensation, residual value guarantees under capital lease arrangements,
commercial letters of credit, loan commitments, subordinated interests in a
special purpose entity, and guarantees of a company's own performance. Other
guarantees are subject to the disclosure requirements of FIN 45 but not to the
recognition provisions and include, among others, a guarantee accounted for as a
derivative instrument under SFAS 133, a parent's guarantee of debt owed to a
third party by its subsidiary or vice versa, and a guarantee which is based on
performance, not price. The disclosure requirements of FIN 45 are effective for
the Company as of December 31, 2002 and require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee, and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee. The
recognition requirements of FIN 45 are to be applied prospectively to guarantees
issued or modified after December 31, 2002. We do no expect the requirements of
FIN 45 to have a material impact on our consolidated financial statements. For
disclosures required by FIN 45, See Note 11, "Commitments and Contingencies" to
the consolidated financial statements appearing in this document.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," that supersedes APB Opinion No. 17. Under SFAS 142, goodwill and
intangible assts deemed to have indefinite lives are no longer amortized, but
are to be reviewed at least annually for impairment, under impairment guidelines
established in the statement. SFAS 142 also changes the amortization methodology
in intangible assets that are deemed to have finite lives and adds to required
disclosures regarding goodwill and intangible assets. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. We adopted SFAS 142 on January
1, 2002, and our unamortized balance of goodwill as of that date was
approximately $30.4 million. Beginning in 2002, we ceased our amortization of
goodwill. Goodwill amoritzation for 2001 and 2000 was approximately $1.4 million
and $1.1 million, respectively. During 2002, under guidelines contained in the
statement, management performed an analysis concerning potential impairment of
the goodwill carried and determined that no impairment existed. A subsequent
assessment is being performed in the first quarter of 2003, and to date, no
impairment has been found to exist. See Note 1 and Note 4 to the consolidated
financial statements appearing in this document for further discussion of SFAS
142.
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 factors, along with many other factors,
could affect the price of our common stock and notes. 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. These factors can negatively affect the demand for and pricing of
our homes. We are also subject to various risks, many of which are outside our
21
control, including delays in construction schedules, cost overruns, changes in
governmental regulations (such as no- or slow-growth initiatives), increases in
real estate taxes and other local government fees, and raw materials and labor
costs.
We are also subject to the potential for significant variability and
fluctuations in the cost and availability of real estate. Write-downs of our
land inventories could occur if market conditions deteriorate and these
write-downs could be material in amount. Although historically we have generally
developed parcels ranging from 100 to 300 lots, in order to achieve and maintain
an adequate inventory of lots, we are beginning to purchase larger parcels, in
some cases with a joint venture partner. Write-downs may also occur if we
purchase land at higher prices during stronger economic periods and the value of
that land subsequently declines during slower economic periods.
HOME WARRANTY FACTORS. Construction defect and home warranty claims are
common in the homebuilding industry and can be costly. While we maintain product
liability insurance and generally require our subcontractors and design
professionals to indemnify us for liabilities arising from their work, we cannot
assure you that these insurance rights and indemnities will be adequate to cover
all construction defect and warranty claims for which we may be held liable. For
example, we may be responsible for applicable self-insured retentions, which
have increased recently, and certain claims may not be covered by insurance or
may exceed applicable coverage limits.
INCREASED INSURANCE COSTS. Recently, lawsuits have been filed against
builders asserting claims of personal injury and property damage caused by the
presence of mold in residential dwellings. Some of these lawsuits have resulted
in substantial monetary judgments or settlements. We believe that we have
maintained adequate insurance coverage to insure against these types of claims.
We believe it is possible that in the future insurance carriers may exclude
claims from future policies arising from the presence of mold or such coverage
may become prohibitively expensive. If we are unable to obtain adequate
insurance coverage, a material adverse effect on our business, financial
condition and results of operations could result if we are exposed to claims
arising from the presence of mold in the homes that we sell.
Partially as a result of the September 11, 2001 terrorist attacks, the cost
of insurance has risen, deductibles or retentions have increased and the
availability of insurance has diminished. Significant increase in our cost of
insurance coverage or retentions could have a material adverse effect on our
business, financial condition and results of operations.
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;
* our ability to acquire additional land or options for additional land
on acceptable terms;
* conditions of the real estate market in areas where we operate and of
the general economy;
* the cyclical nature of the homebuilding industry, changes in
prevailing interest rates and the availability of mortgage financing;
* costs and availability of materials and labor; and
* delays in construction schedules due to strikes, adverse weather, acts
of God, reduced subcontractor availability and governmental
restrictions.
INTEREST RATES AND MORTGAGE FINANCING. In general, housing demand is
adversely affected by increases in interest rates and housing costs and the
unavailability of mortgage financing. Most of our buyers finance their home
purchases through third-party lenders providing mortgage financing. If mortgage
interest rates increase and, consequently, the ability of prospective buyers to
finance home purchases is adversely affected, home sales, gross margins and cash
flow may also be adversely affected and the impact may be significant. Interest
rates are currently at historically low levels and, while it is impossible to
predict future increases or decreases in market interest rates, we do not expect
current rates to remain indefinitely at their current levels. In addition,
homebuilding activities depend upon the availability and costs of mortgage
financing for buyers of homes owned by potential customers, as those customers
(move-up buyers) often need to sell their residences before they purchase our
homes. Any reduction of financing availability could adversely affect home
sales.
22
COMPETITION. The homebuilding industry is highly competitive. 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. If we are unable to successfully compete, our
financial results and growth could suffer. Some of our competitors have
significantly greater financial resources 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. 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,
Northern California and Nevada. Our lack of geographic diversification could
adversely impact us if the homebuilding business in our current markets should
decline, since there may not be a balancing opportunity in a stronger market in
other geographic regions.
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, 2002, our debt totaled approximately
$264.9 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. The level of our indebtedness could have
important consequences to our stockholders, including the following:
* our ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate purposes may
be impaired;
* we must use a substantial portion of our cash flow from operations to
pay interest and principal on our indebtedness, which will reduce the
funds available to use for other purposes such as capital
expenditures;
* we have a higher level of indebtedness than some of our competitors,
which may put us at a competitive disadvantage and reduce our
flexibility in planning for, or responding to, changing conditions in
our industry, including increased competition; and
* we are more vulnerable to economic downturns and adverse developments
in our business.
We expect to obtain the money to pay our expenses and to pay the principal
and interest on our indebtedness from cash flow from operations. Our ability to
meet our expenses thus depends on our future performance, which will be affected
by financial, business, economic and other factors. We will not be able to
control many of these factors, such as economic conditions in the markets where
we operate and pressure from competitors. We cannot be certain that our cash
flow will be sufficient to allow us to pay principal and interest on our debt
and meet our other obligations. If we do not have sufficient funds, we may be
required to refinance all or part of our existing debt, sell assets or borrow
more money. We cannot guarantee that we will be able to do so on terms
acceptable to us, if at all. In addition, the terms of existing or future debt
agreements may restrict us from pursuing any of these alternatives.
OPERATING AND FINANCIAL LIMITATIONS. The indenture for our senior notes and
the agreement for our senior unsecured credit facility impose significant
operating and financial restrictions on us. These restrictions will limit our
ability, among other things, to:
* incur additional indebtedness;
* pay dividends or make other distributions;
* repurchase our stock;
* make investments;
* sell assets;
* enter into agreements restricting our subsidiaries' ability to pay
dividends;
* enter into transactions with affiliates; and
* consolidate, merge or sell all or substantially all of our assets.
23
In addition, the indenture for our senior notes requires us to maintain a
minimum consolidated tangible net worth and our senior unsecured credit facility
requires us to maintain other specified financial ratios. We cannot assure you
that these covenants will not adversely affect our ability to finance our future
operations or capital needs or to pursue available business opportunities. A
breach of these covenants or our inability to maintain the required financial
ratios could result in a default in respect of the related indebtedness. If a
default occurs, the relevant lenders could elect to declare the indebtedness,
together with accrued interest and other fees, to be immediately due and
payable.
GOVERNMENT REGULATIONS; ENVIRONMENTAL CONDITIONS. Regulatory requirements
could cause us to incur significant liabilities and costs and could restrict our
business activities. 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.
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. 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
geographic areas. Environmental regulations can also have an adverse impact on
the availability and price of certain raw materials such as lumber.
RECENT ACQUISITIONS. During 2002 we acquired Hammonds and Perma-Bilt and we
cannot assure you that:
* the Hammonds and Perma-Bilt businesses will be successfully integrated
with our existing business;
* the market and financial synergies we anticipate will be achieved in
our expected time frame, or at all;
* the acquisitions will be accretive to earnings due to unexpected
expenses, contingencies or liabilities, or due to the financial
performance of the Hammonds and Perma-Bilt businesses;
* the combined companies will not lose key employees, management,
suppliers or subcontractors; and
* we can successfully manage new housing lines that were previously
managed by Hammonds and Perma-Bilt or new lines planned for the
future.
FUTURE EXPANSION. We may continue to consider growth or expansion of our
operations in our current markets or in other areas of the country. Our
expansion into new or existing markets could have a material adverse effect on
our cash flows or profitability. 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. Acquisitions also involve numerous risks,
including difficulties in the assimilation of the acquired company's operations,
the incurrence of unanticipated liabilities or expenses, the diversion of
management's attention from other business concerns, risks of entering markets
in which we have limited or no direct experience and the potential loss of key
employees of the acquired company.
DEPENDENCE ON KEY PERSONNEL. Our success largely depends on the continuing
services of certain key employees, including Steve Hilton and John Landon, and
our continued favorable development depends on our ability to attract and retain
qualified personnel. The loss of the services of key employees could harm our
business.
DEPENDENCE ON SUBCONTRACTORS. We conduct our construction operations only
as a general contractor. Virtually all architectural and construction work is
performed by unaffiliated third-party subcontractors. As a consequence, we
depend on the continued availability of and satisfactory performance by these
subcontractors for the design and construction of our homes. We cannot assure
24
you that there will be sufficient availability of and satisfactory performance
by these unaffiliated third-party subcontractors. In addition, inadequate
subcontractor resources could have a material adverse affect on our business.
INFLATION. We, like other homebuilders, 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 mortgage financing to prospective buyers. Inflation also increases our cost
of financing, materials and labor and could cause our financial results or
growth to decline. We attempt to pass cost increases on to our customers through
higher sales prices. To date, inflation has not had a material adverse effect on
our results of operations, although it could impact our future operating
results.
NATURAL DISASTERS. We have significant homebuilding operations in Texas and
Northern California. Some of our markets in Texas occasionally experience severe
weather conditions such as tornadoes or hurricanes. Northern California has
experienced a significant number of earthquakes, flooding, landslides and other
natural disasters in recent years. We do not insure against some of these risks.
These occurrences could damage or destroy some of our homes under construction
or our building lots, which may result in losses that exceed our insurance
coverage. We could also suffer significant construction delays or substantial
fluctuations in the pricing or availability of building materials. Any of these
events could cause a decrease in our revenue, cash flows and earnings.
RECENT LAWS, REGULATIONS AND ACCOUNTING PRONOUNCEMENTS. In the past several
months, a number of new laws, governmental and stock exchange regulations, as
well as accounting policies, principles or practices, have been adopted or
proposed, many of which could, depending on their ultimate outcome or
interpretations, affect our corporate governance or accounting methods. As an
example, the accounting profession recently adopted new standards for whether
certain transactions should be accounted for as on- or off-balance sheet
transactions. We have the right to acquire a substantial amount of lot inventory
through rolling options with third parties and, to a lesser extent, joint
ventures. At the present time, we do not believe that these pronouncements, and
other current proposals, will materially affect us; however, we cannot assure
you that the ultimate interpretation or implementation of new and proposed laws
and other pronouncements will not produce such an effect.
ACTS OF WAR. Acts of war or any outbreak or escalation of hostilities
between the United States and any foreign power, including the armed conflict
with Iraq, may cause disruption to the economy, our company, our employees and
our customers, which could impact our revenue, costs and expenses and financial
condition.
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (PSLRA),
Congress encouraged public companies to make "forward-looking statements" by
creating a safe-harbor to protect companies from securities law liability in
connection with forward-looking statements. We intend to qualify both our
written and oral forward-looking statements for protection under the PSLRA.
The words "believe," "expect," "anticipate," "forecast," "plan," and
"project" and similar expressions identify forward-looking statements, which
speak only as of the date the statement was made. Such forward-looking
statements are within the meaning of that term in Section 27A of the Securities
Act of 1993, and Section 21E of the Exchange Act. Forward-looking statements in
this Form 10-K include statements concerning the demand for and the pricing of
our homes, our ability to deliver existing backlog, the expected outcome of
legal proceedings against us, the sufficiency of our capital resources, the
impact of new accounting standards, the future realizability of deferred tax
assets, the expectation of continued positive operating results in 2003 and
beyond, the expected benefits of the Hammonds and Perma-Bilt acquisitions,
including future home closings and Hammonds and Perma-Bilt's future contribution
to our revenue and earnings, and our ability to continue positive operating
results in light of current economic and political conditions. Such statements
are subject to significant risks and uncertainties.
Important factors currently known to management that could cause actual
results to differ materially from those in forward-looking statements, and that
could negatively affect our business are discussed in this report under the
25
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Factors That May Affect Our Future Results and Financial
Condition."
Forward-looking statements express expectations of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties that could cause actual
events or results to differ materially from those projected. Due to these
inherent uncertainties, the investment community is urged not to place undue
reliance on forward-looking statements. In addition, we undertake no obligations
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of anticipated events or changes to projections over time. As a
result of these and other factors, our stock and note prices may fluctuate
dramatically.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of our senior unsecured notes offering, $155.0 million of our
outstanding borrowings is based on a fixed interest rate. Except in limited
circumstances, we do not have an obligation to prepay our fixed-rate debt prior
to maturity and, as a result, interest rate risk and changes in fair value
should not have a significant impact in the fixed rate debt until we would be
required to refinance such debt.
We are exposed to market risk primarily related to potential adverse
changes in interest rates on our existing revolving credit facility. The
interest rate relative to this borrowing fluctuates with the prime and
Eurodollar lending rates, both upwards and downwards. As of December 31, 2002,
we had approximately $107.6 million drawn under our revolving credit facility
that is subject to changes in interest rates. An increase or decrease of 1% in
interest rates would change our annual debt service payments by approximately
$1.0 million per year.
We do not enter into, or intend to enter into, derivative financial
instruments for trading or speculative purposes.
Our operations are interest rate sensitive. Overall housing demand is
adversely affected by increases in interest rates. If mortgage interest rates
increase significantly, this may negatively affect the ability of homebuyers to
secure adequate financing. Higher interest rates could adversely affect our
revenues, gross margins and net income and will also increase our borrowing
costs because our revolving credit facility will fluctuate with the prime and
Eurodollar lending rates, both upwards and downwards.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements as of December 31, 2002 and 2001 and
for each of the years in the three-year period ended December 31, 2002, 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 16.
26
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Meritage Corporation:
We have audited the accompanying consolidated balance sheets of Meritage
Corporation and subsidiaries (the Company) as of December 31, 2002 and 2001, 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, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 of the consolidated financial statements, the
Company changed their method of accounting for goodwill and other intangible
assets in 2002.
/s/ KPMG LLP
Phoenix, Arizona
February 6, 2003
27
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
2002 2001
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents $ 6,600 $ 3,383
Real estate 484,970 330,238
Deposits on real estate under option or contract 77,516 45,252
Receivables 8,894 5,508
Deferred tax asset, net 2,701 2,612
Goodwill 73,785 30,369
Property and equipment, net 14,007 9,667
Prepaid expenses and other assets 23,315 9,686
--------- ---------
Total assets $ 691,788 $ 436,715
========= =========
LIABILITIES
Accounts payable $ 52,133 $ 36,168
Accrued liabilities 41,329 32,861
Home sale deposits 16,091 13,538
Notes payable 264,927 177,561
--------- ---------
Total liabilities 374,480 260,128
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01. Authorized
50,000,000 shares; issued and outstanding
15,227,460 and 12,613,938 shares at
December 31, 2002 and 2001, respectively 152 126
Additional paid-in capital 197,320 109,412
Retained earnings 148,209 78,272
Treasury stock at cost, 2,137,926 and
1,637,926 shares at December 31, 2002
and 2001, respectively (28,373) (11,223)
--------- ---------
Total stockholders' equity 317,308 176,587
--------- ---------
Total liabilities and stockholders' equity $ 691,788 $ 436,715
========= =========
See accompanying notes to consolidated financial statements
28
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Home sales revenue $ 1,112,439 $ 742,576 $ 515,428
Land sales revenue 7,378 1,598 5,039
----------- ----------- -----------
1,119,817 744,174 520,467
----------- ----------- -----------
Cost of home sales (898,343) (585,440) (411,203)
Cost of land sales (6,578) (1,474) (4,446)
----------- ----------- -----------
(904,921) (586,914) (415,649)
----------- ----------- -----------
Home sales gross profit 214,096 157,136 104,225
Land sales gross profit 800 124 593
----------- ----------- -----------
214,896 157,260 104,818
Commissions and other sales costs (65,291) (41,085) (28,680)
General and administrative expenses (41,496) (35,723) (21,215)
Interest expense -- -- (8)
Other income, net 5,435 2,884 1,847
----------- ----------- -----------
Earnings before income taxes and extraordinary items 113,544 83,336 56,762
Income taxes (43,607) (32,444) (21,000)
----------- ----------- -----------
Earnings before extraordinary items 69,937 50,892 35,762
Extraordinary items, net of tax effects -- (233) --
----------- ----------- -----------
Net earnings $ 69,937 $ 50,659 $ 35,762
=========== =========== ===========
Earnings per share:
Basic:
Earnings before extraordinary items $ 5.64 $ 4.80 $ 3.46
Extraordinary items, net of tax effects -- (0.02) --
----------- ----------- -----------
Net earnings per share $ 5.64 $ 4.78 $ 3.46
=========== =========== ===========
Diluted:
Earnings before extraordinary items $ 5.31 $ 4.32 $ 3.13
Extraordinary items, net of tax effects -- (0.02) --
----------- ----------- -----------
Net earnings per share $ 5.31 $ 4.30 $ 3.13
=========== =========== ===========
See accompanying notes to consolidated financial statements
29
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
------------------------------------------------------------------------
RETAINED
ADDITIONAL EARNINGS
NUMBER OF COMMON PAID-IN (ACCUMULATED TREASURY
SHARES STOCK CAPITAL DEFICIT) STOCK TOTAL
--------- --------- -------- --------- --------- ---------
Balance at December 31, 1999 10,950 $ 110 $ 100,352 $ (8,149) $ (1,902) $ 90,411
Net earnings -- -- -- 35,762 -- 35,762
Tax benefit from stock option
exercises -- -- 1,917 -- -- 1,917
Exercise of stock options 718 6 2,044 -- -- 2,050
Contingent shares issued 178 2 (2) -- -- --
Stock option and contingent stock
compensation expenses -- -- 73 -- -- 73
Purchase of treasury stock -- -- -- -- (9,114) (9,114)
--------- --------- -------- --------- --------- ---------
Balance at December 31, 2000 11,846 118 104,384 27,613 (11,016) 121,099
Net earnings -- -- -- 50,659 -- 50,659
Tax benefit from stock option
exercises -- -- 2,486 -- -- 2,486
Exercise of stock options 768 8 2,542 -- -- 2,550
Purchase of treasury stock -- -- -- -- (207) (207)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2001 12,614 126 109,412 78,272 (11,223) 176,587
Net earnings -- -- -- 69,937 -- 69,937
Tax benefit from stock option
exercises -- -- 5,222 -- -- 5,222
Exercise of stock options 601 6 3,006 -- -- 3,012
Purchase of treasury stock -- -- -- -- (17,150) (17,150)
Issuance of common stock upon
public offering 2,012 20 79,680 -- -- 79,700
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2002 15,227 $ 152 $ 197,320 $ 148,209 $ (28,373) $ 317,308
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements
30
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 69,937 $ 50,659 $ 35,762
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization 6,780 5,741 3,407
(Increase) decrease in deferred tax asset before
extraordinary items (89) (2,069) 156
Stock option and contingent stock compensation expenses -- -- 73
Tax benefit from stock option exercises 5,222 2,486 1,917
Changes in assets and liabilities, net of effect of
acquisitions in 2002 and 2001:
Increase in real estate (54,896) (64,386) (40,295)
Increase in deposits on real estate under option or contract (29,088) (12,102) (8,551)
Increase in receivables and prepaid expenses
and other assets (13,854) (10,816) (1,241)
Increase in accounts payable and accrued liabilities 10,291 13,232 12,368
(Decrease) increase in home sale deposits (139) 118 2,656
--------- --------- ---------
Net cash (used in) provided by operating
activities (5,836) (17,137) 6,252
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions (129,582) (65,759) (5,158)
Increase in goodwill (4,938) (2,710) --
Purchases of property and equipment (8,285) (7,270) (3,017)
--------- --------- ---------
Net cash used in investing activities (142,805) (75,739) (8,175)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 816,153 527,910 447,269
Repayments of debt (729,857) (578,391) (447,054)
Proceeds from issuance of senior notes -- 165,000 --
Repayments of senior notes -- (25,000) --
Proceeds from sale of common stock, net 79,700 -- --
Purchase of treasury stock (17,150) (207) (9,114)
Proceeds from exercises of stock options 3,012 2,550 1,797
--------- --------- ---------
Net cash provided by (used in) financing activities 151,858 91,862 (7,102)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 3,217 (1,014) (9,025)
Cash and cash equivalents, beginning of period 3,383 4,397 13,422
--------- --------- ---------
Cash and cash equivalents, end of period $ 6,600 $ 3,383 $ 4,397
========= ========= =========
See Supplemental Disclosure of Cash Flow Information at Note 8.
See accompanying notes to consolidated financial statements
31
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS. We are a leading designer and builder of single-family homes in
the rapidly growing Sunbelt states of Texas, Arizona, California and Nevada. We
focus on providing a broad range of first-time, move-up and luxury homes to our
targeted customer base. We and our predecessors have operated in Arizona since
1985, in Texas since 1987 and in Northern California since 1989. In 2002 we
acquired Hammonds Homes (Hammonds), a builder of primarily move-up homes in
Houston, Austin and Dallas, Texas, and Perma-Bilt Homes (Perma-Bilt), a
homebuilder that serves the first-time and move-up markets in the Las Vegas,
Nevada area.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
include our accounts and those of our consolidated subsidiaries. Intercompany
balances and transactions have been eliminated in consolidation, and certain
prior year amounts have been reclassified to be consistent with current
financial statement presentation. Financial results include the operations of
Hancock Communities (Hancock) from May 31, 2001, Hammonds from July 1, 2002 and
Perma-Bilt from October 1, 2002, the effective dates of the acquisitions (see
Note 4).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. We have established various
accounting policies which govern the application of accounting principles
generally accepted in the United States of America in the preparation and
presentation of our consolidated financial statements. Certain accounting
policies involve significant judgments, assumptions and estimates by management
that have a material impact on the carrying value of certain assets and
liabilities, and revenue and costs, which we consider to be critical accounting
policies. The judgments, assumptions and estimates we use are based on
historical experience, knowledge of the accounts and other factors which we
believe to be reasonable under the circumstances and we evaluate our judgements
and assumptions on an on-going basis. Because of the nature of the judgments and
assumptions we have made, actual results could differ from these judgments and
estimates, which could have a material impact on the carrying values of assets
and liabilities and the results of our operations.
The accounting policies that we deem most critical to us, and involve the
most difficult, subjective or complex judgments, include our estimates of costs
to complete our individual projects, the ultimate recoverability (or impairment)
of these costs, goodwill impairment, the likelihood of closing lots held under
option or contract and the ability to estimate expenses and accruals, including
legal and warranty reserves. Should we under or over estimate costs to complete
individual projects, gross margins in a particular period could be misstated and
the ultimate recoverability of costs related to a project from home sales may be
uncertain. Furthermore, non-refundable deposits paid for land options or
contracts may have no economic value to us if we do not ultimately purchase the
land. Our inability to accurately estimate expenses or accruals or an impairment
of real estate or goodwill could result in charges, or income, in future
periods, which relate to activities or transactions in a preceding period.
CASH AND CASH EQUIVALENTS. Liquid investments with an initial maturity of
three months or less are classified as cash equivalents. Amounts in transit from
title companies for home closings of approximately $5.2 million and $317,000 are
included in cash and cash equivalents at December 31, 2002 and 2001,
respectively.
REAL ESTATE. Real estate consists of finished home sites and home sites
under development, completed homes and homes under construction, and land held
for development. Costs capitalized include direct construction costs for homes,
development period interest and certain common costs that benefit the entire
community. Common costs are incurred on a community-by-community basis and
allocated to residential lots based on the number of lots to be built in the
project, which approximates the relative sales value method.
An impairment loss is recorded when events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable from the
cash flows generated by future disposition. In such cases, amounts are carried
at the lower of cost or estimated fair value less disposal costs.
32
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deposits paid related to land options and contracts to purchase land are
capitalized when incurred 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 at the time the lots are acquired. Deposits are
charged to expense if the land acquisition is no longer considered probable.
COST OF HOME SALES. Cost of home sales includes direct home construction
costs, closing costs, land acquisition and development costs, development period
interest, and common costs. Direct construction costs are accumulated during the
period of construction and charged to cost of sales under specific
identification methods, as are closing costs. Land acquisition and development
costs, interest and common costs are allocated based on the number of homes to
be built in each community, which approximates the relative sales value method.
Estimated future warranty costs are charged to cost of sales in the period
when the revenues from the related home closings are recognized. Costs are
accrued based upon historical experience and generally range from 0.45% to 0.75%
of the home's sales price. (See Note 11.)
REVENUE RECOGNITION. Revenues from sales of residential real estate and
related activities are recognized when closings have occurred, the buyer has
made the required minimum down payment and other criteria for sale and profit
recognition are satisfied.
PROPERTY AND EQUIPMENT. Property and equipment consists of approximately
$3.3 million of computer and office equipment and approximately $10.7 million of
model home furnishings, and is stated at cost less accumulated depreciation.
Accumulated depreciation related to these assets amounted to approximately $10.5
million and $7.1 million at December 31, 2002 and 2001, respectively.
Depreciation is generally calculated using the straight-line method over the
estimated useful lives of the assets, which range from three to seven years.
Maintenance and repair costs are expensed as incurred.
DEFERRED COSTS. We incurred costs of approximately $5.2 million related to
the 2001 issuance of our 9.75% senior notes, due June 2011 and approximately
$1.5 million in bank fees related to the addition of our December 2002 credit
facility. We have deferred these costs and are amortizing them using the
effective interest method over the life of the debt. At December 31, 2002 and
2001, approximately $5.9 million and $4.9 million, respectively, of deferred
costs, net of amortization, were included on our balance sheets within prepaid
expenses and other assets.
INCOME TAXES. We account for income taxes in accordance with 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.
STOCK SPLIT. On April 2, 2002, our Board of Directors declared a
two-for-one split of our common stock in the form of a stock dividend to
stockholders of record on April 12, 2002. The additional shares were distributed
on April 26, 2002. All share and per share amounts have been restated to reflect
the split.
EARNINGS PER SHARE. We compute basic earnings per share by dividing
earnings available to common stockholders by the weighted-average number of
common shares outstanding during the year. Diluted earnings per share reflects
the potential dilution that could occur if dilutive 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.
STOCK-BASED COMPENSATION. See discussion of SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," under this note, "Impact of
Recently Issued Accounting Standards".
33
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2002, we had one stock-based employee compensation plan,
which is described more fully in Note 6. We apply the intrinsic value-based
method of accounting prescribed in Accounting Principles Board ("APB") Opinion
No. 25 "Accounting for Stock Issued to Employees", as allowed by SFAS No. 123
"Accounting for Stock-Based Compensation." Under this method, compensation
expense is recorded on the date of the grant only if the market price of the
underlying stock on the date of the grant was greater than the exercise price.
SFAS No. 123 established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, we have elected to continue to apply the intrinsic
value-based method of accounting described above, and have adopted the
disclosure requirements of SFAS No. 123. As we do not issue options with
exercise prices below the market value on the date of the grant, we do not
recognize compensation expense for our stock-based plan. Had compensation cost
for these plans been determined pursuant to SFAS No. 123, our net earnings and
earnings per share would have been reduced to the following pro forma amounts.
YEARS ENDED DECEMBER 31,
--------------------------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
2002 2001 2000
-------- -------- --------
Net earnings As reported $ 69,937 $ 50,659 $ 35,762
Deduct* (2,237) (1,464) (298)
-------- -------- --------
Pro forma $ 67,700 $ 49,195 $ 35,464
======== ======== ========
Basic earnings per share As reported $ 5.64 $ 4.78 $ 3.46
Pro forma $ 5.46 $ 4.64 $ 3.43
Diluted earnings per share As reported $ 5.31 $ 4.30 $ 3.13
Pro forma $ 5.14 $ 4.18 $ 3.10
*Deduct: Total stock-based employee compensation expense determined under fair
value based method for awards, net of related tax effects. See Note 6 for
assumptions used to determine fair value.
To date, we have only granted options to employees and non-employee
directors.
GOODWILL. Effective January 1, 2002, we adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." Upon the adoption of SFAS No. 142, goodwill is no longer subject to
amortization. Goodwill is subject to at least an annual assessment for
impairment by applying a fair value-based test. If the carrying amount of the
net assets of an identified reporting unit exceeds the fair value of that
reporting unit, goodwill is considered to be impaired. We continually evaluate
whether events and circumstances have occurred that indicate the remaining
balance of goodwill may not be recoverable. In evaluating impairment, we base
our estimates of fair value on an analysis of selected business acquisitions in
the homebuilding industry provided to us by an independent third party. Such
evaluations for impairment are significantly impacted by the amount a buyer is
willing to pay in the current market for a like business. If the goodwill is
considered to be imapired, the impairment loss to be recognized is measured by
the amount by which the carrying amount of the goodwill exceeds the fair value
of the net assets identified in our reporting units. See "Impact of Recently
Issued Accounting Standards" for further information on goodwill.
FAIR VALUE OF FINANCIAL INSTRUMENTS. We determine fair value of financial
instruments as required by SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments."
The estimated fair value of our 9.75% senior notes at December 31, 2002 and
2001 was $162.0 million and $160.4 million, respectively, based on independent
dealer quotes. The recorded amount of our senior notes at December 31, 2002 and
2001 was $155.0 million.
Our revolving credit facility and acquisition and development loans carry
interest rates that are variable and/or comparable to current market rates based
on the nature of the obligations, their terms and remaining maturity, and
therefore, the cost basis approximates fair value.
Due to the short term nature of other financial assets and liabilities, we
consider the carrying amounts of our short-term financial instruments to be at
fair value.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. In January 2003, the FASB
issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities". This interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", addresses consolidation by business
enterprises of variable interest entities (selected entities with related
contractual, ownership, voting or other monetary interests, including certain
special purpose entities), and requires certain additional disclosure with
respect to these entities. The provisions of FIN 46 are applicable immediately
to variable interest entities created after January 31, 2003. A public entity
with a variable interest in a variable interest entity created before February
1, 2003, shall apply the provisions of FIN 46 to that entity no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. We do not expect the requirements of FIN 46 to have a material impact
on our consolidated financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This amendment to FASB Statement No.
123 provides alternative methods of transition for a voluntary change to the
34
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fair value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of FASB Statement
No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The provisions of this
statement are effective for financial statements of interim or annual periods
after December 15, 2002. We do not intend to change to the fair value method of
accounting. The required disclosures are included in the stock-based
compensation section of this note.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to guarantees. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes that are related to an asset,
liability, or equity security of the guaranteed party. Certain guarantee
contracts are excluded from both the disclosure and recognition requirements of
this interpretation, including, among others, guarantees relating to employee
compensation, residual value guarantees under capital lease arrangements,
commercial letters of credit, loan commitments, subordinated interests in a
special purpose entity, and guarantees of a company's own performance. Other
guarantees are subject to the disclosure requirements of FIN 45 but not to the
recognition provisions and include, among others, a guarantee accounted for as a
derivative instrument under SFAS 133, a parent's guarantee of debt owed to a
third party by its subsidiary or vice versa, and a guarantee which is based on
performance, not price. The disclosure requirements of FIN 45 are effective for
the Company as of December 31, 2002 and require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee, and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee. The
recognition requirements of FIN 45 are to be applied prospectively to guarantees
issued or modified after December 31, 2002. We do not expect the requirements of
FIN 45 to have a material impact on our consolidated financial statements. For
disclosures required by FIN 45 applicable to us, see Note 11, "Commitments and
Contingencies."
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," that supersedes APB Opinion No. 17. Under SFAS 142, goodwill and
intangible assts deemed to have indefinite lives are no longer amortized, but
are to be reviewed at least annually for impairment, under impairment guidelines
established in the statement. SFAS 142 also changes the amortization methodology
in intangible assets that are deemed to have finite lives and adds to required
disclosures regarding goodwill and intangible assets. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. We adopted SFAS 142 on January
1, 2002 and our unamortized balance of goodwill as of that date was
approximately $30.4 million. Beginning in 2002, we ceased our amortization of
goodwill. Goodwill amoritzation for 2001 and 2000 was approximately $1.4 million
and $1.1 million, respectively. If SFAS No. 142 had been in effect in 2001 and
2000, net earnings for the years ended December 31, 2001 and 2000 would have
been $51.5 million and $36.4 million, respectively, and diluted earnings per
share would have been $4.38 and $3.19, respectively.
During 2002, under guidelines contained in the statement, management
performed an analysis concerning potential impairment of the goodwill carried
and determined that no impairment existed. A subsequent assessment is being
performed in the first quarter of 2003, and to date, no impairment has been
found to exist. See Note 4, "Acquisitions".
NOTE 2 - REAL ESTATE AND CAPITALIZED INTEREST
The components of real estate at December 31 are as follows (in thousands):
2002 2001
-------- --------
Homes under contract, in production $191,761 $135,005
Finished home sites 123,500 81,151
Home sites under development 66,552 57,291
Homes held for resale 55,273 33,278
Model homes 19,160 18,289
Land held for development 28,724 5,224
-------- --------
$484,970 $330,238
======== ========
35
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We capitalize certain interest costs incurred during development and
construction. Capitalized interest is allocated to real estate under development
and charged to cost of sales when the related property is closed. Summaries of
interest incurred, interest capitalized and interest expensed follow (in
thousands):
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
-------- --------
Interest capitalized, beginning of year $ 8,746 $ 5,426
Interest capitalized 19,294 16,623
Amortization to cost of home and land sales (19,259) (13,303)
-------- --------
Interest capitalized, end of year $ 8,781 $ 8,746
======== ========
Interest incurred $ 19,294 $ 16,623
Interest capitalized (19,294) (16,623)
-------- --------
Interest expensed $ -- $ --
======== ========
The purchase of real estate under option contracts with specific
performance is dependent upon the completion of certain requirements by the
sellers and us. At December 31, 2002, we had approximately 779 home sites with
an aggregate purchase price of approximately $34.8 million under option
contracts with specific performance. Real estate under option or contract and
related deposits are summarized below (dollars in thousands):
DEPOSITS ON LETTERS OF CREDIT
REAL ESTATE ON REAL ESTATE
NUMBER OF UNDER OPTION UNDER OPTION
HOME SITES OR CONTRACT OR CONTRACT
---------- ----------- -----------
Real estate under option or contract
with specific performance 611 $ 6,010 $ 2,017
Real estate under option or contract
with non-specific performance 19,950 71,506 13,118
------ -------- --------
20,561 $ 77,516 $ 15,135
====== ======== ========
NOTE 3 - NOTES PAYABLE
Notes payable at December 31 consist of the following:
2002 2001
--------- ---------
(IN THOUSANDS)
$250 million unsecured revolving credit facility
maturing December 12, 2005 with extension
provisions, with interest payable monthly
approximating prime (4.25% at December 31,
2002) or LIBOR (approximately 1.383% at
December 31, 2002) plus 2.0%. $ 107,565 $ --
$100 million bank revolving construction line of
credit. Paid in full during 2002. -- 617
$90 million bank revolving construction line of
credit. Paid in full during 2002. -- 15,590
Acquisition and development seller carry back
financing, interest payable monthly at rates
ranging from prime to prime plus 0.25% or at
a fixed rate of 10% per annum; 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 2,362 6,204
Senior unsecured notes, maturing June 1, 2011,
interest only payments at 9.75% per annum,
payable semi-annually 155,000 155,000
Other -- 150
--------- ---------
Total $ 264,927 $ 177,561
========= =========
36
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In May 2001, we issued $165 million in principal amount of 9.75% senior
notes due June 1, 2011. Approximately $15.9 million of this amount was used to
repay existing senior notes. The early repayment of debt resulted in prepayment
fees of approximately $731,000, which, net of the related income tax benefit of
approximately $286,000, resulted in an extraordinary loss of $445,000.
In September 2001, we purchased and retired $10 million in principal amount
of our outstanding 9.75% senior notes for 93.25% of par. The purchases resulted
in an extraordinary gain of $212,000 (net of approximately $136,000 in income
taxes).
In February 2003 we completed an add-on offering of $50 million in
aggregate principal amount of our 9.75% senior notes due June 1, 2001. The notes
were issued at a price of 103.25% of their face amount to yield 9.054%, and
together with the May 2001 offering, constitute a single series of notes.
Scheduled maturities of notes payable as of December 31, 2002 follow (in
thousands):
YEARS ENDED
DECEMBER 31,
------------
2003 $ 1,808
2004 554
2005 107,565
2006 --
2007 --
Thereafter 155,000
--------
$264,927
========
Obligations to pay principal and interest on our bank credit facility and
senior unsecured notes are guaranteed by all of our wholly-owned subsidiaries
(Guarantor Subsidiaries), other than certain minor subsidiaries (collectively,
Non-Guarantor Subsidiaries). Such guarantees are full and unconditional, and
joint and several. Separate financial statements of the Guarantor Subsidiaries
are not provided because Meritage Corporation (the parent company) has no
independent assets or operations and the Non-Guarantor Subsidiaries are,
individually and in the aggregate, minor. There are no significant restrictions
on the ability of the parent company or any guarantor to obtain funds from its
subsidiaries by dividend or loan.
The bank credit facility and senior unsecured notes contain covenants which
require maintenance of certain levels of tangible net worth, compliance with
certain minimum financial ratios and 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, 2002 and 2001 and for the years
then ended we were in compliance with these covenants.
NOTE 4 - ACQUISITIONS
PERMA-BILT ACQUISITION. Effective October 1, 2002, we purchased the
homebuilding assets of Perma-Bilt Homes ("Perma-Bilt Homes" or "Perma-Bilt"), a
builder of single-family homes in the Las Vegas, Nevada metropolitan area. The
purchase price was approximately $46.6 million in cash including the repayment
of existing debt in the amount of $16.7 million. We also assumed accounts
payable, accrued liabilities and home sale deposits totaling $5.8 million. In
addition, we agreed to an earn-out of 10% of the pre-tax profits of Perma-Bilt,
payable in cash over three years. Perma-Bilt Homes builds a wide range of homes
with a focus on serving the move-up housing markets in Nevada.
37
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HAMMONDS ACQUISITION. On July 1, 2002, we acquired substantially all of the
homebuilding and related assets of Hammonds Homes, Ltd., and Crystal City Land &
Cattle, Ltd., (collectively, "Hammonds Homes" or "Hammonds"). The purchase price
was approximately $83.4 million in cash plus the assumption of accounts payable,
accrued liabilities, and home sale deposits totaling $11.0 million and a note
payable totaling $1.1 million. Established in 1987, Hammonds Homes builds a wide
range of homes in communities throughout the Houston, Dallas/Ft. Worth and
Austin, Texas areas with a focus on serving the move-up housing market.
HANCOCK ACQUISITION. On May 30, 2001, we acquired substantially all of the
homebuilding and related assets of HC Builders, Inc. and Hancock Communities,
L.L.C. (collectively, "Hancock Communities" or "Hancock") The purchase price was
$65.8 million in cash, plus the assumption of accounts payable, accrued
liabilities and home sales deposits totaling $9.4 million and a note payable
totaling $1.9 million. In addition, we granted the founder of Hancock, an
earn-out, payable in cash over three years, equal to 20% of Hancock's pre-tax
net income after a 10.5% charge on capital. Hancock serves the first-time and
move-up markets throughout the Phoenix area.
The following unaudited pro forma financial data for the years ended
December 31, 2002, 2001 and 2000 has been prepared as if the acquisition of the
assets and liabilities of Hancock on May 30, 2001, had occurred on January 1,
2000, and as if the acquisitions of Hammonds on July 1, 2002 and Perma-Bilt on
October 1, 2002 had occurred on January 1, 2001. Unaudited pro forma financial
data is presented for informational purposes only and is based on historical
information. This information may not be indicative of our actual amounts had
the transactions occurred on the dates listed above, nor does it purport to
represent future periods (in thousands except per share amounts):
YEARS ENDED
DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Revenue $1,269,703 $1,063,733 $ 704,118
Earnings before extraordinary items 75,568 69,357 43,422
Net earnings 75,568 69,569 42,976
Diluted EPS before extraordinary items 6.09 5.89 3.80
Diluted EPS after extraordinary items 5.74 5.91 3.76
GOODWILL. Goodwill represents the excess of the purchase price of our
acquisitions over the fair value of the assets acquired. The acquisitions of
Hammonds, Perma-Bilt and Hancock were recorded using the purchase method of
accounting with the results of operations of these entities included in our
consolidated financial statements as of the date of the acquisition. The
purchase prices were allocated based on estimated fair value of the assets and
liabilities at the date of the acquisition. Intangible assets equal to the
excess purchase price over the fair value of the net assets of $21.3 million,
$17.2 million and $11.4 million for Hammonds, Perma-Bilt and Hancock,
respectively, were recorded as goodwill, which is presented on the consolidated
balance sheet. The Hancock goodwill was being amortized on a straight line basis
over a period of twenty years during fiscal 2001.
38
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The changes in the carrying amount of goodwill related to our reportable
segments for the year ended December 31, 2002 are as follows (in thousands):
TEXAS ARIZONA CALIFORNIA NEVADA TOTAL
----- ------- ---------- ------ -----
Balance, beginning of year $13,457 $15,084 $ 1,828 $ -- $30,369
Goodwill acquired during the year 21,250 -- -- 17,228 38,478
Increase in goodwill agreements due to earnout -- 4,571 -- 367 4,938
------- ------- ------- ------- -------
Balance, end of year $34,707 $19,655 $ 1,828 $17,595 $73,785
======= ======= ======= ======= =======
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, follows (in thousands,
except per share amounts):
2002 2001 2000
-------- -------- --------
Earnings before extraordinary items* $ 69,937 $ 50,892 $ 35,762
Extraordinary items, net of tax effects -- (233) --
-------- -------- --------
Net earnings $ 69,937 $ 50,659 $ 35,762
======== ======== ========
Weighted average number of shares outstanding 12,405 10,610 10,342
-------- -------- --------
BASIC:
Basic earnings per share before extraordinary items $ 5.64 $ 4.80 $ 3.46
Extraordinary items -- (0.02) --
-------- -------- --------
Basic earnings per share $ 5.64 $ 4.78 $ 3.46
======== ======== ========
DILUTED:
Weighted average number of shares outstanding 12,405 10,610 10,342
Effect of dilutive securities:
Contingent shares and warrants -- -- 38
Options to acquire common stock 766 1,166 1,048
-------- -------- --------
Diluted weighted common shares outstanding 13,171 11,776 11,428
======== ======== ========
Diluted earnings per share before extraordinary items $ 5.31 $ 4.32 $ 3.13
Extraordinary items -- (0.02) --
-------- -------- --------
Diluted earnings per share $ 5.31 $ 4.30 $ 3.13
======== ======== ========
Antidilutive stock options not included in the
calculation of diluted earnings per share 307 -- 76
======== ======== ========
* There were no reconciling items between earnings before extraordinary items
on a basic or diluted basis.
NOTE 6 - STOCK-BASED COMPENSATION
Our Board of Directors administers our current stock option plan which has
been approved by our stockholders. The plan authorizes grants of incentive stock
options and non-qualified stock options to our executives, directors, employees
and consultants and provides a means of performance-based compensation in order
to attract and retain qualified employees. At December 31, 2002, a total of
1,656,150 shares of Meritage common stock were reserved for issuance upon
exercise of stock options granted under this plan. The options vest over periods
from two to five years from the date such options were granted, are based on
continued employment or service and expire five to ten years after the date of
grant.
We apply APB Opinion No. 25 and related interpretations in accounting for
our plan. Under APB No. 25, if the exercise price of our stock options is at
least equal to the market price of the underlying stock on the date of the
39
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
grant, no compensation expense is recognized. Pro forma information regarding
net earnings and net earnings per share is required by SFAS No. 148 and is
included in Note 1.
The fair value for these options was established at the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions for the years presented:
2002 2001 2000
---- ---- ----
Expected dividend yield 0% 0% 0%
Risk-free interest rate 4.57% 4.79% 6.71%
Expected volatility 55% 55% 47%
Expected life (in years) 7 6 6
Weighted average fair value of options $23.48 $16.64 $ 5.67
OTHER OPTIONS
In connection with our merger and combination with Legacy Homes, Messrs.
Hilton and Landon each received 333,334 (adjusted for our 2-for-1 stock split)
non-qualified stock options with three year vesting periods. The exercise price
of these options was $2.625 (adjusted for our 2-for-1 stock split) per share,
which was negotiated at the time of the transactions. All of these options were
exercised by December 31, 2002.
SUMMARY OF STOCK OPTION ACTIVITY:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2002 2001 2000
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- --------- ----------- -------- ----------- --------
Options outstanding at beginning
of year 1,620,726 $ 18.12 1,788,000 $ 4.37 2,346,452 $ 3.83
Granted 320,000 38.76 643,900 15.17 179,600 5.22
Exercised (600,956) 4.83 (768,294) 3.32 (718,052) 2.50
Canceled (21,420) 17.25 (42,880) 7.88 (20,000) 6.09
----------- ----------- ----------
Options outstanding at end of year 1,318,350 $ 17.98 1,620,726 $ 9.06 1,788,000 $ 4.37
=========== =========== ==========
Options exercisable at end of year 285,690 588,588 1,175,400
Price range of options exercised $2.81 - $14.43 $2.625 - $8.815 $2.185 - $7.125
Price range of options outstanding $2.81 - $45.80 $2.625 - $20.885 $2.625 - $9.00
Total shares reserved at end of year 1,656,150 1,657,108 2,453,142
40
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 2002, WERE:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
----------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ---------------- ----- ----------- -----
$ 2.81 - $ 9.00 445,830 3.2 years $ 6.53 198,910 $ 6.34
$ 14.00 - $ 21.00 555,020 4.4 years 15.29 86,780 15.83
$ 31.00 - $ 45.80 317,500 6.6 years 38.76 -- --
----------- ---------
1,318,350 4.8 years $ 17.98 285,690 $ 9.22
=========== =========
NOTE 7 - INCOME TAXES
Total income tax expense (benefit) was allocated as follows (in thousands):
2002 2001 2000
-------- -------- --------
Income from continuing operations $ 43,607 $ 32,444 $ 21,000
Extraordinary items -- (149) --
-------- -------- --------
$ 43,607 $ 32,295 $ 21,000
======== ======== ========
Components of income tax expense attributable to income from continuing
operations are (in thousands):
2002 2001 2000
-------- -------- --------
Current taxes:
Federal $ 37,839 $ 29,295 $ 18,255
State 5,857 5,218 2,589
------- -------- --------
43,696 34,513 20,844
------- -------- --------
Deferred taxes:
Federal (75) (1,742) 140
State (14) (327) 16
-------- -------- --------
(89) (2,069) 156
-------- -------- --------
Total $ 43,607 $ 32,444 $ 21,000
======== ======== ========
Income taxes differ for the years ended December 31, 2002, 2001 and 2000,
from the amounts computed using the expected federal statutory income tax rate
of 35% as a result of the following (in thousands):
2002 2001 2000
-------- -------- --------
Expected taxes at current federal
statutory income tax rate $ 39,740 $ 29,355 $ 19,299
State income taxes 3,815 3,097 1,719
Non-deductible merger/acquisition
costs and other 52 (8) (18)
-------- -------- --------
Income tax expense $ 43,607 $ 32,444 $ 21,000
======== ======== ========
The actual tax provision differs from the expected tax expense computed by
applying the applicable United States federal corporate tax rate of 35% and the
composite state tax rates, which range from 0.0% to 6.4% to the income before
taxes for the years ended December 31, 2002, 2001 and 2000. This is principally
due to merger/acquisition costs and other various income and expense items that
are not deductible for tax purposes, including certain meal and entertainment
deductions.
41
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 at
December 31, 2002 and 2001 (in thousands):
2002 2001
-------- --------
Deferred tax assets:
Warranty reserve $ 1,854 $ 931
Real estate and fixed asset basis differences 2,296 450
Wages payable 690 1,719
Other 761 400
-------- --------
Total deferred tax assets 5,601 3,500
Deferred tax liabilities:
Deductible merger/acquisition costs (2,900) (888)
-------- --------
Net deferred tax asset $ 2,701 $ 2,612
======== ========
We believe it is more likely than not that future operating results will
generate sufficient taxable income to realize the net deferred tax asset.
NOTE 8 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Additional information related to our Consolidated Statements of Cash Flows
follows (in thousands):
The 2002 acquisitions of Hammonds and Perma-Bilt and the 2001 acquisition
of Hancock resulted in the following changes in assets and liabilities:
2002 2001
---------- ----------
Increase in real estate $ (99,836) $ (54,545)
Increase in deposits on real estate
under option or contract (3,176) (8,899)
Increase in receivables and other assets (3,514) (543)
Increase in goodwill (38,479) (11,423)
Increase in property and equipment (2,481) (1,632)
Increase in accounts payable and accrued
liabilities 14,142 6,890
Increase in home sale deposits 2,692 2,503
Increase in notes payable 1,070 1,890
--------- ---------
Net cash paid for acquisition $(129,582) $ (65,759)
========== ==========
2002 2001 2000
-------- -------- --------
Cash paid during the year for:
Interest $ 18,613 $ 14,722 $ 8,403
Income taxes $ 35,404 $ 31,160 $ 18,786
NOTE 9 - RELATED PARTY TRANSACTIONS
We have transacted business with related or affiliated companies and with
certain officers and directors of the Company. We believe that the terms and
fees negotiated for all transactions listed below are no less favorable than
those that could be negotiated in arm's length transactions.
Since 1997, we have leased office space in Plano, Texas from Home Financial
Services, a Texas partnership owned by John Landon, our co-chief executive
officer, and his wife. The lease expires in May 2005. Rents paid to the
partnership were $225,182, $193,771, and $185,613, in 2002, 2001 and 2000,
respectively, and were recorded as general and administrative expenses on our
consolidated statements of earnings.
42
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 2002, we chartered an aircraft from a company in which Steve Hilton,
our co-chief executive officer, has an ownership interest. The total amount paid
for the charter service in 2002 was approximately $128,000 which was included
within general and administrative expenses on our consolidated statements of
earnings.
We paid legal fees of approximately $432,000, $420,000 and $311,000 to law
firms of which C. Timothy White, one of our directors, is a partner, in 2002,
2001 and 2000, respectively. These fees were recorded as general and
administrative expenses on our consolidated statements of earnings.
One of our directors, Ray Oppel, has invested in various limited
partnerships that enter into landbanking transactions with us. Mr. Oppel's
limited partnership ownership percentage in these entities ranges from 21.5% to
34.2%. Mr. Oppel also has a 7.5% limited partnership interest in a joint venture
that sells lots to Hammonds Homes, which was made prior to our acquisition of
Hammonds. By the end of 2001, Mr. Oppel had discontinued making investments in
landbanking transactions that involved sales to Meritage.
In connection with our 2001 acquisition we assumed various existing
transactions between Greg Hancock and Hancock Communities. Greg Hancock was the
founder of Hancock Communities and from June 2002 until February 2003 was a
division president of Meritage. The following agreements are still in place:
Mr. Hancock is the majority owner of a venture that is developing a master
planned community in Buckeye, Arizona. We have entered into an option contract
to purchase approximately 586 acres of residential land in this community. At
December 31, 2002, we had paid option deposits to the venture totaling $750,000,
which is included in deposits on real estate under option or contract on our
accompanying balance sheet. In 2002 we purchased approximately 200 acres of this
residential land from the venture at a cost of approximately $5.2 million. We
did not purchase land from this entity in 2001. We also perform certain planning
and construction supervision functions for the venture for which we are paid a
management fee of 3% of the development costs. We earned approximately $808,700
and $173,000 in 2002 and 2001, respectively, pursuant to this arrangement, which
we recorded as other income in our statement of earnings.
At December 31, 2001, we owed approximately $1.9 million to a venture
controlled by Mr. Hancock that had sold land to Hancock. The note payable was
repaid in full in January 2002.
At December 31, 2001, Mr. Hancock owed us approximately $340,000, related
to the resolution of various post-closing matters pertaining to the Hancock
acquisition. This obligation was recorded as a receivable on our balance sheet
and was paid in full in January 2002.
In 2002 we purchased land from an independent third party to whom Mr.
Hancock had loaned money for the purpose of making the underlying debt service
payments on a parcel of land. In connection with our acquisition of this parcel,
we assumed the seller's obligation to repay the loan to Mr. Hancock, and at
December 31, 2002, we had a note payable to him for $850,000. This note relates
to a development in Arizona and will be repaid to Mr. Hancock as the homes in
that community close. The note is carried on our consolidated balance sheet
within notes payable.
NOTE 10 - SEGMENT INFORMATION
During 2002 we changed the composition of our reportable segments. We
classify our operations into four primary operating segments: Texas, Arizona,
California and Nevada. These segments generate revenue through home sales to
external customers and are not dependent on any one major customer. In 2001, we
classified our operations into two segments, first-time and volume priced homes,
and mid to luxury priced homes. This previous classification structure was based
on placing our various divisions into the two categories based on the primary
price range of homes built by that division. We changed our classification
structure because as our divisions broadened the price ranges of homes they
build, it became impractical to place a division in one or the other category.
Accordingly, the current structure summarizes our divisions by the states in
which they are located. We have restated the corresponding items of segment
information for earlier periods presented.
Operational information relating to our business segments follows.
Information has been included for Hammonds from July 1, 2002 and for Perma-Bilt
from October 1, 2002, the effective acquisition dates. 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, taxes and
43
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
extraordinary items (EBIT). The accounting policies of the business segments are
the same as those described in Note 1. There are no significant transactions
between our primary segments.
YEARS ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
(IN THOUSANDS)
HOME SALES REVENUE:
Texas $ 387,264 $ 259,725 $ 214,472
Arizona 445,275 325,918 175,674
California 245,640 156,933 125,282
Nevada 34,260 -- --
----------- ----------- -----------
Total $ 1,112,439 $ 742,576 $ 515,428
=========== =========== ===========
EBIT:
Texas $ 42,918 $ 43,420 $ 35,082
Arizona 57,685 35,432 17,666
California 36,418 23,604 16,819
Nevada 2,056 -- --
Corporate and other (6,274) (5,816) (3,626)
----------- ----------- -----------
Total $ 132,803 $ 96,640 $ 65,941
=========== =========== ===========
DECEMBER 31,
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
(IN THOUSANDS)
ASSETS AT YEAR END:
Texas $ 274,163 $ 139,288 $ 108,238
Arizona 230,176 198,637 102,746
California 113,467 88,056 53,723
Nevada 62,143 -- --
Corporate and other 11,839 10,734 2,368
----------- ----------- -----------
Total $ 691,788 $ 436,715 $ 267,075
=========== =========== ===========
NOTE 11- COMMITMENTS AND CONTINGENCIES
We are involved in various routine legal proceedings incidental to our
business, some of which are covered by insurance. With respect to all pending
litigation matters, our ultimate legal and financial responsibility, if any,
cannot be estimated with certainty and, in most cases, potential losses related
to those matters are not considered probable. We have accrued approximately
$937,000 for losses related to potential litigation where our ultimate exposure
is considered probable and the potential loss can be reasonably estimated which
is classified within accrued liabilities on our December 31, 2002 balance sheet.
We believe that none of these matters will have a material adverse impact upon
our consolidated financial condition, results of operations or cash flows.
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, 2002, we had outstanding letters of credit of $16.2
million and performance bonds of $72.9 million. We do not believe that these
letters of credit or bonds will be drawn upon.
As a part of our model home construction activities, we enter into lease
transactions with third parties. The total cost, including land, and
construction of model homes leased by us under these lease agreements is
approximately $38.6 million, all of which is excluded from our balance sheet as
of December 31, 2002.
44
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We lease office facilities, model homes and equipment under various
operating lease agreements. Approximate minimum lease payments for
non-cancelable operating leases as of December 31, 2002, are as follows (in
thousands):
YEARS ENDED
DECEMBER 31,
2003..................................... $ 3,645
2004..................................... 1,973
2005..................................... 1,248
2006..................................... 242
2007..................................... 19
Thereafter............................... --
-------
$ 7,127
=======
Rent expense approximated $3.4 million, $2.5 million and $1.6 million in
2002, 2001 and 2000, respectively, and is recorded as general and administrative
expense.
We have certain obligations related to post-construction warranties and
defects related to homes sold. Historically, these amounts have not been
material and we do not anticipate future obligations to be material. At December
31, 2002, we had approximately $6.7 million in reserves for various warranty
claims. Summaries of our warranty reserve follow:
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
------- -------
Warranty reserve, beginning of year $ 4,071 $ 2,320
Additions to reserve 7,041 4,771
Warranty claims and expenses (4,436) (3,020)
------- -------
Warranty reserve, end of year $ 6,676 $ 4,071
======= =======
Warranty reserves are included in accrued liabilities within the
accompanying consolidated balance sheets. Additions to warranty reserves are
included within cost of sales in the accompanying statements of earnings.
NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results for the years ended December 31, 2002 and 2001 follow (in
thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
2002
- ----
Revenue $ 169,731 $ 251,441 $ 329,129 $ 369,516
Gross profit 31,636 50,092 64,406 68,762
Earnings before income taxes 14,043 24,806 36,746 37,949
Net earnings 8,566 14,938 22,437 23,996
Per Share Data:
Basic earnings per share $ 0.77 $ 1.28 $ 1.66 $ 1.80
Diluted earnings per share $ 0.72 $ 1.19 $ 1.58 $ 1.72
2001
- ----
Revenue $ 116,706 $ 175,408 $ 207,177 $ 244,883
Gross profit 23,596 37,636 45,709 50,319
Earnings before income taxes and
extraordinary items 12,181 21,144 23,991 26,020
Extraordinary items, net of tax effects -- (445) 212 --
Net earnings 7,389 12,493 14,887 15,890
Per Share Data:
Basic earnings per share $ 0.72 $ 1.22 $ 1.37 $ 1.47
Extraordinary items, net of tax effects -- (.04) .02 --
--------- --------- --------- ---------
Net earnings per share $ 0.72 $ 1.18 $ 1.39 $ 1.47
========= ========= ========= =========
Diluted earnings per share
Earnings before extraordinary items $ 0.64 $ 1.10 $ 1.23 $ 1.35
Extraordinary items, net of tax effects -- (0.04) 0.02 --
--------- --------- --------- ---------
Net earnings per share $ 0.64 $ 1.06 $ 1.25 $ 1.35
========= ========= ========= =========
45
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required in response to this item is incorporated by reference
from our definitive proxy statement for our 2003 Annual Meeting of stockholders
to be held on May 21, 2003, which proxy statement will be filed with the SEC not
later than 120 days after year end. With the exception of the foregoing
information and other information specifically incorporated by reference into
this Form 10-K Report, our 2003 Proxy Statement is not being filed as a part of
this report.
ITEM 11. EXECUTIVE COMPENSATION
Information required in response to this item is incorporated by reference
from our definitive proxy statement for our 2003 Annual Meeting of stockholders
to be held on May 21, 2003, which proxy statement will be filed with the SEC not
later than 120 days after year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following sets forth information as of December 31, 2002 about the
number of shares of our common stock to be issued upon exercise of outstanding
options and the number of shares of our common stock remaining available for
future issuance under existing equity compensation plans for (1) plans approved
by stockholders and (2) plans not approved by stockholders. We have no
outstanding warrants or stock appreciation rights.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF (EXCLUDING SECURITIES
PLAN CATEGORY OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (A))
------------- ---------------------- ------------------- ------------------------
(a) (b) (c)
Equity Compensation Plans
Approved by Stockholders 1,318,350 $17.98 337,800
Equity Compensation Plans
Not Approved by Stockholders -- -- --
--------- ------ -------
Total 1,318,350 $17.98 337,800
========= ====== =======
At December 31, 2002, we did not have any equity compensation plans that
had been adopted without stockholder approval.
Additional information required in response to this item is incorporated by
reference from our definitive proxy statement for our 2003 Annual Meeting of
stockholders to be held on May 21, 2003, which proxy statement will be filed
with the SEC not later than 120 days after year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required in response to this item is incorporated by reference
from our definitive proxy statement for our 2003 Annual Meeting of stockholders
to be held on May 21, 2003, which proxy statement will be filed with the SEC not
later than 120 days after year end.
47
ITEM 14. CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in our filings
with the SEC is recorded, processed, summarized and reported on a timely basis,
we have formalized our disclosure controls and procedures. Our co-chief
executive officers and principal financial officer have reviewed and evaluated
the effectiveness of our disclosure controls and procedures, as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c), as of a date within 90 days prior to
the filing date of this report (the "Evaluation Date"). Based on such
evaluation, these officers have concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective in timely alerting them to
material information relating to Meritage (and our consolidated subsidiaries)
required to be included in our periodic SEC fillings. Since the Evaluation Date,
there have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
Evaluation Date.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional audit services rendered
by our principal accountant, KPMG LLP, for the audit of our annual financial
statements for 2002 and 2001, and fees billed for other services rendered by
KPMG LLP.
2002 2001
-------- --------
Audit fees $238,245 $150,000
Audit related fees (1) 134,074 110,808
-------- --------
Audit and audit related fees 372,319 260,808
Tax fees (2) 119,893 240,845
All other fees (3) -- 24,186
-------- --------
Total fees $492,212 $525,839
======== ========
(1) Audit related fees consisted principally of fees for services related to
SEC filings and research, the 2002 acquisitions of Hammonds and Perma-Bilt,
our 2002 equity offering and the audit of our 401(k) Plan.
(2) Tax fees consisted of fees for income tax consulting and tax compliance,
including preparation of our state and federal income tax returns.
(3) All other fees consisted of fees for management advisory services.
PART IV
ITEM 16. 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 27
(2) Consolidated Financial Statements and Notes Page 28
to Consolidated Financial Statements of the
Company, including Consolidated Balance
Sheets as of December 31, 2002 and 2001 and
related Consolidated Statements of Earnings,
Stockholders' Equity and Cash Flows for each
of the years in the three-year period ended
December 31, 2002
(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.
48
(b) REPORTS ON FORM 8-K
On October 9, 2002, we filed a Current Report on Form 8-K describing
the completion of our acquisition of the homebuilding assets of Perma-Bilt
Homes.
On October 23, 2002, we filed a Current Report on Form 8K/A amending
Form 8-K dated October 7, 2002 to include transaction documents relating to
our acquisition of Perma-Bilt Homes.
(c) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE OR METHOD OF FILING
- ------ ----------- ------------------------
2.1 Agreement and Plan of Reorganization, dated as of Incorporated by reference to Exhibit 2 of Form S-4
September 13, 1996, by and among Homeplex, the Registration Statement No. 333-15937.
Monterey Merging Companies and the Monterey
Stockholders
2.2 Agreement of Purchase and Sale of Assets, dated Incorporated by reference to Exhibit 2 of Form 8-K/A
as of May 20, 1997, by and among Monterey, Legacy dated June 18, 1997.
Homes, Ltd., Legacy Enterprises, Inc., and John
and Eleanor Landon
2.3 Agreement of Purchase and Sale of Assets, dated Incorporated by reference to Exhibit 2.2 of Form 10-Q for
as of June 15, 1998, by and among the Company, the quarterly period ended June 30, 1998.
Sterling Communities, S.H. Capital, Inc.,
Sterling Financial Investments, Inc., Steve
Hafener and W. Leon Pyle
2.4 Master Transaction Agreement, dated May 7, 2001, Incorporated by reference to Exhibit 2.1 of Form 8-K
by and among the Company, Hancock-MTH Builders, dated May 10, 2001.
Inc., Hancock-MTH Communities, Inc., HC Builders,
Inc. and Hancock Communities, L.L.C.
2.4.1 Amendment No. 1 to Master Transaction Agreement Incorporated by reference to Exhibit 2.1 of Form 8-K
and Agreement of Purchase and Sale of Assets, dated June 6, 2001.
dated May 30, 2001, by and between Meritage
Corporation, Meritage-MTH Communities, Inc., HC
Builders, Inc., Hancock Communities, L.L.C. and
American Homes West, Incorporated
2.5 Master Transaction Agreement, dated June 12, Incorporated by reference to Exhibit 10.1 of Form 8-K
2002, by and among the Company, MTH Homes-Texas, dated July 12, 2002.
L.P., Hammonds Homes Ltd., Crystal City Land &
Cattle, Ltd., Hammonds Homes I, LLC, Crystal City
I, LLC and Ronnie D. Hammonds
2.5.1 Amendment No. 1 to Master Transaction Agreement, Incorporated by reference to Exhibit 10.2 of Form 8-K
dated June 12, 2002, by and among the Company, dated July 12, 2002.
MTH Homes-Texas, L.P., Hammonds Homes Ltd.,
Crystal City Land & Cattle, Ltd., Hammonds Homes
I, LLC, Crystal City I, LLC and Ronnie D. Hammonds
49
2.6 Master Transaction Agreement, dated October 7, Incorporated by reference to Exhibit 10.1 of Form 8-K/A
2002, by and among the Company, MTH-homes Nevada, dated October 7, 2002.
Inc., Perma-Bilt, A Nevada Corporation, and
Zenith National Insurance Corp.
3.1 Amendment to Articles of Incorporation Incorporated by reference to Exhibit 3.1 of Form 10-Q for
the quarterly period ended September 30, 1998.
3.2 Restated Articles of Incorporation Incorporated by reference to Exhibit 3 of Form 8-K dated
June 20, 2002.
3.3 Amended and Restated Bylaws Incorporated by reference to Exhibit 3.3 of Form S-3
#333-58793.
4.1 Form of Specimen of Common Stock Certificate Incorporated by reference to Exhibit 4.2 of Form S-3
dated May 1, 2002.
4.3 Indenture, dated May 31, 2001, by and among the Incorporated by reference to Exhibit 4.1 of Form 8-K
Company, the Guarantors named therein and Wells dated June 6, 2001.
Fargo Bank, N.A.
4.3.1 First Supplemental Indenture, dated September 20, Filed herewith.
2001, by and among the Company, Hulen Park
Venture, LLC, Meritage Holdings, L.L.C., the
Guarantors named therein and Wells Fargo Bank,
N.A.
4.3.2 Second Supplemental Indenture, dated July 12, Filed herewith.
2002, by and among the Company, MTH Homes-Texas,
L.P., MTH-Texas GP II, Inc., MTH-Texas LP, II,
Inc., the Guarantors named therein and Wells
Fargo Bank, N.A.
4.3.3 Third Supplemental Indenture, dated October 21, Filed herewith.
2002, by and among the Company, MTH-Homes Nevada,
Inc., the Guarantors named therein and Wells
Fargo Bank, N.A.
4.3.4 Fourth Supplemental Indenture, dated February 19, Filed herewith.
2003 by and among the Company, MTH-Cavalier, LLC,
the Guarantors named therein and Wells Fargo Bank,
N.A.
10.1 $250 Million Credit Agreement, dated December 12, Filed herewith.
2002, by and among the Company, Guaranty Bank,
Fleet National Bank, Bank One, NA and the other
lenders thereto.
10.2 2001 Annual Incentive Plan* Incorporated by reference to Exhibit B of the Proxy
Statement for the 2001 Annual Meeting of Stockholders.
10.3 Employment Agreement, dated May 30, 2001, by and Incorporated by reference to Exhibit 10.2 of Form 8-K
among the Company, Hancock MTH Builders, Inc., dated June 6, 2001.
Hancock Communities, Inc. and Greg Hancock*
50
10.4 Employment Agreement between the Company and Incorporated by reference to Exhibit 10.1 of Form 10-Q
Larry W. Seay* for the quarterly period ended September 30, 2001.
10.5 Change of Control Agreement between the Company Incorporated by reference to Exhibit 10.3 of Form 10-Q
and Steven J. Hilton* for the quarterly period ended March 30, 2000.
10.6 Change of Control Agreement between the Company Incorporated by reference to Exhibit 10.4 of Form 10-Q
and John R. Landon* for the quarterly period ended March 30, 2000.
10.7 Change of Control Agreement between the Company Incorporated by reference to Exhibit 10.5 of Form 10-Q
and Larry W. Seay* for the quarterly period ended March 30, 2000.
10.8 Change of Control Agreement between the Company Incorporated by reference to Exhibit 10.6 of Form 10-Q
and Richard T. Morgan* for the quarterly period ended March 30, 2000.
10.9 Deferred Bonus Agreement-2001 Award Year- between Incorporated by reference to Exhibit 10.2 of Form 8-K
the Company and Larry W. Seay* dated June 20, 2002.
10.10 Deferred Bonus Agreement-2002 Award Year- Filed herewith.
between the Company and Larry W. Seay*
10.11 Deferred Bonus Agreement-2001 Award Year- between Incorporated by reference to Exhibit 10.3 of Form 8-K
the Company and Richard T. Morgan* dated June 20, 2002.
10.12 Deferred Bonus Agreement-2001 Award Year- between Filed herewith.
the Company and Richard T. Morgan*
10.13 Registration Rights Agreement, dated February Incorporated by reference to Exhibit 10.1 of Form 8-K
21, 2003, by and among the Company, the dated February 21, 2003.
Guarantors named therein, Deutsche Bank
Securities, Inc., UBS Warburg LLC, Banc One
Capital Markets, Inc. and Fleet Securities, Inc.
14 Code of Ethics Filed herewith.
21 List of Subsidiaries Filed herewith.
23.1 Consent of KPMG LLP Filed herewith.
24 Powers of Attorney See signature page.
99.1 Certificate of Steven J. Hilton, Co-Chief Filed herewith.
Executive Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certificate of John R. Landon, Co-Chief Executive Filed herewith.
Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Certificate of Larry W. Seay, Chief Financial Filed herewith.
Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------
* Indicates a management contract or compensation plan.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 31st
day of March 2003.
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/ JOHN R. LANDON Co-Chairman and March 31, 2003
- ----------------------- Chief Executive Officer
John R. Landon
/s/ STEVEN J. HILTON Co-Chairman and March 31, 2003
- ----------------------- Chief Executive Officer
Steven J. Hilton
/s/ LARRY W. SEAY Chief Financial Officer, Vice March 31, 2003
- ----------------------- President-Finance, and Secretary
Larry W. Seay (Principal Financial Officer)
/s/ VICKI L. BIGGS Controller and March 31, 2003
- ----------------------- Chief Accounting Officer
Vicki L. Biggs
/s/ RAYMOND OPPEL Director March 31, 2003
- -----------------------
Raymond Oppel
/s/ ROBERT G. SARVER Director March 31, 2003
- -----------------------
Robert G. Sarver
/s/ C. TIMOTHY WHITE Director March 31, 2003
- -----------------------
C. Timothy White
/s/ PETER L. AX Director March 31, 2003
- -----------------------
Peter L. Ax
/s/ WILLIAM CAMPBELL Director March 31, 2003
- -----------------------
William Campbell
S-1
CERTIFICATION OF THE CO-CHIEF EXECUTIVE OFFICER
I, John R. Landon, certify that:
1. I have reviewed this annual report on Form 10-K of Meritage Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ JOHN R. LANDON
----------------------------------------
John R. Landon
Co-Chief Executive Officer
CERTIFICATION OF THE CO-CHIEF EXECUTIVE OFFICER
I, Steven J. Hilton, certify that:
1. I have reviewed this annual report on Form 10-K of Meritage Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ STEVEN J. HILTON
----------------------------------------
Steven J. Hilton
Co-Chief Executive Officer
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Larry W. Seay, certify that:
1. I have reviewed this annual report on Form 10-K of Meritage Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ LARRY W. SEAY
----------------------------------------
Larry W. Seay
Chief Financial Officer