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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 September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-9977
MERITAGE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland 86-0611231
(State of Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
8501 E. Princess Drive, Suite 290 85255
Scottsdale, Arizona (Zip Code)
(Address of Principal Executive Offices)
(480) 609-3330
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes [X] No [ ]
As of November 10, 2002, 13,554,694 shares of Meritage Corporation common stock
were outstanding.
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MERITAGE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001......................... 3
Consolidated Statements of Earnings for the Three and Nine
Months ended September 30, 2002 and 2001 (unaudited)...... 4
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2002 and 2001 (unaudited)...... 5
Notes to Consolidated Financial Statements (unaudited)...... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................... 17
ITEM 4. CONTROLS AND PROCEDURES..................................... 18
PART II. OTHER INFORMATION
ITEMS 1-5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 18
SIGNATURES ............................................................ S-1
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------- ---------
ASSETS
Cash and cash equivalents $ 6,751 $ 3,383
Real estate 469,768 330,238
Deposits on real estate under option or contract 63,573 45,252
Receivables 4,794 5,508
Deferred tax asset 2,518 2,612
Goodwill 54,280 30,369
Property and equipment, net 12,531 9,667
Prepaid expenses and other assets 13,948 9,686
--------- ---------
Total assets $ 628,163 $ 436,715
========= =========
LIABILITIES
Accounts payable and accrued liabilities $ 95,315 $ 69,029
Home sale deposits 19,770 13,538
Notes payable 204,235 177,561
--------- ---------
Total liabilities 319,320 260,128
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value. Authorized
50,000,000 shares; issued and outstanding
15,191,620 and 12,613,938 shares at
September 30, 2002 and December 31, 2001,
respectively 152 126
Additional paid-in capital 196,758 109,412
Retained earnings 124,213 78,272
Treasury stock at cost; 1,670,926 and
1,637,926 shares at September 30, 2002 and
December 31, 2001, respectively (12,280) (11,223)
--------- ---------
Total stockholders' equity 308,843 176,587
--------- ---------
Total liabilities and stockholders' equity $ 628,163 $ 436,715
========= =========
See accompanying notes to consolidated financial statements
3
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Home sales revenue $ 328,514 $ 207,177 $ 744,686 $ 497,693
Land sales revenue 615 -- 5,615 1,598
--------- --------- --------- ---------
329,129 207,177 750,301 499,291
--------- --------- --------- ---------
Cost of home sales (264,271) (161,468) (598,856) (390,876)
Cost of land sales (452) -- (5,311) (1,474)
--------- --------- --------- ---------
(264,723) (161,468) (604,167) (392,350)
--------- --------- --------- ---------
Home sales gross profit 64,243 45,709 145,830 106,817
Land sales gross profit 163 -- 304 124
--------- --------- --------- ---------
64,406 45,709 146,134 106,941
Commissions and other sales costs (17,644) (10,954) (44,240) (27,402)
General and administrative costs (11,518) (11,433) (30,307) (24,251)
Interest expense -- -- -- (1)
Other income, net 1,502 669 4,008 2,030
--------- --------- --------- ---------
Earnings before income taxes and
extraordinary items 36,746 23,991 75,595 57,317
Income taxes (14,309) (9,316) (29,654) (22,314)
--------- --------- --------- ---------
Earnings before extraordinary items 22,437 14,675 45,941 35,003
Extraordinary items, net of tax effects -- 212 -- (233)
--------- --------- --------- ---------
Net earnings $ 22,437 $ 14,887 $ 45,941 $ 34,770
========= ========= ========= =========
EARNINGS PER SHARE:
Basic:
Earnings before extraordinary items $ 1.66 $ 1.37 $ 3.80 $ 3.32
Extraordinary items, net of tax effects -- 0.02 -- (0.02)
--------- --------- --------- ---------
Net earnings per share $ 1.66 $ 1.39 $ 3.80 $ 3.30
========= ========= ========= =========
Diluted:
Earnings before extraordinary items $ 1.58 $ 1.23 $ 3.58 $ 3.01
Extraordinary items, net of tax effects -- 0.02 -- (0.02)
--------- --------- --------- ---------
Net earnings per share $ 1.58 $ 1.25 $ 3.58 $ 2.99
========= ========= ========= =========
See accompanying notes to consolidated financial statements
4
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2002 2001
--------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 45,941 $ 34,770
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 4,731 3,747
(Increase) decrease in deferred tax asset before extraordinary item 94 (1,418)
Tax benefit from stock option exercises 4,923 2,376
Change in assets and liabilities, net of effect of acquisitions:
Increase in real estate (73,846) (80,425)
Increase in deposits on real estate under option or contract (15,245) (7,485)
Increase in receivables and prepaid expenses and other assets (633) (8,058)
Increase in accounts payable and accrued liabilities 17,286 22,322
Increase in home sale deposits 4,222 2,509
--------- ---------
Net cash used in operating activities (12,527) (31,662)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions (83,354) (65,759)
Increase in goodwill (2,666) (258)
Purchases of property and equipment (5,081) (5,115)
--------- ---------
Net cash used in investing activities (91,101) (71,132)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 510,188 551,809
Repayments of debt (484,584) (453,769)
Proceeds from sale of common stock, net 79,676 --
Purchase of treasury stock (1,057) (207)
Proceeds from exercises of stock options 2,773 2,020
--------- ---------
Net cash provided by financing activities 106,996 99,853
--------- ---------
Net increase (decrease) in cash and cash equivalents 3,368 (2,941)
Cash and cash equivalents, beginning of period 3,383 4,397
--------- ---------
Cash and cash equivalents, end of period $ 6,751 $ 1,456
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for: 2002 2001
--------- ---------
Interest $ 10,178 $ 6,387
Income taxes $ 20,370 $ 13,893
The acquisitions of Hammonds Homes in 2002 and Hancock Communities in
2001 resulted in the following changes in assets and liabilities:
Real estate $ (65,684) $ (54,545)
Deposits on real estate under option or contract (3,076) (8,899)
Receivables and other assets (3,140) (543)
Accounts payable and accrued liabilities 9,000 6,890
Home sale deposits 2,011 2,503
Goodwill (21,245) (11,423)
Property and equipment (2,290) (1,632)
Borrowings 1,070 1,890
--------- ---------
Net cash paid for acquisitions $ (83,354) $ (65,759)
========= =========
See accompanying notes to consolidated financial statements
5
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
BUSINESS. We are a leading designer and builder of single-family homes in
the rapidly growing Sunbelt states of Texas, Arizona and California. We focus on
providing a broad range of first-time, move-up and luxury homes to our targeted
customer base. We and our predecessors have operated in Arizona since 1985, in
Texas since 1987 and in Northern California since 1989. To expand our presence
in Arizona, in 2001 we acquired Hancock Communities (Hancock), another
well-established homebuilder that serves the first-time and move-up markets in
the Phoenix area. To expand our presence in Texas in July 2002 we acquired
Hammonds Homes, a Texas-based homebuilder that focuses on the move-up market in
the Houston, Dallas/Ft. Worth and Austin areas. We entered the Las Vegas, Nevada
market in October 2002 with our acquisition of Perma-Bilt Homes.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America, and include the accounts of Meritage
Corporation and our wholly owned subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation and certain amounts have been
reclassified for comparative purposes. In our opinion, the accompanying
unaudited consolidated financial statements include all adjustments, which are
of a normal recurring nature, necessary to present fairly our financial position
and results of operations for the periods presented. The results of operations
for any interim period are not necessarily indicative of results to be expected
for a full fiscal year or for any future periods. These financial statements
should be read in conjunction with our consolidated financial statements and
footnotes thereto included in our December 31, 2001 annual report on Form 10-K.
STOCK SPLIT. On April 2, 2002, our Board of Directors declared a
two-for-one split of our common stock in the form of a stock dividend to
stockholders of record on April 12, 2002. The additional shares were distributed
on April 26, 2002. All share and per share information has been restated to
reflect this split.
EQUITY OFFERING. In June 2002, we sold 2,012,500 shares of our common stock
at a price of $42.00 per share. The net proceeds from the offering of $79.7
million were used primarily for our July 2002 purchase of Hammonds Homes, with
the balance being used for general corporate purposes and our purchase of
Perma-Bilt Homes in October 2002.
COMMON STOCK REPURCHASE. In August 2002, we announced that our Board of
Directors authorized the expenditure of up to $32 million to repurchase shares
of our common stock. No date for completing the program has been determined, but
we will purchase shares subject to applicable securities laws, and at times and
in amounts as management deems appropriate.
GOODWILL. In June 2001, the Financial Accounting Standards Board (FASB)
issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," effective July 1, 2001, and No. 142, "Goodwill and Other
Intangible Assets," effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill is no longer amortized but is subject to
transitional and annual impairment tests in accordance with SFAS No. 142.
Goodwill represents the cost of acquired companies in excess of the fair
value of net assets acquired at the acquisition date. The goodwill recorded
resulting from our acquisitions is allocated to our business operating segments
as follows:
AT SEPTEMBER 30,
2002
----------------
(in thousands)
First-time and volume-priced $51,130
Mid- to luxury-priced 3,150
-------
Total $54,280
=======
Goodwill is reviewed by management for impairment annually, or whenever
events or changes in circumstances indicate the carrying amount may be impaired.
There were no impairment charges to goodwill amounts during the nine months
ended September 30, 2002.
6
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONT.)
Effective January 1, 2002, we adopted the nonamortization provisions of
SFAS No. 142 related to the goodwill existing at December 31, 2001. The
following table sets forth reported net earnings and earnings per share, as
adjusted to exclude goodwill amortization expense (dollars in thousands except
per share amounts):
THREE NINE
MONTHS MONTHS YEARS ENDED DECEMBER 31,
ENDED ENDED -------------------------------------
SEPT. 30, 2001 SEPT. 30, 2001 2001 2000 1999
-------------- -------------- ---------- ---------- ----------
Earnings before extraordinary
items $ 14,675 $ 35,003 $ 50,892 $ 35,762 $ 18,945
Extraordinary items, net of tax
effects 212 (233) (233) -- --
---------- ---------- ---------- ---------- ----------
Net earnings, as reported $ 14,887 $ 34,770 $ 50,659 $ 35,762 $ 18,945
========== ========== ========== ========== ==========
Earnings, as adjusted before
extraordinary items $ 14,924 $ 35,615 $ 51,771 $ 36,434 $ 19,573
Extraordinary items, net of tax
effects 212 (233) (233) -- --
---------- ---------- ---------- ---------- ----------
Net earnings, as adjusted $ 15,136 $ 35,382 $ 51,538 $ 36,434 $ 19,573
========== ========== ========== ========== ==========
AS REPORTED:
Basic earnings per share before
extraordinary items $ 1.37 $ 3.32 $ 4.80 $ 3.46 $ 1.74
Extraordinary items 0.02 (0.02) (0.02) -- --
---------- ---------- ---------- ---------- ----------
Basic earnings per share $ 1.39 $ 3.30 $ 4.78 $ 3.46 $ 1.74
========== ========== ========== ========== ==========
Diluted earnings per share
before extraordinary items $ 1.23 $ 3.01 $ 4.32 $ 3.13 $ 1.57
Extraordinary items 0.02 (0.02) (0.02) -- --
---------- ---------- ---------- ---------- ----------
Diluted earnings per share $ 1.25 $ 2.99 $ 4.30 $ 3.13 $ 1.57
========== ========== ========== ========== ==========
AS ADJUSTED:
Basic earnings per share before
extraordinary items $ 1.39 $ 3.38 $ 4.88 $ 3.52 $ 1.80
Extraordinary items 0.02 (0.02) (0.02) -- --
---------- ---------- ---------- ---------- ----------
Basic earnings per share $ 1.41 $ 3.36 $ 4.86 $ 3.52 $ 1.80
========== ========== ========== ========== ==========
Diluted earnings per share
before extraordinary items $ 1.25 $ 3.06 $ 4.40 $ 3.19 $ 1.62
Extraordinary items 0.02 (0.02) (0.02) -- --
---------- ---------- ---------- ---------- ----------
Diluted earnings per share $ 1.27 $ 3.04 $ 4.38 $ 3.19 $ 1.62
========== ========== ========== ========== ==========
During the second quarter of 2002, we finalized the first of the required
impairment tests of goodwill as of January 1, 2002, and have determined that
goodwill is not impaired. There were no changes in circumstances in the third
quarter of 2002 that would cause us to reevaluate our impairment analysis.
7
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONT.)
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No.146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No.94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS 146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred, as
opposed to being recognized at the date an entity commits to an exit plan under
EITF 94-3. SFAS 146 also establishes that fair value is the objective for
initial measurement of the liability. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. We do not anticipate exit
or disposal activities in the near term, therefore the adoption of SFAS 146 is
not expected to have a material impact on our consolidated financial statements
in the future for 2002.
In April 2002, the FASB issued SFAS No. 145, Rescission of SFAS Statements
No.4 (Reporting Gains and Losses from Extinguishment of Debt), No.44 (Accounting
for Intangible Assets of Motor Carriers), and No.64 (Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements), Amendment of SFAS No.13 (Accounting
for Leases), and Technical Corrections. This statement also amends other
existing authorative pronouncements to make various technical corrections,
clarify meanings or describe their applicability under changed conditions. SFAS
145 is effective for transactions occuring after MAy 15, 2002. Our adoption of
SFAS 145 on May 15, 2002 did not have a material impact on our consolidated
financial statements, and is not anticipated to have a material impact in the
future.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective for fiscal years
beginning after December 15, 2001. This standard supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and provides a single accounting model for long-lived assets to
be disposed of. SFAS No. 144 provides guidance on differentiating between assets
held and used and assets to be disposed of. Assets to be disposed of would be
classified as held for sale (and depreciation would cease) when management,
having the authority to approve the action, commits to a plan to sell the
asset(s) meeting all required criteria. We adopted this statement on January 1,
2002, which did not have a material effect on our earnings or financial
position.
NOTE 2 - REAL ESTATE AND CAPITALIZED INTEREST
The components of real estate are (in thousands):
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Homes under contract, in production $ 227,594 $ 135,005
Finished home sites 111,680 81,151
Home sites under development 66,761 57,291
Homes held for resale 36,143 33,278
Model homes 14,826 18,289
Land held for development 12,764 5,224
----------- -----------
$ 469,768 $ 330,238
=========== ===========
We capitalize certain interest costs incurred during development and
construction. Capitalized interest is allocated to real estate and charged to
cost of sales when the related property is closed. Summaries of interest
incurred, interest capitalized and interest expensed follow (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Beginning unamortized capitalized interest $ 10,050 $ 7,248 $ 8,746 $ 5,426
Interest capitalized 4,808 5,430 14,143 11,868
Amortized to cost of home and land sales (5,886) (3,576) (13,917) (8,192)
-------- -------- -------- --------
Ending unamortized capitalized interest $ 8,972 $ 9,102 $ 8,972 $ 9,102
======== ======== ======== ========
Interest incurred $ 4,808 $ 5,430 $ 14,143 $ 11,869
Interest capitalized (4,808) (5,430) (14,143) (11,868)
-------- -------- -------- --------
Interest expensed $ -- $ -- $ -- $ 1
======== ======== ======== ========
8
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3 - NOTES PAYABLE
Notes payable consists of:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
$100 million bank revolving construction line of
credit, interest payable monthly approximating
prime (4.75% at September 30, 2002) or LIBOR
(rates varying from 1.819% to 1.806% at
September 30, 2002) plus 2.0%, payable at the
earlier of close of escrow, maturity date of
individual homes and home sites within the
collateral pool or over a 24-month period
beginning June 1, 2003, secured by first deeds
of trust on real estate $ 6,591 $ 617
$90 million bank revolving construction line of
credit, interest payable monthly approximating
prime or LIBOR plus 2.0%, payable at the earlier
of close of escrow, maturity date of individual
homes and home sites within the line or
August 31, 2003, secured by first deeds of
trust on real estate 40,207 15,590
Acquisition and development seller carry back
financing, interest payable monthly at fixed
rates of 9% to 10% per annum; payable at the
maturity date of the individual projects,
secured by first deeds of trust on land 1,211 6,204
Senior unsecured notes, maturing June 1, 2011,
interest only payments of 9.75% per annum,
payable semi-annually 155,000 155,000
Other notes 1,226 150
---------- ----------
Total $ 204,235 $ 177,561
========== ==========
The bank credit facilities and senior unsecured notes contain covenants
which require maintenance of certain levels of tangible net worth, compliance
with certain minimum financial ratios and place limitations on the payment of
dividends and redemptions of equity, and limit the incurrence of additional
indebtedness, asset dispositions, mergers, certain investments and creations of
liens, among other items. As of September 30, 2002 and for the year ended
December 31, 2001, we were in compliance with these covenants. The senior
unsecured notes restrict our ability to pay dividends.
NOTE 4 - ACQUISITIONS
On July 1, 2002, we acquired substantially all of the homebuilding and
related assets of Hammonds Homes. The purchase price was approximately $83.4
million in cash, plus the assumption of accounts payable, accrued liabilities
and home sales deposits totaling $11.0 million and a note payable totaling $1.1
million. This acquisition was accounted for using the purchase method of
accounting. Accordingly, we recorded goodwill of approximately $21.2 million,
which represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired and liabilities assumed.
This goodwill was allocated to our first-time and volume-priced business
segment.
9
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4 - ACQUISITIONS (CONT.)
The following unaudited financial data for the three and nine months ended
September 30, 2002 and 2001 has been prepared as if the acquisition of the
assets and liabilities of Hammonds Homes on July 1, 2002 had occurred on January
1, 2001. The 2001 and first nine months of 2002 unaudited pro forma financial
data is presented for informational purposes only and is based on historical
information. This information may not be indicative of our actual amounts had
the transaction occurred on the date listed above, nor does it purport to
represent future periods (in thousands except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- ---------
Revenue $329,129 $ 257,833 $829,472 $ 634,460
Net earnings 22,437 17,777 48,859 42,432
Diluted EPS $ 1.58 $ 1.49 $ 3.80 $ 3.65
On October 7, 2002, we completed the acquisition of substantially all of
the homebuilding and related assets of Perma-Bilt Homes. The purchase price was
approximately $46.6 million, subject to final adjustments, comprised of cash
paid at closing of $29.9 million and the repayment of existing debt in the
amount of $ 16.7 million. The acquisition was accounted for using the purchase
method of accounting. Accordingly, we recorded goodwill of approximately $21.3
million. Perma-Bilt Homes, established in 1993, builds a wide range of quality
homes in five communities in the Las Vegas, Nevada area with a focus on serving
the move-up housing market.
On May 30, 2001, we acquired substantially all of the homebuilding and
related assets of HC Builders, Inc. and Hancock Communities, L.L.C. The purchase
price was $65.8 million in cash, plus the assumption of accounts payable,
accrued liabilities and home sales deposits totaling $9.4 million and a note
payable totaling $1.9 million. In addition, we granted to Greg Hancock, the
founder of the company, an earn-out payable in cash over three years, which was
equal to 20% of Hancock's pre-tax net income after a 10.5% charge on capital.
This acquisition was accounted for using the purchase method of accounting.
Accordingly, we recorded goodwill of approximately $11.4 million, which
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired and liabilities assumed.
This goodwill was allocated to our first-time and volume-priced business
segment. Goodwill is also increased to the extent of the earn-out, which
amounted to approximately $2.7 million in the first nine months of 2002. Prior
to January 1, 2002, the goodwill was being amortized over a period of 20 years.
10
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 5 - EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows (in thousands,
except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
BASIC:
Earnings before extraordinary items $ 22,437 $ 14,675 $ 45,941 $ 35,003
Extraordinary items, net of tax effects -- 212 -- (233)
-------- -------- -------- --------
Net earnings $ 22,437 $ 14,887 $ 45,941 $ 34,770
======== ======== ======== ========
Weighted average number of shares outstanding-basic 13,514 10,735 12,105 10,529
-------- -------- -------- --------
Basic earnings per share before extraordinary items $ 1.66 $ 1.37 $ 3.80 $ 3.32
Extraordinary items -- 0.02 -- (0.02)
-------- -------- -------- --------
Basic earnings per share $ 1.66 $ 1.39 $ 3.80 $ 3.30
======== ======== ======== ========
DILUTED:
Earnings before extraordinary items $ 22,437 $ 14,675 $ 45,941 $ 35,003
Extraordinary items, net of tax effects -- 212 -- (233)
-------- -------- -------- --------
Net earnings $ 22,437 $ 14,887 $ 45,941 $ 34,770
======== ======== ======== ========
Weighted average number of shares outstanding - basic 13,514 10,735 12,105 10,529
Effect of dilutive securities:
Options to acquire common stock 725 1,191 736 1,091
-------- -------- -------- --------
Diluted weighted common shares outstanding 14,239 11,926 12,841 11,620
-------- -------- -------- --------
Diluted earnings per share before extraordinary items $ 1.58 $ 1.23 $ 3.58 $ 3.01
Extraordinary items -- 0.02 -- (0.02)
-------- -------- -------- --------
Diluted earnings per share $ 1.58 $ 1.25 $ 3.58 $ 2.99
======== ======== ======== ========
Antidilutive stock options not included in diluted EPS 295 -- 295 --
======== ======== ======== ========
11
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 6 - INCOME TAXES
Components of income tax expense attributable to income from continuing
operations consist of (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Current:
Federal $ 10,445 $ 8,743 $ 24,712 $ 20,162
State 1,963 1,933 4,848 3,571
-------- -------- -------- --------
12,408 10,676 29,560 23,733
-------- -------- -------- --------
Deferred:
Federal 1,668 (1,178) 66 (1,212)
State 233 (182) 28 (207)
-------- -------- -------- --------
1,901 (1,360) 94 (1,419)
-------- -------- -------- --------
Total $ 14,309 $ 9,316 $ 29,654 $ 22,314
======== ======== ======== ========
NOTE 7 - SEGMENT INFORMATION
We classify our operations into two primary management segments: first-time
and volume-priced homes and mid- to luxury-priced homes. These segments generate
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.
12
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 7 - SEGMENT INFORMATION (CONT.)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(IN THOUSANDS)
HOME SALES REVENUE:
First-time and volume-priced $ 201,981 $ 126,569 $ 447,782 $ 286,769
Mid- to luxury-priced 126,533 80,608 296,904 210,924
--------- --------- --------- ---------
Total $ 328,514 $ 207,177 $ 744,686 $ 497,693
========= ========= ========= =========
EBIT:
First-time and volume-priced $ 24,672 $ 16,126 $ 54,769 $ 40,180
Mid- to luxury-priced 19,509 12,927 38,939 28,653
Corporate (1,549) (1,486) (4,196) (3,323)
--------- --------- --------- ---------
Total $ 42,632 $ 27,567 $ 89,512 $ 65,510
========= ========= ========= =========
AT AT
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
ASSETS:
First-time and volume-priced $ 425,758 $ 261,825
Mid- to luxury-priced 190,967 164,156
Corporate 11,438 10,734
--------- ---------
Total $ 628,163 $ 436,715
========= =========
13
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, as amended. Such statements include
projections of revenue, income or loss and capital expenditures; financing needs
or plans and liquidity; the impact of changes in interest rates; and plans
relating to our products, as well as assumptions relating to the foregoing.
Actual results may differ materially from those expressed in
forward-looking statements. Risks identified in Exhibit 99.4 to this Quarterly
Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended
December 31, 2001, including under the captions "Market for the Registrant's
Common Stock and Related Stockholder Matters - Factors That May Affect Future
Stock Performance," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Our Future Results
and Financial Condition and - Special Note of Caution Regarding Forward-Looking
Statements" describe factors, among others, that could contribute to or cause
such differences. These factors may also affect our business generally. As a
result of these factors, the prices of our securities may fluctuate
dramatically.
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition provides
information regarding our results of operations for the three and nine month
periods ended September 30, 2002 and 2001. All material balances and
transactions between us and our subsidiaries have been eliminated in
consolidation. In our opinion, the data reflects all adjustments, consisting of
only normal recurring adjustments, necessary to fairly present our financial
position and results of operations for the periods presented. The results of
operations for any interim period are not necessarily indicative of results
expected for a full fiscal year.
HOME SALES REVENUE, SALES CONTRACTS AND NET SALES BACKLOG
The data provided below shows operating and financial data regarding our
homebuilding activities (dollars in thousands).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE SEPTEMBER 30,
-------------------- INCREASE -------------------- PERCENTAGE
HOME SALES REVENUE 2002 2001 (DECREASE) 2002 2001 INCREASE
-------- -------- -------- -------- -------- ----------
TOTAL
Dollars $328,514 $207,177 59% $744,686 $497,693 50%
Homes closed 1,311 938 40% 3,091 2,227 39%
Average sales price $ 250.6 $ 220.9 13% $ 240.9 $ 223.5 8%
TEXAS
Dollars $132,129 $ 62,306 112% $258,571 $185,263 40%
Homes closed 692 357 94% 1,431 1,077 33%
Average sales price $ 190.9 $ 174.5 9% $ 180.7 $ 172.0 5%
ARIZONA
Dollars $122,948 $100,794 22% $296,673 $201,155 47%
Homes closed 442 469 (6)% 1,192 863 38%
Average sales price $ 278.2 $ 214.9 29% $ 248.9 $ 233.1 7%
CALIFORNIA
Dollars $ 73,437 $ 44,077 67% $189,442 $111,275 70%
Homes closed 177 112 58% 468 287 63%
Average sales price $ 414.9 $ 393.5 5% $ 404.8 $ 387.7 4%
14
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE SEPTEMBER 30, PERCENTAGE
-------------------- INCREASE -------------------- INCREASE
HOME SALES REVENUE 2002 2001 (DECREASE) 2002 2001 (DECREASE)
-------- -------- -------- -------- -------- --------
TOTAL
Dollars $304,556 $161,486 89% $895,286 $513,237 74%
Homes ordered 1,129 723 56% 3,433 2,220 55%
Average sales price $ 269.8 $ 223.4 21% $ 260.8 $ 231.2 13%
TEXAS
Dollars $130,799 $ 50,409 159% $302,051 $193,241 56%
Homes ordered 641 297 116% 1,575 1,156 36%
Average sales price $ 204.1 $ 169.7 20% $ 191.8 $ 167.2 15%
ARIZONA
Dollars $ 88,266 $ 84,197 5% $316,361 $220,025 44%
Homes ordered 306 359 (15)% 1,200 814 47%
Average sales price $ 288.5 $ 234.5 23% $ 263.6 $ 270.3 (2)%
CALIFORNIA
Dollars $ 85,491 $ 26,880 218% $276,874 $ 99,971 177%
Homes ordered 182 67 172% 658 250 163%
Average sales price $ 469.7 $ 401.2 17% $ 420.8 $ 399.9 5%
AT SEPTEMBER 30, PERCENTAGE
-------------------- INCREASE
NET SALES BACKLOG 2002 2001 (DECREASE)
-------- -------- --------
TOTAL
Dollars $598,907 $432,968 38%
Homes in backlog 2,292 1,849 24%
Average sales price $ 261.3 $ 234.2 12%
TEXAS
Dollars $232,487 $127,542 82%
Homes in backlog 1,185 774 53%
Average sales price $ 196.2 $ 164.8 19%
ARIZONA
Dollars $225,674 $241,604 (7)%
Homes in backlog 784 905 (13)%
Average sales price $ 287.8 $ 267.0 8%
CALIFORNIA
Dollars $140,746 $ 63,822 121%
Homes in backlog 323 170 90%
Average sales price $ 435.7 $ 375.4 16%
HOME SALES REVENUE. The increases in total home sales revenue and number of
homes closed in the third quarter and first nine months of 2002 compared to the
same periods of 2001 resulted mainly from the strong market conditions in
Northern California and the addition of Hammonds Homes to our operations in
Texas, which was acquired on July 1, 2002. Hammonds contributed 235 closings
with a value of approximately $50 million to the third quarter 2002 results.
15
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 norms. Sales contracts for the third quarter and the
nine months ended September 30, 2002 are up from the previous year, due mainly
to the addition of Hammonds Homes to our operations in Texas and the strength of
the homebuilding market in California. In addition, orders in Arizona have been
negatively impacted by a decrease in sales in our high-end Monterey Scottsdale
product and the early sell-out of some lower priced Hancock communities, ahead
of their replacements. Hammonds contributed 209 contracts to our third quarter
2002 results.
NET SALES BACKLOG. Backlog represents net sales contracts that have not
closed. Total dollar backlog at September 30, 2002 increased 38% over the
September 30, 2001 amount due to an increase in the number of homes in backlog.
The number of homes in backlog at September 30, 2002 increased 24% over the same
date in the prior year. These increases resulted mainly from our Hammonds
acquisition and continued strong demand for homes in California. Arizona backlog
was down due to the same factors identified in Sales Contracts above.
OTHER OPERATING INFORMATION
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
HOME SALES GROSS PROFIT
Dollars $ 64,243 $ 45,709 $145,830 $106,817
Percent of home sales revenues 19.6% 22.1% 19.6% 21.5%
COMMISSIONS AND OTHER SALES COSTS
Dollars $ 17,644 $ 10,954 $ 44,240 $ 27,402
Percent of home sales revenue 5.4% 5.3% 5.9% 5.5%
GENERAL AND ADMINISTRATIVE COSTS
Dollars $ 11,518 $ 11,433 $ 30,307 $ 24,251
Percent of total revenue 3.5% 5.5% 4.0% 4.9%
INCOME TAXES
Dollars $ 14,309 $ 9,316 $ 29,654 $ 22,314
Percent of income before taxes
and extraordinary items 38.9% 38.8% 39.2% 38.9%
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), amortization of capitalized
interest, sales tax, warranty, construction overhead and closing costs. The
dollar increases in gross profit for the three and nine months ended September
30, 2002 are attributable to the increase in the number of home closings. The
decrease in our home sales gross profit percentage for the three and nine months
ended September 30, 2002 is attributable to more competitive market conditions
during the time the orders were taken for the current year home closings as
compared to the prior year's closings. The gross margins of homes closed in 2002
were adversely impacted by the use of a greater level of sales incentives,
prompted by the less robust economic conditions existing at the time orders were
taken for these homes. In addition, the margins in the current year's quarter
were negatively impacted by a fair value adjustment to increase the value of
homes under construction by approximately $2.9 million as a result of applying
purchase accounting in the acquisition of Hammonds Homes. Approximately $2
million of this amount was expensed as a component of cost of sales due to
Hammonds' closings for the quarter ended September 30, 2002.
16
COMMISSIONS AND OTHER SALES COSTS. Commissions and other sales costs, such
as advertising and sales office expenses, were approximately $17.6 million, or
5.4% of home sales revenue in the three months ended September 30, 2002, as
compared to approximately $11.0 million, or 5.3% of home sales revenue, in the
third quarter of 2001. For the first nine months of 2002, commissions and other
sales costs were approximately $44.2 million or 5.9% of home sales revenue,
compared with $27.4 million, or 5.5% of home sales revenue, for the nine months
of 2001. These increases were primarily due to higher sales incentives as a
percentage of revenue related to our Monterey and Hancock divisions, and
advertising related to communities not yet or recently opened for sale.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs were
approximately $11.5 million, or 3.5% of total revenue, in the third quarter of
2002, as compared to approximately $11.4 million, or 5.5% of total revenue, in
2001. General and administrative costs were approximately $30.3 million, or 4.0%
of total revenue, in the first nine months of 2002, as compared to approximately
$24.3 million, or 4.9% of total revenue, for the same period of 2001. General
and administrative costs in 2002 were lower as a percentage of revenue, in
comparison to 2001, mainly due to the June 30, 2002 conclusion of the earn-out
payments made in accordance with the purchase agreement terms of our Northern
California division and by holding down other general and administrative costs
while revenues increased. The earn-out was calculated based on 20 percent of the
pre-tax earnings of the Northern California division after reduction for a
capital charge.
INCOME TAXES. Increases in income taxes for the quarter and nine months
ended September 30, 2002 from the prior year resulted mainly from an increase in
pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of working capital are land purchases, lot development
and home construction. We use a combination of borrowings and funds generated by
operations to meet short-term working capital requirements and we issue equity
or debt in order to meet long-term capital requirements.
At September 30, 2002, we had short-term secured revolving construction
loans and acquisition and development facilities totaling $190.0 million, of
which $46.8 million was outstanding. $141.5 million of unborrowed funds
supported by approved collateral were available under these credit facilities at
that date, subject to compliance with the financial and other covenants in our
loan agreements. This additional borrowing was fully available under such loan
covenants at September 30, 2002. We also have $155 million in principal
outstanding of unsecured, 9.75% senior notes due June 1, 2011, which were issued
in May 2001.
As discussed in Note 4, Aquisitions, approximately $46.6 million of
liquidity was utilized to purchase Perma-Bilt Homes on October 7, 2002.
We believe that the current borrowing capacity and anticipated cash flows
from operations are sufficient to meet our working capital requirements and
other needs for the foreseeable future. There is no assurance, however, that
future amounts available from our cash flows will be sufficient to meet future
capital needs. The amount and types of indebtedness that we incur may be limited
by the terms of the indenture governing our senior notes and by the terms of our
other credit agreements.
As a component of our model home construction activities, we enter into
lease transactions with third parties. The total cost, including land costs, of
model homes leased by us and constructed under these lease agreements is
approximately $21.6 million, all of which is excluded from our balance sheet as
of September 30, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into derivative financial instruments for trading purposes,
although we do have other financial instruments in the form of notes payable and
senior debt. Our lines of credit and credit facilities are at variable interest
rates and are subject to market risk in the form of interest rate fluctuations.
The interest rate on our senior debt is at a fixed rate of 9.75%. Except in the
event of default or upon the occurrence of certain events, we do not have an
17
obligation to prepay our fixed-rate debt prior to maturity and, as a result,
interest rate risk and changes in fair value should not have a significant
impact in our fixed-rate debt until we would be required to refinance such debt.
ITEM 4. CONTROLS AND PROCEDURES
Meritage's Co-Chief Executive Officers and Chief Financial Officer have
concluded based on their evaluation as of a date within 90 days of the filing of
this Form 10-Q, that its disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT PAGE OR
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
10.1 Ninth Modification Agreement to Guaranty Federal Bank Loan,
dated as of August 22, 2002 Filed herewith
99.1 Certificate of Steven J. Hilton, Co-Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith
99.2 Certificate of John R. Landon, Co-Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith
99.3 Certificate of Larry W. Seay, Chief Financial Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith
99.4 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-Looking Statements Filed herewith
(b) REPORTS ON FORM 8-K
On September 11, 2002, we filed a Current Report on Form 8-K/A amending
Form 8-K dated July 12, 2002 to include the financial statements and pro forma
financial information of Hammonds Homes, which we acquired in July 2002.
On October 9, 2002, we filed a Current Report on Form 8-K describing the
completion of our acquisition of the homebuilding assets of Perma-Bilt Homes.
On October 23, 2002 we filed a Current Report on Form 8-K/A amending Form
8-K dated October 7, 2002 to include transaction documents relating to our
acquisition of Perma-Bilt Homes.
18
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 November 2002.
MERITAGE CORPORATION,
a Maryland Corporation
BY /s/ LARRY W. SEAY
-------------------------------------
Larry W. Seay
CHIEF FINANCIAL OFFICER AND
VICE PRESIDENT-FINANCE
(PRINCIPAL FINANCIAL OFFICER AND
DULY AUTHORIZED OFFICER)
BY /s/ VICKI L. BIGGS
-------------------------------------
Vicki L. Biggs
CHIEF ACCOUNTING OFFICER AND VICE
PRESIDENT-CORPORATE CONTROLLER
S-1
CERTIFICATIONS
CERTIFICATION OF THE CO-CHIEF EXECUTIVE OFFICER
I, Steven J. Hilton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Meritage Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Steven J. Hilton
----------------------------------------
Steven J. Hilton
Co-Chief Executive Officer
CERTIFICATION OF THE CO-CHIEF EXECUTIVE OFFICER
I, John R. Landon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Meritage Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ John R. Landon
----------------------------------------
John R. Landon
Co-Chief Executive Officer
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Larry W. Seay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Meritage Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Larry W. Seay
----------------------------------------
Larry W. Seay
Chief Financial Officer