================================================================================ 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. ================================================================================ 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