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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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.)
8501 East Princess Drive, Suite 290 85255
Scottsdale, Arizona (Zip Code)
(Address of Principal Executive Offices)
(480) 609-3330
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of May 7, 2003, 12,983,194 shares of Meritage Corporation common stock were
outstanding.
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MERITAGE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002 ...................................... 3
Consolidated Statements of Earnings for the Three
Months ended March 31, 2003 and 2002 (unaudited) ........... 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 2003 and 2002 (unaudited) ..... 5
Notes to Consolidated Financial Statements (unaudited) ....... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ... 18
ITEM 4. CONTROLS AND PROCEDURES ...................................... 18
PART II. OTHER INFORMATION
ITEMS 1-5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................. 19
SIGNATURES .............................................................. 20
CERTIFICATIONS .......................................................... 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents $ 21,962 $ 6,600
Real estate 543,278 484,970
Deposits on real estate under option or contract 87,422 77,516
Receivables 5,424 8,894
Deferred tax asset, net 2,701 2,701
Goodwill 74,040 73,785
Property and equipment, net 14,881 14,007
Prepaid expenses and other assets 14,207 13,941
Investments in unconsolidated entities 10,516 9,374
------------ ------------
Total assets $ 774,431 $ 691,788
============ ============
LIABILITIES
Accounts payable $ 55,956 $ 52,133
Accrued liabilities 52,935 41,329
Home sale deposits 19,487 16,091
Loans payable 111,450 109,927
Senior notes 206,625 155,000
------------ ------------
Total liabilities 446,453 374,480
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01. 50,000,000 shares
authorized; 15,240,860 and 15,227,460 shares issued
at March 31, 2003 and December 31, 2002, respectively 152 152
Additional paid-in capital 197,397 197,320
Retained earnings 163,982 148,209
Treasury stock at cost, 2,302,226 and 2,137,926 shares at
March 31, 2003 and December 31, 2002, respectively (33,553) (28,373)
------------ ------------
Total stockholders' equity 327,978 317,308
------------ ------------
Total liabilities and stockholders' equity $ 774,431 $ 691,788
============ ============
See accompanying notes to consolidated financial statements
3
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Home sales revenue $ 283,410 $ 169,731
Cost of home sales (227,056) (138,095)
------------ ------------
Home sales gross profit 56,354 31,636
Commissions and other sales costs (19,745) (11,296)
General and administrative expenses (12,212) (7,465)
Other income, net 1,209 1,168
------------ ------------
Earnings before income taxes 25,606 14,043
Income taxes (9,833) (5,477)
------------ ------------
Net earnings $ 15,773 $ 8,566
============ ============
Weighted average number of shares:
Basic 13,041 11,137
Diluted 13,683 11,950
Net earnings per common share:
Basic $ 1.21 $ 0.77
Diluted $ 1.15 $ 0.72
See accompanying notes to consolidated financial statements
4
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 15,773 $ 8,566
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 1,717 1,351
Increase in deferred tax asset -- (497)
Tax benefit from stock option exercises -- 3,202
Changes in assets and liabilities:
Increase in real estate (58,308) (45,088)
Increase in deposits on real estate under option or contract (9,906) (1,034)
Decrease (increase) in receivables and prepaid expenses and
other assets 2,968 (939)
Increase (decrease) in accounts payable and accrued liabilities 15,429 (4,106)
Increase in home sale deposits 3,396 3,207
------------ ------------
Net cash used in operating activities (28,931) (35,338)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in and distributions from unconsolidated entities, net (1,142) 14
Purchases of property and equipment (2,355) (1,520)
Increase in goodwill (255) (444)
------------ ------------
Net cash used in investing activities (3,752) (1,950)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable 227,835 142,987
Repayments of loans payable (226,312) (110,349)
Increase in senior notes 51,625 --
Purchase of treasury stock (5,180) --
Proceeds from stock option exercises 77 1,540
------------ ------------
Net cash provided by financing activities 48,045 34,178
------------ ------------
Net increase (decrease) in cash and cash equivalents 15,362 (3,110)
Cash and cash equivalents at beginning of period 6,600 3,383
------------ ------------
Cash and cash equivalents at end of period $ 21,962 $ 273
============ ============
SUPPLEMENTED DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 797 $ 371
Income taxes $ 8,305 $ 7,424
See accompanying notes to consolidated financial statements
5
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(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, California and Nevada. 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. We expanded our
presence in Texas with the July 2002 acquisition of Hammonds Homes (Hammonds), a
builder that focuses on the move-up market in the Houston, Dallas/Ft. Worth and
Austin areas. We entered the Las Vegas, Nevada market in October 2002 with our
acquisition of Perma-Bilt Homes (Perma-Bilt), another move-up builder.
We operate in Texas as Legacy Homes, Monterey Homes and Hammonds Homes, in
Arizona as Monterey Homes, Meritage Homes and Hancock Communities, in Northern
California as Meritage Homes and in Nevada as Perma-Bilt Homes. At March 31,
2003, we were actively selling homes in 125 communities, with base prices
ranging from $88,000 to $910,000. We have four primary business segments: Texas,
Arizona, California and Nevada. See Note 7 to our consolidated financial
statements included in this report for information regarding our segments.
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 those
of our consolidated subsidiaries. Intercompany balances and transactions have
been eliminated in consolidation and certain prior year amounts have been
reclassified to be consistent with current financial statement presentation. In
our opinion, 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 Form 10-K for the year ended December 31, 2002.
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 amounts have been restated to reflect
the stock 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 used primarily for our July 2002 purchase of Hammonds Homes, with
the balance being used for general corporate purposes and our purchase of
Perma-Bilt Homes in October 2002.
STOCK-BASED COMPENSATION. See discussion of SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," under this note, "Recent
Accounting Pronouncement".
At March 31, 2003, we had one stock-based employee compensation plan. We
apply the intrinsic value-based method of accounting prescribed in Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees", as allowed by SFAS No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148. Under this method, compensation expense is
recorded on the date of the grant only if the market price of the underlying
stock on the date of the grant was greater than the exercise price. SFAS No. 123
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, we have elected to continue to apply the intrinsic value-based
method of accounting described above, and have adopted the disclosure
requirements of SFAS No. 123. We have not issued options with exercise prices
below the market value on the date of the grant, therefore we have not
recognized compensation expense for our stock-based plan. Had
6
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
compensation cost for these plans been determined pursuant to SFAS No. 123, our
net earnings and earnings per share would have been reduced to the following
amounts.
THREE MONTHS ENDED MARCH 31,
----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2003 2002
-------- --------
Net earnings As reported $ 15,773 $ 8,566
Deduct* (872) (286)
-------- --------
Pro forma $ 14,901 $ 8,280
======== ========
Basic earnings per share As reported $ 1.21 $ 0.77
Pro forma $ 1.14 $ 0.74
Diluted earnings per share As reported $ 1.15 $ 0.72
Pro forma $ 1.09 $ 0.69
*Deduct: Total stock-based employee compensation expense determined under fair
value based method for awards, net of related tax effects.
The fair value for options granted in the first quarter of 2003 was
established at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions. No options were granted in the first
quarter of 2002.
THREE MONTHS
ENDED MARCH 31,
2003
------
Expected dividend yield 0%
Risk-free interest rate 3.30%
Expected volatility 55%
Expected life (in years) 7
Weighted average fair value of options $18.62
To date, we have only granted options to employees and non-employee
directors.
COMMON STOCK REPURCHASE. In August 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. In the first quarter of 2003, we
repurchased 164,300 shares of our common stock at an average price of $31.53 per
share.
WARRANTY RESERVES. We have certain obligations related to post-construction
warranties and defects related to homes sold. Historically these amounts have
not been material and we do not anticipate future obligations to be material. At
March 31, 2003, we had approximately $7.2 million in reserve for various
warranty claims. Summaries of our warranty reserve follow (in thousands):
MARCH 31,
-----------------------
2003 2002
--------- ---------
Warranty reserve, beginning of period $ 6,676 $ 4,071
Additions to reserve 1,655 926
Warranty claims and expenses (1,119) (1,244)
--------- ---------
Warranty reserve at end of period $ 7,212 $ 3,753
========= =========
7
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
RECENT ACCOUNTING PRONOUNCEMENTS. In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 46 (FIN 46), "Consolidation of
Variable Interest Entities", an interpretation of Accounting Research Bulletin
No. 51. FIN 46 addresses consolidation by business enterprises of variable
interest entities (selected entities with related contractual, ownership, voting
or other monetary interests, including certain special purpose entities), and
requires certain additional disclosure with respect to these entities. The
provisions of FIN 46 are applicable immediately to variable interest entities
created after January 31, 2003. A public entity with a variable interest in a
variable interest entity created before February 1, 2003, shall apply the
provisions of FIN 46 to that entity no later than the beginning of the first
interim or annual reporting period beginning after June 15, 2003. We do not
expect the requirements of FIN 46 to have a material impact on our consolidated
financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This amendment to FASB Statement No.
123 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of FASB Statement
No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The provisions of this
statement were effective for financial statements of interim or annual periods
after December 15, 2002. We do not currently intend to change to the fair value
method of accounting. The required disclosures are included in the stock-based
compensation section of this note.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to guarantees. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes that are related to an asset,
liability, or equity security of the guaranteed party. Certain guarantee
contracts are excluded from both the disclosure and recognition requirements of
this interpretation, including, among others, guarantees relating to employee
compensation, residual value guarantees under capital lease arrangements,
commercial letters of credit, loan commitments, subordinated interests in a
special purpose entity, and guarantees of a company's own performance. Other
guarantees are subject to the disclosure requirements of FIN 45 but not to the
recognition provisions and include, among others, a guarantee accounted for as a
derivative instrument under SFAS 133, a parent's guarantee of debt owed to a
third party by its subsidiary or vice versa, and a guarantee which is based on
performance, not price. The disclosure requirements of FIN 45 were effective for
us as of December 31, 2002 and required disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee, and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee. The
recognition requirements of FIN 45 are to be applied prospectively to guarantees
issued or modified after December 31, 2002. The adoption of FIN 45 on January 1,
2003 did not have a material impact on our consolidated financial statements.
For disclosures required by FIN 45 applicable to us, see Note 11, "Commitments
and Contingencies" to our Annual Report on Form 10-K for December 31, 2002 and
the Warranty Reserves section of this footnote.
NOTE 2 - REAL ESTATE AND CAPITALIZED INTEREST
Real estate consists of the following (in thousands):
8
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Homes under contract, in production $ 228,351 $ 191,761
Finished home sites 140,251 123,500
Home sites under development 75,930 66,552
Homes held for resale 53,704 55,273
Model homes 19,998 19,160
Land held for development 25,044 28,724
---------- ----------
$ 543,278 $ 484,970
========== ==========
We capitalize certain interest costs incurred during the development and
construction period of real estate. Capitalized interest is allocated and
capitalized to real estate when incurred and charged to cost of sales when the
related property is closed. Summaries of interest incurred, interest capitalized
and interest expensed follow (in thousands):
MARCH 31,
------------------------
2003 2002
---------- ----------
Interest capitalized, beginning of period $ 8,781 $ 8,746
Interest capitalized 5,662 4,553
Amortization to cost of home and land sales (4,031) (3,374)
---------- ----------
Interest capitalized, end of period $ 10,412 $ 9,925
========== ==========
Interest incurred $ 5,662 $ 4,553
Interest capitalized (5,662) (4,553)
---------- ----------
Interest expensed $ -- $ --
========== ==========
NOTE 3 - LOANS PAYABLE AND SENIOR NOTES
Loans payable consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
---------- ----------
$250 million unsecured revolving credit facility
maturing December 12, 2005 with extension
provisions, with interest payable monthly
approximating prime (4.25% at March 31, 2003)
or LIBOR (approximately 1.285% at March 31,
2003) plus 2.0% $ 110,300 $ 107,565
Acquisition and development seller carry back
financing, interest payable at a fixed rate of
15% per annum, principal and interest payments
payable at the date of the sale of individual
properties to a third party, secured by first
deeds of trust on real estate 1,150 2,362
---------- ----------
Total loans payable $ 111,450 $ 109,927
========== ==========
At March 31, 2003, our outstanding 9.75% senior notes due 2011 totaled
$206.6 million, which includes $155.0 million in principal amount issued in May
2001 and an add-on of $51.6 million, including premium, issued in February 2003.
The February 2003 add-on offering of $50 million in aggregate principal amount
of our 9.75% senior notes was issued at a price of 103.25% of their face amount
to yield 9.054%, and together with the May 2001 offering, constitute a single
series of notes.
9
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
The bank credit facility 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, 2003 we were in compliance with these
covenants. The senior unsecured notes restrict our ability to pay dividends.
NOTE 4 - ACQUISITIONS
PERMA-BILT ACQUISITION. Effective October 1, 2002, we purchased the
homebuilding assets of Perma-Bilt Homes ("Perma-Bilt Homes" or "Perma-Bilt"), a
builder of single-family homes in the Las Vegas, Nevada metropolitan area. The
purchase price was approximately $46.6 million in cash including the repayment
of existing debt in the amount of $16.7 million. We also assumed accounts
payable, accrued liabilities and home sale deposits totaling $5.8 million. In
addition, we agreed to an earn-out of 10% of the pre-tax profits of Perma-Bilt,
payable in cash over three years. Perma-Bilt Homes builds a wide range of homes
with a focus on serving the move-up housing markets in Nevada.
HAMMONDS ACQUISITION. On July 1, 2002, we acquired 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
was approximately $83.4 million in cash plus the assumption of accounts payable,
accrued liabilities, and home sale deposits totaling $11.0 million and a note
payable totaling $1.1 million. Established in 1987, Hammonds Homes builds a wide
range of homes in communities throughout the Houston, Dallas/Ft. Worth and
Austin, Texas areas with a focus on serving the move-up housing market.
The following unaudited pro forma financial data for the three months ended
March 31, 2003 and 2002 has been prepared as if the acquisition of the assets
and liabilities of Hammonds on July 1, 2002 and Perma-Bilt on October 1, 2002
had occurred on January 1, 2002. 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 transactions
occurred on the dates listed above, nor does it purport to represent future
periods (in thousands except per share amounts):
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---------- ----------
Revenue $ 283,410 $ 227,874
Net earnings $ 15,773 $ 9,869
Diluted EPS $ 1.15 $ 0.83
GOODWILL. Goodwill represents the excess of the purchase price of our
acquisitions over the fair value of the assets acquired. The acquisitions of
Hammonds and Perma-Bilt were recorded using the purchase method of accounting
with the results of operations of these entities included in our consolidated
financial statements as of the date of the acquisition. The purchase prices were
allocated based on estimated fair value of the assets and liabilities at the
date of the acquisition. Intangible assets equal to the excess purchase price
over the fair value of the net assets of $21.3 million and $17.2 million for
Hammonds and Perma-Bilt, respectively, were recorded as goodwill, which is
presented on the consolidated balance sheet. The first quarter 2003 increase of
$254,490 in the carrying amount of goodwill on our balance sheet was caused by
the earnout of our Nevada division. The earnout is based on a percentage of
Perma-Bilt's earnings for the period and was negotiated at the time we acquired
the Nevada operations.
Under the guidelines contained in SFAS No. 142, "Goodwill and Other
Intangible Assets," in the first quarter of 2003 management performed an
analysis concerning potential impairment of the goodwill carried on our balance
sheet and it was determined that no impairment existed.
10
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
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, 2003 and 2002 follows.
The number of shares outstanding and earnings per share have been adjusted to
reflect the 2-for-1 stock split effective April 26, 2002:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---------- ----------
(in thousands, except per
share amounts)
BASIC:
Net earnings $ 15,773 $ 8,566
Weighted average number of shares outstanding 13,041 11,137
---------- ----------
Basic earnings per share $ 1.21 $ 0.77
========== ==========
DILUTED:
Net earnings $ 15,773 $ 8,566
Weighted average number of shares outstanding-basic 13,041 11,137
Effect of dilutive securities:
Options to acquire common stock 642 813
---------- ----------
Diluted weighted average common shares outstanding 13,683 11,950
---------- ----------
Diluted earnings per share $ 1.15 $ 0.72
========== ==========
Antidilutive stock options not included in diluted EPS 296 --
========== ==========
NOTE 6 - INCOME TAXES
Components of income tax expense attributable to earnings before income
taxes at March 31 are as follows (in thousands):
2003 2002
---------- ----------
Current taxes:
Federal $ 8,514 $ 5,062
State 1,319 846
---------- ----------
9,833 5,908
---------- ----------
Deferred taxes:
Federal -- (400)
State -- (31)
---------- ----------
-- (431)
---------- ----------
Total $ 9,833 $ 5,477
========== ==========
NOTE 7 - SEGMENT INFORMATION
We classify our operations into four primary operating segments: Texas,
Arizona, California and Nevada. These segments generate revenue through home
sales to external customers and are not dependent on any one major customer.
During 2002 we changed the composition of our reportable segments. Previously,
we classified our operations into two segments, first-time and volume priced
homes. This previous classification structure placed our various divisions into
two categories based on the primary price range of homes built by that division.
11
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
We changed our classification structure because as our divisions broadened the
price ranges of homes offered, it became impractical to place a division in one
or the other category. Accordingly, the current structure summarizes our
divisions by the state in which they are located. We have restated the
corresponding items of segment information for 2002.
Operational information relating to our 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 expense, interest amortized to cost of sales, income taxes and
extraordinary items (EBIT). EBIT is a widely accepted financial indicator used
by investors and analysts to analyze and compare companies on the basis of
operating performance and we believe is a financial measure widely used in the
homebuilding industry. A reconciliation of reported net earnings to EBIT
follows:
2003 2002
---------- ----------
Net earnings $ 15,773 $ 8,566
Income taxes 9,833 5,477
Interest 4,031 3,374
---------- ----------
EBIT $ 29,637 $ 17,417
========== ==========
The accounting policies of our business segments are the same as those
described in Note 1. There are no significant transactions between our primary
segments.
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---------- ----------
(in thousands)
HOME SALES REVENUE:
Texas $ 121,503 $ 62,042
Arizona 67,125 64,726
California 67,303 42,963
Nevada 27,479 --
---------- ----------
Total $ 283,410 $ 169,731
========== ==========
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---------- ----------
(in thousands)
EBIT:
Texas $ 13,945 $ 8,754
Arizona 4,570 4,610
California 10,923 4,856
Nevada 3,579 --
Corporate and other (3,380) (803)
---------- ----------
Total $ 29,637 $ 17,417
========== ==========
12
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
AT MARCH 31, AT DECEMBER 31,
2003 2002
---------- ----------
(in thousands)
ASSETS:
Texas $ 314,917 $ 274,163
Arizona 248,255 230,176
California 128,291 113,467
Nevada 70,534 62,143
Corporate and other 12,434 11,839
---------- ----------
Total $ 774,431 $ 691,788
========== ==========
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," "plan" 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, capital expenditures and
backlog; plans for future operations; financing needs or plans and liquidity;
the impact of changes in interest rates; plans relating to our products or
services, acquisitions, and new or planned development projects; the demand for
and pricing of our homes; the expected outcome of legal proceedings against us;
the sufficiency of our capital resources; the impact of new accounting
standards; and our ability to continue positive operating results in light of
current economic and political conditions, 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, 2002, including those under the captions "Market for the
Registrant's Common Stock and Related Stockholder Matters - Factors That May
Affect Future Stock Performance," and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors that May Affect Our
Future Results and Financial Condition" 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 and other factors, our stock and note
prices may fluctuate dramatically.
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations is based our consolidated unaudited financial statements for the
three months ended March 31, 2003 and 2002. 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.
CRITICAL ACCOUNTING POLICIES
We have established various accounting policies which govern the
application of accounting principles generally accepted in the United States of
America in the preparation and presentation of our consolidated financial
statements. Our significant policies are described in Note 1 of the consolidated
financial statements in our Annual Report on Form 10-K for December 31, 2002.
Certain accounting policies involve significant judgments, assumptions and
estimates by management that have a material impact on the carrying value of
13
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(UNAUDITED)
certain assets and liabilities, and revenues and costs which we consider to be
critical accounting policies. The judgments, assumptions and estimates we use
are based on historical experience, knowledge of the accounts and other factors
which we believe to be reasonable under the circumstances, and we evaluate our
judgments and assumptions on an on-going basis. Because of the nature of the
judgments and assumptions we have made, actual results could differ from these
judgments and estimates, which could have a material impact on the carrying
values of assets and liabilities and the results of our operations.
The accounting policies that we deem most critical to us, and involve the
most difficult, subjective or complex judgments, include our estimates of costs
to complete our individual projects, the ultimate recoverability (or impairment)
of these costs, goodwill impairment, the likelihood of closing lots held under
option or contract and the ability to estimate expenses and accruals, including
legal and warranty reserves. Should we under or over estimate costs to complete
individual projects, gross margins in a particular period could be misstated and
the ultimate recoverability of costs related to a project from home sales may be
uncertain. Furthermore, non-refundable deposits paid for land options or
contracts may have no economic value to us if we do not ultimately purchase the
land. Our inability to accurately estimate expenses, accruals, or an impairment
of real estate or goodwill could result in charges, or income, in future
periods, which relate to activities or transactions in a preceding period.
We acquired Hammonds Homes, a builder in Houston, Austin and Dallas, Texas,
effective July 1, 2002, and Perma-Bilt Homes, which builds in the Las Vegas,
Nevada area, effective October 1, 2002. The results presented below include the
operations of these acquisitions since their dates of purchase and are not
necessarily indicative of results to be expected in the future.
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,
($ IN THOUSANDS)
--------------------------------------
HOME SALES REVENUE 2003 2002 % CHANGE
---------- ---------- --------
TOTAL
Dollars .................. $ 283,410 $ 169,731 67%
Homes closed ............. 1,136 758 50%
Average sales price ...... $ 249.5 $ 223.9 11%
TEXAS *
Dollars .................. $ 121,503 $ 62,042 96%
Homes closed ............. 606 363 67%
Average sales price ...... $ 200.5 $ 170.9 17%
ARIZONA
Dollars .................. $ 67,125 $ 64,726 4%
Homes closed ............. 250 285 (12%)
Average sales price ...... $ 268.5 $ 227.1 18%
CALIFORNIA
Dollars .................. $ 67,303 $ 42,963 57%
Homes closed ............. 158 110 44%
Average sales price ...... $ 426.0 $ 390.6 9%
NEVADA **
Dollars .................. $ 27,479 $ -- n/a
Homes closed ............. 122 -- n/a
Average sales price ...... $ 225.2 $ -- n/a
14
QUARTER ENDED MARCH 31,
($ IN THOUSANDS)
--------------------------------------
SALES CONTRACTS 2003 2002 % CHANGE
---------- ---------- --------
TOTAL
Dollars .................. $ 412,864 $ 293,082 41%
Homes ordered ............ 1,582 1,160 36%
Average sales price ...... $ 261.0 $ 252.7 3%
TEXAS *
Dollars .................. $ 161,135 $ 85,984 87%
Homes ordered ............ 791 472 68%
Average sales price ...... $ 203.7 $ 182.2 12%
ARIZONA
Dollars .................. $ 123,653 $ 116,603 6%
Homes ordered ............ 447 456 (2%)
Average sales price ...... $ 276.6 $ 255.7 8%
CALIFORNIA
Dollars .................. $ 89,775 $ 90,495 (1%)
Homes ordered ............ 180 232 (22%)
Average sales price ...... $ 498.8 $ 390.1 28%
NEVADA **
Dollars .................. $ 38,301 $ -- n/a
Homes ordered ............ 164 -- n/a
Average sales price ...... $ 233.5 $ -- n/a
QUARTER ENDED MARCH 31,
($ IN THOUSANDS)
--------------------------------------
NET SALES BACKLOG 2003 2002 % CHANGE
---------- ---------- --------
TOTAL
Dollars .................. $ 667,218 $ 498,302 34%
Homes in backlog ......... 2,516 2,004 26%
Average sales price ...... $ 265.2 $ 248.7 7%
TEXAS *
Dollars .................. $ 258,531 $ 139,593 85%
Homes in backlog ......... 1,270 802 58%
Average sales price ...... $ 203.6 $ 174.1 17%
ARIZONA
Dollars .................. $ 200,683 $ 257,863 (22%)
Homes in backlog ......... 663 947 (30%)
Average sales price ...... $ 302.7 $ 272.3 11%
CALIFORNIA
Dollars .................. $ 159,399 $ 100,846 58%
Homes in backlog ......... 355 255 39%
Average sales price ...... $ 449.0 $ 395.5 14%
NEVADA **
Dollars .................. $ 48,605 $ -- n/a
Homes in backlog ......... 228 -- n/a
Average sales price ...... $ 213.2 $ -- n/a
15
* 2003 amounts include 251 ($54,748) homes ordered, 220 ($46,849) homes
closed and 417 ($90,019) homes in backlog from Hammonds Homes.
** Amounts are for Perma-Bilt Homes, acquired effective October 1, 2002.
HOME SALES REVENUE. The increases in total home sales revenue and number of
homes closed in the first three months of 2003 compared to the first three
months of 2002 results mainly from the addition of Hammonds Homes and Perma-Bilt
Homes to our operations in the second half of 2002. Together, Hammonds and
Perma-Bilt closed 342 homes with a value of $74.3 million in the first quarter
of 2003. In addition, the average sales price of homes closed during the first
quarter of 2003 was approximately 11% higher than the comparable period in 2002.
A significant portion of this increase is attributable to the increased closings
in California, where prices are well above the company average. These increases
were partially offset by a decrease in the number of closings in Arizona during
the first quarter of 2003 compared to the first quarter in 2002. Generally, the
number of homes closed in Arizona were lower as the timing of some new
communities tempered our orders during the later part of 2002.
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 2003 compared to the first three months
of 2002 due mainly to the addition Hammonds and Perma-Bilt to our operations,
which together contributed 415 new sales contracts with a value of approximately
$93.0 million. The decrease in sales contracts in our Arizona and Northern
California regions for the first quarter of 2003 is attributable to an decrease
in the number of communities open for sales compared to the prior year's first
quarter.
NET SALES BACKLOG. Backlog represents net sales contracts that have not
closed. The aggregate dollar value of homes in backlog at March 31, 2003
increased 34% from March 31, 2002, reflecting a 26% increase in the number of
homes in backlog, due primarily to the inclusion of 645 homes from the Hammonds
and Perma-Bilt operations, and a 7% increase in the average price of homes in
backlog.
OTHER OPERATING INFORMATION
QUARTER ENDED MARCH 31,
($ IN THOUSANDS)
------------------------
2003 2002
------- -------
HOME SALES GROSS PROFIT
Dollars................................... $56,354 $31,636
Percent of home sales revenue............. 19.9% 18.6%
COMMISSIONS AND OTHER SALES COSTS
Dollars................................... $19,745 $11,296
Percent of home sales revenue............. 7.0% 6.7%
GENERAL AND ADMINISTRATIVE COSTS
Dollars................................... $12,212 $ 7,465
Percent of total revenue.................. 4.3% 4.4%
INCOME TAXES
Dollars................................... $ 9,833 $ 5,477
Percent of earnings before income taxes... 38.4% 39.0%
HOME SALES GROSS PROFIT. Home sales gross profit represents home sales
revenue, less cost of home sales, which include developed lot costs, direct home
construction costs, an allocation of common community costs (such as model home
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, 2003 is attributable to a 50% increase in
number of homes closed. The gross profit percentage increase in the first
16
quarter of 2003 resulted primarily from improvement in our California and
Arizona operations. These improvements were offset by lower margins in Texas,
which had been at unusually high levels last year.
COMMISSIONS AND OTHER SALES COSTS. Commissions and other sales costs, such
as advertising and sales office expenses, were approximately $19.7 million, or
7.0% of home sales revenue, in 2003, as compared to approximately $11.3 million,
or 6.7% of home sales revenue in 2002. 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 opening for sale, but not yet recording
closing revenue during the first quarter of 2003 compared to the first quarter
of 2002.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were approximately $12.2 million, or 4.3% of total revenue in the first quarter
of 2003, as compared to approximately $7.5 million, or 4.4% of total revenue in
2002. Operating costs in 2003 were slightly lower as a percentage of revenue in
comparison to the prior year primarily due to the June 2002 end to the
California earn-out payment per the terms of the purchase contract when we
acquired the division. Thus, 2002 general and administrative expenses include
approximately $853,000 of costs related to the earn-out, whereas the 2003
amounts do not. The earn-out was based on 20% of the pre-tax earnings of the
Northern California region after reduction for a capital charge.
INCOME TAXES. The increase in income taxes to $9.8 million for the quarter
ended March 31, 2003 from $5.5 million in the prior year's quarter resulted from
an increase in pre-tax income, partially offset by a slight decrease in the
effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of capital for the quarter ended March 31, 2003 were
operating expenses, land purchases, lot development, home construction and the
repurchase of common stock. We use a combination of borrowings and funds
generated by operations to meet our short-term working capital requirements.
Cash flows 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,
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 flows may significantly
exceed earnings reported for financial statement purposes, as cost of sales
includes charges for substantial amounts of previously expended costs.
At March 31, 2003, $110.3 million of borrowings were outstanding under our
senior unsecured revolving credit facility, with unborrowed availability under
the bank credit facility of approximately $110.0 million.
This credit facility contains certain financial and other covenants,
including:
o requiring the maintenance of tangible net worth;
o requiring the maintenance of a minimum interest coverage ratio;
o establishing a maximum permitted total leverage ratio;
o imposing limitations on the incurrence of additional indebtedness and
liens;
o imposing restrictions on investments, dividends and certain other
payments;
o imposing restrictions on sale-leaseback transactions and the
incurrence of off-balance sheet liabilities; and
o imposing limitations on the maximum net book value of specified land
holdings as a percentage of consolidated tangible net worth.
17
In February 2003, we completed an add-on offering of $50 million in
aggregate principal amount of our 9.75% senior notes due June 1, 2001, the
proceeds of which were used to pay down our senior unsecured revolving credit
facility. The notes were issued at a price of 103.25% of their face amount to
yield 9.054%, and together with the May 2001 offering, constitute a single
series of notes.
Our senior notes require us to comply with a number of covenants that
restrict certain transactions, including:
o limitations on additional indebtedness;
o limitations on the payment of dividends, redemption of equity
interests and certain investments;
o maintenance of a minimum level of consolidated tangible net worth;
o limitations on liens securing certain obligations; and
o limitations on the sale of assets, mergers and consolidations and
transactions with affiliates.
As of March 31, 2003, we were in compliance with the credit facility and
note covenants.
We believe that our current borrowing capacity, cash on hand at March 31,
2003, and anticipated net cash flows are and will be sufficient to meet
liquidity needs for the foreseeable future. There is no assurance, however, that
future 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 the credit agreement
governing our senior unsecured credit facility.
In August 2002 we announced a new stock repurchase program in which our
Board of Directors approved the buyback of up to $32 million of our outstanding
stock. In the first quarter of 2003, we repurchased 164,300 shares of our common
stock at an average price of $31.53 per share.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of our 9.75% senior notes, $206.6 million of our outstanding
borrowings is based on a fixed interest rate. Except in limited circumstances,
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.
We are exposed to market risk primarily related to potential adverse
changes in interest rates on our existing revolving credit facility. The
interest rate relative to this borrowing fluctuates with the prime and
Eurodollar lending rates, both upwards and downwards. As of March 31, 2003, we
had approximately $110.3 million drawn under our revolving credit facility that
is subject to changes in interest rates. An increase or decrease of 1% in
interest rates would change our annual debt service payments by approximately
$1.0 million per year. We do not enter into, or intend to enter into, derivative
financial instruments for trading or speculative purposes.
Our operations are interest rate sensitive. Overall housing demand is
adversely affected by increases in interest rates. If mortgage interest rates
increase significantly, this may negatively affect the ability of homebuyers to
secure adequate financing. Higher interest rates could adversely affect our
revenues, gross margins and net income and will also increase our borrowing
costs because our revolving credit facility will fluctuate with the prime and
Eurodollar lending rates, both upwards and downwards.
ITEM 4. CONTROLS AND PROCEDURES
Meritage's Co-Chief Executive Officers and Chief Financial Officer have
concluded based on their evaluation as of a date within 90 days of the filing of
this Form 10-Q, that the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934) are effective. There have been no significant changes in internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
18
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 Filed herewith
Executive Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certificate of John R. Landon, Co-Chief Filed herewith
Executive Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.3 Certificate of Larry W. Seay, Chief Financial Filed herewith
Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.4 Private Securities Reform Act of 1995 Safe Filed herewith
Harbor Compliance Statement for Forward-Looking
Statements
(b) REPORTS ON FORM 8-K
(1) On February 14, 2003 we filed a Current Report on Form 8-K announcing
that we had priced an offering of $50 million in aggregate principal
amount of our 9.75% senior notes due 2011.
(2) February 25, 2003, we filed a Current Report on Form 8-K announcing
that we had completed a private placement of $50 million in aggregate
principal amount of our 9.75% senior notes due June 1, 2011.
(3) On April 10, 2003 we filed a Current Report on Form 8-K for the
purpose of furnishing a press release related to the announcement of
Meritage's first quarter 2003 new orders, closings and backlog.
(4) On April 24, 2003 we filed a Current Report on form 8-K for the
purpose of furnishing a press release related to the announcement of
our first quarter 2003 earnings and other results.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 13 day of May, 2003.
MERITAGE CORPORATION,
a Maryland Corporation
By /s/ LARRY W. SEAY
-------------------------------------
Larry W. Seay
CHIEF FINANCIAL OFFICER AND VICE
PRESIDENT-FINANCE (PRINCIPAL
FINANCIAL OFFICER)
By /s/ VICKI L. BIGGS
-------------------------------------
Vicki L. Biggs
VICE PRESIDENT-CONTROLLER (PRINCIPAL
ACCOUNTING OFFICER)
20
CERTIFICATIONS
CERTIFICATION OF THE CO-CHIEF EXECUTIVE OFFICER
I, Steven J. Hilton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Meritage Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Steven J. Hilton
----------------------------------------
Steven J. Hilton
Co-Chief Executive Officer
21
CERTIFICATION OF THE CO-CHIEF EXECUTIVE OFFICER
I, John R. Landon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Meritage Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ John R. Landon
----------------------------------------
John R. Landon
Co-Chief Executive Officer
22
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Larry W. Seay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Meritage Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Larry W. Seay
----------------------------------------
Larry W. Seay
Chief Financial Officer
23