SCHEDULE 14A INFORMATION
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Meritage Corporation
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number, or the form or schedule and the date of its filing.
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
DATE: WEDNESDAY, MAY 9, 2001
TIME: 9:00 A.M.
LOCATION: THE HILTON SCOTTSDALE RESORT
6333 NORTH SCOTTSDALE ROAD
SCOTTSDALE, ARIZONA 85254
To Our Stockholders:
You are invited to attend the Meritage Corporation 2001 Annual Meeting of
Stockholders for the following purposes:
1. To elect four Class II Directors, each to hold office for a two-year
term;
2. To approve the Meritage Corporation 2001 Executive Management
Incentive Plan so that the compensation paid thereunder will be fully
deductible by the Company;
3. To transact any other business that may properly come before the
meeting.
Only stockholders of record at the close of business on March 30, 2001 are
entitled to notice of and to vote at the annual meeting. A copy of our 2000
Annual Report to Stockholders, which includes audited financial statements, is
enclosed.
By Order of the Board of Directors
/s/ Larry W. Seay
Scottsdale, Arizona Larry W. Seay
March 30, 2001 Secretary
YOUR VOTE IS IMPORTANT.
PLEASE SIGN, DATE AND MAIL THE ENCLOSED PROXY. A POSTAGE PAID
ENVELOPE IS PROVIDED FOR MAILING IN THE UNITED STATES.
MERITAGE CORPORATION
6613 NORTH SCOTTSDALE ROAD
SUITE 200
SCOTTSDALE, ARIZONA 85250
--------------------------
PROXY STATEMENT
--------------------------
This Proxy Statement is furnished to you in connection with the
solicitation of proxies to be used in voting at our Annual Meeting of
Stockholders on May 9, 2001. THE MERITAGE BOARD OF DIRECTORS IS SOLICITING
PROXIES. The proxy materials relating to the annual meeting were mailed on or
about April 5, 2001 to stockholders of record at the close of business on March
30, 2001 (the "record date"). You may revoke your proxy at any time before it is
exercised by attending the annual meeting and voting in person, duly executing
and delivering a proxy bearing a later date, or sending written notice of
revocation to the Corporate Secretary at the above address.
We will bear the entire cost of proxy solicitation, including charges and
expenses of brokerage firms and others for forwarding solicitation material to
beneficial owners of our outstanding common stock. We may solicit proxies
through the mail, by personal interview or telephone.
VOTING SECURITIES OUTSTANDING
As of the record date, there were 5,143,019 shares of Meritage common stock
outstanding. Each share is entitled to one vote on each proposal at the annual
meeting. Only holders of record of common stock at the close of business on the
record date will be permitted to vote at the meeting, either in person or by
valid proxy. Abstentions and broker non-votes will be treated as shares that are
present and entitled to vote for purposes of determining a quorum, but as
unvoted for purposes of determining the approval of any matter.
The following information should be reviewed along with the audited
consolidated financial statements, notes to consolidated financial statements,
independent auditors' reports and other information included in our 2000 Annual
Report that was mailed to you along with this Proxy Statement.
2
ELECTION OF DIRECTORS
(PROPOSAL NO. 1)
Our Board of Directors has seven members. The directors are divided into
two classes serving staggered two-year terms. This year our Class II directors
are up for election. The Board has nominated John R. Landon, Robert G. Sarver,
C. Timothy White and Peter L. Ax, who are incumbent Class II Directors, for
re-election. Mr. Ax was appointed as a Director in September 2000.
All nominees have consented to serve as directors. The Board of Directors
has no reason to believe that any of the nominees should be unable to act as a
director. However, if a nominee becomes unable to serve or if a vacancy should
occur before election, the Board may either reduce its size or designate a
substitute nominee. If a substitute nominee is named, the proxies will vote for
the election of the substitute.
The affirmative vote of a majority of the shares of common stock present at
the Annual Meeting, in person or by proxy, and entitled to vote is required to
elect directors. Unless you tell us on the proxy card to vote differently, we
will vote your signed and returned proxies FOR the Board's nominees.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" APPROVAL OF PROPOSAL 1.
3
DIRECTOR AND OFFICER INFORMATION
STEVEN J. HILTON has served as co-chairman and co-chief executive officer
(or co-managing director) since April 1998 and served as our president and
co-chief executive officer from December 31, 1996 to April 1998. In 1985, Mr.
Hilton co-founded Monterey Homes, which merged with Homeplex Mortgage Investment
Co., the Company's predecessor, and was its treasurer, secretary and director
until December 31, 1996. Mr. Hilton is a member of the Central Arizona
Homebuilders' Association and the National Homebuilders' Association.
JOHN R. LANDON has served as co-chairman and co-chief executive officer (or
co-managing director) since April 1998 and served as our chief operating officer
and co-chief executive officer from the combination of Legacy Homes and Meritage
in July 1997 to April 1998. Mr. Landon founded Legacy Homes in 1987 and, as its
president, managed all aspects of the company's business. Mr. Landon is a member
of the National Association of Homebuilders and the Dallas Home and Apartment
Builders' Association.
WILLIAM W. CLEVERLY has served as a director since December 31, 1996. He
served as co-chairman and co-chief executive officer (or co-managing director)
from April 1998 to March 1999, and as chairman of the board and co-chief
executive officer from December 31, 1996 to April 1998. Mr. Cleverly co-founded
Monterey Homes in 1985, and was its president and director until December 31,
1996. Mr. Cleverly is the chief executive officer of Inca Capital, a real estate
finance and investment company and is a member of the Central Arizona
Homebuilders' Association and the National Homebuilders' Association.
RAYMOND OPPEL has served as a director since December 1997. In 1982, he
co-founded and became chairman and chief executive officer of the Oppel Jenkins
Group, a regional homebuilder in Texas and New Mexico, which was sold to the
public homebuilder KB Home, in 1995. Mr. Oppel has served as president of the
Texas Panhandle Builder's Association and is a licensed real estate broker. Mr.
Oppel currently is active as a private investor in real estate development,
banking and a new automobile dealership.
ROBERT G. SARVER has served as a director since December 1996, and has been
the chairman and chief executive officer of California Bank and Trust since
1998. From 1995 to 1998, he served as chairman of Grossmont Bank. Mr. Sarver is
currently a director of Skywest Airlines and Zion's Bancorporation, a publicly
held bank holding company. In 1990, Mr. Sarver co-founded and currently serves
as the executive director of Southwest Value Partners and Affiliates, a real
estate investment company. In 1984, Mr. Sarver founded National Bank of Arizona,
Inc. and was its President until its acquisition by Zion's Bancorporation in
1994.
C. TIMOTHY WHITE has served as a director since December 1996, and served
as a director of Monterey Homes from February 1995 until December 1996. Since
1989, Mr. White has been an attorney with the law firm of Tiffany & Bosco, P.A.
in Phoenix, Arizona, which provides legal services to Meritage.
PETER L. AX has served as a director since September 2000 and is the
managing partner of Phoenix Capital Management, a Scottsdale-based financial
consulting firm. Mr. Ax is the former chairman and chief executive officer of
SpinCycle, Inc., the nation's largest consolidator and developer of
coin-operated laundromats. Mr. Ax is the exclusive financial advisor to
Cleanwave, LLC, an internet-based provider of laundry services owned by Shell
Chemical, a division of Royal Dutch Shell and SpinCycle, Inc. Mr. Ax is also on
the Board of Directors of CashX and of Takos.com. Prior to his involvement in
these companies Mr. Ax served as head of the private equity division and senior
vice president of Lehman Brothers in New York. Mr. Ax is a certified public
accountant and holds an M.B.A. from the Wharton School at the University of
Pennsylvania.
LARRY W. SEAY has served as chief financial officer and vice
president-finance since December 31, 1996, and has also served as our secretary
and treasurer since 1997. Mr. Seay was chief financial officer and vice
president-finance of Monterey Homes from April 1996 to December 31, 1996. From
1990 to 1996, Mr. Seay served as vice president/treasurer of UDC Homes, Inc. Mr.
Seay is a certified public accountant and a member of the American Institute of
Certified Public Accountants.
RICHARD T. MORGAN has served as vice president since April 1998 and also
served as chief financial officer of our Texas division since July 1997. Mr.
Morgan joined Legacy Homes in 1989 as controller, and was appointed Legacy's
chief financial officer in 1997.
4
STOCK OWNED BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table summarizes, as of March 30, 2001, the number and
percentage of outstanding shares of our common stock beneficially owned by the
following:
* each person or group management knows to beneficially own more than 5%
of such stock;
* all Meritage directors and nominees for director;
* all executive officers named in the compensation summary under
"Executive Compensation";
* all Meritage directors and executive officers as a group.
The address for our directors and executive officers is c/o Meritage
Corporation, 6613 North Scottsdale Road, Suite 200, Scottsdale, Arizona 85250.
The number of shares includes shares of common stock owned of record by such
person's minor children and spouse and by other related individuals and entities
over whose shares of common stock such person has custody, voting control or the
power of disposition.
Number Right To Total Percent of
Name of of Shares Acquire by Beneficial Outstanding
Beneficial Owner Age Position with Company Owned May 30, 2001 Shares Shares (1)
---------------- --- --------------------- ----- ------------ ------ ----------
Steven J. Hilton 39 Class I Director, Co-Chairman and Co-CEO 662,341 180,907 843,248 15.9%
John R. Landon 43 Class II Director, Co-Chairman and Co-CEO 647,267(2) 180,907 828,174 15.6%
William W. Cleverly 44 Class I Director 298,341 136,667 435,008 8.3%
Robert G. Sarver 39 Class II Director, Audit and 286,300(3) 10,000 296,300 5.8%
Compensation Committee
C. Timothy White 40 Class II Director 3,316 10,000 13,316 *
Ray Oppel 44 Class I Director, Audit and 15,000 10,000 25,000 *
Compensation Committee
Peter L. Ax 42 Class II Director, Audit and -- -- --
Compensation Committee
Larry W. Seay 45 Chief Financial Officer, Vice 7,400 7,500 14,900 *
President-Finance, Secretary and
Treasurer
Richard T. Morgan 45 Vice President 3,500 12,000 15,500 *
All directors and executive officers as a group (9 persons) 1,923,465 547,981 2,471,446 46.8%
Alan D. Hamberlin 5333 N. 7th St., Phoenix AZ 85014 320,226(4) -- 320,226 6.2%
Fidelity Management &
Research Co. 82 Devonshire Street, Boston MA, 02109 270,000(5) -- 270,000 5.3%
- ----------
* Represents less than 1%.
(1) The percentages shown include the shares of common stock actually owned as
of March 30, 2001, and the shares which the person or group had the right
to acquire within 60 days of that date. In calculating the percentage of
ownership, all shares of common stock which the identified person had the
right to acquire within 60 days of March 30, 2001 upon exercise of options,
are considered as outstanding for computing the percentage of the shares
owned by that person or group, but are not considered as outstanding for
computing the percentage of the shares of stock owned by any other person.
(2) All 647,267 shares are owned with Eleanor Landon, spouse, as
tenants-in-common.
(3) Mr. Sarver beneficially owns 1,500 shares through his spouse and 500 shares
through a minor child.
(4) Based on Schedule 13G, filed with the SEC on October 31, 2000. Alan D.
Hamberlin has sole voting power with respect to 320,226 shares and sole
dispositive power with respect to those shares. Mr. Hamberlin is a former
director of the Company.
(5) Based on Schedule 13G, filed with the SEC on February 14, 2001. Fidelity
Management & Research Co. ("Fidelity") has beneficial ownership with
respect to 270,000 shares and sole dispositive power with respect to those
270,000 shares. The shares as to which the Schedule 13G is filed by FMR
Corporation, in its capacity as the parent holding company of Fidelity, an
investment advisor to various investment companies, are owned by one
investment company, Fidelity Low Priced Stock Funds. The Schedule 13G also
states that Fidelity carries out the voting of the shares under written
guidelines established by the Funds' Boards of Trustees.
5
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
THE BOARD OF DIRECTORS met six times in fiscal 2000. Each director attended at
least 75% of his Board and committee meetings.
THE COMPENSATION COMMITTEE reviews the performance of management and will, at
the appropriate times, review the structure of management and plans for
management succession. The Committee also reviews and approves the Company's
compensation policies and administers Meritage's Stock Option Plan. If approved
by the Stockholders, the Committee will administer the Meritage 2001 Executive
Management Incentive Plan. The Compensation Committee, consisting of Mr. Oppel,
Mr. Sarver and Mr. Ax, all non-employee directors, was formed in the fourth
quarter of 2000, and began meeting in 2001. Prior to the formation of the
Committee, the entire Board decided upon compensation matters.
THE AUDIT COMMITTEE recommends appointment of our independent auditors, reviews
our financial statements and considers other matters in relation to the external
audit of financial affairs to promote accurate and timely reporting. The audit
committee consists of Mr. Oppel, Mr. Sarver and Mr. Ax, all non-employee
directors, and met four times during fiscal 2000.
OTHER COMMITTEES. We do not maintain a standing nominating committee or other
committee performing similar functions. The entire Board performs those duties.
DIRECTOR COMPENSATION
Non-employee directors received an annual retainer of $13,000 in 2000,
except Mr. Ax. Mr. Ax was appointed to the Board of Directors in September of
2000, and therefore received a retainer only for the period he served in that
position, which amounted to $4,400. Non-employee directors receive no additional
compensation for attending Board or committee meetings. In 1997 and 1999, each
non-employee director was granted options to acquire 5,000 shares of our common
stock as additional consideration for their services. Mr. Ax was granted options
in January 2,000 to acquire 2000 shares of our common stock as additional
consideration for his services. All non-employee director stock options vest in
equal share increments on each of the first two anniversary dates of the date of
grant and have an exercise price equal to the closing price of the stock on the
grant date.
William Cleverly, a stockholder of Monterey Homes before the merger,
resigned as a managing director effective March 18, 1999. Mr. Cleverly continues
to serve on our Board of Directors and as a consultant to us. In connection with
Mr. Cleverly's resignation, Meritage and Mr. Cleverly entered into a separation
and consulting agreement. Under this agreement, we purchased Mr. Cleverly's
employment agreement (which is described below under "Employment Agreements")
for $656,375, an amount equal to his salary through the end of his employment
term and his pro-rated bonus through March 31, 1999. Mr. Cleverly remained
entitled to the contingent stock he was granted in connection with the merger of
Monterey Homes with the Company in 1996 and to the stock options he was granted
under his 1996 stock option agreement, which contains terms identical to Mr.
Hilton's stock option agreement. The separation was deemed a termination without
cause under Mr. Cleverly's employment agreement.
For three years from the effective date of the separation agreement, Mr.
Cleverly agreed to consult on our new product development and other areas agreed
upon by the parties. Mr. Cleverly is not required to spend more than 25 hours
per month in his capacity as our consultant. The separation agreement contains a
non-compete provision that prohibits Mr. Cleverly from competing with us for
three years following the effective date, subject to various exceptions. In
consideration for Mr. Cleverly's agreement not to compete, he will be paid a
total of $285,000 in quarterly installments of $23,750. As of December 31, 2000,
we have paid Mr. Cleverly $166,250 of this amount.
For five years from the effective date of the separation agreement, Mr.
Cleverly will be nominated for election to our Board of Directors, so long as he
owns at least 275,000 shares of our stock or unless he has committed any act
that constitutes "cause" as defined in his previous employment agreement.
In connection with the separation agreement, both Mr. Cleverly and Meritage
released the other party from any liabilities or obligations either party had or
may have against such party in the future, subject to certain exceptions.
6
EXECUTIVE COMPENSATION
The following table summarizes the compensation we paid in 2000, 1999 and
1998 to our Co-Chief Executive Officers and other most highly compensated
executive officers
2000 SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
-------------------- Other Annual ----------- All Other
Name and Principal Position Year Salary Bonus Compensation Options (#) Compensation(1)
--------------------------- ---- -------- -------- ------------ ----------- ---------------
Steven J. Hilton - Co-Chairman and Co- 2000 $400,000 $975,597 -- 11,200 $35,005
Chief Executive Officer 1999 375,000 475,000 -- 30,000 33,212
1998 210,000 200,000 -- -- 33,438
John R. Landon - Co-Chairman and Co- 2000 400,000 975,597 -- 11,200 63,257
Chief Executive Officer 1999 375,000 475,000 -- 30,000 26,004
1998 210,000 200,000 -- -- 22,183
Larry W. Seay - Chief Financial Officer, 2000 161,428 175,000 -- 7,500 14,654
Vice President-Finance, Secretary and 1999 150,000 125,000 -- 20,000 12,611
Treasurer 1998 120,726 95,937 -- -- 9,884
Richard T. Morgan - Vice President 2000 122,500 80,000 -- -- 5,334
1999 110,833 60,000 -- 15,000 1,237
1998 97,167 54,000 -- -- 1,272
- ----------
(1) These amounts represent matching contributions by the Company to the
officers' accounts under the 401(k) plan, group health and life plan
premiums and Company automobile allowances.
2000 OPTION GRANTS
The following table lists stock options granted in 2000 to the officers
named in the Summary Compensation Table. The amounts shown as potential
realizable values rely on arbitrarily assumed share price appreciation rates
prescribed by the SEC over the five or seven-year term of the options. In
assessing those values, please note that the ultimate value of the options
depends on actual future share values and do not necessarily reflect
management's assessment of our future stock price performance. The potential
realizable values are not intended to indicate the value of the options.
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
--------------------------------------------------- --------------------------
Percentage
of Total
Shares Options
Underlying Granted to Exercise or
Options Employees Base Price Expiration
Name Granted (#) in 2000 ($/Share) Date 0% 5% 10%
---- ----------- ------- --------- ------- ---- ------- -------
Steven J. Hilton 11,200 12% $11.00 1/11/05 -- $19,744 $57,177
John R. Landon 11,200 12% 11.00 1/11/05 -- 19,744 57,177
Larry W. Seay 7,500 8% 10.00 1/11/07 -- 30,533 71,154
Richard T. Morgan -- -- -- -- -- -- --
No stock appreciation rights have been granted under the Meritage Stock
Option Plan.
7
AGGREGATED OPTION EXERCISES IN 2000
AND OPTION VALUES AT END OF FISCAL YEAR 2000
The following table lists the number of shares acquired and the value
realized as a result of options exercised during 2000 for the listed officers.
The table contains values for "in the money" options, which are those with a
positive spread between the exercise price and the December 31, 2000 share price
of $37.25. The values are the difference between the year-end price per share
and the exercise price per share, multiplied by the number of applicable shares
in the money. These values have not been and may never be realized. The options
may never be exercised, and the value, if any, will depend on the share price on
the exercise date.
Number of Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Year End (#) Fiscal Year End ($)
Shares --------------------------- ---------------------------
Acquired On Value
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- ----------- ------------- ----------- -------------
Steven J. Hilton -- -- 172,667 35,200 $5,462,793 $ 811,794
John R. Landon -- -- 172,667 35,200 5,462,793 811,794
Larry W. Seay -- -- 7,500 28,500 193,885 717,145
Richard T. Morgan -- -- 9,000 16,000 241,500 391,000
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
THE FOLLOWING REPORT OF THE COMPENSATION COMMITTEE DOES NOT CONSTITUTE
SOLICITING MATERIAL AND SHOULD NOT BE DEEMED FILED OR INCORPORATED BY REFERENCE
INTO ANY OTHER COMPANY FILING UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES
EXCHANGE ACT OF 1934, EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES
THIS REPORT.
It is the duty of the Compensation Committee to review and determine the
salaries and bonuses of executive officers of the Company, including the
Company's Co-Chief Executive Officers, and to establish the general compensation
policies for such individuals. The Compensation Committee believes that the
compensation programs for the executive officers should reflect the Company's
performance and the value created for our stockholders. In addition, our
compensation programs should support the goals and values of the Company and
should reward individual contributions to the Company's success.
GENERAL COMPENSATION POLICY AND PHILOSOPHY. Our philosophy is to provide
the Company's executive officers with compensation that is based on their
individual performance and the financial performance of the Company, and that is
competitive enough to attract and retain highly skilled individuals. Each
officer's compensation is comprised of:
* a base salary;
* performance bonuses designed to reward performance based on financial
results; and
* stock-based incentives designed to tie the executive officers' overall
compensation to the interests of the Company's stockholders by
providing substantial rewards to executives if stockholders benefit
from stock price appreciation, and no reward if the stock price does
not appreciate.
Executives also participate in various other benefit plans generally
available to all company employees, including a medical and 401(k) plan.
The Company attempts to set executive compensation at levels that are
competitive within the industry. Each year the Company reviews executive
compensation against publicly available information for other homebuilders.
Periodically, the Company engages outside consultants to evaluate its
compensation programs.
A substantial portion of each executive's compensation is in the form of a
bonus program. For most executives, the program is tied to an annual budget. The
Company believes that tying compensation to financial performance aligns the
interests of executives with those of stockholders.
8
In 1997, the Board of Directors and our stockholders approved the adoption
of the Meritage Corporation Stock Option Plan. The plan authorizes grants of
incentive stock options and non-qualified stock options to executives, directors
and consultants as selected by the Board. The total number of shares of common
stock available for awards under the plan is 775,000, and the maximum number of
shares of common stock that can be issued to any one person under the plan is
100,000 shares.
The Board believes the plan promotes success and enhances our value, as it
ties the personal interests of the participants to those of our stockholders,
and provides the participants with an incentive for outstanding performance. The
Board of Directors has the exclusive authority to administer the plan, including
the power to determine the eligibility, the types of awards to be granted, the
timing of the awards and the exercise price of awards.
CEO COMPENSATION. Our two Co-Chief Executive Officers, Steven J. Hilton and
John R. Landon, have employment agreements with us, which provide for a base
salary, stock options and bonuses based on company performance.
Our prior Board of Directors negotiated an employment agreement and a
related stock option agreement with Mr. Hilton effective December 31, 1996, in
connection with the merger of Monterey Homes, an Arizona-based homebuilding
business, into the Company. Mr. Hilton was a stockholder of Monterey Homes
before the merger. The employment agreement and stock option agreement were
integral factors in Mr. Hilton's decision to proceed with the merger and assume
management of Meritage. Mr. Hilton's compensation package is more fully
described under "Employment Agreements."
In July 1997, we combined with Legacy Homes, a Texas based homebuilding
business owned by John and Eleanor Landon. In connection with the combination,
we negotiated an employment agreement and related stock option agreement with
Mr. Landon, under which Mr. Landon was appointed chief operating officer and
co-chief executive officer and was granted stock options. The employment
agreement and other related agreements were integral factors in Mr. Landon's
decision to combine Legacy Homes with the Company and become part of our
management team. Mr. Landon's agreement also included provisions for us to pay
him additional consideration based on our earnings. Portions of this additional
consideration were paid in 1998 and 1999. Our Board of Directors removed the
contingent nature of the remaining $5.2 million in 1999, which was paid to Mr.
Landon in January 2000. Mr. Landon's compensation package is more fully
described under "Employment Agreements."
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M). Section 162(m) of the
Internal Revenue Code (the Code) limits the deductibility of executive
compensation paid by publicly held corporations to $1 million for each executive
officer named in this proxy statement. The $1 million limitation generally does
not apply to compensation that is pursuant to a performance-based plan approved
by stockholders. In connection with their employment agreements, Messrs. Hilton
and Landon were each granted options to purchase 166,667 shares of the Company's
common stock. These options vested over three-years.
None of the stock options granted to Messrs. Hilton or Landon satisfy the
exceptions to the non-deductibility of tax or $1 million threshold described
above. In 2001 and 2002, 166,667 options each held by Messrs. Hilton and Landon
with an exercise price of $5.25, will terminate and will need to be exercised.
If as a result of substantial appreciation in our common stock and the exercise
of substantial option holdings, Messrs. Hilton or Landon's compensation were to
exceed $1 million in a given year, the excess may not be deductible. The
compensation element of these options do not result in a charge to earnings on
our financial statements.
In 2000, Messrs. Hilton and Landon were each paid in excess of $1 million.
This excess did not qualify for deduction under Section 162(m) of the Code. This
year, the Company's bonus plan is being submitted to stockholders to facilitate
deductibility. See "Proposal No. 2 - Approval of Meritage Corporation 2001
Executive Management Incentive Plan."
Robert G. Sarver
Raymond Oppel
Peter L. Ax
9
REPORT OF THE AUDIT COMMITTEE
THE FOLLOWING REPORT OF THE AUDIT COMMITTEE DOES NOT CONSTITUTE SOLICITING
MATERIAL AND SHOULD NOT BE DEEMED FILED OR INCORPORATED BY REFERENCE INTO ANY
OTHER COMPANY FILING UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE
ACT OF 1934, EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES THIS
REPORT.
It is the duty of the Audit Committee to provide independent, objective
oversight of the Company's accounting functions and internal controls. The Audit
Committee is composed of independent directors, and acts under a written charter
that sets forth the audit related functions the committee is to perform. You can
find a copy of that charter attached to this proxy statement as Exhibit A. The
audit functions of the Audit Committee are to:
* serve as an independent and objective party to monitor the Company's
financial reporting process and internal control system;
* review and appraise the audit efforts of the Company's independent
accountants; and
* provide an open avenue of communication among the independent
accountants, financial and senior management, and the Board of
Directors.
The Audit Committee meets with management periodically to consider the
adequacy of the Company's internal controls and the objectivity of its financial
reporting. We discuss these matters with the Company's independent auditors and
with appropriate Company financial personnel. We regularly meet privately with
the independent auditors, who have unrestricted access to the Committee. We also
recommend to the Board the appointment of the independent auditors and review
periodically their performance and independence from management. We have
considered the provision of additional services by our independent auditors and
believe that the provision of such additional services does not adversely impact
their independence.
Although the Committee reviews the Company's financing plans and reports
recommendation to the full Board for approval, management has primary
responsibility for the Company's financial statements and the overall reporting
process, including the Company's system of internal controls. The independent
auditors audit the annual financial statements prepared by management, express
an opinion as to whether those financial statements fairly present the financial
position, results of operations and cash flows of the Company in conformity with
generally accepted accounting principles and discuss with us any issues they
believe should be raised with us.
This year, we reviewed the Company's audited financial statements and met
with both management and KPMG LLP, the Company's independent auditors, to
discuss those financial statements. Management has represented to us that the
financial statements were prepared in accordance with generally accepted
accounting principles. We have received from and discussed with KPMG LLP the
written disclosure and the letter required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees). These items
relate to that firm's independence from the Company. We also discussed with KPMG
LLP any matters required to be discussed by Statement on Auditing Standards No.
61 (Communication with Audit Committees).
Based on these reviews and discussions, we recommended to the Board that
the Company's audited financial statements be included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
Robert G. Sarver
Raymond Oppel
Peter L. Ax
10
EMPLOYMENT AGREEMENTS
We have employment agreements with Steven J. Hilton and John R. Landon that
provide for terms through December 31, 2001 and June 30, 2001, respectively.
Both agreements provide for an annual base salary and an annual bonus based on a
percentage of consolidated net income, as determined by the Board of Directors.
Mr. Hilton and Mr. Landon serve as our co-chairmen and co-chief executive
officers.
Under both agreements, if employment is terminated:
* voluntarily or for cause, or with respect to Mr. Landon, voluntarily
without good reason, we have no further obligation to pay the
officers' salary or bonus;
* without cause, or with respect to Mr. Landon, voluntarily for good
reason, we are obligated to pay the officer his then current base
salary through the term of his agreement;
* due to death or permanent disability, we are obligated to pay the
officer his then current salary for six months after termination, plus
a pro rated bonus.
"Cause" under both the Hilton and Landon agreements is defined to mean an
act or acts of dishonesty constituting a felony and resulting or intended to
result directly or indirectly in substantial personal gain or enrichment at our
expense. "Cause" under the Landon agreement also includes willful disregard of
the employee's primary duties to the Company. "Good Reason" under the Landon
agreement is defined to include:
* assignment of duties inconsistent with the scope of the duties
associated with Mr. Landon's titles or positions or which would
require Mr. Landon to relocate his principal residence outside the
Dallas/Fort Worth, Texas metropolitan area;
* termination of Mr. Landon for cause and it is determined that cause
did not exist; or
* our failure to make certain working capital arrangements available to
the Texas division.
Both agreements contain non-compete provisions over their terms that
restrict Mr. Hilton and Mr. Landon from:
* engaging in the homebuilding business and, with respect to Mr. Landon,
the mortgage brokerage or banking business;
* recruiting, hiring or discussing employment with any person who is, or
within the past six months was, a Meritage employee;
* soliciting any customer or supplier of Meritage for a competing
business or otherwise attempting to induce any customer or supplier to
discontinue its relationship with us; or
* except solely as a limited partner with no management or operating
responsibilities, engaging in the land banking or lot development
business.
The foregoing provisions do not restrict:
* the ownership of less than 5% of a publicly-traded company; or
* if the employment of either Mr. Hilton or Mr. Landon is terminated
under his respective employment agreement, engaging in the custom
homebuilding business, or the production homebuilding business outside
a 100 mile radius of any Meritage project or outside Northern
California, or engaging in the land banking or lot development
business. The non-compete provisions survive the termination of the
Hilton agreement unless Mr. Hilton is terminated without cause. The
non-compete provisions under the Landon agreement survive termination
of that agreement unless Mr. Landon is terminated without cause or
resigns for good reason.
11
We also have an employment agreement with Larry W. Seay, our chief
financial officer, that provides for a term through January 1, 2002. Mr. Seay's
agreement is designed to provide for a base salary and an annual bonus based on
the achievement of specific performance objectives. Compensation is subject to
continuing employment and standard employment policies. During the terms of the
agreement, Mr. Seay agrees that he will not:
* engage in the business of providing any homebuilding products or
services where we do or propose to do business;
* solicit for employment anyone who works for or contracts with Meritage
for one year after the last date the employee is with the Company;
* solicit or take away any of our customers or disclose potential
customers to our competitors.
If Mr. Seay is terminated without cause, he will be entitled to receive:
* an amount equal to 50% of his base salary;
* 50% of his average bonus for the previous three fiscal years; and
* acceleration of his stock options as if he held them through the end
of the following fiscal year.
If Mr. Seay voluntarily terminates his employment within twelve months
following a change of control of the Company due to a demotion in position, he
will be entitled to receive:
* an amount equal to 100% of his base salary;
* 100% of his average bonus for the previous three fiscal years; and
* vesting in full of all his stock options.
CHANGE OF CONTROL ARRANGEMENTS
We have senior executive severance agreements under which, upon termination
of employment within two years of a change of control, certain executive
officers, including Messrs. Hilton, Landon, Seay and Morgan, will receive a cash
payment equal to one or two times the highest annual compensation paid during
the two years prior to termination, and accelerated vesting under our benefit
and stock option plans.
12
PERFORMANCE GRAPH
In connection with the Company's merger with Monterey Homes on December 31,
1996, we terminated our REIT status and entered into the homebuilding business.
We have not included performance data for 1996, as the information for that year
is no longer relevant to our business.
The chart below graphs our performance in the form of cumulative total
return to stockholders since we began homebuilding as our primary business. Our
total return is compared to that of the Standard and Poor's 500 Composite Stock
Index and of a cumulative return on the common stock of seven publicly trade
peer issuers, which includes Beazer Homes USA, Inc., Crossman Communities, Inc.,
Hovnanian Enterprises, Inc, MDC Holdings, Inc. NVR, Inc., and Washington Homes,
Inc. (the "Peer Group"). Engle Homes, Inc., which was previously included in the
Peer Group, was the subject of a tender offer and merger transaction in 2000,
and as a result, its common stock is no longer publicly traded. Therefore, Engle
Homes, Inc. has been removed from the Peer Group.
The comparison assumes $100 was invested on December 31, 1996 in Meritage
common stock and in each of the other indices and assumes reinvestment of
dividends.
AS OF DECEMBER 31,
----------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Meritage Corporation 100 167.2 168.1 150.0 513.8
S&P 500 100 133.6 171.5 207.6 188.7
Peer Group 100 153.4 197.3 238.8 217.1
[PERFORMANCE CHART]
13
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Executive officers, directors and "beneficial owners" of more than ten
percent of our common stock must file initial reports of ownership and reports
of changes in ownership with the Securities and Exchange Commission under
Section 16(a). Based upon a review of the copies of the forms furnished to us,
or written representations that all required forms were filed, management
believes all filing requirements were met during 2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have leased approximately 12,000 square feet of office space in a
Scottsdale, Arizona office building from a limited liability company owned by
Messrs. Hilton and Cleverly since 1994. The building was sold to third parties
in 2000. Rents paid to the limited liability company totaled $43,852 in 2000,
$238,240 in 1999, and $210,816 in 1998.
Since 1997, we have leased office space in Plano, Texas from Home Financial
Services, a Texas partnership owned by John and Eleanor Landon. The lease
expires May 15, 2002. Rents paid to the partnership were $185,613 in 2000,
$176,773 in 1999 and $169,294 in 1998.
We paid legal fees to Tiffany & Bosco, P.A. of approximately $ 311,000 in
2000 and $334,000 in 1999. C. Timothy White, one of our Directors, is a partner
of Tiffany and Bosco, P.A.
In 1999 we entered into a $70 million borrowing agreement with Wells Fargo
Bank and California Bank and Trust ("CBT") that was increased to $100 million in
2000. This line of credit begins to term out over a 24-month period beginning in
December 2001, has interest payable monthly approximating prime or LIBOR plus
1.75%, and is secured by first deeds of trust on real estate. Mr. Sarver, one of
our directors, is the chairman and chief executive officer of CBT.
In 2000 we purchased 42 lots for development in Arizona from a business
controlled by William Cleverly, one of our Directors. The total amount paid for
the lots was approximately $2,435,000.
Management believes that the terms and fees nogotiated for all transactions
listed above are no less favorable than those that could be negotiated in arm's
length transactions.
APPROVAL OF MERITAGE CORPORATION 2001
EXECUTIVE MANAGEMENT INCENTIVE PLAN
(PROPOSAL NO. 2)
The Board of Directors has adopted the Meritage Corporation 2001 Executive
Management Incentive Plan (the "Plan"). The Plan will become effective as of
January 1, 2001, subject to further approval by the affirmative vote of the
holders of the majority of Company Common Stock present, or represented, and
entitled to vote, at the Annual Meeting of Stockholders. No award may be made
under the Plan after its expiration date, but awards made prior thereto may
extend beyond that date.
The Plan will provide for annual incentive awards to certain of the
Company's key executives and is being submitted to shareholders in an effort to
assure that awards under the Plan will be tax deductible for the Company.
Section 162(m) of the Internal Revenue Code of 1986, as amended from time to
time (the "Code") places a $1 million annual limit on the amount of compensation
paid to the named executive officers that may be deducted by the Company for
federal income tax purposes, unless such compensation is based on the
achievement of pre-established performance goal(s) set by the Compensation
Committee pursuant to an incentive plan that has been approved by the Company's
shareholders. Shareholder approval of the Plan is necessary for maintaining the
tax-deductible status of incentive payments made to the participants.
14
We have summarized below the key provisions of the Plan. Because it is a
summary, it may not contain all of the information that is important to you. The
summary is qualified in its entirety by reference to the full text of the 2001
Executive Management Incentive Plan, which is attached as Appendix B to this
Proxy Statement.
PURPOSE OF THE PLAN
The Plan is designed to recognize and reward select Company executives for
their contributions to the overall success of the Company.
ELIGIBILITY
Awards may be made under the Plan to any employee of the Company who is a
"covered employee" within the meaning of Section 162(m) of the Code. A covered
employee may include Meritage's Co-Chief Executive Officers and the four other
most highly compensated executive officers of the Company. Non-employee
directors are not eligible to receive an award under the Plan.
ADMINISTRATION
The Plan will be administered by the Compensation Committee or any other
committee appointed by the Board of Directors (the "Committee"), which consists
of not less than two non-employee directors who are "outside directors" within
the meaning of Section 162(m). The Committee has full authority to interpret the
Plan and to establish rules for its administration. The Committee has the
authority to determine eligibility for participation in the Plan, to decide all
questions concerning eligibility for and the amount of awards, and to establish
and administer the performance goals (defined below) and certify whether, and to
what extent, they are attained.
DETERMINATION OF AWARDS
In determining awards to be made under the Plan, the Committee may approve
a formula that is based on one or more objective criteria to measure corporate
performance as set forth in the Plan ("Performance Criteria"). The Committee may
establish Performance Criteria and as selected by the Committee, the Committee
may set annual performance objectives ("Performance Goals") with respect to such
Performance Criteria for the Company. Performance Criteria must include one or
more of the following: the Company's pre- or after-tax net earnings, revenue
growth, operating income, operating cash flow, return on net assets, return on
shareholders' equity, return on assets, return on capital, share price growth,
shareholder returns, gross or net profit margin, earnings per share, price per
share and market share, any of which may be measured either in absolute terms,
or as compared to any incremental increase, or as compared to results of a peer
group. The Committee will also determine the amount and form of compensation
payable to the participant upon attainment of a Performance Goal before the
beginning of each Performance Period or within the time permitted under Section
162(m) of the Code.
Payment of awards will be made in cash. The Committee will make all
determinations regarding the achievement of Performance Goals and the
determination of actual awards. The Committee may in its discretion decrease,
but not increase, the amount of any award that otherwise would be payable under
the Plan.
AMOUNT AVAILABLE AND MAXIMUM INDIVIDUAL AWARDS
The Committee shall determine the amount available for awards in any year.
The maximum award payable to any employee for a performance period is
$3,000,000.
AMENDMENT AND TERMINATION
The Committee may suspend or terminate the Plan at any time with or without
prior notice. In addition, the Committee may from time to time and with or
without prior notice, amend or modify the Plan in any manner, but may not
without shareholder approval adopt any amendment that would require the vote of
shareholders of the Company pursuant to Section 162(m) of the Code.
15
FEDERAL INCOME TAX CONSEQUENCES
The amount of cash received by a participant is required to be recognized
by such participant as ordinary income subject to withholding and will generally
be allowed as a deduction to the Company.
Section 162(m) limits the deduction of compensation in excess of $1 million
per year paid to certain of the Company's employees unless, among other
exceptions, the compensation is performance-based compensation within the
meaning of that provision. The Company believes that Section 162(m) will not
limit the deduction of compensation payable pursuant to the Plan if the Plan is
approved by the stockholders.
The Plan is not subject to any provision of the Employee Retirement Income
Security Act of 1974 and is not qualified under Section 401(a) of the Code.
The preceding discussion of federal income tax consequences does not
purport to be a complete analysis of all of the potential tax effects of the
Plan. It is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. No information is provided with respect to
foreign, state or local tax laws, or estate and gift tax considerations.
VOTE REQUIRED
Adoption of the Plan requires approval by holders of a majority of the
outstanding shares of Company Common Stock who are present, or represented, and
entitled to vote thereon, at the Annual Meeting of Stockholders.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" APPROVAL OF PROPOSAL 2.
INDEPENDENT AUDITORS
KPMG LLP served as the Company's principal independent auditors for the fiscal
year ended December 31, 2000. The firm has been appointed as our independent
auditors for the fiscal year ending December 31, 2001. We expect representatives
of KPMG LLP to be present at our Annual Meeting to answer questions, and they
will be given an opportunity to make a statement if they wish to.
AUDIT FEES
The aggregate fees billed by KPMG LLP for professional services rendered
for the annual audit of the Company's financial statements and the reviews of
the financial statements included in the Company's Forms 10-Q for the fiscal
year ended December 31, 2000 were $107,500.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
For the fiscal year ended December 31, 2000, KPMG LLP did not provide,
directly or indirectly, any services relating to the design or implementation of
Meritage's information system, local area network, or any hardware or software
system.
ALL OTHER FEES
The aggregate fees paid to KPMG LLP for professional services rendered for
preparation of Meritage's state and federal income taxes during the fiscal year
ended December 31, 2000 were $81,525.
16
STOCKHOLDER PROPOSALS
The Board of Directors will consider nominations from stockholders for the
class of directors whose terms expire at the year 2002 Annual Meeting.
Nominations must be made in writing to our Corporate Secretary, received at
least 90 days prior to the 2002 Annual Meeting, and contain sufficient
background information concerning the nominee's qualifications. Our Corporate
Secretary must receive any other stockholder proposals for the 2002 Annual
Meeting by December 19, 2001 to be considered for inclusion in our 2002 Proxy
Statement.
OTHER MATTERS
The Board of Directors is not aware of any other matters to be presented at
the meeting. If any other business should properly come before the meeting, the
proxy holders will vote according to their best judgment.
Meritage Corporation
/s/ Larry W. Seay
Larry W. Seay
Chief Financial Officer, Vice
President-Finance, Secretary and Treasurer
March 31, 2001
17
EXHIBIT A
MERITAGE CORPORATION
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER
I. PURPOSE
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing: the
financial reports and other financial information provided by the
Corporation to any governmental body or the public; the Corporation's
systems of internal controls regarding finance, accounting, legal
compliance and ethics that management and the Board have established; and
the Corporation's auditing, accounting and financial reporting processes
generally. Consistent with this function, the Audit Committee should
encourage continuous improvement of, and should foster adherence to the
Corporation's policies, procedures and practices at all levels. The Audit
Committee's primary duties and responsibilities are to:
* Serve as an independent and objective party to monitor the
Corporation's financial reporting process and internal control system.
* Review and appraise the audit efforts of the Corporation's independent
accountants and internal auditing department.
* Provide an open avenue of communication among the independent
accountants, financial and senior management, the internal auditing
department, and the Board of Directors.
The Audit Committee will primarily fulfill these responsibilities by
carrying out the activities enumerated in Section IV of this Charter.
II. COMPOSITION
The Audit Committee shall be comprised of three or more directors as
determined by the Board, each of whom shall be independent directors, and
free from any relationship that, in the opinion of the Board, would
interfere with the exercise of his or her independent judgment as a member
of the Committee.
The following Independence criteria (which is consistent with SEC and NYSE
rules) shall apply to each Audit Committee member:
* Employees. A director who is an employee (including non-employee
executive officers) of the company or any of its affiliates may not
serve on the Audit Committee until three years following the
termination of his or her employment. In the event the employment
relationship is with a former parent or predecessor of the company,
the director could serve on the audit committee after three years
following the termination of the relationship between the company and
the former parent or predecessor.
* Business Relationship. A director (i) who is a partner, controlling
shareholder, or executive officer of the organization that has a
business relationship with the company, or (ii) who has a direct
business relationship with the company (e.g., a consultant) may serve
on the Audit Committee only if the company's Board of Directors
determines in its business judgment that the relationship does not
interfere with the director's exercise of independent judgment. In
making a determination regarding the independence of a director
pursuant to this paragraph, the Board of Directors should consider,
among other things, the materiality of the relationship to the
company, to the director, and if applicable, to the organization with
which the director is affiliated.
"Business relationships" can include commercial, industrial, banking,
consulting, legal, accounting and other relationships. A director can
have this relationship directly with the company, or the director can
be a partner, officer or employee or an organization that has such a
relationship. The director may serve on the Audit Committee without
the above-referenced Board of Directors' determination after three
18
years following the termination of, as applicable, either (1) the
relationship between the organization with which the director is
affiliated and the company, (2) the relationship between the director
and his or her partnership status, shareholder interest or executive
officer position, or (3) the direct business relationship between the
director and the company.
* Cross Compensation Committee Link. A director who is employed as an
executive of another corporation where any of the company's executives
serves on that corporation's Compensation Committee may not serve on
the Audit Committee.
* Immediate Family. A director who is an Immediate Family member of an
individual who is an executive officer of the company or any of its
affiliates cannot serve on the Audit Committee until after three years
following the termination of such employment relationship.
All members of the Committee shall have a working familiarity with basic
finance and accounting practices, and at least one member of the Committee
shall have accounting or related financial management expertise. Committee
members may enhance their familiarity with finance and accounting by
participating in educational programs conducted by the Corporation or an
outside consultant.
The members of the Committee shall be elected by the Board at the annual
organizational meeting of the Board or until there successors shall be duly
elected and qualified. Unless a Chair is elected by the full Board, the
members of the Committee may designate a Chair by majority vote of the full
Committee membership.
III. MEETINGS
The Committee shall meet at least four times annually, or more frequently
as circumstances dictate. As part of its job to foster open communication,
the Committee should meet at least annually with management and the
independent accountants in separate executive sessions to discuss any
matters that the Committee or each of these groups believe should be
discussed privately. In addition, the Committee or at least its Chair
should meet with the independent accountants and management quarterly to
review the Company's financial statements consistent with IV.3. below.
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
DOCUMENTS/REPORTS REVIEW
1. Review and update this Charter periodically, at least annually, as
conditions dictate.
2. Review the organization's annual financial statements and any reports
or other financial information submitted to any governmental body, or
the public, including any certification, report, opinion or review
rendered by the independent accountants.
3. Review the 10-Q with financial management and the independent
accountants, if necessary, prior to its filing or prior to the release
of earnings. The Chair of the Committee may represent the entire
Committee for purposes of this review.
INDEPENDENT ACCOUNTANTS
4. Recommend to the Board of Directors the selection of the independent
accountants, considering independence and effectiveness and approve
the fees and other compensation to be paid to the independent
accountants. On an annual basis, the Committee should review and
19
discuss with the accountants all significant relationships the
accountants have with the Corporation to determine the accountants'
independence.
5. Review the performance of the independent accountants and approve any
proposed discharge of the independent accountants when circumstances
warrant.
6. Periodically consult with the independent accountants out of the
presence of management about internal controls and the fullness and
accuracy of the organization's financial statements.
FINANCIAL REPORTING PROCESSES
7. In consultation with the independent accountants, review the integrity
of the organization's financial reporting processes, both internal and
external.
8. Consider the independent accountant's judgments about the quality and
appropriateness of the Corporation's accounting principles as applied
in its financial reporting.
9. Consider and approve, if appropriate, major changes to the
Corporation's auditing and accounting principles and practices as
suggested by the independent accountants or management.
PROCESS IMPROVEMENT
10. Establish regular and separate systems of reporting to the Audit
Committee by each of management and the independent accountants any
significant judgments made in management's preparation of the
financial statements and the view of each as to appropriateness of
such judgments.
11. Following completion of the annual audit, review separately with each
of management and the independent accountants any significant
difficulties encountered during the course of the audit, including any
restrictions on the scope of work or access to required information.
12. Review any significant disagreements among management and the
independent accountants in connection with the preparation of the
financial statements.
13. Review with the independent accountants and management the extent to
which changes or improvements in financial or accounting practices, as
approved by the Audit Committee, have been implemented. (This review
should be conducted at an appropriate time subsequent to
implementation of changes or improvements, as decided by the
Committee.)
ETHICAL AND LEGAL COMPLIANCE
14. Review and update periodically the company's employee handbook as it
pertains to ethical conduct and ensure that management has established
a system to enforce these policies.
15. Review management's monitoring of the Corporation's compliance with
the organization's conduct policies, and ensure that management has
the proper review system in place to ensure that Corporation's
financial statements, reports and other financial information
disseminated to governmental organizations, and the public, satisfy
legal requirements.
16. Review, with the organization's counsel, legal compliance matters
including corporate securities trading policies.
17. Review, with the organization's counsel, any legal matter that could
have a significant impact on the Company's financial statements.
18. Perform any other activities consistent with this Charter, the
Corporation's By-laws and governing law, as the Committee or the Board
deems necessary or appropriate.
20
EXHIBIT B
MERITAGE CORPORATION
2001 ANNUAL INCENTIVE PLAN
ARTICLE 1.
ESTABLISHMENT, AND PURPOSE AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. Meritage Corporation (the "Company") hereby
establishes an annual incentive plan to be known as the "Meritage Corporation
2001 Executive Management Incentive Plan" (the "Plan").
1.2 PURPOSE OF THE PLAN. The Plan is designed to (i) recognize and reward
on an annual basis select Company executives for their contributions to the
overall success of the Company, and (ii) qualify compensation paid under the
Plan as "performance-based compensation" as that term is defined in Section
162(m) of the Internal Revenue Code of 1986 (the "Code") and the regulations
thereunder.
1.3 DURATION OF THE PLAN. Subject to approval by the Company's
stockholders, the Plan will commence as of January 1, 2001. If the Plan is not
approved by the Company's stockholders, the Plan will not be effective and any
grants made under the Plan prior to that date will be void. The Plan shall
terminate on December 31, 2005. No award may be made under the Plan after the
date the Plan terminates, but awards made prior to that date may extend beyond
that date.
ARTICLE 2.
DEFINITIONS AND CONSTRUCTION
2.1 DEFINITIONS. Whenever used in the Plan, the following terms shall have
the meanings set forth below and, when the meaning is intended, the initial
letter of the word is capitalized:
a. "Award" means the agreement of the Company to pay compensation to a
Participant upon the attainment of specified Performance Goals.
b. "Award Agreement" means the written agreement evidencing the terms and
conditions of an Award.
c. "Board" or "Board or Directors" means the Board of Directors of
Meritage Corporation.
d. "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
e. "Committee" means the Compensation Committee of the Board or the
committee appointed by the Board pursuant to Article 3 to administer
the Plan.
f. "Company" means Meritage Corporation, or any successor thereto.
g. "Covered Employee" means an Employee who is a "covered employee"
within the meaning of Section 162(m) of the Code.
h. "Director" means any individual who is a member of the Board of
Directors of the Company.
i. "Employee" means any full-time, nonunion employee of the Company.
Directors who are not otherwise employed by the Company shall not be
considered Employees under this Plan.
j. "Participant" means a Covered Employee who is designated by the
Committee to participate in the Plan for a Performance Period pursuant
to Article 4.
k. "Performance Criteria" means the criteria that the Committee selects
for purposes of establishing the Performance Goal or Performance Goals
for a Participant for a Performance Period. The Performance Criteria
that will be used to establish Performance Goals are limited to the
following: pre- or after-tax net earnings, revenue growth, operating
21
income, operating cash flow, return on net assets, return on
shareholders' equity, return on assets, return on capital, Share price
growth, shareholder returns, gross or net profit margin, earnings per
Share, price per Share, and market share, any of which may be measured
either in absolute terms, or as compared to any incremental increase,
or as compared to results of a peer group. The Committee shall, within
the time prescribed by Section 162(m) of the Code, define in an
objective fashion the manner of calculating the Performance Criteria
it selects to use for such Performance Period for such Participant.
l. "Performance Goals" means, for a Performance Period, the goals
established in writing by the Committee for the Performance Period
based upon the Performance Criteria. Depending on the Performance
Criteria used to establish such Goal, the Goal may be expressed in
terms of overall Company performance or the performance of an
operating unit, division, or community. The Committee, in its
discretion, may, within the time prescribed by Section 162(m) of the
Code, adjust or modify the calculation of Performance Goals for such
Performance Period in order to prevent the dilution or enlargement of
the rights of Participants, (i) in the event of, or in anticipation
of, any unusual or extraordinary corporate item, transaction, event,
or development; and (ii) in recognition of, or in anticipation of, any
other unusual or nonrecurring events affecting the Company, or the
financial statements of the Company, or in response to, or in
anticipation of, changes in applicable laws, regulations, accounting
principles, or business conditions.
m. "Performance Period" means the one or more periods of time, which may
be of varying and overlapping durations, as the Committee may select,
over which the attainment of one or more Performance Goals will be
measured for the purpose of determining a Participant's right to, and
the payment of, compensation under the Plan.
n. "Shares" means the shares of common stock of Meritage Corporation.
2.2 SEVERABILITY. In the event that a court of competent jurisdiction
determines that any portion of this Plan is in violation of any statute, common
law, or public policy, then only the portions of this Plan that violate such
statute, common law, or public policy shall be stricken. All portions of this
Plan that do not violate any statute or public policy shall continue in full
force and effect. Further, any court order striking any portion of this Plan
shall modify the stricken terms as narrowly as possible to give as much effect
as possible to the intentions of the parties under this Plan.
ARTICLE 3.
ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Compensation
Committee of the Board, or by any other Committee appointed by the Board
consisting of not less than two Directors who qualify as "outside directors"
under Section 162(m) of the Code and the regulations issued thereunder. The
members of the Committee shall be appointed from time to time by, and shall
serve at the discretion of, the Board of Directors.
3.2 AUTHORITY OF THE COMMITTEE. The Committee shall have all the authority
that is necessary or helpful to enable it to discharge its responsibilities
under the Plan. Without limiting the generality of the preceding sentence, the
Committee shall have the exclusive right to interpret the Plan, to determine
eligibility for participation in the Plan, to decide all questions concerning
eligibility for and the amount of Awards payable under the Plan, to establish
and administer the Performance Goals and certify whether, and to what extent,
they are attained, to cancel and reissue any Awards granted hereunder in the
event the Award lapses for any reason (provided that the Committee shall not
have the authority to re-price previously issued and currently outstanding
Awards without shareholder approval), to construe any ambiguous provisions of
the Plan, to correct any default, to supply any omission, to reconcile any
inconsistency, to issue administrative guidelines as an aide to the
administration of the Plan, to make regulations for carrying out the Plan, and
to decide any and all questions arising in the administration, interpretation,
and application of the Plan.
22
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board of Directors shall be final, conclusive, and binding on
all persons, including the Company, its stockholders, Employees, Participants,
and their estates and beneficiaries.
3.4 SECTION 162(m) COMPLIANCE. This Plan shall be administered to comply
with Section 162(m) of the Code and, if any provisions of the Plan cause any
Award to not qualify as performance-based compensation under Section 162(m) of
the Code, that provision shall be stricken from this Plan, but the other
provisions of this Plan shall remain in effect. Any action striking any portion
of this Plan shall modify the stricken terms as narrowly as possible to give as
much effect as possible to the intentions of the parties under this Plan.
Furthermore, if any portion of the Plan or any Award Agreement conflicts with
Section 162(m) or the regulations issued thereunder, the provisions of Section
162(m) and such regulations shall control.
ARTICLE 4.
ELIGIBILITY AND PARTICIPATION
4.1 ELIGIBILITY. Participation is limited in any fiscal year to Employees
who the Committee concludes will be Covered Employees for such year.
4.2 ACTUAL PARTICIPATION. From among the Covered Employees eligible to
participate each year, the Committee may select those to receive Awards in any
one or more Performance Periods under the Plan.
ARTICLE 5.
FORM OF AWARDS
Awards shall be paid in cash. The Committee may, in its sole discretion,
subject any Award to such terms, conditions, restrictions, or limitations
(including but not limited to restrictions on transferability, vesting,
termination of employment for cause or otherwise, or change of control) that the
Committee deems to be appropriate, provided that such terms are not inconsistent
with the terms of the Plan or Section 162(m) of the Code. All Awards will be
evidenced by an Award Agreement.
ARTICLE 6.
DETERMINATION AND LIMITATION OF AWARDS
6.1 DETERMINATION OF AWARDS. Within the time prescribed by Section 162(m)
of the Code for each Performance Period, the Committee shall, in its sole
discretion, determine and establish:
a. the Performance Goals applicable to the Performance Period for each
Participant;
b. the total dollar amount payable to each Participant under the Award
based upon attaining the Performance Goals; and
c. such other terms and conditions of such Award as the Committee
determines to be appropriate under the circumstances.
Such determinations shall be reflected in the minutes of a Committee meeting, or
in a written action adopted without the necessity of a meeting, and also shall
be documented in the Award Agreement.
6.2 LIMITATIONS OF AWARDS. If only one Performance Goal is established for
a Performance Period, the Performance Goal for such Performance Period must be
achieved in order for a Participant to receive payment for an Award for such
Performance Period. If more than one Performance Goal is established for a
Performance Period, one or more of the Performance Goals for such Performance
Period must be achieved in order for a Participant to receive payment for an
Award for such Performance Period, all as set forth in accordance with the terms
of the Award Agreement. Furthermore, the Committee is authorized at any time
during or after a Performance Period to reduce or eliminate (but not to
increase) the amount of an Award payable to any Covered Employee for a
Performance Period for any reason.
23
6.3 MAXIMUM AWARDS. Notwithstanding any provision in the Plan to the
contrary, the maximum Award payable to any Covered Employee under the Plan for a
Performance Period shall be $3,000,000.00.
6.4 EMPLOYMENT CONTINUATION. Unless otherwise determined by the Committee,
provided in the Award Agreement, or required by applicable law, no payment
pursuant to this Plan shall be made to a Participant unless the Participant is
employed by the Company on the last day of the Performance Period.
6.5 DEFERRAL OF PAYMENTS. In the exercise of its discretion, the Committee
may allow a Participant to elect to defer the receipt of all or any portion of
an Award. Such deferral shall be made pursuant to the terms and conditions set
forth in any deferred compensation plan or arrangement adopted by the Company.
ARTICLE 7.
RIGHTS OF EMPLOYEES
7.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment at any
time, nor confer upon any Participant any right to continue in the employ of the
Company.
7.2 PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to be selected to
receive a future Award.
ARTICLE 8.
AMENDMENT, MODIFICATION AND TERMINATION
The Committee may suspend or terminate the Plan at any time with or without
prior notice. In addition, the Committee may from time to time and with or
without prior notice, amend or modify the Plan in any manner, but may not
without shareholder approval adopt any amendment that would require the vote of
shareholders of the Company pursuant to Section 162(m) of the Code.
ARTICLE 9.
WITHHOLDING
The Company shall have the power and the right to deduct or withhold, or
require a Participant to remit to the Company, an amount sufficient to satisfy
Federal, state, and local taxes (including the Participant's FICA obligation)
required by law to be withheld with respect to any grant, exercise, or payment
made under or as a result of this Plan.
ARTICLE 10.
SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business
and/or assets of the Company.
ARTICLE 11.
REQUIREMENTS OF LAW
11.1 REQUIREMENTS OF LAW. The granting of Awards under the Plan shall be
subject to all applicable laws, rules, and regulations, and to such approvals by
any governmental agencies as may be required.
11.2 GOVERNING LAW. The Plan, and all agreements hereunder, shall be
governed by the laws of the State of Maryland.
25
Please mark [X]
your votes as
indicated in
this example
WITHHELD
FOR FOR ALL
--- -------
I. ELECTION OF CLASS II DIRECTORS: [ ] [ ]
VOTE FOR nominees listed below
John R. Landon
Robert G. Sarver
C. Timothy White
Peter L. Ax
(INSTRUCTION: To withhold authority to vote for any individual nominee strike a
line through the nominee's name in the list below)
FOR AGAINST ABSTAIN
--- ------- -------
2. APPROVAL OF 2001 EXECUTIVE MANAGEMENT [ ] [ ] [ ]
INCENTIVE PLAN
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before this meeting.
The undersigned hereby revokes any proxy or proxies heretofore given to vote
such shares at said meeting or at any adjournment thereof.
PLEASE VOTE, SIGN, DATE AND RETURN THE PROXY CARD USING THE ENCLOSED ENVELOPE
Signature ______________________ Signature ______________________ Date ______
Please sign exactly as name(s) appear herein. If acting as an executor,
administrator, trustee, custodian, guardian, etc., you should so indicate in
signing. If the stockholder is a corporation, please sign the full corporate
name, by a duly authorized officer. If shares are held jointly, each stockholder
named should sign.
- FOLD AND DETACH HERE -
PROXY PROXY
MERITAGE CORPORATION
ANNUAL MEETING OF STOCKHOLDERS - May 9, 2001
The undersigned hereby appoints each of Steven J. Hilton or John R. Landon
proxies with full power of substitution acting unanimously and voting or if only
one is present and voting then that one, to vote the shares of stock of Meritage
Corporation, which the undersigned is entitled to vote, at the Annual Meeting of
Stockholders to be held at the The Hilton Scottsdale Resort, 6333 N. Scottsdale
Road, Scottsdale, Arizona 85254 on Wednesday, May 9, 2001, at 9:00 a.m. local
time, and at any adjournment or adjournments thereof, with all the powers the
undersigned would possess if present.
IF YOU RETURN YOUR PROPERLY EXECUTED PROXY, WE WILL VOTE YOUR SHARES AS YOU
DIRECT. IF YOU DO NOT SPECIFY ON YOUR PROXY CARD HOW YOU WANT TO VOTE YOUR
SHARES, WE WILL VOTE THEM FOR PROPOSALS 1 AND 2 AND IN THE DISCRETION OF THE
PROXIES ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY
ADJOURNMENTS THEREOF.
Please mark, sign and date the reverse side and
return the proxy card promptly using the enclosed envelope.
- FOLD AND DETACH HERE -