================================================================================
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, 1999
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
Scottsdale, Arizona 85250
(Address of Principal Executive Offices) (Zip Code)
(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, 1999; 5,462,906 shares of Meritage Corporation common stock
were outstanding.
================================================================================
<PAGE>
MERITAGE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998.............................................. 3
Consolidated Statements of Earnings for the Three and Six
Months ended June 30, 1999 and 1998............................ 4
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1999 and 1998............................ 5
Notes to Consolidated Financial Statements..................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................... 15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 15
SIGNATURES ............................................................... S-1
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents $ 7,084,225 $ 12,386,806
Real estate under development 147,191,665 104,758,530
Deposits on real estate under option
or contract 11,726,728 7,338,406
Other receivables 1,774,219 2,460,966
Deferred tax asset 2,382,163 6,935,000
Goodwill 19,275,181 14,640,712
Property and equipment, net 3,803,921 2,566,163
Other assets 1,413,349 1,163,737
------------ ------------
Total Assets $194,651,451 $152,250,320
============ ============
LIABILITIES
Accounts payable and accrued liabilities $ 29,918,011 $ 34,068,178
Home sale deposits 12,113,269 8,587,245
Notes payable 72,666,108 37,204,845
Minority interest in consolidated
joint ventures 152,710 110,922
------------ ------------
Total Liabilities 114,850,098 79,971,190
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share;
50,000,000 Shares authorized; issued and
outstanding - 5,470,906 Shares at June 30, 1999,
and 5,334,942 shares at December 31, 1998 54,709 53,349
Additional paid-in capital 100,087,648 99,319,669
Accumulated deficit (20,228,042) (27,093,888)
Less cost of shares held in treasury
(10,000 shares) (112,962) --
------------ ------------
Total Stockholders' Equity 79,801,353 72,279,130
------------ ------------
Total Liabilities and Stockholders' Equity $194,651,451 $152,250,320
============ ============
See accompanying notes to consolidated financial statements
3
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Home sales revenues $ 76,646,871 $ 55,608,159 $ 127,953,068 $ 92,121,503
Cost of home sales (60,810,073) (45,698,437) (102,132,361) (75,324,372)
------------ ------------ ------------- ------------
Gross profit 15,836,798 9,909,722 25,820,707 16,797,131
Commissions and other sales costs (4,492,042) (2,553,903) (7,907,859) (4,894,388)
General and administrative expense (3,678,297) (2,273,598) (6,824,344) (4,182,056)
Interest expense (1,844) (115,279) (2,679) (195,594)
Other income, net 669,889 246,619 1,033,721 286,407
Residual interest and real estate
loan interest income -- 2,028,908 -- 5,232,667
------------ ------------ ------------- ------------
Earnings before income taxes 8,334,504 7,242,469 12,119,546 13,044,167
Income taxes 3,793,701 546,000 5,253,701 896,000
------------ ------------ ------------- ------------
Net earnings $ 4,540,803 $ 6,696,469 $ 6,865,845 $ 12,148,167
============ ============ ============= ============
Basic earnings per share $ .83 $ 1.26 $ 1.26 $ 2.29
Diluted earnings per share $ .75 $ 1.10 $ 1.14 $ 1.99
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 6,865,845 $ 12,148,167
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,009,513 597,518
Deferred tax expense 4,552,837 --
Stock option compensation expense 296,658 690,884
Gain on sales of residual interests -- (5,180,046)
Increase in real estate under development (42,433,135) (23,970,178)
Increase in deposits on real estate under
option or contract (4,388,322) (1,739,951)
(Increase) decrease in other receivables
and other assets 437,135 (259,921)
Decrease in accounts payable and accrued
liabilities (9,276,403) (6,289,779)
Increase in home sale deposits 3,526,024 3,922,390
------------ ------------
Net cash used in operating activities (39,409,848) (20,080,916)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,713,715) (274,288)
Proceeds from sales of residual interest -- 6,600,000
------------ ------------
Net cash provided by (used in)
investing activities (1,713,715) 6,325,712
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 128,447,739 65,373,666
Repayment of borrowings (92,986,476) (54,949,383)
Purchase of treasury shares (112,962) --
Stock options exercised 472,681 304,796
------------ ------------
Net cash provided by financing activities 35,820,982 10,729,079
------------ ------------
Net decrease in cash and cash equivalents (5,302,581) (3,026,125)
Cash and cash equivalents at beginning
of period 12,386,806 8,245,392
------------ ------------
Cash and cash equivalents at end of period $ 7,084,225 $ 5,219,267
============ ============
See accompanying notes to consolidated financial statements
5
<PAGE>
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. Our operations in the
Phoenix and Tucson, Arizona metropolitan markets are under the Monterey Homes
and Meritage Homes of Arizona brand names, in the Dallas/Fort Worth, Austin and
Houston, Texas markets we use the Legacy Homes name and in the San Francisco Bay
and Sacramento, California markets we are known as Meritage Homes of Northern
California. We have recently undergone significant growth and are pursuing a
strategy of expanding our operations.
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. First half 1998 results do not include the operations of Meritage
Homes of Northern California, which was acquired on July 1, 1998. In the opinion
of management, the unaudited consolidated financial statements reflect all
adjustments, consisting only of 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 to be expected for a full fiscal year.
NOTE 2 - REAL ESTATE UNDER DEVELOPMENT AND CAPITALIZED INTEREST
The components of real estate under development follow (in thousands):
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
Homes under contract, in production $ 64,696 $ 44,186
Finished lots and lots under development 60,920 46,558
Model homes and homes held for resale 21,576 14,015
-------- --------
$147,192 $104,759
======== ========
We capitalize certain interest costs incurred during development and
construction. Capitalized interest is allocated to real estate under development
and charged to cost of home sales when the units are delivered. Summaries of
interest capitalized and interest expensed follow (in thousands):
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
Beginning unamortized capitalized
interest $ 2,260 $2,074 $ 1,982 $ 1,890
Interest capitalized 1,510 856 2,599 1,484
Interest amortized in cost of home
sales (1,117) (800) (1,928) (1,244)
------- ------ ------- -------
Ending unamortized capitalized
interest $ 2,653 $2,130 $ 2,653 $ 2,130
======= ====== ======= =======
Interest incurred $ 1,512 $ 971 $ 2,602 $ 1,679
Interest capitalized (1,510) (856) (2,599) (1,484)
------- ------ ------- -------
Interest expensed $ 2 $ 115 $ 3 $ 195
======= ====== ======= =======
6
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3 - NOTES PAYABLE
Notes payable consist of the following (in thousands):
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
$60 million bank construction line of credit,
interest payable monthly approximating prime
(7.75% at June 30, 1999) or LIBOR (30 day LIBOR
5.2% at June 30, 1999), plus 2.25% payable at
the earlier of close of escrow, maturity date
of individual homes within the line or June 9,
2000, secured by first deeds of trust on homes $23,155 $ 4,641
$80 million bank construction line of credit,
interest payable monthly approximating prime or
LIBOR plus 2.25%, payable at the earlier of
close of escrow, maturity date of individual
homes within the line or July 31, 2000, secured
by first deeds of trust on homes 25,268 10,925
$20 million bank acquisition and development
credit facility, interest payable monthly
approximating prime or LIBOR plus 2.25%,
payable at the earlier of funding of
construction financing, the maturity date of
individual projects within the line or June 19,
2000, secured by first deeds of trust on land 5,908 3,314
Other acquisition and development credit
facilities with commitments totaling $4.5
million, interest payable monthly, ranging from
prime to prime plus .25%; payable at the
earlier of funding of construction financing or
the maturity date of the individual projects,
secured by first deeds of trust on land 2,424 2,407
Senior unsecured notes, maturing September 15,
2005, annual interest of 9.10% payable
quarterly, principal payable in three equal
installments on September 15, 2003, 2004 and
2005 15,000 15,000
Other 911 918
-------- --------
Total $ 72,666 $ 37,205
======== ========
7
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4 - EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the three and six months ended June 30, 1999 and 1998
follows (in thousands, except per share amounts):
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- -----------------
1999 1998 1999 1998
------ ------ ------ -------
Net earnings $4,541 $6,696 $6,866 $12,148
Weighted average shares outstanding -
basic 5,456 5,316 5,441 5,311
------ ------ ------ -------
Basic earnings per share $ .83 $ 1.26 $ 1.26 $ 2.29
====== ====== ====== =======
Basic EPS - Weighted average shares
outstanding 5,456 5,316 5,441 5,311
Effect of dilutive securities:
Contingent shares 70 132 77 141
Stock options 494 652 519 662
------ ------ ------ -------
Weighted average shares outstanding -
dilutive 6,020 6,100 6,037 6,114
------ ------ ------ -------
Diluted earnings per share $ .75 $ 1.10 $ 1.14 $ 1.99
====== ====== ====== =======
NOTE 5 - TREASURY STOCK
In June 1999, we began acquiring shares of our common stock in connection
with a stock repurchase program announced in April 1999. The program authorizes
us to purchase up to $6 million of common stock from time to time on the open
market or in privately negotiated transactions at price levels we consider
attractive. We purchased 10,000 shares of common stock in June at an aggregate
cost of $112,962. The purpose of the stock repurchase program is to help us
achieve our long-term goal of enhancing stockholder value.
NOTE 6 - STERLING COMMUNITIES ACQUISITION
On June 15, 1998, we signed a definitive agreement with Sterling
Communities, S.H. Capital, Inc., Sterling Financial Investments, Inc., Steven W.
Hafener and W. Leon Pyle (together, the Sterling Entities), to acquire
substantially all of the assets of Sterling Communities. The transaction was
effective as of July 1, 1998. Assets acquired principally consist of real
property and other residential homebuilding assets located in the San Francisco
Bay and Sacramento areas of California. We are continuing the operations of the
Sterling Entities under the name Meritage Homes of Northern California.
Consideration paid for the assets and stock acquired, and various
liabilities assumed, consisted of $6.9 million in cash and additional
consideration to be paid for up to four years after the transaction date. We
used the purchase method of accounting and the purchase price was allocated
among our net assets based on their estimated fair market value at the
transaction date. Goodwill of approximately $2.2 million was recorded, which is
being amortized over 20 years. The additional consideration will be equal to 20%
of the pre-tax income of Meritage's California division and will be expensed as
earned.
8
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 7 - INCOME TAXES
Components of income tax expense are as follows(in thousands):
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
Current taxes:
Federal $ 157 $ 281 $ 240 $ 370
State 296 265 459 526
------ ------ ------ ------
453 546 699 896
------ ------ ------ ------
Deferred taxes:
Federal 3,254 -- 4,467 --
State 87 -- 88 --
------ ------ ------ ------
3,341 -- 4,555 --
------ ------ ------ ------
Total $3,794 $ 546 $5,254 $ 896
====== ====== ====== ======
CARRYFORWARDS
At June 30, 1999, we had a federal net operating loss carryforward of
approximately $1.1 million. Any unused carryforward will expire beginning in
2007.
NOTE 8 - SEGMENT INFORMATION
We classify our operations into three primary geographic segments: Arizona,
Texas and California. These segments generate revenues 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. 1998 information has not been included for the California operations
which were acquired July 1, 1998. 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 for the Company. There are no significant transactions between segments.
9
<PAGE>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1999 1998 1999 1998
(in thousands)
HOME SALES REVENUE:
Texas $42,461 $36,171 $ 72,795 $58,847
Arizona 30,056 19,437 49,684 33,275
California 4,130 -- 5,474 --
------- ------- -------- -------
Total $76,647 $55,608 $127,953 $92,122
======= ======= ======== =======
EBIT:
Texas $ 5,819 $ 5,005 $ 9,554 $ 8,016
Arizona 3,815 1,865 5,705 2,772
California 1,195 -- 773 --
Corporate and other (1,378) 1,275 (1,984) 3,683
------- ------- -------- -------
Total $ 9,451 $ 8,145 $ 14,048 $14,471
======= ======= ======== =======
AMORTIZATION OF CAPITALIZED INTEREST:
Texas $ 367 $ 304 $ 667 $ 502
Arizona 688 496 1,191 742
California 62 -- 70 --
------- ------- -------- -------
Total $ 1,117 $ 800 $ 1,928 $ 1,244
======= ======= ======== =======
AT AT
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
ASSETS:
Texas $ 92,024 $ 64,448
Arizona 69,026 58,758
California 29,749 12,321
Corporate 3,852 16,723
-------- --------
Total $194,651 $152,250
======== ========
10
<PAGE>
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 may
include, but are not limited to, projections of revenues, income or loss,
capital expenditures, plans for future operations, financing needs or plans, the
impact of inflation, the impact of changes in interest rates, plans relating to
our products or services, potential real property acquisitions, and new or
planned development projects, as well as assumptions relating to the foregoing.
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, 1998, including the
Notes to the Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," describe factors,
among others, that could contribute to or cause such differences. Additional
factors that could cause actual results to differ materially from those
expressed in such forward-looking statements are set forth in "Business" and
"Market for the Registrant's Common Stock and Related Stockholder Matters" in
our December 31, 1998 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding the
results of operations of Meritage and its subsidiaries for the three and six
months ended June 30, 1999 and June 30, 1998. All material balances and
transactions between Meritage and its subsidiaries have been eliminated. This
discussion should be read in conjunction with our Annual Report on Form 10-K for
the year ended December 31, 1998. In management's opinion, the data reflects all
adjustments, consisting of only normal recurring adjustments, necessary to
fairly present our financial position and results of operations for the periods
presented. The results of operations for any interim period are not necessarily
indicative of results expected for a full fiscal year. Comparative information
for June 30, 1998 has not been included for the California operations, which
were acquired in July 1998.
11
<PAGE>
HOME SALES REVENUE
Home sales revenue is the product of the number of units closed during the
period and the average sales price per unit. Comparative 1999 and 1998 housing
revenues follow (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, DOLLAR/UNIT PERCENTAGE JUNE 30, DOLLAR/UNIT PERCENTAGE
------------------- INCREASE INCREASE ------------------- INCREASE INCREASE
1999 1998 (DECREASE) (DECREASE) 1999 1998 (DECREASE) (DECREASE)
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL
Dollars $76,647 $55,608 $21,039 37.8% $127,953 $92,122 $35,831 38.9%
Units closed 374 323 51 15.8% 631 528 103 19.5%
Average sales price $ 204.9 $ 172.2 $ 32.7 19.0% $ 202.8 $ 174.5 $ 28.3 16.2%
TEXAS
Dollars $42,461 $36,171 $ 6,290 17.4% $ 72,795 $58,847 $13,948 23.7%
Units closed 275 266 9 3.4% 475 426 49 11.4%
Average sales price $ 154.4 $ 136.0 $ 18.4 13.5% $ 153.3 $ 138.1 $ 15.2 11.0%
ARIZONA
Dollars $30,056 $19,437 $10,619 54.6% $ 49,684 $33,275 $16,409 49.3%
Units closed 88 57 31 54.4% 141 102 39 38.2%
Average sales price $ 341.5 $ 341.0 $ .5 * $ 352.4 $ 326.2 $ 26.2 8.0%
CALIFORNIA
Dollars $ 4,130 N/A N/A N/A $ 5,474 N/A N/A N/A
Units closed 11 N/A N/A N/A 15 N/A N/A N/A
Average sales price $ 375.5 N/A N/A N/A $ 364.9 N/A N/A N/A
</TABLE>
* - less than 1%
The increase in revenues and number of units closed in 1999 compared to
1998 resulted mainly from our strong market performance in Arizona and Texas,
the addition of the California operations and an increase in closings of homes
in higher priced communities.
GROSS PROFIT
Gross profit is home sales revenue, net of housing cost of sales. Housing
cost of sales includes developed lot costs, unit construction costs,
amortization of common community costs (such as the cost of model complexes and
architectural, legal and zoning costs), interest, sales tax, warranty,
construction overhead and closing costs. Comparative 1999 and 1998 housing gross
profit follows (dollars in thousands):
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1999 1998 INCREASE 1999 1998 INCREASE
---- ---- -------- ---- ---- --------
Dollars $15,837 $9,910 $5,927 $25,821 $16,797 $9,024
Percentage of housing
revenues 20.7% 17.8% 2.9% 20.2% 18.2% 2.0%
The dollar increase in gross profit for the three and six months ended June
30, 1999 over the prior year's periods is attributable to the increase in number
of units closed. The gross profit margin increased due to the continued strong
market performance in Texas and Arizona, along with increased closings in more
profitable Arizona communities.
12
<PAGE>
COMMISSIONS AND OTHER SALES COSTS
The increase in commissions and other sales costs in the second quarter and
first half of 1999 compared with the same periods of 1998 is based on higher
sales volume. Comparative 1999 and 1998 commissions and other sales costs
follows (dollars in thousands):
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1999 1998 INCREASE 1999 1998 INCREASE
------ ------ -------- ------ ------ --------
Total
Dollars $4,492 $2,554 $1,938 $7,908 $4,894 $3,014
Percentage of housing
revenues 5.9% 4.6% 1.3% 6.2% 5.3% .9%
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately $3.7 million (4.8%
of revenue) in the second quarter of 1999, as compared with approximately $2.3
million (4.1% of revenue) in 1998. The increase for the six months ended June
30, 1999 includes approximately $600,000 related to an employment agreement
buyout of a former managing director. Operating costs in the first half of 1999
are also higher as a percentage of revenue due to the increase in overhead
incurred related to expanding into California, and the start-up of our new
Meritage Division in Phoenix, Arizona.
OTHER INCOME
The increase in other income for the three and six month periods ended June
30, 1999, primarily is due to management fees earned by the California division
and an increase in revenue from the mortgage operations in Texas.
RESIDUAL INTEREST AND REAL ESTATE LOAN INTEREST INCOME
In the second quarter of 1998, the remainder of our mortgage security
portfolio was sold for a gain of approximately $2.0 million. There will be no
residual interest or real estate loan interest income in 1999.
INCOME TAXES
The increase in income taxes to $3.8 million for the quarter ended June 30,
1999 from $546,000 in the prior year's period resulted from a higher effective
tax rate in the current year due to the utilization of the net operating loss
("NOL") carryforward for accounting purposes in 1998. In future periods we
expect to have an effective tax rate approximating the statutory federal and
state tax rates as our NOL carryforward is used or expires.
SALES CONTRACTS
Sales contracts for any period represent the number of homes ordered by
customers (net of cancellations) multiplied by the average sales price per unit
ordered. Comparative 1999 and 1998 sales contracts follow (dollars in
thousands):
13
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, DOLLAR/UNIT PERCENTAGE JUNE 30, DOLLAR/UNIT PERCENTAGE
------------------- INCREASE INCREASE ------------------- INCREASE INCREASE
1999 1998 (DECREASE) (DECREASE) 1999 1998 (DECREASE) (DECREASE)
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL
Dollars $92,304 $74,158 $ 18,146 24.5% $191,722 $160,141 $ 31,581 19.7%
Units ordered 495 382 113 29.6% 1,050 887 163 18.4%
Average sales price $ 186.5 $ 194.1 $ (7.6) (3.9)% $ 182.6 $ 180.5 $ 2.1 1.2%
TEXAS
Dollars $53,285 $39,686 $ 13,599 34.3% $116,967 $ 98,446 $ 18,521 18.8%
Units ordered 346 275 71 25.8% 777 700 77 11.0%
Average sales price $ 154.0 $ 144.3 $ 9.7 6.7% $ 150.5 $ 140.6 $ 9.9 7.0%
ARIZONA
Dollars $26,249 $34,472 $ (8,223) (23.9)% $ 53,595 $ 61,695 $ (8,100) (13.1)%
Units ordered 113 107 6 5.6% 212 187 25.0 13.4%
Average sales price $ 232.3 $ 322.2 $ (89.9) (27.9)% $ 252.8 329.9 $ (77.1) (23.4)%
CALIFORNIA
Dollars $12,770 N/A N/A N/A $ 21,160 N/A N/A N/A
Units Ordered 36 N/A N/A N/A 61 N/A N/A N/A
Average sales price $ 354.7 N/A N/A N/A $ 346.9 N/A N/A N/A
</TABLE>
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 of less than 20% of gross sales. Total sales
contracts increased in 1999 compared to 1998 due mainly to the expansion into
California and the economic strength of all of our operating markets,
particularly Texas. Average sales prices in Arizona are decreasing as the
percentage of lower-priced homes sold by our new Meritage Homes of Arizona
division increases.
NET SALES BACKLOG
Backlog represents net sales contracts that have not closed. Comparative
1999 and 1998 net sales backlog follows (dollars in thousands):
AT JUNE 30, DOLLAR/UNIT
--------------------- INCREASE PERCENTAGE
1999 1998 (DECREASE) (DECREASE)
-------- -------- -------- --------
TOTAL
Dollars $219,355 $166,982 $ 52,373 31%
Units in backlog 1,107 831 276 33%
Average sales price $ 198.2 $ 200.9 $ (2.7) (1)%
TEXAS
Dollars $123,999 $ 81,617 $ 42,382 52%
Units in backlog 805 578 227 39%
Average sales price $ 154.0 $ 141.2 $ 12.8 9%
ARIZONA
Dollars $ 77,933 $ 85,365 $ (7,432) (9)%
Units in backlog 251 253 (2) (1)%
Average sales price $ 310.5 $ 337.4 $ (26.9) (8)%
CALIFORNIA
Dollars $ 17,423 N/A N/A N/A
Units in backlog 51 N/A N/A N/A
Average sales price $ 341.6 N/A N/A N/A
14
<PAGE>
Total dollar backlog at June 30, 1999 increased 31% over the prior 1998
period due to a corresponding increase in units in backlog. Units in backlog at
June 30, 1999 increased 33% over the same period in the prior year due to the
increase in net orders caused by expansion into California and strong housing
markets in which we operate. The average sales price of homes in backlog in
Arizona is decreasing as the percentage of lower-priced homes sold by our new
Meritage Homes of Arizona division increases.
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, 1999 we had short-term secured revolving construction loan
facilities totaling $130 million and had $24.5 million in acquisition and
development facilities, of which approximately $48.4 and $8.3 million were
outstanding, respectively. An additional $14.6 million of unborrowed funds
supported by approved collateral were available under our credit facilities at
that date. We also have $15 million outstanding in unsecured, senior
subordinated notes due September 15, 2005, which were issued in October 1998.
Management believes that the current borrowing capacity, cash on hand at
June 30, 1999 and anticipated cash flows from operations are sufficient to meet
our 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 subordinated
notes and by the covenants and other terms of our credit agreements.
YEAR 2000 COMPLIANCE
The year 2000 presents potential concerns for business computing due to
calculation problems from the use of a two-digit format as the year changes from
1999 to 2000. The problem affects certain computer software, hardware, and other
systems containing processors and embedded chips. Consequently, information
technology ("IT") systems and non-IT systems (collectively, "business systems")
may not be able to accurately process certain transactions before, during, or
after January 1, 2000. As a result, business and governmental agencies are at
risk for potential disruption from business systems malfunctions or failures.
This is commonly referred to as the Year 2000 ("Y2K") issue. We could be
impacted by failures of our own business systems as well as those of our
suppliers and business partners, and we have implemented our Y2K compliance
program that consisted of business systems identification, testing and
remediation, assessments of critical suppliers, and contingency planning.
The compliance program's first component was the identification of our
business systems for purposes of evaluating which systems are Y2K compliant and
which will be replaced or remediated. This phase is complete.
The second part of the program is the evaluation and replacement or
remediation of our business systems that are not Y2K compliant. We have
converted to new versions of substantially all of our homebuilding database
systems and our replacement or remediation program is substantially complete.
We have identified critical suppliers and business partners ("key business
partners") and we are taking steps to determine their Y2K readiness. These steps
include interviews and other types of inquiries. Because of the number of
business systems used by key business partners and the varying levels of Y2K
readiness, it is difficult to assess the likelihood and impact of a malfunction
due to this issue. We are not currently aware of any business relationships with
key business partners that we believe will likely result in a significant
disruption of our business. However, a Y2K failure could occur and have an
adverse impact on us. Management currently believes that our greatest risk is
with suppliers, banking and financial institutions, and suppliers of
telecommunications services, all of which are operating within the United
States. Potential consequences of Meritage or its key business partners having
business systems that are not Y2K compliant include delays in receiving
homebuilding components and supplies.
15
<PAGE>
Concurrent with the remediation and evaluation of our business systems and
those of our key business partners, we have developed contingency plans to
decrease the risks that could occur in the event of a Y2K related business
disruption. Contingency plans include increasing the level of homebuilding
components, securing additional financing or other actions management deems
advisable. Estimated costs associated with developing and implementing
contingency measures are expected to be minimal.
The remediation and testing of our business systems has cost approximately
$160,000. These costs have been expensed in the period incurred and funded
through cash flows from operations. The future financial impact is not expected
to be material to our financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not trade in derivative financial instruments and at June 30, 1999
had no significant derivative financial instruments. We do have other financial
instruments in the form of notes payable and senior debt, which are at fixed
interest rates. 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.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1999, we held our 1999 Annual Meeting of Shareholders, at which John
R. Landon, Robert G. Sarver and C. Timothy White were elected as Class II
Directors to serve for a two-year term which expires at the Annual Meeting of
Shareholders in 2001. Voting results for these nominees are summarized as
follows:
VOTES VOTES
FOR WITHHELD
--------- --------
John R. Landon 5,159,091 22,950
Robert G. Sarver 5,158,791 23,250
C. Timothy White 5,157,715 24,326
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT PAGE OR
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
27 Financial Data Schedule Filed herewith
99 Private Securities Reform Act Filed herewith
of 1995 Safe Harbor Compliance
Statement for Forward-Looking
Statements
(b) REPORTS ON FORM 8-K
No reports on form 8-K were filed during the quarter ended June 30,
1999.
16
<PAGE>
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 16th
day of August 1999.
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
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,084,225
<SECURITIES> 0
<RECEIVABLES> 1,774,219
<ALLOWANCES> 0
<INVENTORY> 147,191,665
<CURRENT-ASSETS> 172,994,107
<PP&E> 6,399,391
<DEPRECIATION> 2,595,470
<TOTAL-ASSETS> 194,651,451
<CURRENT-LIABILITIES> 42,031,280
<BONDS> 72,666,108
0
0
<COMMON> 54,709
<OTHER-SE> 79,746,644
<TOTAL-LIABILITY-AND-EQUITY> 194,651,451
<SALES> 127,953,068
<TOTAL-REVENUES> 127,953,068
<CGS> 102,132,361
<TOTAL-COSTS> 7,907,859
<OTHER-EXPENSES> 5,790,623
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,679
<INCOME-PRETAX> 12,119,546
<INCOME-TAX> 5,253,701
<INCOME-CONTINUING> 6,865,845
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,865,645
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.14
</TABLE>
EXHIBIT 99
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"), Congress encouraged public companies to make "forward-looking
statements"(1) by creating a safe-harbor to protect companies from securities
law liability in connection with forward-looking statements. Meritage intends to
qualify both its written and oral forward-looking statements for protection
under the PSLRA.
To qualify oral forward-looking statements for protection under the PSLRA,
a readily available written document must identify important factors that could
cause actual results to differ materially from those in the forward-looking
statements. Meritage provides the following information in connection with its
continuing effort to qualify forward-looking statements for the safe harbor
protection of the PSLRA.
Important factors currently known to management that could cause actual
results to differ materially from those in forward-looking statements include,
but are not limited to, the following: (i) changes in national and local
economic and other conditions, such as employment levels, availability of
mortgage financing, interest rates, consumer confidence, and housing demand;
(ii) risks inherent in homebuilding activities, including delays in construction
schedules, cost overruns, changes in government regulation, increases in real
estate taxes and other local fees; (iii) changes in costs or availability of
land, materials, and labor; (iv) fluctuations in real estate values; (v) the
timing of home closings and land sales; (vi) Meritage's ability to continue to
acquire additional land or options to acquire additional land on acceptable
terms; (vii) a relative lack of geographic diversification of Meritage's
operations, especially when real estate analysts are predicting that new home
sales in certain markets may slow during 1999; (viii) Meritage's inability to
obtain sufficient capital on terms acceptable to Meritage to fund its planned
capital and other expenditures; (ix) changes in local, state and federal rules
and regulations governing real estate development and homebuilding activities
and environmental matters, including "no growth" or "slow growth" initiatives,
building permit allocation ordinances and building moratoriums; (x) expansion by
Meritage into new geographic or product markets in which Meritage has little or
no operating experience; (xi) the inability of Meritage to identify acquisition
candidates that will result in successful combinations; (xii) the failure of
Meritage to make acquisitions on terms acceptable to Meritage, or to
successfully integrate acquired operations, into Meritage; and (xiii) the loss
of key employees of the Company, including Steven J. Hilton and John R. Landon.
Forward-looking statements express expectations of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to these
inherent uncertainties, the investment community is urged not to place undue
reliance on forward-looking statements. In addition, Meritage undertakes no
obligations to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of anticipated events or changes to projections over
time.
(1) "Forward-looking statements" can be identified by use of words such as
"expect," "believe," "estimate," "project," "forecast," "anticipate,"
"plan," and similar expressions.
