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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 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.
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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