SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM  10-K

 

ý       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2003

 

OR

 

o       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

 

 

(Exact Name of Registrant as specified in its charter)

 

Maryland

 

86-0611231

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

8501 E. Princess Drive, Suite 290, Scottsdale, Arizona

 

85255

(Address of principal executive offices)

 

(Zip Code)

 

(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 ý       No o

 

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.  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ý No o

 

The aggregate market value of common stock held by non-affiliates of the registrant (9,965,938 shares) as of June 30, 2003, was $490,922,106, 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 (10,635,091 shares) as of March 5, 2004, was $833,259,380, 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 5, 2004 was 13,252,767.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions from the registrant’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2004 have been incorporated by reference into Part III, Items 10, 11, 12, 13 and 14.

 

 



 

MERITAGE CORPORATION

FORM 10-K

TABLE OF CONTENTS

 

PART I

 

 

 

 

 

 

 

Item 1.

Business

 

 

 

 

 

 

Item 2.

Properties

 

 

 

 

 

 

Item 3.

Legal Proceedings

 

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

Market For the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

 

 

 

 

 

Item 6.

Selected Financial Data

 

 

 

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

Item 8.

Financial Statements and Supplementary Data

 

 

 

 

 

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

 

 

 

 

 

Item 9A.

Controls and Procedures

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

Directors and Executive Officers of the Registrant

 

 

 

 

 

 

Item 11.

Executive Compensation

 

 

 

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

 

 

 

 

 

Item 13.

Certain Relationships and Related Transactions

 

 

 

 

 

 

Item 14.

Principal Accountant Fees and Services

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

 

 

 

 

 

SIGNATURES

 

 

 

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PART I

 

Item 1.  Business

 

The Company

 

Meritage Corporation is a leading designer and builder of single-family homes in the rapidly growing Sunbelt states of Texas, Arizona, California and Nevada, based on the number of homes closed.  We focus on providing a broad range of first-time, move-up, active adult and luxury homes to our targeted customer base.  We 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.  In addition, we entered the Inland Empire market of Southern California in January 2004 with our acquisition of Citation Homes of Southern California.

 

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, in Southern California as Citation Homes of Southern California and in Nevada as Perma-Bilt Homes.  We classify the four states in which we operate as our principal business segments.  Financial information for these reportable segments can be found in our consolidated financial statements included in Item 8 of this report, as presented in Note 11 – Operating and Reporting Segments.  At December 31, 2003, we were actively selling homes in 123 communities, with base prices ranging from $98,000 to $730,000.

 

Available Information; Corporate Governance

 

Information about our company and communities is provided on our Internet website 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, at no cost, 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 annual report on Form 10-K.

 

Meritage operates within a comprehensive plan of corporate governance for the purpose of defining responsibilities and setting high standards for ethical conduct.  Our Board of Directors has established an audit committee, executive compensation committee and nominating/governance committee.  The charters of each of these committees are included on our website.  In addition, we have included on our website our Code of Ethics and our Corporate Governance Principles and Practices.  We will make our committee charters, Code of Ethics and Corporate Governance Principles and Practices available in print to any stockholder who requests it.  You may request a copy of this information, at no cost, by calling us or by writing to us at our principal executive offices in Arizona at the following address:  Meritage Corporation, 8501 East Princess Drive, Suite 290, Scottsdale, Arizona 85255, Attention:  Investor Relations.  Our telephone number is (480) 609-3330.

 

Competitive Strengths

 

We believe Meritage Corporation possesses 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 84% of our land inventory through rolling options with initial deposit requirements typically between 1% and 15% of the land price;

 

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                  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 our new communities, both through internal growth and acquisition, 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 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 and customer incentives.

 

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 18 years of homebuilding experience and each has delivered successful results through varying homebuilding cycles.  In addition, at December 31, 2003, our co-chief executive officers together beneficially owned approximately 18% 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, move-up, and the active adult markets. We also build within the Arizona luxury market, and since 2002, in the Texas and California luxury markets, which are characterized by unique communities and distinctive luxury homes.  In Texas we mainly target the first and second-time move-up markets, and in 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, and 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 six acquisitions (including our January 2004 acquisition of Citation Homes of Southern California), enabling us to substantially increase our revenue and earnings, expand our geographic footprint, increase our market share in existing markets and add new product lines, such as active adult housing for the Arizona retirement market.

 

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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 minimizing 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 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 continually inform customers 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 $98,000 to $730,000.  A summary of activity by state and product type as of and for the year ended December 31, 2003, follows (dollars in thousands):

 

 

 

Number
of Homes
Closed

 

Average
Closing
Price

 

Homes
in
Backlog

 

Dollar
Value of
Backlog

 

Home Sites
Remaining(1)

 

Number of
Active
Communities

 

Texas - First-time

 

6

 

$

147

 

8

 

$

1,124

 

181

 

 

Texas - Move-up

 

2,767

 

200

 

1,092

 

231,946

 

11,525

 

71

 

Texas – Luxury

 

55

 

443

 

19

 

8,349

 

174

 

2

 

Arizona – Active Adult

 

233

 

197

 

145

 

28,896

 

6,310

 

8

 

Arizona - First-time

 

150

 

125

 

91

 

11,283

 

1,560

 

2

 

Arizona - Move-up

 

1,028

 

267

 

526

 

142,171

 

4,322

 

19

 

Arizona – Luxury

 

104

 

737

 

70

 

56,009

 

327

 

5

 

California - Move-up

 

355

 

377

 

257

 

99,208

 

2,550

 

10

 

California – Luxury

 

380

 

528

 

148

 

78,147

 

999

 

4

 

Nevada - Move-up

 

564

 

238

 

224

 

53,638

 

2,564

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Company

 

5,642

 

$

259

 

2,580

 

$

710,771

 

30,512

 

123

 

 


(1)                                  “Home Sites Remaining” is the estimated number of homes that could be built both on the remaining lots available for sale and land expected to be developed into lots.

 

Land Acquisition and Development

 

We typically acquire 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

 

5



 

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 joint venture partners.

 

We select land for development based upon a variety of factors, including:

 

                  extensive 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.

 

We acquire land through purchases and rolling option contracts. Purchases are generally 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 at a certain price during a specified period of time from these third parties as home construction begins.  These contracts are generally non-recourse and typically require the payment of non-refundable deposits of 1% to 15% of the sales price.  At December 31, 2003, we had approximately $106.8 million in cash deposits and $17.5 million in letters of credit deposits on real estate under option or contract.  The total value of land under option at that time was approximately $1.1 billion.  Additional information relating to our lots and land under option is presented in Note 3 – Variable Interest Entities and Consolidated Real Estate Not Owned in the accompanying consolidated financial statements.

 

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 the 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, 2003, we were involved in five joint ventures related exclusively to land acquisition or development, which are accounted for using the equity method of accounting.  Our investment in these entities was approximately $22.7 million at the end of 2003.

 

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The following table presents information regarding land owned or land under contract or option by market as of December 31, 2003.  The number of lots is based on current management estimates, which are subject to change (dollars in thousands).

 

 

 

Land Owned (1)

 

Land Under Contract or Option (1) (2)

 

 

 

 

 

Finished
Lots

 

Lots Under
Development

 

Lots Held for
Development

 

Finished
Lots

 

Lots Under
Development

 

Lots Held
for
Development

 

Total

 

TEXAS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dallas/Ft. Worth

 

1,124

 

455

 

317

 

679

 

1,073

 

163

 

3,811

 

Houston

 

716

 

135

 

 

665

 

1,495

 

 

3,011

 

Austin

 

463

 

20

 

81

 

553

 

704

 

422

 

2,243

 

San Antonio

 

18

 

 

 

48

 

1,549

 

 

1,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Texas

 

2,321

 

610

 

398

 

1,945

 

4,821

 

585

 

10,680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARIZONA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Phoenix/Scottsdale

 

660

 

 

 

471

 

6,089

 

224

 

7,444

 

Tucson

 

248

 

 

 

377

 

3,589

 

1,455

 

5,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Arizona

 

908

 

 

 

848

 

9,678

 

1,679

 

13,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CALIFORNIA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sacramento

 

73

 

74

 

 

27

 

897

 

 

1,071

 

East San Francisco Bay

 

47

 

20

 

 

367

 

1,418

 

 

1,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total California

 

120

 

94

 

 

394

 

2,315

 

 

2,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NEVADA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Las Vegas

 

 

208

 

 

 

294

 

2,477

 

2,979

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

3,349

 

912

 

398

 

3,187

 

17,108

 

4,741

 

29,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total book cost (3)

 

$

166,454

 

$

71,540

 

$

13,737

 

$

22,742

 

$

56,430

 

$

26,405

 

$

357,308

 

 


(1)                                  Excludes lots with finished homes or homes under construction.  The numbers of lots under development and lots held for development are estimates.

 

(2)                                  There can be no assurance that we will actually acquire any lots under option or properties in which we have entered into a variety of contractual relationships, including binding purchase agreements with customary conditions precedent and other similar arrangements.  These amounts do not include 1,499 lots under contract with refundable earnest money deposits of $1.2 million for which we have not completed due diligence and, accordingly, have no money at risk and are under no obligation to perform under the contract.

 

(3)                                  For Land Owned, book cost primarily represents land, development and interest costs.  For Land Under Contract or Option, book cost primarily represents earnest deposits, option deposits and pre-acquisition costs.

 

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 on an individual basis after receiving competitive bids. 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 to minimize costs of

 

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construction. 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, 2003, we employed 438 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 typically have not entered into any weather or materials commodity futures derivative contracts as we do not believe they are particularly advantageous to our operations.

 

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 with many built-in options for each product line within a project. We generally build between one and four model homes for each actively selling 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, 2003, follows:

 

 

 

Model Homes
Owned

 

Model Homes
Leased

 

Monthly Lease
Amount

 

Models Under
Construction

 

Texas

 

67

 

64

 

$

48,400

 

18

 

Arizona

 

19

 

104

 

119,300

 

16

 

California

 

3

 

47

 

63,800

 

26

 

Nevada

 

4

 

8

 

7,000

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

93

 

223

 

$

238,500

 

60

 

 

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, 2003, we had 222 sales and marketing personnel.  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 associates 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.  Our

 

8



 

sales associates 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 associates assist our customers in selecting upgrades or in adding available customization features to their homes, which we design to appeal to local consumer demands.  Occasionally we offer various sales incentives, such as landscaping and certain interior upgrades, to attract buyers.  The use and type of incentives depends largely on economic and local 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, 2003, 14% of our lots in inventory were homes under construction without sales contracts, and 12% of the number of lots in inventory consisted of completed homes without sales contracts.  We believe that we will deliver substantially all homes in backlog at December 31, 2003 to customers during 2004.

 

Our backlog increased to 2,580 units with a value of $710.8 million at December 31, 2003 from 2,070 units with a value of $537.8 million at December 31, 2002.  These increases are primarily due to additional communities that opened for sale in 2003, along with continued strong 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 facilitate obtaining customer 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 homebuyers, 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, rising mortgage interest rates and increases in unemployment 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.

 

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

 

9



 

warranty costs are established based on historical experience within each division or region, and are recorded when the homes are closed.  Reserves generally range from 0.20% to 0.75% of a home’s sale price.  Historically, these reserves have been sufficient to cover warranty repairs.  Our warranty reserve at December 31, 2003 was $9.3 million, which covered approximately 7,377 homes under warranty at that time.

 

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 acquire 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 acquire property on, among other things, an environmental review of the land.  To date, we have not incurred any unanticipated liabilities relating to the removal of unknown toxic wastes or other environmental matters.  However, there is no assurance that we will not incur material liabilities in

 

10



 

the future relating to toxic waste removal or other environmental matters affecting land currently or previously owned.

 

Employees and Subcontractors

 

At December 31, 2003, we had approximately 953 full-time employees, including 293 in management and administration, 222 in sales and marketing, and 438 in construction operations.  Our employees are not unionized, and we believe that we have good employee relationships. We believe we provide competitive group life and medical insurance programs for full-time employees at each location.  The Company pays for a substantial portion of the insurance costs, with the balance contributed by the employees.  We also have a 401(k) savings plan, which is available to most of our employees.

 

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 strive to maintain good relationships with our subcontractors and independent contractors.

 

Joint Ventures

 

We participate in several joint ventures with independent third parties in which we have less than a controlling interest.  These joint ventures are involved in mortgage brokerage, title services and the purchase, development and/or sale of land.  We do not recognize profits from lots or land that we purchase from the joint ventures, but instead defer any profits until the related homes are sold by us.  At December 31, 2003, we had approximately $22.7 million invested in joint ventures involved in the purchase, development and/or sale of land.  We also had approximately $800,000 invested in mortgage brokerage and title service joint ventures.  Our share of 2003 pre-tax earnings of our joint ventures was approximately $3.9 million.

 

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 116,300 square feet of office space in our markets for our operating divisions and corporate and executive offices.   These leases expire between August 2004 and April 2010, and upon expiration of our existing leases, we expect to renew them or obtain like facilities on somewhat comparable terms.

 

As of December 31, 2003, we also had leases for 223 model homes and lots with terms ranging from three months to 48 months, with various renewal options.  Our aggregate monthly lease amount is approximately $238,500.

 

The following schedule summarizes our leased real estate for each of our operating segments.

 

 

 

Monthly Office
Lease Amount

 

Approximate
Square Footage

 

Monthly Model
Lease Amount

 

Number of
Model Homes

 

Texas

 

$

48,400

 

38,300

 

$

48,400

 

64

 

Arizona

 

63,900

 

29,200

 

119,300

 

104

 

California

 

34,700

 

30,500

 

63,800

 

47

 

Nevada

 

9,300

 

6,000

 

7,000

 

8

 

Corporate

 

25,600

 

12,300

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

181,900

 

116,300

 

$

238,500

 

223

 

 

11



 

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 the majority of 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.  At December 31, 2003, we had approximately $720,000 in accrued legal expenses and settlement costs reserved for losses related to litigation and asserted claims where our ultimate exposure is considered probable and the potential loss can be reasonably estimated. Most of these matters relate to correction of home construction defects, foundation issues and general customer claims.  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

 

No matters were submitted to a vote of security holders during the quarter ended December 31, 2003.

 

Executive Officers of the Registrant

 

The executive officers of the Company are elected each year at an organizational meeting of the Board of Directors, which follows the annual meeting of the stockholders, and at other Board of Directors meetings as appropriate.

 

The names, ages, positions and business experience of our executive officers are listed below (all ages are as of March 1, 2004).  There are no understandings between any of our executive officers and any other person pursuant to which any executive officer was appointed to his office.

 

Name

 

Age

 

Position

 

 

 

 

 

Steven J. Hilton

 

42

 

Co-Chairman of the Board and Chief Executive Officer

John R. Landon

 

46

 

Co-Chairman of the Board and Chief Executive Officer

Larry W. Seay

 

48

 

Chief Financial Officer, Vice President-Finance and Secretary

Richard T. Morgan

 

48

 

Vice President and Treasurer

 

Steven J. Hilton co-founded Monterey Homes in 1985, which merged with the Company’s predecessor in December 1996.  Mr. Hilton was chairman and chief executive officer from January 1997 through July 1997 and has been co-chairman and CEO since July 1997.

 

John R. Landon founded Legacy Homes in 1987, which combined with the Company in July 1997.  Mr. Landon has been co-chairman and CEO since July 1997.

 

Larry W. Seay has been chief financial officer and vice president-finance since December 1996 and was named as secretary in 1997.  Mr. Seay served as treasurer from 1997 to 2002.

 

Richard T. Morgan has been vice president since April 1998 and was appointed the Company’s treasurer in 2002.

 

12



 

PART II

 

Item 5.  Market For the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

General

 

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “MTH”.  The high and low sales prices per share of our common stock for the periods indicated, as reported by the NYSE, were:

 

 

 

2003

 

2002

 

Quarter Ended

 

High

 

Low

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

March 31

 

$

37.85

 

$

29.00

 

$

35.12

 

$

23.28

 

June 30

 

$

53.80

 

$

33.05

 

$

47.10

 

$

31.22

 

September 30

 

$

54.60

 

$

42.10

 

$

46.25

 

$

26.38

 

December 31

 

$

69.60

 

$

47.05

 

$

42.20

 

$

28.90

 

 

On March 5, 2004, the closing sales price of the common stock as reported by the NYSE was $78.35 per share.  At that date, there were approximately 198 owners of record.  There are approximately 3,159 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 have not declared cash dividends for the past seven years, nor do we intend to declare cash dividends in the foreseeable future.  Earnings will be retained 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 certain restrictive debt covenants, as well as other factors considered relevant by our Board of Directors.  The indenture for our 9.75% senior notes due 2011 and our unsecured revolving credit facility restrict our ability to pay dividends.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and “Consolidated Financial Statements, Note 4.”

 

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, 2003.  The financial data has been derived from our consolidated financial statements and related notes for the periods presented, audited by KPMG LLP, independent auditors.   This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and the Results of Operations” and the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.  These historical results may not be indicative of future results.

 

The data in the table includes the operations of Hancock Communities, Hammonds Homes and Perma-Bilt Homes since their dates of acquisition, May 2001, July 2002, and October 2002, respectively.

 

13



 

 

 

Historical Consolidated Financial Data
Years Ended December 31,
($ in thousands, except per share amounts)

 

 

 

2003

 

2002

 

2001

 

2000

 

1999

 

Statement of Earnings Data:

 

 

 

 

 

 

 

 

 

 

 

Total closing revenue

 

$

1,471,001

 

$

1,119,817

 

$

744,174

 

$

520,467

 

$

341,786

 

Total cost of closings

 

(1,178,484

)

(904,921

)

(586,914

)

(415,649

)

(277,287

)

Gross profit

 

292,517

 

214,896

 

157,260

 

104,818

 

64,499

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions and other sales costs

 

(92,904

)

(65,291

)

(41,085

)

(28,680

)

(19,243

)

General and administrative expenses (1)

 

(53,929

)

(41,496

)

(36,105

)

(21,215

)

(15,100

)

Other income, net

 

5,776

 

5,435

 

2,884

 

1,847

 

2,064

 

Interest expense

 

 

 

 

(8

)

(6

)

Earnings before income taxes

 

151,460

 

113,544

 

82,954

 

56,762

 

32,214

 

Income taxes(1)

 

(57,054

)

(43,607

)

(32,295

)

(21,000

)

(13,269

)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

94,406

 

$

69,937

 

$

50,659

 

$

35,762

 

$

18,945

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share: (2)

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

7.24

 

$

5.64

 

$

4.78

 

$

3.46

 

$

1.75

 

Diluted

 

$

6.84

 

$

5.31

 

$

4.30

 

$

3.13

 

$

1.57

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (December 31):

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

$

678,011

 

$

484,970

 

$

330,238

 

$

211,307

 

$

171,012

 

Total assets

 

954,539

 

691,788

 

436,715

 

267,075

 

226,559

 

Loans payable and senior notes

 

351,491

 

264,927

 

177,561

 

86,152

 

85,937

 

Total liabilities

 

542,644

 

374,480

 

260,128

 

145,976

 

136,148

 

Stockholders’ equity

 

411,895

 

317,308

 

176,587

 

121,099

 

90,411

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Financial Data:

 

 

 

 

 

 

 

 

 

 

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(56,894

)

$

1,050

 

$

(16,411

)

$

6,252

 

$

(36,337

)

Investing activities

 

(29,220

)

(149,691

)

(76,465

)

(8,175

)

(9,952

)

Financing activities

 

84,313

 

151,858

 

91,862

 

(7,102

)

47,324

 

 


 

(1)                                  2001 includes a $382,651 loss related to the net effect of early extinguishments of long-term debt.  Previously this amount, net of the tax effect of $149,234, was reported as an extraordinary item.  We have reclassified this loss as general and administrative expense and income tax benefit, respectively, to conform with the requirements of SFAS No. 145, which was effective January 31, 2003.

 

(2)                                  1999-2001 amounts have been adjusted to 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

 

Overview

 

We are a leading designer and builder of single-family homes in the rapidly growing Sunbelt states of Texas, Arizona, California and Nevada based on the number of home closings.  We focus on providing a broad range of first-time, move-up, active adult and luxury homes to our targeted customer base.  We believe that the relatively strong population, job and income growth as well as the favorable migration characteristics of our markets will continue to provide significant growth opportunities for us.  At December 31, 2003 we were actively selling homes in 123 communities, with base prices ranging from $98,000 to $730,000.

 

14



 

We achieved record home closings, home sales, revenues and net earnings in 2003.  Home closing revenue increased 31% in 2003 to $1.5 billion and net earnings increased 35% to $94 million.  In addition, in 2003 we closed 5,642 homes, up 23% from 2002 and we received 6,152 new orders for homes, up 37% from 2002.  At December 31, 2003, we have 2,580 homes in backlog with a value of $710.7 million.

 

In general, we focus on minimizing land risk by purchasing property only after full entitlements have been obtained and typically begin development or construction immediately after close.  We acquire land primarily through rolling option contracts, allowing us to purchase individual lots as our building needs dictate.  These arrangements allow us to control lot inventory typically on a non-recourse basis without incurring the risks of land ownership or financial commitments other than relatively small non-refundable deposits.  At December 31, 2003, we owned or had options to acquire approximately 26,000 housing lots, of which more than eighty percent were under rolling option and land purchase contracts.  We believe that the lots we own or have the right to acquire represent approximately a five year supply, and that we are well positioned for future growth. See "–Recent Accounting Standards".

 

We have completed four acquisitions over the last four years, including our January 2004 acquisition of Citation Homes of Southern California.  Our recent acquisitions have provided us with an entry into important new markets.  Our October 2002 acquisition of Perma-Bilt provided us entry into the fast growing Las Vegas market and our January 2004 acquisition of Citation Homes of Southern California provided us entry into the Los Angeles metro area market, which is the second largest single-family housing market in the United States.  Our 2001 acquisition of Hancock (Phoenix and Tucson) and our 2002 acquisition of Hammonds (Dallas, Houston and Austin) have strengthened our positions in our important Arizona and Texas markets.

 

During 2003, we increased the size of our unsecured credit facility to $400 million from $250 million and extended its maturity by 18 months to May 2007.  In addition, we enhanced our liquidity by completing two add-on offerings of our senior notes due 2011, which totaled $125 million in aggregate principal amount.  At December 31, 2003, our unused commitment under our unsecured credit facility was $312 million, of which $160 million was available to borrow.  We believe these financings will support our continued growth and our ability to execute selective acquisitions.

 

This 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 of these 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.  The judgments, assumptions and estimates we use and believe to be critical to our business are based on historical experience, knowledge of the accounts and other factors, which we believe to be reasonable under the circumstances.  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 may 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, the ability to determine the fair value of consolidated real estate not owned and liabilities related to such, certain estimates and assumptions related to implementing FIN 46 and FIN 46R, 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.  The estimates and assumptions we make relating to our implementation of FIN 46R, if not accurate, could result in us incorrectly including, or excluding, respectively, certain contractual land acquisition arrangements as variable interest entities in, or from, respectively, our consolidated financial statements.

 

15



 

Home Closing Revenue, Home Orders  and Order Backlog

 

The tables provided below show operating and financial data regarding our homebuilding activities (dollars in thousands).

                                               

 

 

Years Ended December 31,

 

 

 

2003

 

2002

 

2001

 

Home Closing Revenue

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Dollars

 

$

1,461,981

 

$

1,112,439

 

$

742,576

 

Homes closed

 

5,642

 

4,574

 

3,270

 

Average sales price

 

$

259.1

 

$

243.2

 

$

227.1

 

 

 

 

 

 

 

 

 

Texas

 

 

 

 

 

 

 

Dollars

 

$

577,330

 

$

387,264

 

$

259,725

 

Homes closed

 

2,828

 

2,090

 

1,518

 

Average sales price

 

$

204.1

 

$

185.3

 

$

171.1

 

 

 

 

 

 

 

 

 

Arizona

 

 

 

 

 

 

 

Dollars

 

$

415,709

 

$

445,275

 

$

325,918

 

Homes closed

 

1,515

 

1,735

 

1,343

 

Average sales price

 

$

274.4

 

$

256.6

 

$

242.7

 

 

 

 

 

 

 

 

 

California

 

 

 

 

 

 

 

Dollars

 

$

334,677

 

$

245,640

 

$

156,933

 

Homes closed

 

735

 

594

 

409

 

Average sales price

 

$

455.3

 

$

413.5

 

$

383.7

 

 

 

 

 

 

 

 

 

Nevada *

 

 

 

 

 

 

 

Dollars

 

$

134,265

 

$

34,260

 

n/a

 

Homes closed

 

564

 

155

 

n/a

 

Average sales price

 

$

238.1

 

$

221.0

 

n/a

 

 

 

 

 

 

 

 

 

Home Orders

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Dollars

 

$

1,634,988

 

$

1,161,899

 

$

700,104

 

Homes ordered

 

6,152

 

4,504

 

3,016

 

Average sales price

 

$

265.8

 

$

258.0

 

$

232.1

 

 

 

 

 

 

 

 

 

Texas

 

 

 

 

 

 

 

Dollars

 

$

599,850

 

$

417,158

 

$

255,811

 

Homes ordered

 

2,862

 

2,134

 

1,516

 

Average sales price

 

$

209.6

 

$

195.5

 

$

168.7

 

 

 

 

 

 

 

 

 

Arizona

 

 

 

 

 

 

 

Dollars

 

$

509,913

 

$

383,445

 

$

309,170

 

Homes ordered

 

1,881

 

1,425

 

1,165

 

Average sales price

 

$

271.1

 

$

269.1

 

$

265.4

 

 

 

 

 

 

 

 

 

California

 

 

 

 

 

 

 

Dollars

 

$

375,105

 

$

329,252

 

$

135,123

 

Homes ordered

 

807

 

794

 

335

 

Average sales price

 

$

464.8

 

$

414.7

 

$

403.4

 

 

 

 

 

 

 

 

 

Nevada *

 

 

 

 

 

 

 

Dollars

 

$

150,120

 

$

32,044

 

n/a

 

Homes ordered

 

602

 

151

 

n/a

 

Average sales price

 

$

249.4

 

$

212.2

 

n/a

 

 

16



 

 

 

Years Ended December 31,

 

 

 

2003

 

2002

 

2001

 

Order Backlog

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Dollars

 

$

710,771

 

$

537,764

 

$

374,951

 

Homes in backlog

 

2,580

 

2,070

 

1,602

 

Average sales price

 

$

275.5

 

$

259.8

 

$

234.1

 

 

 

 

 

 

 

 

 

Texas

 

 

 

 

 

 

 

Dollars

 

$

241,419

 

$

218,899

 

$

115,651

 

Homes in backlog

 

1,119

 

1,085

 

693

 

Average sales price

 

$

215.7

 

$

201.8

 

$

166.9

 

 

 

 

 

 

 

 

 

Arizona

 

 

 

 

 

 

 

Dollars

 

$

238,359

 

$

144,155

 

$

205,985

 

Homes in backlog

 

832

 

466

 

776

 

Average sales price

 

$

286.5

 

$

309.3

 

$

265.4

 

 

 

 

 

 

 

 

 

California

 

 

 

 

 

 

 

Dollars

 

$

177,355

 

$

136,927

 

$

53,315

 

Homes in backlog

 

405

 

333

 

133

 

Average sales price

 

$

437.9

 

$

411.2

 

$

400.9

 

 

 

 

 

 

 

 

 

Nevada *

 

 

 

 

 

 

 

Dollars

 

$

53,638

 

$

37,783

 

n/a

 

Homes in backlog

 

224

 

186

 

n/a

 

Average sales price

 

$

239.5

 

$

203.1

 

n/a

 

 


* Amounts are for Perma-Bilt, acquired October 1, 2002

 

Home Closing Revenue.  Home closing revenue in 2003 increased 31% over 2002, resulting primarily from a 23% increase in the number of homes closed and a 7% increase in the average sales price year over year.  We benefited from an increase in the number of communities that closed homes, from continued strong demand for homes and from an overall increase in the U.S. home ownership rate in 2003, which was at an all-time high of 68.6% at the end of the year.  The number of home closings in Texas increased 35% to 2,828 from 2,090, mainly representing the full-year impact of our mid-year 2002 Hammonds acquisition.  While the slower demand experienced in both our Austin and Monterey Phoenix divisions in 2002 stabilized in 2003, the number of home closings in California was up 24% in 2003, resulting from the strong California homebuilding market and an increase in actively selling communities.  The number of homes closed in Nevada increased from 155 to 564, due to the full-year impact in 2003 of our fourth quarter 2002 acquisition of Perma-Bilt.  Somewhat offsetting these increases was a reduction in the number of home closings in Arizona of 13%, due to the earlier than anticipated sell out of some communities and delays in opening their replacements.  Also contributing to the increase in 2003 home closing revenue was the overall 7% increase in the average home closing price, resulting from the mix of homes closed including more higher-priced homes, particularly in California.  As a whole, we benefited from positive demographic factors, historically high home ownership rates, low mortgage interest rates and generally low unemployment figures.

 

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.  Our Texas closings in 2002 included 442 Hammonds homes. These 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 our Monterey Phoenix division because of a slowing in demand for our luxury priced homes.

 

17



 

Home Orders. Home orders for any period represent the aggregate sales price of all homes ordered by customers, net of cancellations.  We do not include orders contingent upon the sale of a customer’s existing home as a sales contract until the contingency is removed.  Historically, we have experienced a cancellation rate of approximately 25% of gross sales, which we believe is consistent with industry norms.  The dollar value of sales contracts in 2003 increased 41% over 2002.  This increase was driven by a 37% increase in the number of new home orders and a 3% increase in average selling price.  The number of new home orders increased by 34% in Texas, a portion of which represents the full-year impact of our Hammonds acquisition.  The number of orders in Arizona increased 32% during 2003, primarily the result of a 17% increase in actively selling communities and continued strong demand for homes.  The number of orders in California was relatively stable, up 2% over 2002, reflecting the earlier than anticipated sellout of communities in the beginning of 2003.  However, the number of orders was up 76% in the fourth quarter of 2003 in California versus the prior year’s fourth quarter, due to the introduction of new communities during the second half of 2003.  New home orders increased in Nevada from 151 in 2002 to 602 in 2003, as a result of the full-year impact of our Perma-Bilt acquisition.  We believe the demand for our homes can be attributed in part to the continuing maturation of first- and second-generation baby boomers, increases in immigration in the south and west, and a constricting supply of land available for single-family housing.

 

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.  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.

 

Order Backlog.  Backlog represents net sales contracts that have not closed.  Total dollar backlog at December 31, 2003 increased 32% over the 2002 amount due to a 25% increase in the number of homes in backlog and a 6% increase in the average sales price of those homes.  Unit backlog was up 79% in Arizona and 22% in California due to an increase in the number of communities and continued strong demand for homes during 2003.  From year-end 2002 to year-end 2003, the number of active communities in Arizona and California increased 17% and 40%, respectively.  Unit backlog in Nevada increased 20% at the end of 2003, and the average home price in backlog increased 18% due to a shift in product mix, resulting in the dollar value of backlog increasing by 42% in Nevada.  Unit backlog in Texas on December 31, 2003 was relatively in line with December 31, 2002, up 3%.  However, the average selling price in backlog in Texas increased 7%, resulting in the dollar value of backlog increasing 10% year-over-year.

 

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% increase in the average sales prices of those homes.   The increase in the number of homes in backlog at December 31, 2002 resulted mainly from our Hammonds and Perma-Bilt 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.

 

18



 

Other Operating Information

 

 

 

Years Ended December 31,

 

 

 

($ in thousands)

 

 

 

2003

 

2002

 

2001

 

Home Closing Gross Profit

 

 

 

 

 

 

 

Dollars

 

$

291,282

 

$

214,096

 

$

157,136

 

Percent of home closing revenue

 

19.9

%

19.2

%

21.2

%

 

 

 

 

 

 

 

 

Commissions and Other Sales Costs

 

 

 

 

 

 

 

Dollars

 

$

92,904

 

$

65,291

 

$

41,085

 

Percent of home closing revenue

 

6.4

%

5.9

%

5.5

%

 

 

 

 

 

 

 

 

General and Administrative Expenses

 

 

 

 

 

 

 

Dollars

 

$

53,929

 

$

41,496

 

$

36,105

 

Percent of total revenue

 

3.7

%

3.7

%

4.9

%

 

 

 

 

 

 

 

 

Income Taxes

 

 

 

 

 

 

 

Dollars

 

$

57,054

 

$

43,607

 

$

32,295

 

Percent of earnings before income taxes

 

37.7

%

38.4

%

38.9

%

 

Home Closing Gross Profit.  Home closinggross profit represents home closing revenue less cost of home closings. Cost of home closings 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.   Home closing gross profit was 19.9% of home closing revenue in 2003, up from 19.2% in 2002.  The improvement in gross margin was primarily due to the absence of purchase accounting adjustments relating to the Hammonds and Perma-Bilt acquisitions, which, combined, amounted to $5.5 million in 2002.  Home closing prices increased at a greater rate than cost of home closings, also contributing to the gross margin improvement.  Average home closing prices were up 7% in 2003 while the average cost of home closings increased only 6%.

 

The dollar increase in gross profit for the year ended December 31, 2002 over 2001 is attributable to a 50% increase in home closing revenue during 2002.  The gross profit margin on home closings decreased to 19.2% 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, which, combined, effectively increased cost of home closings by $5.5 million in 2002.  We also experienced a decrease in gross profit margin on home closings in 2002 due to the lower margins generally achieved by Hammonds in comparison to the Company as a whole, and to increased competitive pressures in some of our markets.

 

Land Closings.  The sale of land is not a significant component of our business plan and takes place sporadically.  Incidental sales of land may continue in the future, but could fluctuate substantially up or down.  A summary of lot and land sales is presented below:

 

 

 

Years ended December 31,

 

 

 

(in thousands)

 

 

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Land closing revenue

 

$

9,020

 

$

7,378

 

$

1,598

 

Cost of land closings

 

(7,785

)

(6,578

)

(1,474

)

 

 

 

 

 

 

 

 

Land closing gross profit

 

$

1,235

 

$

800

 

$

124

 

 

Commissions and Other Sales Costs.  Commissions and other sales costs, such as advertising and sales office expenses, were 6.4% of home closing revenue in 2003, up from 5.9% in 2002.  This increase was primarily the result of the rising use of independent brokers who are paid higher commissions than our employee brokers, along with costs associated with opening new communities for sale.  Our marketing expenses are incurred in connection

 

19



 

with the promotion of a new community, and these expenses are often incurred in advance of actual home closings, which tend to lag the preceding sale by a period of four to nine months.

 

Commissions and other sales costs were approximately $65.3 million, or 5.9% of home closing revenue in 2002, as compared to approximately $41.1 million, or 5.5% of home closing revenue in 2001.  The higher commissions and sales costs in 2002 resulted primarily from a greater number of new communities added that year.

 

General and Administrative Expenses. General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance, and travel expenses.  General and administrative costs as a percent of total revenue for 2003 and 2002 were consistent at 3.7% for each year.

 

General and administrative expenses were approximately $41.5 million, or 3.7% of total revenue in 2002, as compared to approximately $36.1 million, or 4.9% 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.  Income taxes increased to $57.1 million in 2003 from $43.6 million in 2002.  As a percent of pre-tax earnings, taxes were 37.7% in 2003, down from 38.4% in 2002.  This reduction was mainly due to the 2003 increase in pre-tax earnings in Texas and Nevada, which have minimal or no state taxes, as a percent of total pre-tax earnings.  Also, the tax benefit related to the exercise of employee stock options reduced taxes currently payable by approximately $2.8 million, resulting in a more favorable tax rate.  This benefit was credited to paid-in capital.

 

The increase in income taxes to $43.6 million for the year ended December 31, 2002, from $32.3 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 payable for 2002 by approximately $5.2 million, 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, 2003 were for operating expenses, land and property purchases, lot development, home construction, the repurchase of common stock, income taxes, interest and investments in joint ventures.  We used a combination of borrowings under our revolving credit facility and funds generated by operations to meet our short-term working 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.  Future cash flows may significantly exceed earnings reported for financial statement purposes, as cost of sales includes charges for substantial amounts of previously expended costs.

 

We enter into various options and purchase contracts for land as a normal course of business.  Except for our specific performance options, none of these agreements require us to purchase lots.  Generally, our options to purchase lots remain effective so long as we purchase a pre-established minimum number of lots each month or quarter, as determined by the respective agreement.  The pre-established number is typically structured to approximate our expected rate of home construction starts.  At December 31, 2003, we had entered into purchase agreements with an aggregate purchase price of $1.1 billion, on which we had made deposits of approximately $106.8 million in cash along with approximately $17.5 million in letters of credit.  Additional information regarding our purchase agreements and related deposits is presented in Note 3 - Variable Interest Entities and Consolidated Real Estate Not Owned in the accompanying consolidated financial statements.

 

20



 

In December 2003 we increased the committed balance of our unsecured credit facility by $150 million, raising the total commitment to $400 million.  The facility is with a consortium of banks, led by Guaranty Bank and Bank One, NA.  The revised agreement also lengthened the term of the facility by 18 months, extending the maturity date to May 2007, and expanded the number of banks participating in the facility from seven to ten.

 

At December 31, 2003, there was a balance of $62.9 million outstanding under our senior unsecured revolving credit facility and approximately $25.1 million was outstanding in letters of credit that collateralize our obligations under various land purchase and other contracts.  After considering our most restrictive bank covenants, our borrowing availability under the bank credit facility was approximately $160 million at December 31, 2003, as determined by borrowing base limitations defined by our agreement with the lending banks.

 

This credit facility contains certain financial and other covenants, including covenants:

 

                  requiring us to maintain tangible net worth of at least $180 million plus 50% of net income earned since January 1, 2003 plus 75% of the aggregate net increase in tangible net worth resulting from the sale of capital stock and other equity interests (as defined);

 

                  prohibiting our ratio of indebtedness (including accrued expenses) to tangible net worth from being greater than 2.25 to 1;

 

                  requiring us to maintain a ratio of EBITDA (including interest amortized to cost of sales) to interest incurred (as defined) of at least 2.0 to 1;

 

                  prohibiting the net book value of our land and lots where construction of a home has not commenced to exceed 125% of tangible net worth and prohibiting the net book value of our raw land where grading or infrastructure improvements have not begun to exceed 20% of tangible net worth;

 

                  limiting the number of unsold housing units and model units that we may have in our inventory at the end of any fiscal quarter as follows:

 

(1)          unsold homes cannot exceed 25% of the number of home closings within the four fiscal quarters ending on such date; and

 

(2)          model homes cannot exceed 10% of the number of home closings within the four fiscal quarters ending on such date; and

 

                  prohibiting us from entering into any sale and leaseback transaction, excluding the sale and leaseback of model homes and prohibiting us from creating or incurring any off-balance sheet liability.  For purposes of our credit facility, off-balance sheet liabilities include:

 

(1)          certain liabilities arising under asset securitization transactions;

 

(2)          monetary obligations under synthetic leases, tax retention or off-balance sheet lease transactions that upon the application of any debtor relief law to us would be characterized as indebtedness;

 

(3)          any other monetary obligation with respect to any transaction which upon the application of any debtor relief law to us would be characterized as indebtedness or which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on our consolidated balance sheet.

 

Notwithstanding the above, our credit facility specifically provides that liabilities (i) under rolling options and similar contracts for the acquisition of real property and (ii) arising under model home leases shall not be deemed off-balance sheet liabilities.

 

21



 

In May 2001, we issued $165 million in principal amount of 9.75% senior notes due 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 a loss of approximately $445,000 in the second quarter of 2001, which is reported as general and administrative expense and income tax benefit to conform with the requirement of SFAS 145, which was effective January 1, 2003.

 

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 a net gain of $212,000.

 

Through add-on financings, in February 2003 we increased our 9.75% senior notes due 2011 by approximately $51.6 million (including premium of $1.6 million) and in September we increased our senior notes by approximately $81.8 million (including premium of $6.8 million), the proceeds of which were used to pay down our senior unsecured revolving credit facility.

 

Our senior notes require us to comply with a number of covenants that restrict certain transactions, including covenants:

 

                  limiting the amount of additional indebtedness we can incur unless after giving effect to such additional indebtedness, either (i) our fixed charge coverage ratio would be at least 2.0 to 1.0 or (ii) our ratio of consolidated debt to consolidated tangible net worth would be less than 3.0 to 1.0, provided, however, this limitation does not apply to most types of inter-company indebtedness, purchase money indebtedness up to $15 million, non-recourse indebtedness and other indebtedness up to $15 million;

 

                  generally limiting the amount of dividends, redemptions of equity interests and certain investments we can make to $10 million plus (i) 50% of our net income since June 1, 2001 plus (ii) 100% of the net cash proceeds from the sale of qualified equity interests, plus other items and subject to other exceptions;

 

                  requiring us to maintain tangible net worth of at least $60 million;

 

                  limiting our ability to incur or create certain liens; and

 

                  placing limitations on the sale of assets, mergers and consolidations and transactions with affiliates.

 

As of and for the year ended December 31, 2003, we were in compliance with the credit facility and senior note covenants.

 

We believe that our current borrowing capacity, cash on hand at December 31, 2003, and anticipated net cash flows from operations are and will be sufficient to meet liquidity needs for the foreseeable future.  We believe our future cash needs will include funds for the completion of projects that are underway, the maintenance of our day-to-day operations, and the acquisition or start-up of additional homebuilding operations, should the opportunities arise.  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 August 2002, our Board of Directors authorized the expenditure of up to $32 million to repurchase shares of our common stock.  No date for completing the program has been determined, but we will purchase shares subject to applicable securities laws, and at times and in amounts as management deems appropriate.  By

 

22



 

December 31, 2003, we had purchased 664,300 shares of our common stock under the August 2002 program at an average price of $33.61 per share.

 

Off-Balance Sheet Arrangements

 

We often acquire finished building lots at market prices from various development entities under fixed price purchase agreements.  This lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development.  Under these purchase agreements, we are usually required to make deposits in the form of cash or letters of credit, which may be forfeited if we fail to perform under the agreement.  At December 31, 2003, we had entered into purchase agreements with an aggregate purchase price of approximately $1.1 billion, by making deposits of approximately $106.8 million in the form of cash and approximately $17.5 million in letters of credit.

 

We also obtain letters of credit and performance, maintenance, and other bonds in support of our related obligations with respect to the development of our projects.  The amount of these obligations outstanding at any time varies depending on the stage and level of our 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, 2003, we had approximately $7.6 million in outstanding letters of credit and $147.4 million in performance bonds for such purposes. We believe it is unlikely that any of these letters of credit or bonds will be drawn upon.

 

Contractual Obligations

 

The following is a summary of our contractual obligations at December 31, 2003, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

                                               

 

 

Payments Due by Period

 

More

 

 

 

 

 

Less than 1

 

 

 

 

 

Than 5

 

 

 

Total

 

Year

 

1-3 Years

 

4-5 Years

 

Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal, senior notes

 

$

280,000

 

 

 

 

$

280,000

 

Interest, senior notes

 

202,475

 

$

27,300

 

$

54,600

 

$

54,600

 

65,975

 

Revolving construction facilities

 

62,900

 

 

62,900

 

 

 

Other borrowing obligations

 

600

 

600

 

 

 

 

Operating lease obligations

 

9,882

 

4,373

 

3,673

 

1,489

 

347

 

Specific performance option obligations

 

17,653

 

10,376

 

7,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

573,510

 

$

42,649

 

$

128,450

 

$

56,089

 

$

346,322

 

                                               

We do not engage in commodity trading or other similar activities.  We had no derivative financial instruments at December 31, 2003 or 2002.

 

As a part of our model home construction activities, we enter into lease transactions with third parties, the monthly payments for which are typically calculated by applying the LIBOR rate to the agreed upon basis of the leased asset.  At December 31, 2003, the total lease basis of model homes under these lease agreements, including land and construction costs, was approximately $49.8 million, all of which is excluded from our balance sheet.  Our obligations under these leases are included in the table above within the operating lease obligation category.  See Notes 3 and 12 to our consolidated financial statements included in this report for additional information regarding our contractual obligations.

 

23



 

Consolidated Cash Flow

 

Our cash and cash equivalents at December 31, 2003 decreased by approximately $1.8 million from the balance at the end of the prior year.  This decrease reflects a net usage of cash in operating activities of approximately $56.9 million, compared with $1.1 million provided in 2002.  Net cash used for operating activities in 2001 was $16.4 million.  The increase in cash used in operations in 2003 resulted mainly from increased purchases of real estate to be used in our homebuilding operations. The change in cash provided of $1.1 million in 2002 compared to $16.4 million used in 2001 resulted mainly from the $19.3 million increase in net earnings.

 

We used cash in investing activities of $29.2 million in 2003, mainly for purchases of property and equipment and investments in unconsolidated entities, compared with $149.7 million and $76.5 million in 2002 and 2001, 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.

 

Financing activities generated cash of $84.3 million in 2003 and $151.8 million in 2002.  In 2003, we issued additional senior notes of $133.4 million, an increase that was offset by net repayments of our loans payable of $46.4 million and approximately $5.2 million used for repurchases of our common stock.  In 2001 we generated $91.9 million in cash.  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.

 

Other Events

 

As widely reported in the media, in the third quarter of 2003, a gasoline pipeline located under the common area of one of our Tucson communities ruptured, spraying five homes under construction with gasoline but causing no personal injuries.  At the time of the rupture, all 68 lots in the community were under contract to homebuyers, but no homes were completed at that time and the community was unoccupied.  As a consequence of this rupture, the five affected homes were demolished, and we offered all buyers in the affected community the right to cancel their purchase contracts, resulting in a net cancellation of approximately 24 sales (some cancelled contracts were replaced by new buyers).  We believe the owner of the pipeline (a Fortune 500 company) is responsible for and will pay for substantially all damages and losses we incur relating to this incident.  At this time, we are in continuing discussions with the pipeline owner to resolve outstanding issues.  Closings of homes in this community have been delayed as a result of the ongoing investigation and remediation of the damage caused by the rupture and related issues.  At December 31, 2003, we had incurred approximately $400,000 related to this incident, substantially all of which we expect to recover in 2004.

 

Seasonality

 

We historically close 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 luxury products.  We expect this seasonal trend to continue, although it may vary as our operations continue to expand.

 

Recent Accounting Standards

 

In January 2003, SFAS No. 145 “Rescission of SFAS No. 4, 44, 64, and Amendment of SFAS No. 13 and Technical Corrections” became effective.  SFAS No. 145 prevents gains or losses on the extinguishment of debt not meeting the criteria of APB No. 30 from being treated as an extraordinary item. We adopted SFAS No. 145 in January 2003, and as a result, the pretax charge of $382,651 recorded in 2001 as an extraordinary loss has been reclassified to general and administrative expenses, net of the related tax benefit.

 

Recently, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (revised December 2003) "Consolidation of Variable Interest Entities" (FIN 46R), which governs whether certain transactions should be accounted for as on- or off-balance sheet transactions.  Our adoption of FIN 46R could affect our accounting methods and the way we conduct our land acquisition activities.  We have the right to acquire a substantial amount of lot inventory through rolling options and purchase agreements with third parties and, to a lesser extent, joint ventures.  Historically, our rolling options and similar contractual arrangements to acquire lot inventory have not been reflected on our balance sheet.

 

 

24



 

Based upon current interpretations of FIN 46R, in connection with substantially all of our land purchase transactions, we will need to obtain certifications from sellers that the property we have contracted to acquire represents less than half of the fair value of the total assets held by the seller.  If we cannot obtain such a certification, we would then be required to obtain confidential financial information from the seller about the seller’s ownership structure, financing sources, its other assets and liabilities, and its general business and operations.  This information would be used to evaluate whether the selling entity should be consolidated into our financial statements based upon tests designed to determine if we have a majority economic (even if not legal) interest in the entity and, if so, determine how the seller’s assets and liabilities are to be consolidated into our financial statements.

 

Although land-banking and purchase arrangements entered into prior to December 31, 2003 are exempt from these information requirements, provided exhaustive efforts have been made to obtain such information, land transactions entered into in the first quarter of 2004 and forward must satisfy these standards.  For transactions entered into prior to 2004, we have made exhaustive efforts to obtain relevant information and we will continue to make similar efforts in future periods as required.

 

We are currently in the process of contacting property owners that in the first quarter of 2004 entered into contractual arrangements to sell us property to obtain the relevant certifications and information to satisfy these standards.  No assurances can be given that we will be able to obtain such information on a timely basis.  To the extent we are unable to obtain relevant information from sellers, we anticipate that we would either purchase the lots and land subject to these option agreements, cancel these option agreements and write off any earnest money or option deposits related to them, or sell and assign our interest in these option agreements to an independent third party.  Although there can be no assurances, we believe that the impact on our business and financial position of either purchasing the lots and land subject to these option agreements or canceling these option agreements would not be material.

 

In the future, we intend to limit most of our transactions to sellers than can supply the necessary certifications or required financial information to us.

 

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 demand for, cost of and pricing of our homes.  We are subject to various risks, many of which are outside of our 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.    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 of our real estate could occur if market conditions deteriorate and these write-downs could be material in amount.  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.

 

25



 

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 for homes completed before October 1, 2003.  Insurance carriers have been excluding claims from policies arising from the presence of mold for many builders and, as of October 1, 2003, our insurance policy began excluding mold coverage.  We believe we have sufficient retentions to protect against these types of claims related to homes completed after September 30, 2003.  If our retentions are not sufficient to protect against these types of claims or 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 significantly, and the availability of insurance has diminished.  Significant increases 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 closings;

                  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 material.  Interest rates are currently near historically low levels, however, it is impossible to predict future increases or decreases in market interest rates.  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 must sell their residences before they purchase our homes.  Any reduction of financing availability could adversely affect home sales.

 

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

 

26



 

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, 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, 2003, we had approximately $351.5 million of indebtedness.  If we require working capital greater than that provided by operations or available under our credit facility, 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 us 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 additional funds.  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 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.

 

In addition, the indentures for our senior notes and our senior unsecured credit facility require us to maintain a minimum consolidated tangible net worth and our 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

 

27



 

operations or capital needs or to pursue available business opportunities.  A breach of any 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 government 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, but could cause delays in our homebuilding projects.

 

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.

 

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 our Co-Chief Executive Officers, Steven J. Hilton and John R. Landon, and our continued favorable development depends on our ability to attract and retain qualified personnel.  We have employment agreements with Messrs. Hilton and Landon, but we do not have employment agreements with certain other key employees.  We believe that Messrs. Hilton and Landon each possess valuable industry knowledge, experience, and leadership abilities that would be difficult in the short term to replicate.  The loss of the services of key employees could harm our operations and business plans.

 

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 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 have a significant adverse effect on the affordability of mortgage financing to prospective buyers.  Inflation 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; however, inflation could impact our future operating results.

 

28



 

Natural Disasters.  We have significant homebuilding operations in Texas and California.  Some of our markets in Texas occasionally experience extreme weather conditions such as tornadoes or hurricanes.  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 Accounting Pronouncements.  The FASB recently issued FIN 46R, which governs “variable interest entities” in a way that impacts our ability to use rolling option contracts and even long-term purchase agreements to control land for future development.  In order to maintain these interests as “off-balance sheet”, as we have historically done, we will need to structure our transactions differently than we have in the past, and will need to limit transactions to sellers that meet certain requirements, some of which could impact our ability to buy land.  In addition, we may need to record more land and corresponding liabilities on our balance sheet, which may negatively affect how lenders and investors perceive our financial condition.  Some of our transactions in the first quarter of 2004 may not, at the present time, satisfy off-balance sheet treatment.  In such cases, we anticipate that we would either purchase the lots and land subject to these option agreements and write off any earnest money or option deposits related to them, cancel the agreements and forfeit our related earnest money or option deposits, or sell and assign our interest in these option agreements to an independent third party.  We do not believe that these actions, if taken, would have a material adverse impact on our financial results or financial position, but there can be no assurance in this regard.

 

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.  All statements other than of historical fact are forward-looking statements and 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 Annual Report and Form 10-K include statements concerning the demand for and the pricing of our homes, the growth potential of the markets we operate in, our acquisition strategy, positive demographic and other trends related to the homebuilding industry in general and our ability to capitalize on them, the future supply of housing inventory in our markets and the homebuilding industry in general, the number of communities we expect to open for sales in certain markets in 2004, our perceptions of the current and future valuation of homebuilding companies, our ability to renew existing leases on comparable terms, our expectation that existing letters of credit and performance bonds will not be drawn on, our expectation that our costs and expenses relating to a ruptured pipeline under one of our Tucson subdivisions will be paid by the owner of the pipeline, the adequacy of our insurance coverage and warranty reserves, our ability to deliver existing backlog, the expected outcome of legal proceedings against us, the sufficiency of our capital resources to support our growth strategy, the impact of new accounting standards, (particularly FIN 46R) the future realizability of deferred tax assets, the expectation of continued positive operating results in 2004 and beyond and the expected benefits of our acquisitions.  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 heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Our Future Results and Financial Condition.”

 

29


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

 

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.  As of December 31, 2003, we had approximately $62.9 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 $630,000 per year.  We do not enter into, or intend to enter into, derivative financial instruments for trading or speculative purposes.

 

Our fixed rate debt is made up primarily of our $280.0 million in principal of our 9.75% senior notes.  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 on the fixed rate borrowings until we would be required to refinance such debt.

 

The following table presents our debt obligations, principal cash flows by maturity, weighted average interest rates and estimated fair market value.

 

 

 

For the Year Ended December 31,

 

 

 

 

 

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

 

 

 

2004

 

2005

 

2006

 

2007

 

2008

 

Thereafter

 

Total

 

Fair Value at
12/31/03

 

Long term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

0.6

 

 

 

 

 

$

280.0

 

$

280.6

 

$

313.6

(b)

Average interest rate

 

7

%

 

 

 

 

9.75

%

9.74

%

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate

 

 

 

 

 

$

62.9

 

 

 

$

62.9

 

$

62.9

(c)

Average interest rate

 

 

 

 

 

 

(a)

 

 

 

n/a

 

 


(a) Prime or LIBOR plus 2.0%.

(b) Fair value of our fixed rate debt at December 31, 2003, is based on quoted market prices by independent dealers.

(c) Our revolving credit facility carries a variable interest rate which is comparable to current market rates, therefore the cost basis approximates fair value.

 

Our operations are interest rate sensitive.  As overall housing demand is adversely affected by increases in interest rates, a significant increase in mortgage interest rates 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 would also increase our variable rate borrowing costs.

 

Item 8.  Financial Statements and Supplementary Data

 

Our consolidated financial statements as of December 31, 2003 and 2002 and for each of the years in the three-year period ended December 31, 2003, 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 15.

 

30



 

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, 2003 and 2002, 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, 2003.  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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 1 to the consolidated financial statements, the Company changed their method of accounting for goodwill in 2002.

 

 

/s/

KPMG LLP

 

 

 

 

 

 

 

 

 

 

Phoenix, Arizona

 

 

February 16, 2004

 

 

 

31



 

MERITAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

 

 

2003

 

2002

 

 

 

(In thousands, except share data)

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

4,799

 

$

6,600

 

Real estate

 

678,011

 

484,970

 

Consolidated real estate not owned

 

18,572

 

 

Deposits on real estate under option or contract

 

105,870

 

77,516

 

Receivables, net

 

8,716

 

8,894

 

Deferred tax asset, net

 

1,204

 

2,701

 

Goodwill

 

75,645

 

73,785

 

Property and equipment, net

 

23,669

 

14,007

 

Prepaid expenses and other assets

 

14,525

 

13,941

 

Investments in unconsolidated entities

 

23,528

 

9,374

 

 

 

 

 

 

 

Total assets

 

$

954,539

 

$

691,788

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Accounts payable

 

$

80,737

 

$

52,133

 

Accrued liabilities

 

67,411

 

41,329

 

Home sale deposits

 

25,352

 

16,091

 

Liabilities related to consolidated real estate not owned

 

17,653

 

 

Loans payable

 

63,500

 

109,927

 

Senior notes

 

287,991

 

155,000

 

 

 

 

 

 

 

Total liabilities

 

542,644

 

374,480

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Common stock, par value $0.01.  Authorized 50,000,000 shares; issued and outstanding 15,479,558 and 15,227,460 shares at December 31, 2003 and 2002, respectively

 

155

 

152

 

Additional paid-in capital

 

202,678

 

197,320

 

Retained earnings

 

242,615

 

148,209

 

Treasury stock at cost, 2,302,226 and 2,137,926 shares at December 31, 2003 and 2002, respectively

 

(33,553

)

(28,373

)

 

 

 

 

 

 

Total stockholders’ equity

 

411,895

 

317,308

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

954,539

 

$

691,788

 

 

See accompanying notes to consolidated financial statements

 

32



 

MERITAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

 

 

 

Years Ended December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

Home closing revenue

 

$

1,461,981

 

$

1,112,439

 

$

742,576

 

Land closing revenue

 

9,020

 

7,378

 

1,598

 

 

 

1,471,001

 

1,119,817

 

744,174

 

 

 

 

 

 

 

 

 

Cost of home closings

 

(1,170,699

)

(898,343

)

(585,440

)

Cost of land closings

 

(7,785

)

(6,578

)

(1,474

)

 

 

(1,178,484

)

(904,921

)

(586,914

)

 

 

 

 

 

 

 

 

Home closing gross profit

 

291,282

 

214,096

 

157,136

 

Land closing gross profit

 

1,235

 

800

 

124

 

 

 

292,517

 

214,896

 

157,260

 

 

 

 

 

 

 

 

 

Commissions and other sales costs

 

(92,904

)

(65,291

)

(41,085

)

General and administrative expenses

 

(53,929

)

(41,496

)

(36,105

)

Other income, net

 

5,776

 

5,435

 

2,884

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

151,460

 

113,544

 

82,954

 

Income taxes

 

(57,054

)

(43,607

)

(32,295

)

 

 

 

 

 

 

 

 

Net earnings

 

$

94,406

 

$

69,937

 

$

50,659

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

Net earnings per share

 

$

7.24

 

$

5.64

 

$

4.78

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

Net earnings per share

 

$

6.84

 

$

5.31

 

$

4.30

 

 

See accompanying notes to consolidated financial statements

 

33



 

MERITAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

 

Years Ended December 31, 2003, 2002 and 2001

 

 

 

(In thousands)

 

 

 

Number of
Shares

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

94,406

 

 

94,406

 

Tax benefit from stock option exercises

 

 

 

2,805

 

 

 

2,805

 

Exercise of stock options

 

252

 

3

 

2,542

 

 

 

2,545

 

Purchase of treasury stock