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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 MARCH 31, 2002
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 of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6613 North Scottsdale Road, Suite 200 85250
Scottsdale, Arizona (Zip Code)
(Address of Principal Executive Offices)
(480) 998-8700
(Registrant's Telephone Number, Including Area Code)
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 May 6, 2002, 11,446,000 shares of Meritage Corporation common stock were
outstanding.
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MERITAGE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001........................................ 3
Consolidated Statements of Earnings for the Three
Months ended March 31, 2002 and 2001 (unaudited)............. 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 2002 and 2001 (unaudited)....... 5
Notes to Consolidated Financial Statements (unaudited)....... 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
ITEMS 1-3. NOT APPLICABLE............................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 16
ITEM 5. OTHER INFORMATION............................................ 17
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
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents $ 273 $ 3,383
Real estate 375,326 330,238
Deposits on real estate under option or contract 46,286 45,252
Receivables 4,682 5,508
Deferred tax asset 3,109 2,612
Goodwill 30,813 30,369
Property and equipment, net 9,967 9,667
Prepaid expenses and other assets 11,306 9,686
-------- --------
Total assets $481,762 $436,715
======== ========
LIABILITIES
Accounts payable and accrued liabilities $ 64,923 $ 69,029
Home sale deposits 16,745 13,538
Notes payable 210,199 177,561
-------- --------
Total liabilities 291,867 260,128
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value. Authorized 50,000,000
shares; issued and outstanding 12,963,672 and
12,613,938 shares at March 31, 2002 and December 31,
2001, respectively 130 126
Additional paid-in capital 114,150 109,412
Retained earnings 86,838 78,272
Treasury stock at cost, 1,637,926 shares at March 31, 2002
and December 31, 2001 (11,223) (11,223)
-------- --------
Total stockholders' equity 189,895 176,587
-------- --------
Total liabilities and stockholders' equity $481,762 $436,715
======== ========
See accompanying notes to consolidated financial statements
3
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
--------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Home sales revenue $ 169,731 $ 116,113
Land sales revenue -- 593
--------- ---------
169,731 116,706
Cost of home sales (138,095) (92,579)
Cost of land sales -- (531)
--------- ---------
(138,095) (93,110)
Home sales gross profit 31,636 23,534
Land sales gross profit -- 62
--------- ---------
31,636 23,596
Commissions and other sales costs (11,296) (7,013)
General and administrative expenses (7,465) (4,935)
Interest expense -- (1)
Other income, net 1,168 534
--------- ---------
Earnings before income taxes 14,043 12,181
Income taxes (5,477) (4,792)
--------- ---------
Net earnings $ 8,566 $ 7,389
========= =========
Basic earnings per share $ 0.77 $ 0.72
========= =========
Diluted earnings per share $ 0.72 $ 0.64
========= =========
See accompanying notes to consolidated financial statements
4
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
--------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 8,566 $ 7,389
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 1,351 766
(Increase) decrease in deferred tax asset (497) 16
Tax benefit from stock option exercises 3,202 --
Changes in assets and liabilities:
Increase in real estate (45,088) (22,139)
Increase in deposits on real estate under option or contract (1,034) (4,525)
(Increase) decrease in receivables and prepaid expenses and
other assets (1,369) 268
Decrease in accounts payable and accrued liabilities (4,106) (12,214)
Increase in home sale deposits 3,207 2,204
--------- ---------
Net cash used in operating activities (35,768) (28,235)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,520) (798)
--------- ---------
Net cash used in investing activities (1,520) (798)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 142,987 116,572
Repayments of debt (110,349) (85,795)
Proceeds from exercises of stock options 1,540 218
--------- ---------
Net cash provided by financing activities 34,178 30,995
--------- ---------
Net increase (decrease) in cash and cash equivalents (3,110) 1,962
Cash and cash equivalents at beginning of period 3,383 4,397
--------- ---------
Cash and cash equivalents at end of period $ 273 $ 6,359
========= =========
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
BUSINESS. We are a leading designer and builder of single-family homes in
the rapidly growing Sunbelt states of Texas, Arizona and California. We focus on
providing a broad range of first-time, move-up and luxury homes to our targeted
customer base. We and our predecessors have operated in Arizona since 1985, in
Texas since 1987 and in Northern California since 1989. To expand our presence
in Arizona, in 2001 we acquired Hancock Communities (Hancock), another
well-established homebuilder that serves the first-time and move-up markets in
the Phoenix area.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States, and include the accounts of Meritage Corporation and our
wholly owned subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation and certain amounts have been reclassified to be
consistent with current financial statement presentation. In the opinion of
management, the unaudited consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly 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 or for any future
periods. These financial statements should be read in conjunction with our
consolidated financial statements and footnotes thereto included in our annual
report on Form10-K for the year ended December 31, 2001.
NEW ACCOUNTING PRONOUNCEMENTS. In June 2001, the Financial Accounting
Standards Board (FASB) issued Statements of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations," effective July 1, 2001, and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with SFAS
No. 142.
Goodwill represents the cost of acquired companies in excess of the fair
value of net assets acquired at acquisition date. The goodwill recorded
resulting from our acquisitions is allocated to our business operating segments
as follows:
At March 31, 2002
(in thousands)
--------------
First-time and volume-priced $27,663
Mid- to luxury-priced 3,150
-------
$30,813
=======
Goodwill is reviewed by management for impairment annually, or whenever
events or changes in circumstances indicate the carrying amount may not be
recoverable.
6
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Effective January 1, 2002, we adopted the nonamortization provisions of
SFAS No. 142 related to the goodwill existing at December 31, 2001. The
following table sets forth reported net income and earnings per share, as
adjusted to exclude goodwill amortization expense (dollars in thousands except
per share amounts):
YEAR ENDED DECEMBER 31,
----------------------------------------- THREE MONTHS ENDED
2001 2000 1999 MARCH 31, 2001
---------- ---------- ---------- --------------
Earnings before extraordinary items $ 50,892 $ 35,762 $ 18,945 $ 7,389
Extraordinary items, net of tax effects (233) -- -- --
---------- ---------- ---------- ----------
Net earnings, as reported $ 50,659 $ 35,762 $ 18,945 $ 7,389
========== ========== ========== ==========
Earnings, as adjusted before extraordinary items $ 51,771 $ 36,434 $ 19,573 $ 7,603
Extraordinary items, net of tax effects (233) -- -- --
---------- ---------- ---------- ----------
Net earnings, as adjusted $ 51,538 $ 36,434 $ 19,573 $ 7,603
========== ========== ========== ==========
AS REPORTED*:
Basic earnings per share before extraordinary items $ 4.80 $ 3.46 $ 1.74 $ 0.72
Extraordinary items (0.02) -- -- --
---------- ---------- ---------- ----------
Basic earnings per share $ 4.78 $ 3.46 $ 1.74 $ 0.72
========== ========== ========== ==========
Diluted earnings per share before extraordinary items $ 4.32 $ 3.13 $ 1.57 $ 0.64
Extraordinary items (0.02) -- -- --
---------- ---------- ---------- ----------
Diluted earnings per share $ 4.30 $ 3.13 $ 1.57 $ 0.64
========== ========== ========== ==========
AS ADJUSTED*:
Basic earnings per share before extraordinary items $ 4.88 $ 3.52 $ 1.80 $ 0.74
Extraordinary items (0.02) -- -- --
---------- ---------- ---------- ----------
Basic earnings per share $ 4.86 $ 3.52 $ 1.80 $ 0.74
========== ========== ========== ==========
Diluted earnings per share before extraordinary items $ 4.40 $ 3.19 $ 1.62 $ 0.66
Extraordinary items (0.02) -- -- --
---------- ---------- ---------- ----------
Diluted earnings per share $ 4.38 $ 3.19 $ 1.62 $ 0.66
========== ========== ========== ==========
* Adjusted to reflect the 2 for 1 stock split effective April 26, 2002.
7
During the second quarter of 2002, we will finalize the first of the
required impairment tests of goodwill as of January 1, 2002. We cannot determine
the effect of these tests on earnings or financial position at this time.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective for fiscal years
beginning after December 15, 2001. This standard supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and provides a single accounting model for long-lived assets to
be disposed of. SFAS No. 144 provides guidance on differentiating between assets
held and used and assets to be disposed of. Assets to be disposed of would be
classified as held for sale (and depreciation would cease) when management,
having the authority to approve the action, commits to a plan to sell the
asset(s) meeting all required criteria. We adopted this statement on January 1,
2002, which did not have a material effect on our earnings or financial
position.
NOTE 2 - REAL ESTATE AND CAPITALIZED INTEREST
The components of real estate are as follows (in thousands):
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
Homes under contract, in production $164,071 $135,005
Finished home sites 83,351 81,151
Home sites under development 75,560 57,291
Homes held for resale 31,045 33,278
Model homes 16,768 18,289
Land held for development 4,531 5,224
-------- --------
$375,326 $330,238
======== ========
We capitalize certain interest costs incurred during development and
construction. Capitalized interest is allocated to real estate and charged to
cost of sales when the property is closed. Summaries of interest capitalized and
interest expensed follow (in thousands):
MARCH 31,
-------------------
2002 2001
-------- --------
Beginning unamortized capitalized interest $ 8,746 $ 5,426
Interest capitalized 4,553 3,074
Amortization to cost of home and land sales (3,374) (1,959)
-------- --------
Ending unamortized capitalized interest $ 9,925 $ 6,541
======== ========
Interest incurred $ 4,553 $ 3,075
Interest capitalized (4,553) (3,074)
-------- --------
Interest expensed $ -- $ 1
======== ========
8
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3 - NOTES PAYABLE
Notes payable consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2002 2001
-------- --------
$100 million bank revolving construction line of credit, interest payable
monthly approximating prime (4.75% at March 31, 2002) or LIBOR (rates varying
from 1.88% to 2.03% at March 31, 2002) plus 2.0%, payable at the earlier of
close of escrow, maturity date of individual homes and home sites within the
collateral pool or over a 24-month period beginning June 1, 2003, secured by
first deeds of trust on real estate $ 31,816 $ 617
$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 home sites within the collateral
pool or May 31, 2002, secured by first deeds of trust on real estate 18,920 15,590
Acquisition and development seller carry back financing, interest payable
monthly at fixed rates of 9% to 10% per annum; payable at the maturity date of
the individual projects, secured by first deeds of trust on land 4,313 6,204
Senior unsecured notes, maturing June 1, 2011, interest only payments at 9.75%
per annum, payable semi-annually 155,000 155,000
Other 150 150
-------- --------
Total $210,199 $177,561
======== ========
The bank credit facilities and senior unsecured notes contain covenants
which require maintenance of certain levels of tangible net worth, compliance
with certain minimum financial ratios and place limitations on the payment of
dividends and redemptions of equity and limit the incurrence of additional
indebtedness, asset dispositions, mergers, certain investments and creations of
liens, among other items. As of March 31, 2002 and for the year ended December
31, 2001, we were in compliance with these covenants.
NOTE 4 - 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. The purchase
price was $65.8 million in cash, plus the assumption of accounts payable,
accrued liabilities and home sales deposits totaling $9.4 million and a note
payable totaling $1.9 million. In addition, we granted to Greg Hancock, the
founder of the company, an earn-out payable in cash over three years which was
equal to 20% of Hancock's pre-tax net income after a 10.5% charge on capital.
This acquisition was accounted for using the purchase method of accounting.
Accordingly, we 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.
This goodwill was allocated to our first-time and volume-priced business
segment. Goodwill is also increased to the extent of the earn-out which amounted
to approximately $444,000 in the first quarter of 2002. Prior to January 1,
2002, the goodwill was being amortized over a period of 20 years.
9
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The following unaudited financial data for the quarters ended March 31,
2002 and 2001 has been prepared as if the acquisition of the assets and
liabilities of Hancock on May 30, 2001 had occurred on January 1, 2001. The
first quarter 2001 unaudited pro forma financial data is presented for
informational purposes only and is based on historical information. This
information may not be indicative of our actual amounts had the transaction
occurred on the date listed above, nor does it purport to represent future
periods (in thousands except per share amounts):
QUARTERS ENDED
MARCH 31,
---------------------
2002 2001
actual pro forma
-------- ---------
Revenue $169,731 $135,187
Net earnings 8,566 7,569
Diluted EPS* $ 0.72 $ 0.65
*Adjusted to reflect the 2-for-1 stock split effective April 26, 2002.
NOTE 5 - EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the three months ended March 31, 2002 and 2001 follows.
The number of shares outstanding have been adjusted to reflect the 2-for-1 stock
split effective April 26, 2002:
2002 2001
-------- --------
(in thousands,
except per
share amounts)
BASIC:
Net earnings $ 8,566 $ 7,389
======== ========
Weighted average number of shares outstanding 11,137 10,246
-------- --------
Basic earnings per share $ 0.77 $ 0.72
======== ========
DILUTED:
Net earnings $ 8,566 $ 7,389
======== ========
Weighted average number of shares outstanding 11,137 10,246
Effect of dilutive securities:
Options to acquire common stock 813 1,330
-------- --------
Diluted weighted common shares outstanding 11,950 11,576
-------- --------
Diluted earnings per share $ 0.72 $ 0.64
======== ========
On April 2, 2002 we announced that our Board of Directors declared a stock
dividend in the form of a 2-for-1 common stock split which was effected on April
26, 2002 for stockholders of record on April 13, 2002. The accompanying
financial statements retroactively reflect the effect of the stock split.
10
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 6 - INCOME TAXES
Components of income tax expense attributable to income from continuing
operations at March 31 are (in thousands):
2002 2001
------- -------
Current taxes:
Federal $ 5,062 $ 4,017
State 846 759
------- -------
$ 5,908 4,776
------- -------
Deferred taxes:
Federal (400) 31
State (31) (15)
------- -------
(431) 16
------- -------
Total $ 5,477 $ 4,792
======= =======
NOTE 7 - SEGMENT INFORMATION
We classify our operations into two primary management segments: first-time
and volume-priced homes and mid- to luxury-priced homes. These segments generate
revenues through the sale of homes to external customers. We are not dependent
on any one major customer or supplier.
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 Note 1. There are no
significant transactions between segments.
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
--------- ---------
(IN THOUSANDS)
HOME SALES REVENUE:
First-time and volume-priced $ 108,243 $ 65,430
Mid- to luxury-priced 61,488 50,683
--------- ---------
Total $ 169,731 $ 116,113
========= =========
EBIT:
First-time and volume-priced $ 13,044 $ 10,005
Mid- to luxury-priced 5,176 4,861
Corporate and other (803) (726)
--------- ---------
Total $ 17,417 $ 14,140
========= =========
11
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
AT MARCH 31, AT DECEMBER 31,
2002 2001
-------- --------
(IN THOUSANDS)
ASSETS:
First-time and volume-priced $281,899 $261,825
Mid- to luxury-priced 187,348 164,156
Corporate and other 12,515 10,734
-------- --------
Total $481,762 $436,715
======== ========
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 1993, as amended, and Section
21E of the Securities Exchange Act of 1934. Such statements may include, but are
not limited to, projections of revenue, income or loss, capital expenditures and
backlog; plans for future operations; financing needs or plans and liquidity;
the impact of changes in interest rates; and plans relating to our products or
services, acquisitions, and new or planned development projects, as well as
assumptions relating to the foregoing.
Actual results may differ materially from those expressed in forward
looking statements. Risks identified in Exhibit 99.1 to this Quarterly Report on
Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31,
2001, including under the captions "Business" and "Market for the Registrant's
Common Stock and Related Stockholder Matters" are 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. As a result of these factors, the prices of our securities
may fluctuate dramatically.
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition provides
information regarding our results of operations for the three months ended March
31, 2002 and 2001. 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.
12
HOME SALES REVENUE, SALES CONTRACTS AND NET SALES BACKLOG
The data provided below shows operating and financial data regarding our
homebuilding activities.
QUARTER ENDED
MARCH 31,
($'s in thousands) PERCENTAGE
---------------------- INCREASE
HOME SALES REVENUE 2002 2001 (DECREASE)
-------- -------- ----------
TOTAL
Dollars .................. $169,731 $116,113 46%
Homes closed ............. 758 516 47%
Average sales price ...... $ 223.9 $ 225.0 *
TEXAS
Dollars .................. $ 62,042 $ 55,576 12%
Homes closed ............. 363 320 13%
Average sales price ...... $ 170.9 $ 173.7 (2%)
ARIZONA
Dollars .................. $ 64,726 $ 33,177 95%
Homes closed ............. 285 126 126%
Average sales price ...... $ 227.1 $ 263.3 (14%)
CALIFORNIA
Dollars .................. $ 42,963 $ 27,360 57%
Homes closed ............. 110 70 57%
Average sales price ...... $ 390.6 $ 390.9 *
QUARTER ENDED
MARCH 31,
($'s in thousands) PERCENTAGE
---------------------- INCREASE
SALES CONTRACTS 2002 2001 (DECREASE)
-------- -------- ----------
TOTAL
Dollars .................. $293,082 $176,893 66%
Homes ordered ............ 1,160 740 57%
Average sales price ...... $ 252.7 $ 239.0 6%
TEXAS
Dollars .................. $ 85,984 $ 73,508 17%
Homes ordered ............ 472 437 8%
Average sales price ...... $ 182.2 $ 168.2 8%
ARIZONA
Dollars .................. $116,603 $ 67,315 73%
Homes ordered ............ 456 213 114%
Average sales price ...... $ 255.7 $ 316.0 (19%)
CALIFORNIA
Dollars .................. $ 90,495 $ 36,070 151%
Homes ordered ............ 232 90 158%
Average sales price ...... $ 390.1 $ 400.8 (3%)
13
QUARTER ENDED
MARCH 31,
($'s in thousands) PERCENTAGE
---------------------- INCREASE
NET SALES BACKLOG 2002 2001 (DECREASE)
-------- -------- ----------
TOTAL
Dollars .................. $498,302 $370,681 34%
Homes in backlog ......... 2,004 1,470 36%
Average sales price ...... $ 248.7 $ 252.2 (1%)
TEXAS
Dollars .................. $139,593 $137,496 2%
Homes in backlog ......... 802 812 (1%)
Average sales price ...... $ 174.1 $ 169.3 3%
ARIZONA
Dollars .................. $257,863 $149,349 73%
Homes in backlog ......... 947 431 120%
Average sales price ...... $ 272.3 $ 346.5 (21%)
CALIFORNIA
Dollars .................. $100,846 $ 83,836 20%
Homes in backlog ......... 255 227 12%
Average sales price ...... $ 395.5 $ 369.3 7%
* - less than 1%
HOME SALES REVENUE. The increases in total home sales revenue and number of
homes closed in the first three months of 2002 compared to the first three
months of 2001 results mainly from the continued expansion of our operations in
Northern California through the opening of new communities and the addition of
Hancock Communities to our Arizona operations in May of 2001. Hancock closed 166
homes with a value of $32.5 million in the first quarter of 2002. The decreases
in average home sales prices in Arizona for the first quarter of 2002 reflect a
change in our product mix, as we are now selling more volume-priced homes than
in 2001.
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. Historically, we have experienced a
cancellation rate approximating 25% of gross sales. Total sales contracts
increased in the first three months of 2002 compared to the first three months
of 2001 due mainly to the addition of Hancock Communities to our operations in
Arizona, which contributed 224 new sales contracts with a value of approximately
$52.2 million, and an increase in demand for homes in Northern California. The
increase in sales contracts in our Northern California region for the first
quarter of 2002 is also attributable to an increase in the number of communities
open for sales to 12 from 9 in the prior year's first quarter.
NET SALES BACKLOG. Backlog represents net sales contracts that have not
closed. Total dollar backlog at March 31, 2002 increased 34% over the same
period in 2001 amount due to an increase in the number of homes in backlog. The
number of homes in backlog at March 31, 2002 increased 36% over the same date in
the prior year. These increases resulted from the addition of Hancock
Communities contributing 479 homes with a value of approximately $104.6 million
to backlog, and expansion of our operations in Northern California through the
opening of new communities.
14
OTHER OPERATING INFORMATION
QUARTER ENDED
MARCH 31,
---------------------
2002 2001
-------- --------
HOME SALES GROSS PROFIT
Dollars .............................. $ 31,636 $ 23,534
Percent of home sales revenue ........ 18.6% 20.3%
COMMISSIONS AND OTHER SALES COSTS
Dollars .............................. $ 11,296 $ 7,013
Percent of home sales revenue ........ 6.7% 6.0%
GENERAL AND ADMINISTRATIVE COSTS
Dollars .............................. $ 7,465 $ 4,935
Percent of total revenue ............. 4.4% 4.2%
INCOME TAXES
Dollars .............................. $ 5,477 $ 4,792
Percent of income before taxes ....... 39.0% 39.3%
HOME SALES GROSS PROFIT. Home sales gross profit represents home sales
revenue, net of cost of home sales, which include developed lot costs, home
construction costs, an allocation of common community costs (such as model
complex costs and architectural, legal and zoning costs), interest, sales tax,
warranty, construction overhead and closing costs. The dollar increase in gross
profit for the quarter ended March 31, 2002 is attributable to a 47% increase in
number of homes closed and continued growth in all of our markets. The gross
profit percentage decrease in 2002 resulted from closings booked in the quarter
which generally consisted of homes that were ordered in the second half of 2001,
the margins for which were impacted by the slower economic conditions that
existed at that time, which led our buyers to purchase more first-time and
volume priced homes than mid to luxury priced homes.
COMMISSIONS AND OTHER SALES COSTS. Commissions and other sales costs, such
as advertising and sales office expenses, were approximately $11.3 million, or
6.7% of home sales revenue, in 2002, as compared to approximately $7.0 million,
or 6.0% of home sales revenue in 2001. The increase in these expenses as a
percentage of home sales revenue reflects slightly higher marketing costs due to
the greater number of new communities open for sale during the first quarter of
2002 compared to the first quarter of 2001. We had 77 actively selling
communities at March 31, 2002 as compared to 57 at March 31, 2001.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were approximately $7.5 million, or 4.4% of total revenue in 2002, as compared
to approximately $4.9 million, or 4.2% of total revenue in 2001. Operating costs
in 2002 were slightly higher as a percentage of revenue in comparison to the
prior year due to increasing costs in the current year, including an increase in
insurance expense in 2002 of $608,000.
INCOME TAXES. The increase in income taxes to $5.5 million for the quarter
ended March 31, 2002 from $4.8 million in the prior year resulted from an
increase in pre-tax income.
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 short-term working capital requirements and we issue equity
or debt in order to meet long-term capital requirements.
Cash flow for each of our communities depends on the status of the
development cycle, and can differ substantially from reported earnings. Early
stages of development or expansion require significant cash outlays for land
acquisitions, plat and other approvals, and construction of model homes, roads,
certain utilities, general landscaping and other amenities. Because these costs
are capitalized, income reported for financial statement purposes during those
early stages may significantly exceed cash flow. Later, cash flow can
significantly exceed earnings reported for financial statement purposes, as cost
of sales includes charges for substantial amounts of previously expended costs.
At March 31, 2002, we had short-term secured revolving construction loans
and acquisition and development facilities totaling $175.0 million, of which
approximately $50.7 million was outstanding. An additional $84.8 million of
unborrowed funds supported by approved collateral were available under these
credit facilities at that date, subject to compliance with the financial and
other covenants in our loan agreements. This additional borrowing was fully
available under such loan covenants at March 31, 2002. We also have $155 million
15
in principal outstanding in unsecured, 9.75% senior notes due June 1, 2011,
which were issued in May 2001.
We believe that the current borrowing capacity 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
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 our other credit agreements.
As a component of our model home construction activities, we enter into
lease transactions with third parties. The total cost, including land costs, of
model homes leased by us and constructed under these lease agreements is
approximately $19.0 million, all of which is excluded from our balance sheet as
of March 31, 2002.
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 of 9.75%. Except in the
event of default or upon the recurrence of certain events, we do not have an
obligation to prepay our fixed-rate debt prior to maturity and, as a result,
interest rate risk and changes in fair value should not have a significant
impact in the fixed-rate debt until we would be required to refinance such debt.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on May 8, 2002. At the Annual
Meeting, the stockholders elected Steven J. Hilton, Raymond (Ray) Oppel and
William G. Campbell and to serve as Directors for a two-year term. John R.
Landon, Robert G. Sarver, C. Timothy White and Peter L. Ax continued as
Directors after the meeting. Additionally, our stockholders approved an
amendment to the Meritage Corporation 1997 Stock Option Plan that increased the
total number of shares authorized for issuance by 300,000, and the number of
shares that may be issued to any one person under the plan from 100,000 to
150,000.
Stockholders holding 5,326,985 shares (pre-split), or 94.07% of the
outstanding shares, were present in person or by proxy at the Annual Meeting. A
tabulation with respect to each nominee for director and the stock option plan
amendment proposal follows:
Votes Against or Broker
Votes For Withheld Abstain Non-Vote
--------- -------- ------- --------
Election of Steven J. Hilton 4,964,551 362,434 N/A N/A
Election of Raymond (Ray) Oppel 5,201,552 125,433 N/A N/A
Election of William G. Campbell 5,200,752 126,233 N/A N/A
Approval of amendments to the Meritage
Corporation Stock Option Plan 2,640,824 1,118,843 9,328 1,557,990
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT PAGE OR
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
99.1 Private Securities Reform Act of 1995 Filed herewith
Safe Harbor Compliance Statement for
Forward-Looking Statements
(b) REPORTS ON FORM 8-K
We did not file any reports on Form 8-K during the first quarter of 2002.
17
SIGNATURES
Pursuant to the requirements 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 15th day of May, 2002.
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