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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, 2001
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 of 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 NOVEMBER 10, 2001, 5,412,006 SHARES OF MERITAGE CORPORATION COMMON STOCK
WERE OUTSTANDING.
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MERITAGE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000 ......................... 3
Consolidated Statements of Earnings for the Three and
Nine Months ended September 30, 2001 and 2000
(unaudited) ............................................... 4
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2001 and 2000 (unaudited) ...... 5
Notes to Consolidated Financial Statements ................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ....................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ............................................... 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................... 17
SIGNATURES ............................................................ S-1
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------- ---------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 1,456 $ 4,397
Real estate under development 346,277 211,307
Deposits on real estate under option or contract 40,635 24,251
Receivables 4,377 2,179
Deferred tax asset 1,961 543
Goodwill 29,355 17,675
Property and equipment, net 8,949 4,717
Other assets 7,178 2,006
--------- ---------
Total Assets $ 440,188 $ 267,075
========= =========
LIABILITIES
Accounts payable and accrued liabilities $ 78,119 $ 48,907
Home sale deposits 15,929 10,917
Notes payable 186,082 86,152
--------- ---------
Total Liabilities 280,130 145,976
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01. Authorized 50,000,000
shares; issued and outstanding 6,208,969 shares at
September 30, 2001 and 5,922,822 shares at
December 31, 2000 62 59
Additional paid-in capital 106,919 102,526
Retained earnings 64,300 29,530
Treasury stock at cost; 818,963 shares at September 30, 2001
and 811,963 at December 31, 2000 (11,223) (11,016)
--------- ---------
Total Stockholders' Equity 160,058 121,099
--------- ---------
Total Liabilities and Stockholders' Equity $ 440,188 $ 267,075
========= =========
See accompanying notes to consolidated financial statements.
3
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Home sales revenue $ 207,177 $ 134,464 $ 497,693 $ 346,919
Land sales revenue -- 1,412 1,598 4,115
--------- --------- --------- ---------
207,177 135,876 499,291 351,034
--------- --------- --------- ---------
Cost of home sales (161,468) (105,629) (390,876) (277,111)
Cost of land sales -- (1,264) (1,474) (3,648)
--------- --------- --------- ---------
(161,468) (106,893) (392,350) (280,759)
--------- --------- --------- ---------
Home sales gross profit 45,709 28,835 106,817 69,808
Land sales gross profit -- 148 124 467
--------- --------- --------- ---------
45,709 28,983 106,941 70,275
Commissions and other sales costs (10,954) (7,291) (27,402) (19,528)
General and administrative costs (11,433) (5,364) (24,251) (14,213)
Interest expense -- (1) (1) (6)
Other income, net 669 319 2,030 1,274
--------- --------- --------- ---------
Earnings before income taxes and
extraordinary items 23,991 16,646 57,317 37,802
Income taxes (9,316) (6,137) (22,314) (13,949)
--------- --------- --------- ---------
Earnings before extraordinary items 14,675 10,509 35,003 23,853
Extraordinary items, net of tax effects 212 -- (233) --
--------- --------- --------- ---------
Net earnings $ 14,887 $ 10,509 $ 34,770 $ 23,853
========= ========= ========= =========
Earnings per share:
Basic:
Earnings before extraordinary items $ 2.73 $ 2.06 $ 6.64 $ 4.57
Extraordinary items, net of tax effects 0.04 -- (0.04) --
--------- --------- --------- ---------
Net earnings per share $ 2.77 $ 2.06 $ 6.60 $ 4.57
========= ========= ========= =========
Diluted:
Earnings before extraordinary items $ 2.46 $ 1.85 $ 6.02 $ 4.15
Extraordinary items, net of tax effects 0.04 -- (0.04) --
--------- --------- --------- ---------
Net earnings per share $ 2.50 $ 1.85 $ 5.98 $ 4.15
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
--------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 34,770 $ 23,853
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 3,747 2,320
(Increase) decrease in deferred tax asset before extraordinary item (1,418) 28
Stock option compensation expense -- 73
Tax benefit from stock option exercise 2,376 --
Change in assets and liabilities, net of effect of acquisition in 2001:
Increase in real estate under development (80,425) (51,452)
Increase in deposits on real estate under option or contract (7,485) (3,394)
Increase in receivables and other assets (8,316) (350)
Increase in accounts payable and accrued liabilities 22,322 7,455
Increase in home sale deposits 2,509 4,300
--------- ---------
Net cash used in operating activities (31,920) (17,167)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition (65,759) (5,158)
Purchases of property and equipment (5,115) (2,206)
--------- ---------
Net cash used in investing activities (70,874) (7,364)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 551,809 318,723
Repayments of debt (453,769) (298,093)
Repurchase of stock (207) (8,507)
Proceeds from exercises of stock options 2,020 564
--------- ---------
Net cash provided by financing activities 99,853 12,687
--------- ---------
Net decrease in cash and cash equivalents (2,941) (11,844)
Cash and cash equivalents at beginning of period 4,397 13,422
--------- ---------
Cash and cash equivalents at end of period $ 1,456 $ 1,578
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The acquisition of Hancock Communities resulted in the
following changes in assets and liabilities:
Real estate under development $ (54,545)
Deposits on real estate under option or contract (8,899)
Receivables and other assets (543)
Accounts payable and accrued liabilities 6,890
Home sale deposits 2,503
Goodwill (11,423)
Property and equipment (1,632)
Borrowings 1,890
---------
Net cash paid for acquisition $ (65,759)
=========
See accompanying notes to consolidated financial statements.
5
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO 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/Scottsdale and Tucson, Arizona markets as Monterey Homes, Hancock
Communities and Meritage Homes, and in the East San Francisco Bay and
Sacramento, California markets as Meritage Homes.
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 accompanying unaudited
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present our financial
position, results of operations and cash flows 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
The components of real estate under development are (in thousands):
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
Homes under contract, in production $159,589 $ 92,881
Finished home sites 84,014 60,630
Home sites under development 55,999 27,636
Model homes and homes held for resale 43,626 26,937
Land held for development 3,049 3,223
-------- --------
$346,277 $211,307
======== ========
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 to the buyer. A
summary of interest capitalized and interest expensed follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Beginning unamortized capitalized interest $ 7,248 $ 4,911 $ 5,426 $ 3,971
Interest capitalized 5,430 2,975 11,868 7,617
Amortized to cost of home and land sales (3,576) (2,203) (8,192) (5,905)
-------- -------- -------- --------
Ending unamortized capitalized interest $ 9,102 $ 5,683 $ 9,102 $ 5,683
======== ======== ======== ========
Interest incurred $ 5,430 $ 2,976 $ 11,869 $ 7,623
Interest capitalized (5,430) (2,975) (11,868) (7,617)
-------- -------- -------- --------
Interest expensed $ -- $ 1 $ 1 $ 6
======== ======== ======== ========
6
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3 - NOTES PAYABLE
Notes payable consists of:
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------- --------
(IN THOUSANDS)
$100 million bank revolving construction line of credit, interest
payable monthly approximating prime (6.0% at September 30, 2001) or
LIBOR (rates varying from 2.57% to 2.66% at September 30, 2001) plus
2.0%, payable at the earlier of close of escrow, maturity date of
individual homes and lots within the collateral pool or over a
24-month period beginning June 1, 2003, secured by first deeds of
trust on real estate $ 9,880 $ 50,354
$75 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 and lots
within the line or May 31, 2002, secured by first deeds of trust on
real estate 14,998 17,269
Acquisition and development seller carry back financing, interest
payable monthly at fixed rates of 9% and 10% per annum; payable at the
maturity date of the individual projects, secured by first deeds of
trust on land 6,204 3,516
Senior unsecured notes, maturing June 1, 2011, annual interest of 9.75%
payable semi-annually 155,000 --
Senior unsecured notes, paid in full May 30, 2001 -- 15,000
Other -- 13
-------- --------
Total $186,082 $ 86,152
======== ========
7
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4 - EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows (in thousands,
except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
BASIC:
Earnings before extraordinary items $ 14,675 $ 10,509 $ 35,003 $ 23,853
Extraordinary items, net of tax effects 212 -- (233) --
-------- -------- -------- --------
Net earnings $ 14,887 $ 10,509 $ 34,770 $ 23,853
======== ======== ======== ========
Weighted average number of shares outstanding 5,367 5,097 5,264 5,224
-------- -------- -------- --------
Basic earnings per share before extraordinary items $ 2.73 $ 2.06 $ 6.64 $ 4.57
Extraordinary items .04 -- (.04) --
-------- -------- -------- --------
Basic earnings per share $ 2.77 $ 2.06 $ 6.60 $ 4.57
======== ======== ======== ========
DILUTED:
Earnings before extraordinary items $ 14,675 $ 10,509 $ 35,003 $ 23,853
Extraordinary items, net of tax effects 212 -- (233) --
-------- -------- -------- --------
Net earnings $ 14,887 $ 10,509 $ 34,770 $ 23,853
======== ======== ======== ========
Weighted average number of shares outstanding 5,367 5,097 5,264 5,224
Effect of dilutive securities:
Contingent shares and warrants -- -- -- 25
Options to acquire common stock 596 582 546 496
-------- -------- -------- --------
Diluted weighted common shares outstanding 5,963 5,679 5,810 5,745
-------- -------- -------- --------
Diluted earnings per share before extraordinary items $ 2.46 $ 1.85 $ 6.02 $ 4.15
Extraordinary items 0.04 -- (0.04) --
-------- -------- -------- --------
Diluted earnings per share $ 2.50 $ 1.85 $ 5.98 $ 4.15
======== ======== ======== ========
Antidilutive stock options not included in diluted EPS -- 102 -- 265
======== ======== ======== ========
NOTE 5 - EXTRAORDINARY ITEMS
During the quarter ended September 30, 2001 we recognized an extraordinary
gain of $212,000, net of related income tax effect of $136,000. This gain
resulted from the purchase and retirement of $10 million in principal of our
9.75% senior notes due June 1, 2011, which we bought back at 93.25.
The nine months ended September 30, 2001, includes as an extraordinary item
a $446,000 loss, net of a $285,000 tax benefit, due to the early extinguishment
of $15 million of senior unsecured debt in May 2001.
8
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 6 - INCOME TAXES
Total income tax expense for the three and nine months ended September 30,
2001 was allocated as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
Income from continuing operations $ 9,316 $ 22,314
Extraordinary items 136 (149)
------- --------
$ 9,452 $ 22,165
======= ========
Income tax expense attributable to income from continuing operations consists of
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Current:
Federal $ 8,743 $ 5,263 $ 20,162 $ 12,202
State 1,933 710 3,571 1,719
-------- -------- -------- --------
10,676 5,973 23,733 13,921
-------- -------- -------- --------
Deferred:
Federal (1,178) 147 (1,212) 25
State (182) 17 (207) 3
-------- -------- -------- --------
(1,360) 164 (1,419) 28
-------- -------- -------- --------
Total $ 9,316 $ 6,137 $ 22,314 $ 13,949
======== ======== ======== ========
NOTE 7 - SEGMENT INFORMATION
We classify our operations into three primary geographic segments: Texas,
Arizona and California. These segments generate revenue 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.
9
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 7 - SEGMENT INFORMATION (CONT.)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(IN THOUSANDS)
HOME SALES REVENUE:
Texas $ 62,306 $ 58,932 $ 185,264 $ 160,643
Arizona 100,794 45,168 201,154 99,367
California 44,077 30,364 111,275 86,909
--------- --------- --------- ---------
Total $ 207,177 $ 134,464 $ 497,693 $ 346,919
========= ========= ========= =========
EBIT:
Texas $ 10,892 $ 10,449 $ 31,954 $ 26,228
Arizona 10,063 4,862 19,487 8,619
California 8,098 5,033 17,392 12,975
Corporate and other (1,486) (1,493) (3,323) (4,109)
--------- --------- --------- ---------
Total $ 27,567 $ 18,851 $ 65,510 $ 43,713
========= ========= ========= =========
AMORTIZATION OF CAPITALIZED INTEREST:
Texas $ 625 $ 585 $ 1,772 $ 1,876
Arizona 2,001 1,213 4,417 2,724
California 950 405 2,003 1,305
--------- --------- --------- ---------
Total $ 3,576 $ 2,203 $ 8,192 $ 5,905
========= ========= ========= =========
AT AT
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------- --------
(IN THOUSANDS)
ASSETS:
Texas $140,077 $108,238
Arizona 217,497 102,746
California 80,722 53,723
Corporate 1,892 2,368
-------- --------
Total $440,188 $267,075
======== ========
NOTE 8 - HANCOCK ACQUISITION
On May 30, 2001, we acquired substantially all of the homebuilding and
related assets of HC Builders, Inc. and Hancock Communities, L.L.C.
(collectively "Hancock"). The purchase price was $65.8 million in cash, plus the
assumption of trade payables, accrued liabilities and customer deposit
liabilities totaling $9.4 million and a note totaling $1.9 million. In addition,
we granted to Greg Hancock, the founder of Hancock Communities, an earn-out,
payable over three years, equal to 20% of Hancock's pre-tax net income after a
10.5% charge on capital. Hancock designs, builds and markets a wide range of
high-quality homes in the Phoenix, Arizona area with a focus on serving the
entry-level and move-up single-family housing markets and is currently
developing affordable age-restricted adult communities. During 2000, Hancock
closed 1,143 homes at an average selling price of $160,700, resulting in total
revenues of $183.7 million and EBITDA of $16.9 million.
10
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
This acquisition was accounted for using the purchase method of accounting.
Accordingly, the Company recorded goodwill of approximately $11.4 million, which
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired and liabilities assumed.
Such amount is being amortized over a period of 20 years.
The following unaudited pro forma financial data for the three and nine
months ended September 30, 2001 and 2000 has been prepared as if the acquisition
of the assets and liabilities of Hancock on May 30, 2001 had occurred on January
1, 2000. Unaudited pro forma financial data is presented for informational
purposes only and is based on historical information. This information may not
be indicative of the actual amounts of the Company had the events occurred on
the date listed above, nor does it purport to represent future periods (in
thousands except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue $207,177 $194,294 $552,001 $486,925
Earnings before extraordinary items 14,675 12,671 40,728 28,311
Net earnings 14,887 12,671 40,940 27,865
Diluted EPS before extraordinary items 2.46 2.23 7.01 4.93
Diluted EPS after extraordinary items 2.50 2.23 7.05 4.85
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS
On October 3, 2001, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, it retains many of the fundamental provisions of that
Statement.
Statement No. 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE
EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of
a business. However, it retains the requirement in Opinion No. 30 to report
separately discontinued operations and extends that reporting to a COMPONENT OF
AN ENTITY that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. By broadening the
presentation of discontinued operations to include more disposal transactions,
the FASB has enhanced managements' ability to provide information that helps
financial statement users to assess the effects of a disposal transaction on the
ongoing operations of an entity. Statement No. 144 is effective for fiscal years
beginning after December 15, 2001. At the current time, management believes that
the adoption of this statement on January 1, 2002 will not have a material
impact on our financial position.
11
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
The Company is required to adopt the provisions of Statement 141
immediately, except with regard to business combinations initiated prior to July
1, 2001, and Statement 142 effective January 1, 2002. Furthermore, any goodwill
and any intangible assets determined to have an indefinite useful life that are
acquired in a purchase business combination completed after June 30, 2001 will
not be amortized, but will continue to be evaluated for impairment, in
accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized until the adoption of
Statement 142.
Statement 141 will require, upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were acquired
in a prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. Upon adoption of Statement 142, the Company
will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of Statement
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
As of September 30, 2001, the Company had unamortized goodwill in the
amount of approximately $29.4 million, which will be subject to the transition
provisions of Statement 142. Amortization expense related to goodwill was
$1,004,000 and $1,067,000 for the nine months ended September 30, 2001 and for
the year ended December 31, 2000, respectively. The Company has not determined
the impact of the immediate adoption of Statement 141 or the adoption of
Statement 142 on January 1, 2002.
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, as amended, and Section
21E of the Securities Exchange Act of 1934. Such statements include the expected
benefits of the Hancock acquisition, including future closings and Hancock's
contribution to our revenue and earnings, projections of revenue, income or
loss, capital expenditures, backlog, plans for future operations, financing
needs or plans and liquidity, and plans relating to our housing products or
services, as well as assumptions relating to the foregoing. Our past performance
or past or present economic conditions in our housing markets may not be
indicative of future performance and conditions.
12
Actual results may differ materially from those expressed in
forward-looking statements. Risks identified 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, 2000, including under the captions "Business", "Market for the
Registrant's Common Stock and Related Stockholder Matters", in the Notes to the
Consolidated Financial Statements and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations, Factors That May Affect Our
Future Results and Financial Condition," and "Special Note of Caution Regarding
Forward-Looking Statements" describe factors, among others, that could
contribute to or cause such differences. These factors may also affect our
business generally. Additional factors that could cause actual results to differ
materially from those expressed in such forward-looking statements and that
could affect our business generally, are described in our Form S-4 filed with
the SEC on July 18, 2001. As a result of these factors, the Company's stock and
bond prices may fluctuate dramatically.
RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding our
results of operations for the three and nine month periods ended September 30,
2001 and 2000. All material balances and transactions between us and our
subsidiaries have been eliminated in consolidation. 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 in accordance with accounting principles generally
accepted in the United States of America. The results of operations for any
interim period are not necessarily indicative of results expected for a full
fiscal year.
HOME SALES REVENUE, SALES CONTRACTS AND NET SALES BACKLOG
The data provided below shows operating and financial data regarding our
homebuilding activities (dollars in thousands).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE SEPTEMBER 30, PERCENTAGE
------------------------ INCREASE ----------------------- INCREASE
HOME SALES REVENUE 2001 2000 (DECREASE) 2001 2000 (DECREASE)
--------- --------- ---------- --------- --------- ----------
TOTAL
Dollars $ 207,177 $ 134,464 54% $ 497,693 $ 346,919 43%
Homes closed 938 588 60% 2,227 1,553 43%
Average sales price $ 220.9 $ 228.7 (3)% $ 223.5 $ 223.4 *
TEXAS
Dollars $ 62,306 $ 58,932 6% $ 185,263 $ 160,643 15%
Homes closed 357 334 7% 1,077 939 15%
Average sales price $ 174.5 $ 176.4 (1)% $ 172.0 $ 171.1 *
ARIZONA
Dollars $ 100,794 $ 45,168 123% $ 201,155 $ 99,367 102%
Homes closed 469 165 184% 863 361 139%
Average sales price $ 214.9 $ 273.7 (22)% $ 233.1 $ 275.3 (15)%
CALIFORNIA
Dollars $ 44,077 $ 30,364 45% $ 111,275 $ 86,909 28%
Homes closed 112 89 26% 287 253 13%
Average sales price $ 393.5 $ 341.2 15% $ 387.7 $ 343.5 13%
- ----------
* Less than one percent
13
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE SEPTEMBER 30, PERCENTAGE
------------------------ INCREASE ----------------------- INCREASE
SALES CONTRACTS 2001 2000 (DECREASE) 2001 2000 (DECREASE)
--------- --------- ---------- --------- --------- ----------
TOTAL
Dollars $ 161,486 $173,930 (7)% $ 513,237 $ 470,601 9%
Homes ordered 723 731 (1)% 2,220 1,950 14%
Average sales price $ 223.4 $ 237.9 (6)% $ 231.2 $ 241.3 (4)%
TEXAS
Dollars $ 50,409 $ 71,684 (30)% $ 193,241 $ 190,166 2%
Homes ordered 297 422 (30)% 1,156 1,094 6%
Average sales price $ 169.7 $ 169.9 * $ 167.2 $ 173.8 (4)%
ARIZONA
Dollars $ 84,197 $ 59,912 41% $ 220,025 $ 148,771 48%
Homes ordered 359 194 85% 814 474 72%
Average sales price $ 234.5 $ 308.8 (24)% $ 270.3 $ 313.9 (14)%
CALIFORNIA
Dollars $ 26,880 $ 42,334 (37)% $ 99,971 $ 131,664 (24)%
Homes ordered 67 115 (42)% 250 382 (35)%
Average sales price $ 401.2 $ 368.1 9% $ 399.9 $ 344.7 16%
- ----------
* Less than one percent
AT SEPTEMBER 30, PERCENTAGE
------------------------- INCREASE
NET SALES BACKLOG 2001 2000 (DECREASE)
---- ---- ----------
TOTAL
Dollars $432,968 $344,566 26%
Homes in backlog 1,849 1,390 33%
Average sales price $ 234.2 $ 247.9 (6)%
TEXAS
Dollars $127,542 $123,505 3%
Homes in backlog 774 721 7%
Average sales price $ 164.8 $ 171.3 (4)%
ARIZONA
Dollars $241,604 $143,722 68%
Homes in backlog 905 437 107%
Average sales price $ 267.0 $ 328.9 (19)%
CALIFORNIA
Dollars $ 63,822 $ 77,339 (18)%
Homes in backlog 170 232 (27)%
Average sales price $ 375.4 $ 333.4 13%
HOME SALES REVENUE. The increases in total home sales revenue and number of
homes closed in the third quarter and first nine months of 2001 compared to the
same periods of 2000 resulted mainly from strong markets at the time the orders
for these closings were taken in all of our divisions, continued growth in our
mid-priced communities in Arizona and the addition of Hancock Communities to our
operations in Phoenix, Arizona, which was acquired on May 30, 2001. During the
three and nine months ended September 30, 2000, 313 and 383 Hancock homes were
closed, respectively.
14
SALES CONTRACTS. Sales contracts for any period represent the aggregate
sales price of all homes ordered by customers, net of cancellations. We do not
include sales contingent upon the sale of a customer's existing home as a sales
contract until the contingency is removed. Sales contracts for the nine months
ended September 30, 2001 are up from the previous year, due to 304 contracts
from the Hancock acquisition and the strength of our markets earlier in the
year. Total sales contracts decreased in the third quarter of 2001 compared to
the same period of 2000 due mainly, we believe, to a combination of factors,
including a difficult comparison to the prior year's very strong sales results,
slowing in our high-end Monterey Scottsdale product and in our move-up Austin
product, compounded by the events of September 11. These factors were mostly
offset by the inclusion of 234 Hancock sales contracts in the third quarter of
2001. Historically, we have experienced a cancellation rate approximating 23% of
gross sales, which we believe is consistent with industry norms. For the
quarter, cancellation rates increased to 31% which we believe was caused by
September 11.
NET SALES BACKLOG. Backlog represents net sales contracts that have not
closed. Total dollar backlog at September 30, 2001 increased 26% over the
September 30, 2000 amount due to an increase in the number of homes in backlog.
The number of homes in backlog at September 30, 2001 increased 33% over the same
date in the prior year. These increases resulted mainly from our Hancock
acquisition.
OTHER OPERATING INFORMATION
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ----------------------------------
PERCENTAGE PERCENTAGE
INCREASE INCREASE
2001 2000 (DECREASE) 2001 2000 (DECREASE)
---- ---- ---------- ---- ---- ----------
HOME SALES GROSS PROFIT
Dollars $45,709 $28,835 58.5% $106,817 $69,808 53.0%
Percentage of home sales revenues 22.1% 21.4% * 21.5% 20.1% 1.4%
COMMISSIONS AND OTHER SALES COSTS
Dollars $10,954 $ 7,291 50.2% $ 27,402 $19,528 40.3%
Percent of home sales revenue 5.3% 5.4% * 5.5% 5.6% *
GENERAL AND ADMINISTRATIVE COSTS
Dollars $11,433 $ 5,364 113.1% $ 24,251 $14,213 70.6%
Percent of total revenue 5.5% 3.9% 1.6 4.9% 4.0% *
INCOME TAXES
Dollars $ 9,316 $ 6,137 51.8% $ 22,314 $13,949 60.0%
Percent of income before taxes
and extraordinary items 38.8% 36.9% 1.9% 38.9% 36.9% 2.0%
* Less than one percent
HOME SALES GROSS PROFIT. Gross profit equals home sales revenue, net of
housing cost of sales, which include developed lot costs, home construction
costs, amortization of common community costs (such as the cost of model complex
and architectural, legal and zoning costs), interest, sales tax, warranty,
construction overhead and closing costs. The dollar increases in gross profit
for the three and nine months ended September 30, 2001 are attributable to the
greater number of home closings and due to the strong housing markets that
existed at the time these homes were sold. We were also able to benefit from a
reasonably favorable environment for controlling construction costs.
COMMISSIONS AND OTHER SALES COSTS. Commissions and other sales costs, such
as advertising and sales office expenses, were approximately $11.0 million, or
5.3% of home sales revenue, in the three months ended September 30, 2001, as
compared to approximately $7.3 million, or 5.4% of home sales revenue, in the
third quarter of 2000. For the first nine months of 2001, commissions and other
sales costs were approximately $27.4 million or 5.5% of home sales revenue,
compared with $19.5 million, or 5.6% of home sales revenue, for the nine months
of 2000.
15
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs were
approximately $11.4 million, or 5.5% of total revenue, in the third quarter of
2001, as compared to approximately $5.4 million, or 3.9% of total revenue, in
2000. General and administrative costs were approximately $24.3 million, or 4.9%
of total revenue, in the first nine months of 2001, as compared to approximately
$14.2 million, or 4.0% of total revenue, for the same period of 2000. General
and administrative costs in 2001 were higher as a percentage of revenue, in
comparison to the prior year due to a general overall increase in these costs,
and due to the strong closing performance of our Northern California region,
which resulted in a larger-than-typical earn-out payment per the terms of the
purchase contract when we acquired the division. The earn-out, which terminates
in June 2002, is calculated based on 20 percent of the pre-tax earnings of the
Northern California region after reduction for a capital charge.
INCOME TAXES. The increases in income taxes for the quarter and nine months
ended September 30, 2001 from the prior year resulted from an increase in
pre-tax income, along with a slightly higher effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of working capital are land purchases, lot development
and home construction. We use a combination of borrowings and funds generated by
operations to meet our working capital requirements.
At September 30, 2001, we had short-term secured revolving construction
loan and acquisition and development facilities totaling $185.0 million, of
which approximately $24.9 million was outstanding. An additional $123.7 million
of unborrowed funds supported by approved collateral were available under our
credit facilities at that date, subject to compliance with the financial and
other covenants in our loan agreements. This additional borrowing is limited to
approximately $69 million under such loan covenants.
In September 2001, we purchased and retired $10 million in principal amount
of our 9.75% senior notes due June 1, 2011. The purchases were made at 93.25% of
par and resulted in an extraordinary gain of $212,000, net of related income tax
effect of $136,000.
The 9.75% senior unsecured notes require us to comply with a number of
covenants including:
1) Limitations on additional indebtedness,
2) Limitations on the payment of dividends, redemption of equity
interests and certain investments,
3) Maintenance of a minimum level of consolidated tangible net worth,
4) Limitations on liens securing certain obligations, and
5) Limitations on the sale of assets, mergers and consolidations and
transactions with affiliates.
We believe that our current borrowing capacity, cash on hand at September
30, 2001 and anticipated cash flows from operations are sufficient to meet
liquidity needs for the foreseeable future. There is no assurance, however, that
future amounts available from our sources of liquidity will be sufficient to
meet future capital needs. The amount and types of indebtedness that we incur
may be limited by the terms of the indenture governing our senior notes and by
the terms of our other credit agreements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into derivative financial instruments for trading purposes,
although we do have other financial instruments in the form of notes payable and
senior debt. Our lines of credit and credit facilities are at variable interest
rates and are subject to market risk in the form of interest rate fluctuations.
The interest rate on our senior debt is at a fixed rate.
16
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 Employment Agreement between the Company and Larry W. Seay,
dated October 1, 2001 Filed herewith
99 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-Looking Statements Filed herewith
(B) REPORTS ON FORM 8-K
None.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly cause this report on Form 10-Q to
be signed on its behalf by the undersigned, thereunto duly authorized, this 14th
day of November 2001.
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