================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-9977 MERITAGE CORPORATION (Exact Name of Registrant as Specified in Its Charter) Maryland 86-0611231 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 6613 North Scottsdale Road, Suite 200 Scottsdale, Arizona 85250 (Address of Principal Executive Offices) (Zip Code) (480) 998-8700 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ]. As of October 10, 2000, 4,827,209 shares of Meritage Corporation common stock were outstanding. ================================================================================ MERITAGE CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999........................ 3 Condensed Consolidated Statements of Earnings for the Three and Nine Month Periods ended September 30, 2000 and 1999........ 4 Condensed Consolidated Statements of Cash Flows for the Nine Month Periods ended September 30, 2000 and 1999................. 5 Notes to Condensed Consolidated Financial Statements............ 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................. 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................................... 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 14 SIGNATURES ................................................................. S-1 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MERITAGE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, 2000 1999 --------- --------- (UNAUDITED) ASSETS Cash and cash equivalents $ 1,578 $ 13,422 Real estate under development 222,464 171,012 Deposits on real estate under option or contract 19,094 15,700 Receivables 1,619 1,643 Deferred tax asset 670 699 Goodwill 17,941 18,742 Property and equipment, net 4,727 4,040 Other assets 1,676 1,301 --------- --------- Total Assets $ 269,769 $ 226,559 ========= ========= LIABILITIES Accounts payable and accrued liabilities $ 44,248 $ 41,950 Customer deposits on sales contracts 12,561 8,261 Notes payable 106,567 85,937 --------- --------- Total Liabilities 163,376 136,148 --------- --------- STOCKHOLDERS' EQUITY Common stock, par value $.01 per share; 50,000,000 Shares authorized; issued and outstanding - 5,612,362 shares at September 30, 2000, and 5,474,906 shares at December 31, 1999 56 55 Additional paid-in capital 101,043 100,407 Accumulated earnings (deficit) 15,704 (8,149) Less cost of shares held in treasury (785,153 shares at September 30, 2000, and 186,000 shares at December 31, 1999) (10,410) (1,902) --------- --------- Total Stockholders' Equity 106,393 90,411 --------- --------- Total Liabilities and Stockholders' Equity $ 269,769 $ 226,559 ========= ========= See accompanying notes to condensed consolidated financial statements 3 MERITAGE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Home sales revenue $ 134,464 $ 76,786 $ 346,919 $ 204,584 Land sales revenue 944 0 2,601 155 --------- --------- --------- --------- 135,408 76,786 349,520 204,739 Cost of home sales (105,574) (62,232) (276,924) (164,295) Cost of land sales (851) 0 (2,321) (69) --------- --------- --------- --------- (106,425) (62,232) (279,245) (164,364) Home sales gross profit 28,890 14,554 69,995 40,289 Land sales gross profit 93 0 280 86 --------- --------- --------- --------- 28,983 14,554 70,275 40,375 Commissions and other sales costs (7,291) (4,572) (19,528) (12,480) General and administrative expense (5,363) (3,531) (14,212) (10,356) Interest expense (2) (2) (6) (4) Other income, net 319 362 1,273 1,395 --------- --------- --------- --------- Earnings before income taxes 16,646 6,811 37,802 18,930 Income taxes (6,137) (2,784) (13,949) (8,037) --------- --------- --------- --------- Net earnings $ 10,509 $ 4,027 $ 23,853 $ 10,893 ========= ========= ========= ========= Basic earnings per share $ 2.06 $ .74 $ 4.57 $ 2.00 ========= ========= ========= ========= Diluted earnings per share $ 1.85 $ .67 $ 4.15 $ 1.80 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 4 MERITAGE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 23,853 $ 10,893 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,320 1,608 Stock option compensation expense 73 445 Decrease in deferred tax asset 28 6,363 Increase in real estate under development (51,452) (75,393) Increase in deposits on real estate under option or contract (3,394) (6,327) (Increase) decrease in receivables and other assets (350) 39 Increase in accounts payable and accrued liabilities 7,455 1,639 Increase in customer deposits on sales contracts 4,300 2,511 --------- --------- Net cash used in operating activities (17,167) (58,222) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for merger/acquisition (5,158) (6,967) Purchases of property and equipment (2,206) (2,273) --------- --------- Net cash used in investing activities (7,364) (9,240) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings 318,723 213,469 Repayment of borrowings (298,093) (154,940) Purchase of treasury shares (8,507) (113) Proceeds from employee stock options exercised 564 495 --------- --------- Net cash provided by financing activities 12,687 58,911 --------- --------- Net decrease in cash and cash equivalents (11,844) (8,551) Cash and cash equivalents at beginning of period 13,422 12,387 --------- --------- Cash and cash equivalents at end of period $ 1,578 $ 3,836 ========= =========
See accompanying notes to condensed consolidated financial statements 5 MERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION We develop, construct and sell new high-quality, single-family homes in the semi-custom luxury, move-up and entry-level markets. We operate in the Dallas/Fort Worth, Austin and Houston, Texas markets as Legacy Homes, in the Phoenix and Tucson, Arizona metropolitan markets under the Monterey Homes and Meritage Homes of Arizona brand names, and in the San Francisco Bay and Sacramento, California markets as Meritage Homes of Northern California. BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Meritage Corporation and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation and certain prior period amounts have been reclassified to be consistent with current financial statement presentation. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly present our financial position and results of operations for the periods presented. The results of operations for any interim period are not necessarily indicative of results to be expected for a full fiscal year. NOTE 2 - REAL ESTATE UNDER DEVELOPMENT AND CAPITALIZED INTEREST Real estate under development consisted of the following (in thousands): SEPTEMBER 30, DECEMBER 31, 2000 1999 -------- -------- Homes under contract, in production $110,654 $ 71,987 Finished home sites and home sites under development 82,370 63,610 Model homes and homes held for resale 24,392 31,797 Land held for development 5,048 3,618 -------- -------- $222,464 $171,012 ======== ======== We capitalize certain interest costs incurred during development and construction. Capitalized interest is allocated to real estate under development and charged to cost of sales when the property is delivered. Summaries of interest capitalized and interest expensed follow (in thousands):
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Beginning unamortized capitalized interest $ 4,911 $ 2,653 $ 3,971 $ 1,982 Interest capitalized 2,975 1,942 7,617 4,541 Amortized in cost of home and land sales (2,203) (1,118) (5,905) (3,046) ------- ------- ------- ------- Ending unamortized capitalized interest $ 5,683 $ 3,477 $ 5,683 $ 3,477 ======= ======= ======= ======= Interest incurred $ 2,977 $ 1,944 $ 7,623 $ 4,545 Interest capitalized (2,975) (1,942) (7,617) (4,541) ------- ------- ------- ------- Interest expensed $ 2 $ 2 $ 6 $ 4 ======= ======= ======= =======
6 MERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 3 - NOTES PAYABLE Notes payable consist of the following (in thousands): SEPTEMBER 30, DECEMBER 31, 2000 1999 -------- ------- $100 million bank revolving construction line of credit, interest payable monthly approximating prime (9.5% at September 30, 2000) or LIBOR (90 day LIBOR 6.8% at September 30, 2000), plus 1.75% payable December 31, 2001, secured by first deeds of trust on real estate $ 71,807 $36,180 $65 million bank revolving construction line of credit, interest payable monthly approximating prime or LIBOR plus 2.0%, payable at the earlier of close of escrow, maturity date of individual homes within the line or July 31, 2001, secured by first deeds of trust on real estate 16,164 26,104 $15 million unsecured bank revolving line of credit, interest payable monthly at prime, matured January 17, 2000 -- 6,000 Acquisition and development credit facilities and seller carry back financing totaling $5.7 million, interest payable monthly, ranging from prime to prime plus .25% or at a fixed 10% per annum rate; payable at the earlier of funding of construction financing or the maturity date of the individual projects, secured by first deeds of trust on real estate 3,580 2,627 Senior unsecured notes, maturing September 15, 2005, annual interest of 9.10% payable quarterly, principal payable in three equal installments on September 15, 2003, 2004 and 2005 15,000 15,000 Other 16 26 -------- ------- Total $106,567 $85,937 ======== ======= 7 MERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 4 - EARNINGS PER SHARE INFORMATION A summary of the reconciliation from basic earnings per share to diluted earnings per share for the three and nine months ended September 30, 2000 and 1999 follows (in thousands, except per share amounts):
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 2000 1999 2000 1999 ------- ------ ------- ------- Net earnings $10,509 $4,027 $23,853 $10,893 Basic EPS - Weighted average shares outstanding 5,097 5,463 5,224 5,448 ------- ------ ------- ------- Basic earnings per share $ 2.06 $ .74 $ 4.57 $ 2.00 ======= ====== ======= ======= Basic EPS - Weighted average shares outstanding 5,097 5,463 5,224 5,448 Effect of dilutive securities: Contingent shares and warrants -- 70 25 83 Stock options 582 491 496 527 ------- ------ ------- ------- Dilutive EPS - Weighted average shares outstanding 5,679 6,024 5,745 6,058 ------- ------ ------- ------- Diluted earnings per share $ 1.85 $ .67 $ 4.15 $ 1.80 ======= ====== ======= ======= Antidilutive stock options not included in diluted EPS 102 272 265 275 ======= ====== ======= =======
NOTE 5 - INCOME TAXES Components of income tax expense are (in thousands): QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2000 1999 2000 1999 ------ ------- ------- ------ Current taxes: Federal $5,263 $ 724 $12,202 $ 964 State 710 250 1,719 709 ------ ------- ------- ------ 5,973 974 13,921 1,673 ------ ------- ------- ------ Deferred taxes: Federal 147 1,770 25 6,236 State 17 40 3 128 ------ ------- ------- ------ 164 1,810 28 6,364 ------ ------- ------- ------ Total $6,137 $ 2,784 $13,949 $8,037 ====== ======= ======= ====== 8 MERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 6 - SEGMENT INFORMATION We classify our operations into three primary geographic segments: Texas, Arizona and California. These segments generate revenues through the sale of homes to external customers. We are not dependent on any one major customer. Operational information relating to the different business segments follows. Certain information has not been included by segment due to the immateriality of the amount to the segment or in total. We evaluate segment performance based on several factors, of which the primary financial measure is earnings before interest and taxes (EBIT). The accounting policies of the business segments are the same as those described in Notes 1 and 2. There are no significant transactions between segments.
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ----------------------- 2000 1999 2000 1999 --------- -------- --------- --------- (in thousands) HOME SALES REVENUE: Texas $ 58,932 $ 43,604 $ 160,643 $ 116,399 Arizona 45,168 26,056 99,367 75,585 California 30,364 7,126 86,909 12,600 --------- -------- --------- --------- Total $ 134,464 $ 76,786 $ 346,919 $ 204,584 ========= ======== ========= ========= EBIT: Texas $ 10,449 $ 5,790 $ 26,228 $ 15,344 Arizona 4,862 2,565 8,619 8,270 California 5,033 515 12,975 1,288 Corporate and other (1,493) (937) (4,109) (2,921) --------- -------- --------- --------- Total $ 18,851 $ 7,933 $ 43,713 $ 21,981 ========= ======== ========= ========= AMORTIZATION OF CAPITALIZED INTEREST: Texas $ 585 $ 445 $ 1,876 $ 1,112 Arizona 1,213 559 2,724 1,750 California 405 114 1,305 184 --------- -------- --------- --------- Total $ 2,203 $ 1,118 $ 5,905 $ 3,046 ========= ======== ========= ========= AT AT SEPTEMBER 30, DECEMBER 31, 2000 1999 --------- --------- ASSETS: Texas $ 100,809 $ 97,832 Arizona 116,596 77,195 California 49,785 43,773 Corporate 2,579 7,759 --------- --------- Total $ 269,769 $ 226,559 ========= =========
NOTE 7 - RELATED PARTY TRANSACTIONS In September 2000, the Company purchased 312,500 shares from a current director at a cost of $5 million. These shares are held as treasury shares. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements. The words "believe," "expect," "anticipate," and "project" and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Such statements may include, but are not limited to, projections of revenues, income or loss, capital expenditures, plans for future operations, financing needs or plans and liquidity, the impact of inflation, the impact of changes in interest rates, plans relating to our products or services, potential real property acquisitions, and new or planned development projects, as well as assumptions relating to the foregoing. Statements in Exhibit 99 to this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 1999, including the Notes to the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," describe factors, among others, that could contribute to or cause such differences, which could be material. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements are described in "Business" and "Market for the Registrant's Common Stock and Related Stockholder Matters" in our December 31, 1999 Annual Report on Form 10-K. RESULTS OF OPERATIONS The following discussion and analysis provides information regarding the results of our operations for the three and nine months ended September 30, 2000 and 1999. All material balances and transactions between us and our subsidiaries have been eliminated. In management's opinion, the data reflects all adjustments, consisting of only normal recurring adjustments, necessary to fairly present our financial position and results of operations for the periods presented. The results of operations for any interim period are not necessarily indicative of results expected for a full fiscal year. HOME SALES REVENUE Home sales revenue is the product of the number of homes closed during the period and the average sales price per home. Comparative home sales revenue for the third quarter and first nine months of 2000 and 1999 follow (dollars in thousands):
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, DOLLAR/UNIT PERCENTAGE SEPTEMBER 30, DOLLAR/UNIT PERCENTAGE ------------------- INCREASE INCREASE -------------------- INCREASE INCREASE 2000 1999 (DECREASE) (DECREASE) 2000 1999 (DECREASE) (DECREASE) -------- ------- -------- ---------- -------- -------- --------- ---------- Total Dollars $134,464 $76,786 $57,678 75% $346,919 $204,584 $142,335 70% Homes closed 588 399 189 47% 1,553 1,030 523 51% Average sales price $ 228.7 $ 192.5 $ 36.2 20% $ 223.4 $ 198.6 $ 24.8 12% Texas Dollars $ 58,932 $43,604 $15,328 35% $160,643 $116,399 $ 44,244 38% Homes closed 334 283 51 18% 939 758 181 24% Average sales price $ 176.4 $ 154.1 $ 22.4 15% $ 171.1 $ 153.6 $ 17.5 11% Arizona Dollars $ 45,168 $26,056 $19,112 73% $ 99,367 $ 75,585 $ 23,782 31% Homes closed 165 97 68 70% 361 238 123 52% Average sales price $ 273.7 $ 268.6 $ 5.1 2% $ 275.3 $ 317.6 $ (42.3) (13)% California Dollars $ 30,364 $ 7,126 $23,238 326% $ 86,909 $ 12,600 $ 74,309 590% Homes closed 89 19 70 368% 253 34 219 644% Average sales price $ 341.2 $ 375.1 $ (33.9) (9)% $ 343.5 $ 370.6 $ (27.1) (7)%
10 The increase in total home sales revenue and number of homes closed in 2000 compared to 1999 results mainly from strong market performance in all of our divisions and additional closings from our expanding mid-priced market segment in Arizona. HOME SALES GROSS PROFIT Gross profit is home sales revenue, net of housing cost of sales, which include developed home site costs, home construction costs, amortization of common community costs (such as the cost of model complexes and architectural, legal and zoning costs), interest, sales tax, warranty, construction overhead and closing costs. Comparative 2000 and 1999 housing gross profit follows (dollars in thousands):
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- ---------------------------------------- DOLLAR/ DOLLAR/ PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE 2000 1999 INCREASE INCREASE 2000 1999 INCREASE INCREASE ---- ---- -------- -------- ---- ---- -------- -------- Dollars $28,890 $14,554 $14,336 99% $69,995 $40,289 $29,706 74% Percentage of home sales revenues 21.5% 19.0% 2.5% -- 20.2% 19.7% .5% --
The dollar increase in gross profit for the three and nine months ended September 30, 2000 over the prior year periods is attributable to the increase in number of homes closed. The gross profit margin increased marginally in both periods due to an increase in gross margins in Texas and California caused mainly by home sale price increases and due to a larger number of deliveries of high margin California homes. LAND SALES GROSS PROFIT Meritage will occasionally sell land that the Company originally purchased for development. These lots are no longer needed for use in current operations, and are therefore considered to be excess. COMMISSIONS AND OTHER SALES COSTS Commissions and other sales costs, such as advertising and sales offices expenses, were approximately $7.3 million, or 5.4% of home sales revenue for the three months ended September 30, 2000 compared with $4.6 million, or 6.0% of home sales revenue for the third quarter of 1999. For the first nine months of 2000, commissions and other sales costs were approximately $19.5 million, or 5.6% of home sales revenue, compared with $12.5 million, or 6.1% of home sales revenue for the first nine months of 1999. The decrease in these expenses as a percentage of home sales revenue was caused by controlling increases in advertising and other marketing costs, while revenues expanded. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were approximately $5.4 million (4.0% of revenue) in the third quarter of 2000, as compared with approximately $3.5 million (4.6% of revenue) in 1999. For the nine months ended September 30, 2000, G&A expenses were approximately $14.2 million (4.1% of revenue), compared with $10.4 million (5.1% of revenue) for the same period of 1999. The higher expense as a percentage of revenue for the nine months ended September 30, 1999 includes approximately $600,000 related to the buyout of an employment agreement of a former managing director. Operating costs in 1999 were also higher as a percentage of revenue due to overhead increases incurred related to our California expansion, and the start-up of our new Meritage Division in Phoenix, Arizona. INCOME TAXES The increases in income tax expense for the quarter and nine months ended September 30, 2000 from prior year's periods were caused by higher taxable income offset by a slightly lower effective tax rate. SALES CONTRACTS Sales contracts for any period represent the number of homes ordered by customers (net of cancellations) multiplied by the average sales price per unit ordered. Comparative 2000 and 1999 sales contracts follow (dollars in thousands): 11
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------- DOLLAR/UNIT PERCENTAGE ---------------- DOLLAR/UNIT PERCENTAGE 2000 1999 INCREASE INCREASE 2000 1999 INCREASE INCREASE ---- ---- -------- -------- ---- ---- -------- -------- Total Dollars $173,930 $93,955 $79,975 85% $470,601 $295,969 $174,632 59% Units ordered 731 405 326 81% 1,950 1,455 495 34% Average sales price $ 237.9 $ 232.0 $ 5.9 3% $ 241.3 $ 203.4 $ 37.9 19% Texas Dollars $ 71,684 $36,562 $35,122 96% $190,166 $156,178 $ 33,988 22% Units ordered 422 219 203 93% 1,094 996 98 10% Average sales price $ 169.9 $ 166.9 $ 2.9 2% $ 173.8 $ 156.8 $ 17.0 11% Arizona Dollars $ 59,912 $39,027 $20,885 54% $148,771 $100,265 $ 48,506 48% Units ordered 194 132 62 47% 474 344 130 38% Average sales price $ 308.8 $ 295.7 $ 13.2 5% $ 313.9 $ 291.5 $ 22.4 8% California Dollars $ 42,334 $18,366 $23,968 131% $131,664 $ 39,526 $ 92,138 233% Units Ordered 115 54 61 113% 382 115 267 232% Average sales price $ 368.1 340.1 $ 28.0 8% $ 344.7 $ 343.7 $ 1.0 *
* Represents less than one percent We do not include sales contingent upon the sale of a customer's existing home as a sales contract until the contingency is removed. Historically, we have experienced a cancellation rate of approximately 25% or less of gross sales. Total sales contracts increased in 2000 compared to 1999 due mainly to the expansion into California and the start-up of our mid-priced Meritage Phoenix division, along with continued economic strength in our operating markets, particularly Texas. NET SALES BACKLOG Backlog represents net sales contracts that have not closed. Comparative September 30, 2000 and 1999 net sales backlog follows (dollars in thousands): AT SEPTEMBER 30, DOLLAR/UNIT PERCENTAGE ---------------- INCREASE INCREASE 2000 1999 (DECREASE) (DECREASE) ---- ---- ---------- ---------- Total Dollars $344,566 $236,524 $108,042 46% Homes in backlog 1,390 1,113 277 25% Average sales price $ 247.9 $ 212.5 $ 35.4 17% Texas Dollars $123,505 $116,957 $ 6,548 6% Homes in backlog 721 741 (20) (3)% Average sales price $ 171.3 $ 157.8 $ 13.5 9% Arizona Dollars $143,722 $ 90,904 $ 52,818 58% Homes in backlog 437 286 151 53% Average sales price $ 328.9 $ 317.8 $ 11.0 4% California Dollars $ 77,339 $ 28,663 $ 48,676 170% Homes in backlog 232 86 146 170% Average sales price $ 333.4 $ 333.3 $ .1 * * Represents less than one percent 12 Total dollar backlog at September 30, 2000 increased 46% over the 1999 amount due to an increase in the number of homes in backlog and increased sales prices in most of our markets. Units in backlog at September 30, 2000 increased 25% over the same period in the prior year due to the increase in net orders caused by expansion into California, the start-up of our new Meritage Phoenix division and strong housing markets in which we operate. LIQUIDITY AND CAPITAL RESOURCES Our principal uses of working capital are land purchases, home site development and home construction. We use a combination of borrowings and funds generated by operations to meet our working capital requirements. At September 30, 2000 we had short-term secured revolving construction loan and acquisition and development facilities totaling $170.7 million, of which approximately $90.3 million was outstanding. An additional $49 million of unborrowed funds supported by approved collateral were available under our credit facilities at that date. We also have $15 million outstanding in unsecured, senior subordinated notes due in three equal installments, September 15, 2003, 2004 and 2005, which were issued in October 1998. In May 1999, our Board of Directors authorized the buyback of up to $6 million of outstanding Meritage stock. This amount was increased to $20 million at subsequent board meetings. As of September 30, 2000, approximately 785,000 shares had been repurchased for an aggregate price of approximately $10.4 million, including 312,500 shares purchased from a current director in the third quarter, 2000, at a cost of $5 million. We believe that the current borrowing capacity, cash on hand at September 30, 2000 and anticipated cash flows from operations are sufficient to meet our liquidity needs for the foreseeable future. There is no assurance, however, that future amounts available from our sources of liquidity will be sufficient to meet future capital needs. The amount and types of indebtedness that we incur may be limited by the terms of the indenture governing our senior subordinated notes and our credit agreements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not have or trade in derivative financial instruments. We have other financial instruments in the form of notes payable and senior debt, which are at fixed interest rates. Our lines of credit and credit facilities are at variable interest rates and are subject to market risk in the form of interest rate fluctuations. 13 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS EXHIBIT PAGE OR NUMBER DESCRIPTION METHOD OF FILING ------ ----------- ---------------- 10.1 Modification to Loan Agreement with Guaranty Filed herewith Federal Bank, Dated as of July 31, 2000 27 Financial Data Schedule Filed herewith 99 Private Securities Reform Act of 1995 Safe Filed herewith Harbor Compliance Statement for Forward-Looking Statements (b) REPORTS ON FORM 8-K No reports on form 8-K were filed during the quarter ended September 30, 2000. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, this 14th day of November 2000. MERITAGE CORPORATION, a Maryland Corporation By /s/ LARRY W.SEAY -------------------------------------------------- Larry W. Seay Chief Financial Officer and Vice President-Finance (Principal Financial Officer and Duly Authorized Officer) S-1