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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-9977
MERITAGE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland 86-0611231
(State or Other Jurisdiction) (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6613 North Scottsdale Road, Suite 200 85250
Scottsdale, Arizona (Zip Code)
(Address of Principal Executive Offices)
(480) 998-8700
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ].
As of August 10, 2001, 5,345,746 shares of Meritage Corporation common stock
were outstanding.
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MERITAGE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 2001
(unaudited) and December 31, 2000.......................... 3
Consolidated Statements of Earnings for the Three and Six
Month Periods ended June 30, 2001 and 2000 (unaudited)..... 4
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2001 and 2000 (unaudited)............ 5
Notes to Consolidated Financial Statements................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 15
SIGNATURES ........................................................... S.1
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
2001 2000
--------- ---------
(Unaudited)
ASSETS
Cash and cash equivalents $ 4,079 $ 4,397
Real estate under development 324,614 211,307
Deposits on real estate under option or contract 35,708 24,251
Receivables 9,756 2,179
Deferred tax asset 602 543
Goodwill 28,760 17,675
Property and equipment, net 7,147 4,717
Other assets 6,686 2,006
--------- ---------
Total Assets $ 417,352 $ 267,075
========= =========
LIABILITIES
Accounts payable and accrued liabilities $ 61,070 $ 48,907
Home sale deposits 15,308 10,917
Notes payable 198,469 86,152
--------- ---------
Total Liabilities 274,847 145,976
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $.01. Authorized
50,000,000 shares; issued and outstanding
6,150,209 shares at June 30, 2001 and
5,922,822 shares at December 31, 2000 62 59
Additional paid-in capital 104,046 102,526
Retained earnings 49,413 29,530
Treasury stock at cost; 811,963 shares at
June 30, 2001 and December 31, 2000 (11,016) (11,016)
--------- ---------
Total Stockholders' Equity 142,505 121,099
--------- ---------
Total Liabilities and Stockholders' Equity $ 417,352 $ 267,075
========= =========
See accompanying notes to consolidated financial statements.
3
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(in thousands, except per share data)
Home sales revenue $ 174,403 $ 120,802 $ 290,516 $ 212,455
Land sales revenue 1,005 1,946 1,598 2,703
--------- --------- --------- ---------
175,408 122,748 292,114 215,158
Cost of home sales (136,829) (96,526) (229,408) (171,482)
Cost of land sales (943) (1,703) (1,474) (2,384)
--------- --------- --------- ---------
(137,772) (98,229) (230,882) (173,866)
Home sales gross profit 37,574 24,276 61,108 40,973
Land sales gross profit 62 243 124 319
--------- --------- --------- ---------
37,636 24,519 61,232 41,292
Commissions and other sales costs (9,435) (6,458) (16,448) (12,237)
General and administrative costs (7,884) (4,847) (12,818) (8,849)
Interest expense -- (3) (1) (5)
Other income, net 827 422 1,361 955
--------- --------- --------- ---------
Earnings before income taxes and
extraordinary item 21,144 13,633 33,326 21,156
Income taxes (8,205) (5,060) (12,997) (7,812)
--------- --------- --------- ---------
Earnings before extraordinary item 12,939 8,573 20,329 13,344
Extraordinary item:
loss from extinguishment of debt
(net of $285 tax benefit) (446) -- (446) --
--------- --------- --------- ---------
Net earnings $ 12,493 $ 8,573 $ 19,883 $ 13,344
========= ========= ========= =========
Earnings per share:
Basic:
Earnings before extraordinary item $ 2.44 $ 1.62 $ 3.89 $ 2.52
Extraordinary item (.08) -- (.08) --
--------- --------- --------- ---------
Net earnings per share $ 2.36 $ 1.62 $ 3.81 $ 2.52
========= ========= ========= =========
Diluted:
Earnings before extraordinary item $ 2.20 $ 1.50 $ 3.52 $ 2.31
Extraordinary item (.08) -- (.08) --
--------- --------- --------- ---------
Net earnings per share $ 2.12 $ 1.50 $ 3.44 $ 2.31
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-------------------------
2001 2000
--------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 19,883 $ 13,344
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 1,986 1,525
Increase in deferred tax asset before extraordinary item (59) (136)
Stock option compensation expense -- 73
Change in assets and liabilities, net of effect of acquisition:
Increase in real estate under development (58,763) (29,574)
Increase in deposits on real estate under option or contract (2,557) (1,792)
(Increase) decrease in receivables and other assets (11,726) 253
Increase in accounts payable and accrued liabilities 5,274 1,690
Increase in home sale deposits 1,888 4,055
Increase in goodwill (260) --
--------- ---------
Net cash used in operating activities (44,334) (10,562)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition/merger (65,759) (5,158)
Purchases of property and equipment (2,175) (1,431)
--------- ---------
Net cash used in investing activities (67,934) (6,589)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 432,735 196,001
Repayments of debt (322,308) (180,184)
Repurchase of stock -- (2,635)
Proceeds from exercises of stock options 1,523 6
--------- ---------
Net cash provided by financing activities 111,950 13,188
--------- ---------
Net decrease in cash and cash equivalents (318) (3,963)
Cash and cash equivalents at beginning of period 4,397 13,422
--------- ---------
Cash and cash equivalents at end of period $ 4,079 $ 9,459
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The acquisition of Hancock Communities resulted in the following
changes in assets and liabilities:
Real estate under development $ (54,545)
Deposits on real estate under option or contract (8,899)
Receivables and other assets (543)
Accounts payable and accrued liabilities 6,890
Home sale deposits 2,503
Goodwill (11,423)
Property and equipment (1,632)
Borrowings 1,890
---------
Net cash paid for acquisition $ (65,759)
=========
See accompanying notes to consolidated financial statements
5
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
We develop, construct and sell new high-quality, single-family homes in the
semi-custom luxury, move-up and entry-level markets. We operate in the
Dallas/Fort Worth, Austin and Houston, Texas markets as Legacy Homes, in the
Phoenix/Scottsdale and Tucson, Arizona markets as Monterey Homes, Hancock
Communities and Meritage Homes, and in the San Francisco Bay and Sacramento,
California markets as Meritage Homes.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Meritage Corporation and its subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation and certain prior period
amounts have been reclassified to be consistent with current financial statement
presentation. In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present our financial
position, results of operations and cash flows 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.
NOTE 2 - REAL ESTATE UNDER DEVELOPMENT AND CAPITALIZED INTEREST
The components of real estate under development are (in thousands):
June 30, 2001 December 31, 2000
------------- -----------------
Homes under contract, in production $164,150 $ 92,881
Finished home sites 68,646 60,630
Home sites under development 56,917 27,636
Model homes and homes held for resale 31,961 26,937
Land held for development 2,940 3,223
-------- --------
$324,614 $211,307
======== ========
We capitalize certain interest costs incurred during development and
construction. Capitalized interest is allocated to real estate under development
and charged to cost of sales when the property is delivered to the buyer. A
summary of interest capitalized and interest expensed follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
Beginning unamortized capitalized interest $ 6,541 $ 4,274 $ 5,426 $ 3,971
Interest capitalized 3,364 2,774 6,438 4,642
Amortized to cost of home and land sales (2,657) (2,137) (4,616) (3,702)
------- ------- ------- -------
Ending unamortized capitalized interest $ 7,248 $ 4,911 $ 7,248 $ 4,911
======= ======= ======= =======
Interest incurred $ 3,364 $ 2,777 $ 6,439 $ 4,647
Interest capitalized (3,364) (2,774) (6,438) (4,642)
------- ------- ------- -------
Interest expensed $ -- $ 3 $ 1 $ 5
======= ======= ======= =======
6
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3 - NOTES PAYABLE
Notes payable consists of:
June 30, December 31,
2001 2000
-------- --------
(in thousands)
$100 million bank revolving construction line of
credit, interest payable monthly approximating
prime (6.75% at June 30, 2001) or LIBOR (rates
varying from 3.79% to 3.835% at June 30, 2001)
plus 2.0%, payable at the earlier of close of
escrow, maturity date of individual homes and
lots within the collateral pool or over a
24-month period beginning June 1, 2003, secured
by first deeds of trust on real estate $ 19,702 $ 50,354
$75 million bank revolving construction line of
credit, interest payable monthly approximating
prime or LIBOR plus 2.0%, payable at the earlier
of close of escrow, maturity date of individual
homes and lots within the line or May 31, 2002,
secured by first deeds of trust on real estate 9,334 17,269
Acquisition and development seller carry back
financing, interest payable monthly at fixed
rates of 9% and 10% per annum; payable at the
maturity date of the individual projects,
secured by first deeds of trust on land 4,433 3,516
Senior unsecured notes, maturing June 1, 2011,
annual interest of 9.75% payable semi-annually 165,000 --
Senior unsecured notes, paid in full May 30, 2001 -- 15,000
Other -- 13
-------- --------
Total $198,469 $ 86,152
======== ========
7
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4 - EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows (in
thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
BASIC:
Earnings before extraordinary item $ 12,939 $ 8,573 $ 20,329 $ 13,344
Extraordinary item, net of tax benefit (446) -- (446) --
-------- -------- -------- --------
Net earnings $ 12,493 $ 8,573 $ 19,883 $ 13,344
======== ======== ======== ========
Weighted average number of shares outstanding 5,303 5,287 5,213 5,287
-------- -------- -------- --------
Basic earnings per share before extraordinary item $ 2.44 $ 1.62 $ 3.89 $ 2.52
Extraordinary item (.08) -- (.08) --
-------- -------- -------- --------
Basic earnings per share $ 2.36 $ 1.62 $ 3.81 $ 2.52
======== ======== ======== ========
DILUTED:
Earnings before extraordinary item $ 12,939 $ 8,573 $ 20,329 $ 13,344
Extraordinary item, net of tax benefit (446) -- (446) --
-------- -------- -------- --------
Net earnings $ 12,493 $ 8,573 $ 19,883 $ 13,344
======== ======== ======== ========
Weighted average number of shares outstanding 5,303 5,287 5,213 5,287
Effect of dilutive securities:
Contingent shares and warrants -- -- -- 37
Options to acquire common stock 586 439 561 451
-------- -------- -------- --------
Diluted weighted common shares outstanding 5,889 5,726 5,774 5,775
-------- -------- -------- --------
Diluted earnings per share before extraordinary item $ 2.20 $ 1.50 $ 3.52 $ 2.31
Extraordinary item (.08) -- (.08) --
-------- -------- -------- --------
Diluted earnings per share $ 2.12 $ 1.50 $ 3.44 $ 2.31
======== ======== ======== ========
Antidilutive stock options not included in diluted EPS 15 277 15 278
======== ======== ======== ========
NOTE 5 - INCOME TAXES
Total income tax expense for the three and six months ended June 30, 2001
was allocated as follows (in thousands):
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------- -------------
Income from continuing operations $ 8,205 $ 12,997
Extraordinary item (285) (285)
-------- --------
$ 7,920 $ 12,712
======== ========
Income tax expense attributable to income from continuing operations consists of
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Current:
Federal $ 7,271 $ 4,520 $ 11,418 $ 6,939
State 879 657 1,638 1,009
-------- -------- -------- --------
8,150 5,177 13,056 7,948
-------- -------- -------- --------
Deferred:
Federal 65 (105) (34) (122)
State (10) (12) (25) (14)
-------- -------- -------- --------
55 (117) (59) (136)
-------- -------- -------- --------
Total $ 8,205 $ 5,060 $ 12,997 $ 7,812
======== ======== ======== ========
8
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 6 - SEGMENT INFORMATION
We classify our operations into three primary geographic segments: Texas,
Arizona and California. These segments generate revenue through the sale of
homes to external customers. We are not dependent on any one major customer.
Operational information relating to the different business segments
follows. Certain information has not been included by segment due to the
immateriality of the amount to the segment or in total. We evaluate segment
performance based on several factors, of which the primary financial measure is
earnings before interest and taxes (EBIT). The accounting policies of the
business segments are the same as those described in Notes 1 and 2. There are no
significant transactions between segments.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(in thousands)
HOME SALES REVENUE:
Texas $ 67,381 $ 52,281 $ 122,958 $ 101,711
Arizona 67,184 32,257 100,360 54,199
California 39,838 36,264 67,198 56,545
--------- --------- --------- ---------
Total $ 174,403 $ 120,802 $ 290,516 $ 212,455
========= ========= ========= =========
EBIT:
Texas $ 11,532 $ 8,769 $ 21,062 $ 15,779
Arizona 7,220 2,762 9,424 3,757
California 6,161 5,631 9,294 7,942
Corporate and other (1,112) (1,389) (1,837) (2,615)
--------- --------- --------- ---------
Total $ 23,801 $ 15,773 $ 37,943 $ 24,863
========= ========= ========= =========
AMORTIZATION OF CAPITALIZED INTEREST:
Texas $ 564 $ 656 $ 1,147 $ 1,291
Arizona 1,435 933 2,416 1,511
California 658 548 1,053 900
--------- --------- --------- ---------
Total $ 2,657 $ 2,137 $ 4,616 $ 3,702
========= ========= ========= =========
At At
June 30, December 31,
2001 2000
--------- ---------
(in thousands)
ASSETS:
Texas $ 131,622 $ 108,238
Arizona 207,648 102,746
California 71,963 53,723
Corporate 6,119 2,368
--------- ---------
Total $ 417,352 $ 267,075
========= =========
9
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 7 - HANCOCK ACQUISITION
On May 30, 2001, we acquired substantially all of the homebuilding and
related assets of HC Builders, Inc. and Hancock Communities, L.L.C.
(collectively "Hancock"). The purchase price was $65.8 million in cash, plus the
assumption of trade payables, accrued liabilities and customer deposit
liabilities totaling $8.7 million and a note totaling $1.9 million. In addition,
we granted to Greg Hancock, the founder of Hancock Communities, an earn-out,
payable over three years, equal to 20% of Hancock's pre-tax net income after a
10.5% charge on capital. Hancock designs, builds and markets a wide range of
high-quality homes in the Phoenix, Arizona area with a focus on serving the
entry-level and move-up single-family housing markets and is currently
developing affordable age-restricted adult communities. During 2000, Hancock
closed 1,143 homes at an average selling price of $160,700, resulting in total
revenues of $183.7 million and EBITDA of $16.9 million.
This acquisition was accounted for using the purchase method of accounting.
Accordingly, the Company recorded goodwill of approximately $11.4 million, which
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired and liabilities assumed.
Such amount is being amortized over a period of 20 years.
The following unaudited pro forma financial data for the three and six
months ended June 30, 2001 and 2000 has been prepared as if the acquisition of
the assets and liabilities of Hancock on May 30, 2001 had occurred on January 1,
2000. Unaudited pro forma financial data is presented for informational purposes
only and is based on historical information. This information may not be
indicative of the actual amounts of the Company had the events occurred on the
date listed above, nor does it purport to represent future periods (in
thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue $209,637 $165,992 $344,824 $292,631
Expenses before extraordinary item 18,484 10,344 26,138 15,640
Net earnings 18,484 10,344 26,138 15,194
Diluted EPS before extraordinary item 3.14 1.81 4.53 2.71
Diluted EPS after extraordinary item 3.14 1.81 4.53 2.63
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS. Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
as well as all purchase method business combinations completed after June 30,
2001. Statement 141 also specifies the criteria that intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported apart from goodwill. Statement 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
The Company is required to adopt the provisions of Statement 141
immediately, except with regard to business combinations initiated prior to July
1, 2001, and Statement 142 effective January 1, 2002. Furthermore, any goodwill
and any intangible assets determined to have an indefinite useful life that are
acquired in a purchase business combination completed after June 30, 2001 will
not be amortized, but will continue to be evaluated for impairment, in
accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized until the adoption of
Statement 142.
Statement 141 will require, upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were acquired
in a prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. Upon adoption of Statement 142, the Company
will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of Statement
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
10
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The Company currently has unamortized goodwill in the amount of
approximately $28.8 million, that will be subject to the transition provisions
of Statements 141 and 142. Amortization expense related to goodwill was $597,000
and $1,067,000 for the six months ended June 30, 2001 and for the year ended
December 31, 2000, respectively. The Company has not determined the impact of
the immediate adoption of Statement 141 and the adoption of Statement 142 on
January 1, 2002 will not have a material impact on its results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements. The
words "believe," "expect," "anticipate," and "project" and similar expressions
identify forward-looking statements, which speak only as of the date the
statement was made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934. Such statements include the expected
benefits of the Hancock acquisition, including future closings and Hancock's
contribution to our revenues and earnings, projections of revenue, income or
loss, capital expenditures, backlog, plans for future operations, financing
needs or plans and liquidity, and plans relating to our housing products or
services, as well as assumptions relating to the foregoing. Our past performance
or past or present economic conditions in our housing markets may not be
indicative of future performance and conditions.
Actual results may differ materially from those expressed in
forward-looking statements. Statements in Exhibit 99 to this Quarterly Report on
Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31,
2000, including "Business", "Market for the Registrant's Common Stock and
Related Stockholder Matters", in the Notes to the Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Factors That May Affect Our Future Results and
Financial Condition," and "Special Note of Caution Regarding Forward-Looking
Statements" describe factors, among others, that could contribute to or cause
such differences. These factors may also affect our business generally.
Additional factors that could cause actual results to differ materially from
those expressed in such forward-looking statements and that could affect our
business generally, are described in our Form S-4 filed with the SEC on July 18,
2001. As a result of these factors, the Company's stock and bond prices may
fluctuate dramatically.
RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding our
results of operations for the three and six month periods ended June 30, 2001
and 2000. All material balances and transactions between us and our subsidiaries
have been eliminated in consolidation. 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 in accordance with accounting principles generally
accepted in the United States of America. The results of operations for any
interim period are not necessarily indicative of results expected for a full
fiscal year.
11
HOME SALES REVENUE, SALES CONTRACTS AND NET SALES BACKLOG
The data provided below shows operating and financial data regarding our
homebuilding activities (in thousands).
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
-------------------- Increase -------------------- Increase
Home Sales Revenue 2001 2000 (Decrease) 2001 2000 (Decrease)
-------- -------- ---------- -------- -------- ----------
Total
Dollars $174,403 $120,802 44% $290,516 $212,455 37%
Homes closed 773 525 47% 1,289 965 34%
Average sales price $ 225.6 $ 230.1 (2)% $ 225.4 $ 220.2 2%
Texas
Dollars $ 67,381 $ 52,281 29% $122,958 $101,711 21%
Homes closed 400 303 32% 720 605 19%
Average sales price $ 168.5 $ 172.5 (2)% $ 170.8 $ 168.1 2%
Arizona
Dollars $ 67,184 $ 32,257 108% $100,360 $ 54,199 85%
Homes closed 268 117 129% 394 196 101%
Average sales price $ 250.7 $ 275.7 (9)% $ 254.7 $ 276.5 (8)%
California
Dollars $ 39,838 $ 36,264 10% $ 67,198 $ 56,545 19%
Homes closed 105 105 -- 175 164 7%
Average sales price $ 379.4 $ 345.4 10% $ 384.0 $ 344.8 11%
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
-------------------- Increase -------------------- Increase
Sales Contracts 2001 2000 (Decrease) 2001 2000 (Decrease)
-------- -------- ---------- -------- -------- ----------
Total
Dollars $174,858 $147,770 18% $351,752 $296,670 19%
Homes ordered 757 590 28% 1,497 1,219 23%
Average sales price $ 231.0 $ 250.5 (8)% $ 235.0 $ 243.4 (3)%
Texas
Dollars $ 69,324 $ 57,561 20% $142,832 $118,481 21%
Homes ordered 422 317 33% 859 672 28%
Average sales price $ 164.3 $ 181.6 (10)% $ 166.3 $ 176.3 (6)%
Arizona
Dollars $ 68,513 $ 44,922 53% $135,828 $ 88,859 53%
Homes ordered 242 143 69% 455 280 63%
Average sales price $ 283.1 $ 314.1 (10)% $ 298.5 $ 317.4 (6)%
California
Dollars $ 37,021 $ 45,287 (18)% $ 73,092 $ 89,330 (18)%
Homes ordered 93 130 (28)% 183 267 (31)%
Average sales price $ 398.1 $ 348.4 14% $ 399.4 $ 334.6 19%
12
At June 30, Percentage
-------------------- Increase
Net Sales Backlog 2001 2000 (Decrease)
-------- -------- ----------
Total
Dollars $478,658 $305,100 57%
Homes in backlog 2,064 1,247 66%
Average sales price $ 231.9 $ 244.7 (5)%
Texas
Dollars $139,439 $110,753 26%
Homes in backlog 834 633 32%
Average sales price $ 167.2 $ 175.0 (4)%
Arizona
Dollars $258,199 $128,978 100%
Homes in backlog 1,015 408 149%
Average sales price $ 254.4 $ 316.1 (20)%
California
Dollars $ 81,020 $ 65,369 24%
Homes in backlog 215 206 4%
Average sales price $ 376.8 $ 317.3 19%
HOME SALES REVENUE. The increases in total home sales revenue and number of
homes closed in the second quarter and first six months of 2001 compared to the
same periods of 2000 resulted mainly from good performances in all of our
divisions, continued growth in our mid-priced home closings in Arizona and the
addition of Hancock Communities to our operations in Phoenix, Arizona. In June
2001 Hancock contributed 70 home closings with home sales revenue of $12.1
million.
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 23% of gross sales, which we believe is
consistent with industry standards. Total sales contracts increased in the
second quarter and first six months of 2001 compared to the same periods of 2000
due mainly to sales growth in Dallas/Ft. Worth, the continued expansion of our
mid-priced Meritage Phoenix division in Arizona, and the addition of Hancock
Communities to our operations. During the month of June, 2001, Hancock received
70 home contracts. The decrease in sales contracts in our Northern California
region for the second quarter and first six months of 2001 reflects the lack of
available lot inventory caused by the early sellout of communities late in 2000.
NET SALES BACKLOG. Backlog represents net sales contracts that have not
closed. Total dollar backlog at June 30, 2001 increased 57% over the June 30,
2000 amount due to an increase in the number of homes in backlog. The number of
homes in backlog at June 30, 2001 increased 66% over the same date in the prior
year. These increases resulted from expansion of our operations in our
mid-priced Meritage Phoenix division in Arizona and the Hancock acquisition. We
have included in our June 30, 2001 backlog 610 pre-sold Hancock homes with an
aggregate dollar value of approximately $107.5 million. The beginning balance of
the purchased Hancock homes were not included as sales contracts received during
the three and six months ended June 30, 2001.
13
OTHER OPERATING INFORMATION
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
Percentage Percentage
Increase Increase
2001 2000 (Decrease) 2001 2000 (Decrease)
------- ------- ---------- ------- ------- ----------
HOME SALES GROSS PROFIT
Dollars $37,574 $24,276 55% $61,108 $40,973 49%
Percentage of home sales revenues 21.5% 20.1% 1.4% 21.0% 19.3% 1.7%
COMMISSIONS AND OTHER SALES COSTS
Dollars $ 9,435 $6,458 46% $16,448 $12,237 34%
Percent of home sales revenue 5.4% 5.3% * 5.7% 5.8% *
GENERAL AND ADMINISTRATIVE COSTS
Dollars $ 7,884 $4,850 63% $12,819 $ 8,854 45%
Percent of total revenue 4.5% 4.0% * 4.4% 4.1% *
INCOME TAXES
Dollars $ 8,205 $5,060 62% $12,997 $ 7,812 66%
Percent of income before taxes and
extraordinary item 38.8% 37.1% 1.7% 39.0% 36.9% 2.1%
- ----------
* - Less than 1%
HOME SALES GROSS PROFIT. Gross profit equals home sales revenue, net of
housing cost of sales, which include developed lot costs, home construction
costs, amortization of common community costs (such as the cost of model complex
and architectural, legal and zoning costs), interest, sales tax, warranty,
construction overhead and closing costs. The dollar increases in gross profit
for the three and six months ended June 30, 2001 are attributable to the
increase in the number of homes closed and to continued strength in our markets,
allowing increases in sales prices which expanded gross margins.
COMMISSIONS AND OTHER SALES COSTS. Commissions and other sales costs, such
as advertising and sales office expenses, were approximately $9.4 million, or
5.4% of home sales revenue, in the three months ended June 30, 2001, as compared
to approximately $6.5 million, or 5.3% of home sales revenue in the second
quarter of 2000. For the first six months of 2001, commissions and other sales
costs were approximately $16.4 million or 5.7% of home sales revenue, compared
with $12.2 million, or 5.8%, of home sales revenue for the first half of 2000.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs were
approximately $7.9 million, or 4.5% of total revenue in the second quarter of
2001, as compared to approximately $4.9 million, or 4.0% of total revenue in
2000. General and administrative costs were approximately $12.8 million, or 4.4%
of total revenue in the first six months of 2001, as compared to approximately
$8.9 million, or 4.2% of total revenue in the same period for the same period of
2000. General and administrative costs in 2001 were higher as a percentage of
revenue in comparison to the prior year due mainly to the strong performance of
our Northern California region which resulted in a larger-than-typical earn-out
per the term of the purchase contract when we acquired the division.
INCOME TAXES. The increases in income taxes for the quarter and six months
ended June 30, 2001 from the prior year resulted from an increase in pre-tax
income, along with a slightly higher effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of working capital are land purchases, lot development
and home construction. We use a combination of borrowings and funds generated by
operations to meet our working capital requirements.
At June 30, 2001, we had short-term secured revolving construction loan and
acquisition and development facilities totaling $175.0 million, of which
approximately $29.0 million was outstanding. An additional $120.6 million of
unborrowed funds supported by approved collateral were available under our
credit facilities at that date, subject to compliance with the financial and
other covenants in our loan agreements. This additional borrowing is limited to
approximately $56 million under such loan covenants.
14
On May 30, 2001, we issued $165 million in principal amount of 9.75% senior
notes due June 1, 2011. Approximately $66 million of the proceeds of this
offering were used to complete the acquisition of the assets and liabilities of
Hancock, approximately $78 million were used to pay down existing bank debt and
approximately $15.9 million was used to repay existing senior notes. This early
repayment of debt resulted in prepayment penalty fees of approximately $731,000,
which net of the related income tax benefit, is recorded as an extraordinary
loss of $446,000 in the second quarter of 2001.
The 9.75% unsecured senior notes require us to comply with a number of covenants
including:
1) Limitations on additional indebtedness,
2) Limitations on the payment of dividends, redemption of equity
interests and certain investments,
3) Maintenance of a minimum level of consolidated tangible net worth,
4) Limitations on liens securing certain obligations, and
5) Limitations on the sale of assets, mergers and consolidations and
transactions with affiliates.
Management believes that the Company's current borrowing capacity, cash on
hand at June 30, 2001 and anticipated cash flows from operations are sufficient
to meet liquidity needs for the foreseeable future. There is no assurance,
however, that future amounts available from our sources of liquidity will be
sufficient to meet future capital needs. The amount and types of indebtedness
that we incur may be limited by the terms of the indenture governing our senior
notes and by the terms of our other credit agreements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into derivative financial instruments for trading purposes,
though we do have other financial instruments in the form of notes payable and
senior debt. Our lines of credit and credit facilities are at variable interest
rates and are subject to market risk in the form of interest rate fluctuations.
The interest rate on our senior debt is at a fixed rate.
15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT PAGE OR
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
10.1 Modification to $65,000,000 Line of Credit Filed herewith
99 Private Securities Litigation Reform Act of Filed herewith
1995 Safe Harbor Compliance Statement for
Forward-Looking Statements
(b) REPORTS ON FORM 8-K
On May 10, 2001, we filed a report on Form 8-K describing our anticipated
acquisition of the homebuilding assets of Hancock Communities and our intent to
issue 9.75% senior notes due 2011 in a private placement. On May 11, 2001, we
filed an amendment to our Form 8-K updating certain information relating to the
Hancock acquisition.
On June 6, 2001, we filed a report on Form 8-K describing the completion of
our private placement of $165 million in principal amount of 9.75% senior notes
due 2011 and the completion of the Hancock acquisition.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly cause this report on Form 10-Q to
be signed on its behalf by the undersigned, thereunto duly authorized, this 14th
day of August 2001.
MERITAGE CORPORATION,
a Maryland Corporation
By /s/ LARRY W. SEAY
-------------------------------------
Larry W. Seay
Chief Financial Officer and Vice
President-Finance
(Principal Financial Officer and Duly
Authorized Officer)
S-1