================================================================================ 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 JUNE 30, 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) (I.R.S. EMPLOYER OF 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 AUGUST 8, 2002, 13,544,694 SHARES OF MERITAGE CORPORATION COMMON STOCK WERE OUTSTANDING. ================================================================================ MERITAGE CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 TABLE OF CONTENTS PAGE NO. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001.......................... 3 Consolidated Statements of Earnings for the Three and Six Months ended June 30, 2002 and 2001 (unaudited)........ 4 Consolidated Statements of Cash Flows for the Six Months ended June 30, 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 1-5. NOT APPLICABLE 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) JUNE 30, DECEMBER 31, 2002 2001 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Cash and cash equivalents $ 14,481 $ 3,383 Real estate 399,379 330,238 Deposits on real estate under option or contract 47,935 45,252 Receivables 6,992 5,508 Deferred tax asset 4,419 2,612 Goodwill 31,883 30,369 Property and equipment, net 9,928 9,667 Prepaid expenses and other assets 11,156 9,686 --------- --------- Total assets $ 526,173 $ 436,715 ========= ========= LIABILITIES Accounts payable and accrued liabilities $ 64,556 $ 69,029 Home sale deposits 18,510 13,538 Notes payable 156,286 177,561 --------- --------- Total liabilities 239,352 260,128 --------- --------- STOCKHOLDERS' EQUITY Common stock, $0.01 par value. Authorized 50,000,000 shares; issued and outstanding 15,119,250 and 12,613,938 shares at June 30, 2002 and December 31, 2001, respectively 151 126 Additional paid-in capital 196,117 109,412 Retained earnings 101,776 78,272 Treasury stock at cost, 1,637,926 shares (11,223) (11,223) --------- --------- Total stockholders' equity 286,821 176,587 --------- --------- Total liabilities and stockholders' equity $ 526,173 $ 436,715 ========= =========
See accompanying notes to consolidated financial statements 3 MERITAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2002 2001 2002 2001 --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Home sales revenue $ 246,441 $ 174,403 $ 416,172 $ 290,516 Land sales revenue 5,000 1,005 5,000 1,598 --------- --------- --------- --------- 251,441 175,408 421,172 292,114 Cost of home sales (196,490) (136,829) (334,585) (229,408) Cost of land sales (4,859) (943) (4,859) (1,474) --------- --------- --------- --------- (201,349) (137,772) (339,444) (230,882) Home sales gross profit 49,951 37,574 81,587 61,108 Land sales gross profit 141 62 141 124 --------- --------- --------- --------- 50,092 37,636 81,728 61,232 Commissions and other sales costs (15,300) (9,435) (26,596) (16,448) General and administrative costs (11,324) (7,884) (18,789) (12,818) Interest expense -- -- -- (1) Other income, net 1,338 827 2,506 1,361 --------- --------- --------- --------- Earnings before income taxes and extraordinary item 24,806 21,144 38,849 33,326 Income taxes (9,868) (8,205) (15,345) (12,997) --------- --------- --------- --------- Earnings before extraordinary item 14,938 12,939 23,504 20,329 Extraordinary item - loss from extinguishment of debt (net of $285 tax benefit) -- (446) -- (446) --------- --------- --------- --------- Net earnings $ 14,938 $ 12,493 $ 23,504 $ 19,883 ========= ========= ========= ========= Earnings per share: Basic: Earnings before extraordinary item $ 1.28 $ 1.22 $ 2.06 $ 1.95 Extraordinary item -- (0.04) -- (0.04) --------- --------- --------- --------- Net earnings per share $ 1.28 $ 1.18 $ 2.06 $ 1.91 ========= ========= ========= ========= Diluted: Earnings before extraordinary item $ 1.19 $ 1.10 $ 1.92 $ 1.76 Extraordinary item -- (0.04) -- (0.04) --------- --------- --------- --------- Net earnings per share $ 1.19 $ 1.06 $ 1.92 $ 1.72 ========= ========= ========= =========
See accompanying notes to consolidated financial statements 4 MERITAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 2002 2001 --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 23,504 $ 19,883 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 2,877 1,986 Increase in deferred tax asset before extraordinary item (1,807) (59) Tax benefit from stock option exercises 4,738 -- Change in assets and liabilities, net of effect of acquisition: Increase in real estate (69,141) (58,763) Increase in deposits on real estate under option or contract (2,683) (2,557) Increase in receivables and prepaid expenses and other assets (1,813) (11,986) (Decrease) increase in accounts payable and accrued liabilities (4,473) 5,274 Increase in home sale deposits 4,972 1,888 --------- --------- Net cash used in operating activities (43,826) (44,334) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for acquisition (2,757) (65,759) Purchases of property and equipment (3,036) (2,175) --------- --------- Net cash used in investing activities (5,793) (67,934) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings 259,767 432,735 Repayments of debt (281,042) (322,308) Proceeds from sale of common stock, net 79,726 -- Proceeds from exercises of stock options 2,266 1,523 --------- --------- Net cash provided by financing activities 60,717 111,950 --------- --------- Net increase (decrease) in cash and cash equivalents 11,098 (318) Cash and cash equivalents, beginning of period 3,383 4,397 --------- --------- Cash and cash equivalents, end of period $ 14,481 $ 4,079 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 2002 2001 --------- --------- Cash paid during the period for: Interest $ 9,335 $ 5,137 Income Taxes $ 11,890 $ 12,624
The acquisition of Hancock Communities resulted in the following changes in assets and liabilities: Real estate $(54,545) Deposits on real estate under option or contract (8,899) Receivables and prepaid expenses 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 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. To expand our presence in Texas, on July 1, 2002 we acquired Hammonds Homes, a Texas-based homebuilder that focuses on the move-up market in the Houston, Dallas/Ft. Worth and Austin areas. BASIS OF PRESENTATION. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, 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 for comparative purposes. In our opinion, the accompanying unaudited consolidated financial statements include all adjustments, which are of a normal recurring nature, 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 December 31, 2001 annual report on Form 10-K. STOCK SPLIT. On April 2, 2002, our Board of Directors declared a two-for-one split of our common stock in the form of a stock dividend to stockholders of record on April 12, 2002. The additional shares were distributed on April 26, 2002. All share and per share information has been restated to reflect this split. EQUITY OFFERING. In June 2002, we sold 2,012,500 shares of our common stock at a price of $42.00 per share. The net proceeds from the offering of $79.7 million were primarily used for our July 2002 purchase of Hammonds Homes, with the balance being used for general corporate purposes. 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 is no longer amortized but is subject to transitional and 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 the acquisition date. The goodwill recorded resulting from our acquisitions is allocated to our business operating segments as follows: AT JUNE 30, 2002 ------- (in thousands) First-time and volume-priced $28,733 Mid- to luxury-priced 3,150 ------- Total $31,883 ======= Goodwill is reviewed by management for impairment annually, or whenever events or changes in circumstances indicate the carrying amount may be impaired. There were no changes to goodwill amounts during the six months ended June 30, 2002, except as disclosed in Note 4. 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 earnings and earnings per share, as adjusted to exclude goodwill amortization expense (dollars in thousands except per share amounts):
THREE SIX MONTHS MONTHS YEARS ENDED DECEMBER 31, ENDED ENDED ------------------------------------- JUNE 30, 2001 JUNE 30, 2001 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- Earnings before extraordinary items $ 12,939 $ 20,329 $ 50,892 $ 35,762 $ 18,945 Extraordinary items, net of tax effects (446) (446) (233) -- -- ---------- ---------- ---------- ---------- ---------- Net earnings, as reported $ 12,493 $ 19,883 $ 50,659 $ 35,762 $ 18,945 ========== ========== ========== ========== ========== Earnings, as adjusted before extraordinary items $ 13,088 $ 20,692 $ 51,771 $ 36,434 $ 19,573 Extraordinary items, net of tax effects (446) (446) (233) -- -- ---------- ---------- ---------- ---------- ---------- Net earnings, as adjusted $ 12,642 $ 20,246 $ 51,538 $ 36,434 $ 19,573 ========== ========== ========== ========== ========== AS REPORTED: Basic earnings per share before extraordinary items $ 1.22 $ 1.95 $ 4.80 $ 3.46 $ 1.74 Extraordinary items (0.04) (0.04) (0.02) -- -- ---------- ---------- ---------- ---------- ---------- Basic earnings per share $ 1.18 $ 1.91 $ 4.78 $ 3.46 $ 1.74 ========== ========== ========== ========== ========== Diluted earnings per share before extraordinary items $ 1.10 $ 1.76 $ 4.32 $ 3.13 $ 1.57 Extraordinary items (0.04) (0.04) (0.02) -- -- ---------- ---------- ---------- ---------- ---------- Diluted earnings per share $ 1.06 $ 1.72 $ 4.30 $ 3.13 $ 1.57 ========== ========== ========== ========== ========== AS ADJUSTED: Basic earnings per share before extraordinary items $ 1.23 $ 1.98 $ 4.88 $ 3.52 $ 1.80 Extraordinary items (0.04) (0.04) (0.02) -- -- ---------- ---------- ---------- ---------- ---------- Basic earnings per share $ 1.19 $ 1.94 $ 4.86 $ 3.52 $ 1.80 ========== ========== ========== ========== ========== Diluted earnings per share before extraordinary items $ 1.11 $ 1.79 $ 4.40 $ 3.19 $ 1.62 Extraordinary items (0.04) (0.04) (0.02) -- -- ---------- ---------- ---------- ---------- ---------- Diluted earnings per share $ 1.07 $ 1.75 $ 4.38 $ 3.19 $ 1.62 ========== ========== ========== ========== ==========
During the second quarter of 2002, we finalized the first of the required impairment tests of goodwill as of January 1, 2002, and have determined that goodwill is not impaired. 7 MERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 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): JUNE 30, 2002 DECEMBER 31, 2001 ------------- ----------------- Homes under contract, in production $200,333 $135,005 Finished home sites 90,533 81,151 Home sites under development 65,556 57,291 Homes held for resale 21,292 33,278 Model homes 14,080 18,289 Land held for development 7,585 5,224 -------- -------- $399,379 $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 related property is closed. Summaries of interest incurred, interest capitalized and interest expensed follow (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Beginning unamortized capitalized interest $ 9,925 $ 6,541 $ 8,746 $ 5,426 Interest capitalized 4,782 3,364 9,335 6,438 Amortization to cost of home and land sales (4,657) (2,657) (8,031) (4,616) -------- -------- -------- -------- Ending unamortized capitalized interest $ 10,050 $ 7,248 $ 10,050 $ 7,248 ======== ======== ======== ======== Interest incurred $ 4,782 $ 3,364 $ 9,335 $ 6,439 Interest capitalized (4,782) (3,364) (9,335) (6,438) -------- -------- -------- -------- Interest expensed $ -- $ -- $ -- $ 1 ======== ======== ======== ========
8 MERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 3 - NOTES PAYABLE Notes payable consists of: (in thousands) JUNE 30, DECEMBER 31, 2002 2001 -------- -------- $100 million bank revolving construction line of credit, interest payable monthly approximating prime (4.75% at June 30, 2002) or LIBOR (rates varying from 1.84% to 1.86% at June 30, 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 $ -- $ 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, 2003, secured by first deeds of trust on real estate -- 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 1,211 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 75 150 -------- -------- Total $156,286 $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 June 30, 2002 and for the year ended December 31, 2001, we were in compliance with these covenants. The senior unsecured notes restrict our ability to pay dividends. NOTE 4 - 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. 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 $1,514,500 in the first half 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 three and six months ended June 30, 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): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2002 2001 2002 2001 ACTUAL PRO FORMA ACTUAL PRO FORMA -------- -------- -------- -------- Revenue $251,441 $209,637 $421,172 $344,824 Net earnings 14,938 18,484 23,504 26,138 Diluted EPS $ 1.19 $ 1.57 $ 1.92 $ 2.26 NOTE 5 - EARNINGS PER SHARE A summary of the reconciliation from basic earnings per share to diluted earnings per share for the three and six months ended June 30, 2002 and 2001 follows. The number of shares outstanding have been adjusted to reflect the 2-for-1 stock split effective April 26, 2002:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC: Earnings before extraordinary item $ 14,938 $ 12,939 $ 23,504 $ 20,329 Extraordinary item, net of tax benefit -- (446) -- (446) -------- -------- -------- -------- Net earnings $ 14,938 $ 12,493 $ 23,504 $ 19,883 ======== ======== ======== ======== Weighted average number of shares outstanding 11,665 10,606 11,401 10,426 -------- -------- -------- -------- Basic earnings per share before extraordinary item $ 1.28 $ 1.22 $ 2.06 $ 1.95 Extraordinary item -- (0.04) -- (0.04) -------- -------- -------- -------- Basic earnings per share $ 1.28 $ 1.18 $ 2.06 $ 1.91 ======== ======== ======== ======== DILUTED: Earnings before extraordinary item $ 14,938 $ 12,939 $ 23,504 $ 20,329 Extraordinary item, net of tax benefit -- (446) -- (446) -------- -------- -------- -------- Net earnings $ 14,938 $ 12,493 $ 23,504 $ 19,883 ======== ======== ======== ======== Weighted average number of shares outstanding 11,665 10,606 11,401 10,426 Effect of dilutive securities - Options to acquire common stock 849 1,171 831 1,123 -------- -------- -------- -------- Diluted weighted common shares outstanding 12,514 11,777 12,232 11,549 -------- -------- -------- -------- Diluted earnings per share before extraordinary item $ 1.19 $ 1.10 $ 1.92 $ 1.76 Extraordinary item -- (0.04) -- (0.04) -------- -------- -------- -------- Diluted earnings per share $ 1.19 $ 1.06 $ 1.92 $ 1.72 ======== ======== ======== ======== Antidilutive stock options not included in diluted EPS 80 30 80 30 ======== ======== ======== ========
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 for the three and six months ended June 30, 2002 are (in thousands): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Current: Federal $ 9,205 $ 7,271 $ 14,267 $ 11,418 State 2,039 879 2,885 1,638 -------- -------- -------- -------- 11,244 8,150 17,152 13,056 -------- -------- -------- -------- Deferred: Federal (1,202) 65 (1,602) (34) State (174) (10) (205) (25) -------- -------- -------- -------- (1,376) 55 (1,807) (59) -------- -------- -------- -------- Total $ 9,868 $ 8,205 $ 15,345 $ 12,997 ======== ======== ======== ======== 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- (IN THOUSANDS) (IN THOUSANDS) HOME SALES REVENUE: First time and volume-priced $ 137,558 $ 94,770 $ 245,801 $ 160,200 Mid- to luxury-priced 108,883 79,633 170,371 130,316 --------- --------- --------- --------- Total $ 246,441 $ 174,403 $ 416,172 $ 290,516 ========= ========= ========= ========= EBIT: First time and volume-priced $ 17,053 $ 14,049 $ 30,097 $ 24,054 Mid- to luxury-priced 14,253 10,865 19,429 15,726 Corporate and other (1,844) (1,111) (2,647) (1,837) --------- --------- --------- --------- Total $ 29,462 $ 23,803 $ 46,879 $ 37,943 ========= ========= ========= =========
11 MERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) AT JUNE 30, AT DECEMBER 31, 2002 2001 -------- -------- (in thousands) ASSETS: First-time and volume-priced $310,714 $261,825 Mid- to luxury-priced 190,571 164,156 Corporate and other 24,888 10,734 -------- -------- Total $526,173 $436,715 ======== ======== NOTE 8 - SUBSEQUENT EVENTS HAMMONDS ACQUISITION On July 1, 2002, we completed the acquisition of substantially all of the homebuilding and related assets of Hammonds Homes, Ltd. and Crystal City Land & Cattle, Ltd. (collectively, "Hammonds Homes" or "Hammonds"). The purchase price is estimated to be approximately $82.8 million, subject to final adjustments, comprised of cash payable at closing of $45.8 million and the repayment of existing debt in the amount of $37.0 million. Hammonds Homes, established in 1987, builds a wide range of quality homes in approximately 40 communities throughout the Houston, Dallas/Ft. Worth and Austin, Texas areas with a focus on serving the move-up housing market. COMMON STOCK REPURCHASE On August 8, 2002, we announced that our Board of Directors authorized the expenditure of up to $32 million to repurchase shares of our common stock. No date for completing the program has been determined, but we will purchase shares subject to applicable securities laws, and at times and in amounts as management deems appropriate. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements. The words "believe," "expect," "anticipate," and "project" and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures; financing needs or plans and liquidity; the impact of changes in interest rates; and plans relating to our products, as well as assumptions relating to the foregoing. Actual results may differ materially from those expressed in forward-looking statements. Risks identified in Exhibit 99.4 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 "Market for the Registrant's Common Stock and Related Stockholder Matters - Factors That May Affect Future Stock Performance," and "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. 12 RESULTS OF OPERATIONS The following discussion and analysis of financial condition provides information regarding our results of operations for the three and six month periods ended June 30, 2002 and 2001. All material balances and transactions between us and our subsidiaries have been eliminated in consolidation. In our opinion, the data reflects all adjustments, consisting of only normal recurring adjustments, necessary to fairly present our financial position and results of operations for the periods presented. The results of operations for any interim period are not necessarily indicative of results expected for a full fiscal year. HOME SALES REVENUE, 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 SIX MONTHS ENDED JUNE 30, PERCENTAGE JUNE 30, PERCENTAGE ------------------- INCREASE ------------------- INCREASE HOME SALES REVENUE 2002 2001 (DECREASE) 2002 2001 (DECREASE) ---- ---- ---------- ---- ---- ---------- Total Dollars $ 246,441 $ 174,403 41% $ 416,172 $ 290,516 43% Homes closed 1,022 773 32% 1,780 1,289 38% Average sales price $ 241.1 $ 225.6 7% $ 233.8 $ 225.4 4% Texas Dollars $ 64,400 $ 67,381 (4)% $ 126,442 $ 122,958 3% Homes closed 376 400 (6)% 739 720 3% Average sales price $ 171.3 $ 168.5 2% $ 171.1 $ 170.8 * Arizona Dollars $ 108,999 $ 67,184 62% $ 173,725 $ 100,360 73% Homes closed 465 268 74% 750 394 90% Average sales price $ 234.4 $ 250.7 (7)% $ 231.6 $ 254.7 (9)% California Dollars $ 73,042 $ 39,838 83% $ 116,005 $ 67,198 73% Homes closed 181 105 72% 291 175 66% Average sales price $ 403.5 $ 379.4 6% $ 398.6 $ 384.0 4%
* Represents less than 1% 13
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, PERCENTAGE JUNE 30, PERCENTAGE ------------------- INCREASE ------------------- INCREASE SALES CONTRACTS 2002 2001 (DECREASE) 2002 2001 (DECREASE) ---- ---- ---------- ---- ---- ---------- Total Dollars $ 297,648 $ 174,858 70% $ 590,730 $351,752 68% Homes ordered 1,144 757 51% 2,304 1,497 54% Average sales price $ 260.2 $ 231.0 13% $ 256.4 $ 235.0 9% Texas Dollars $ 85,268 $ 69,324 23% $ 171,252 $ 142,832 20% Homes ordered 462 422 9% 934 859 9% Average sales price $ 184.6 $ 164.3 12% $ 183.4 $ 166.3 10% Arizona Dollars $ 111,491 $ 68,513 63% $ 228,095 $ 135,828 68% Homes ordered 438 242 81% 894 455 96% Average sales price $ 254.5 $ 283.1 (10)% $ 255.1 $ 298.5 (15)% California Dollars $ 100,889 $ 37,021 173% $ 191,383 $ 73,092 162% Homes ordered 244 93 162% 476 183 160% Average sales price $ 413.5 $ 398.1 4% $ 402.1 $ 399.4 1%
AT JUNE 30, PERCENTAGE ------------------------ INCREASE NET SALES BACKLOG 2002 2001 (DECREASE) ---- ---- ---------- Total Dollars $ 549,510 $ 478,658 15% Homes in backlog 2,126 2,064 3% Average sales price $ 258.5 $ 231.9 11% Texas Dollars $ 160,461 $ 139,439 15% Homes in backlog 888 834 6% Average sales price $ 180.7 $ 167.2 8% Arizona Dollars $ 260,355 $ 258,199 1% Homes in backlog 920 1,015 (9)% Average sales price $ 283.0 $ 254.4 11% California Dollars $ 128,694 $ 81,020 59% Homes in backlog 318 215 48% Average sales price $ 404.7 $ 376.8 7% HOME SALES REVENUE. The increases in total home sales revenue and number of homes closed in the second quarter and first six months of 2002 compared to the same periods of 2001 resulted mainly from good performances in our Arizona and California divisions. Closings in Arizona were up 74% in the second quarter of this year compared with the second quarter of last year, and 90% in the first six months compared to the same period last year, reflecting an additional 200 home closings in April and May 2002 from our Hancock Communities division. Closings in California were up 72% for the second quarter, and 66% for the first six months of 2002, compared to the same periods in 2001. This is primarily the result of our continued expansion in that region and the strong demand for housing in California. The number of closings in Texas for the three months ended June 30, 2002 were down 6% from the same period last year. This decrease 14 reflects the effect of the economic slow down in our Austin market when orders were taken in the fall and winter of 2001. For the six months ended June 30, 2002, the number of closings in our Texas division increased 3% as compared to the same period 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, which we believe is consistent with industry standards. In the second quarter of 2002, the number of homes ordered in Arizona was up 81% over the prior year's second quarter, reflecting 179 orders in April and May from Hancock Communities. In California, new home orders were up 162% over the prior year's quarter, further reflective of our growth and the strength of the market in that region. Our growth in California is evidenced by the increase of our actively selling communities to 12 at the end of this quarter, compared with 8 at the end of last year's quarter. During the first half of 2002, our home closings and sales contracts in Arizona reflect a lower average sales price per home. This decrease from the prior year is attributable primarily to the addition of our Hancock Communities division in May 2001. Hancock Communities serves the first-time and move-up markets, whereas our Monterey Homes and Meritage divisions serve primarily the move-up and luxury home markets. Thus, Hancock Communities generally offers lower priced homes than our Arizona divisions. NET SALES BACKLOG. Backlog represents net sales contracts that have not closed. Total dollar backlog at June 30, 2002 increased 15% over the June 30, 2001 amount due to an increase in the number of homes in backlog, which at June 30, 2002 increased 3% over the same date in the prior year. These increases resulted from higher sales volume in all three of our regions. OTHER OPERATING INFORMATION
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ------------------------ 2002 2001 2002 2001 --------- --------- --------- --------- HOME SALES GROSS PROFIT Dollars $ 49,951 $ 37,574 $ 81,587 $ 61,108 Percent of home sales revenue 20.3% 21.5% 19.6% 21.0% COMMISSIONS AND OTHER SALES COSTS Dollars $ 15,300 $ 9,435 $ 26,596 $ 16,448 Percent of home sales revenue 6.2% 5.4% 6.4% 5.7% GENERAL AND ADMINISTRATIVE COSTS Dollars $ 11,324 $ 7,884 $ 18,789 $ 12,819 Percent of total revenue 4.5% 4.5% 4.5% 4.4% INCOME TAXES Dollars $ 9,868 $ 8,205 $ 15,345 $ 12,997 Percent of income before taxes and extraordinary item 39.8% 38.8% 39.5% 39.0%
HOME SALES GROSS PROFIT. Gross profit equals home sales revenue, net of cost of home 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), amortization of capitalized interest, sales tax, warranty, construction overhead and closing costs. The dollar increases in gross profit for the three and six months ended June 30, 2002 are attributable to the increase in the number of homes closed and to continued strength in our markets. The decrease in our home sales gross profit percentage for the three and six months ended June 30, 2002 is attributable to pricing pressures on homes sold during the summer and fall of 2001, many of which closed 15 during the first half of 2002. The gross margins of homes sold during this period were adversely impacted by the use of a greater level of sales incentives prompted by the slower economic conditions existing at that time. COMMISSIONS AND OTHER SALES COSTS. Commissions and other sales costs, such as advertising and sales office expenses, were approximately $15.3 million, or 6.2% of home sales revenue, in the three months ended June 30, 2002, as compared to approximately $9.4 million, or 5.4% of home sales revenue in the second quarter of 2001. For the first six months of 2002, commissions and other sales costs were approximately $26.6 million or 6.4% of home sales revenue, compared with $16.5 million, or 5.7%, of home sales revenue for the first half of 2001. These increases were primarily due to higher sales incentives as a percentage of revenue related to our Monterey and Hancock divisions and advertising related to communities not yet or recently opened for sale. GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs during the three and six months ended June 30, 2002, as a percentage of total revenue, remained consistent with the comparable periods in the prior year. INCOME TAXES. The increases in income taxes for the quarter and six months ended June 30, 2002 from the prior year resulted from an increase in pre-tax income, along with a 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 short-term working capital requirements and we issue equity or debt in order to meet long-term capital requirements. At June 30, 2002, we had short-term secured revolving construction loans and acquisition and development facilities totaling $175.0 million, none of which was outstanding. $137.5 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 June 30, 2002. We also have $155 million in principal outstanding in unsecured, 9.75% senior notes due June 1, 2011, which were issued in May 2001. In May 2002, we filed a $300 million universal shelf registration with the Securities and Exchange Commission. Pursuant to this filing, we may, from time to time over an extended period, offer new debt and/or equity securities. This shelf registration allows us to expediently access capital markets periodically. In June 2002, we sold 2,012,500 shares of our common stock at a price of $42.00 per share. The net proceeds from the offering of $79.7 million were primarily used for our July 2002 purchase of Hammonds Homes, with the balance being used for general corporate purposes. We believe that the current borrowing capacity and anticipated cash flows from operations are sufficient to meet our working capital requirements and other 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 June 30, 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 occurrence 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. 16 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS
EXHIBIT PAGE OR NUMBER DESCRIPTION METHOD OF FILING ------ ----------- ---------------- 99.1 Certificate of Steven J. Hilton, Co-Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith 99.2 Certificate of John R. Landon, Co-Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith 99.3 Certificate of Larry W. Seay, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith 99.4 Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements Filed herewith
(b) REPORTS ON FORM 8-K On June 17, 2002, we filed a Current Report on Form 8-K describing our anticipated acquisition of the homebuilding assets of Hammonds Homes. On June 21, 2002, we filed a Current Report on Form 8-K describing the pricing of our public offering of 1,750,000 shares of our common stock at $42.00 per share, subject to an option to offer an additional 262,500 shares of common stock to cover over-allotments. On July 15, 2002, we filed a Current Report on Form 8-K describing the completion of our acquisition of the homebuilding assets of Hammonds Homes. 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 14th day of August 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) By /s/ VICKI L. BIGGS ------------------------------------- Vicki L. Biggs (CHIEF ACCOUNTING OFFICER AND VICE PRESIDENT-CORPORATE CONTROLLER) S-1