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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 26, 1999; 5,425,830 shares of Meritage Corporation common stock were
outstanding.
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<PAGE>
MERITAGE CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998...................................... 3
Consolidated Statements of Earnings for the Three
Months ended March 31, 1999 and 1998....................... 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 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
ITEMS 1-5. Not Applicable.......................................... 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)
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents $ 7,381,677 $ 12,386,806
Real estate under development 128,443,722 104,758,530
Deposits on real estate under option or contract 9,563,461 7,338,406
Other receivables 2,255,924 2,460,966
Deferred tax asset 5,721,000 6,935,000
Goodwill 19,541,959 14,640,712
Property and equipment, net 3,123,821 2,566,163
Other assets 770,279 1,163,737
------------ ------------
Total Assets $176,801,843 $152,250,320
============ ============
LIABILITIES
Accounts payable and accrued liabilities $ 26,540,039 $ 34,068,178
Home sale deposits 11,410,100 8,587,245
Notes payable 63,943,196 37,204,845
Minority interest in consolidated joint ventures 144,767 110,922
------------ ------------
Total Liabilities 102,038,102 79,971,190
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share;
50,000,000 shares authorized; issued
and outstanding - 5,425,830 shares at
March 31, 1999, and 5,334,942 shares
at December 31, 1998 54,258 53,349
Additional paid-in capital 99,478,329 99,319,669
Accumulated deficit (24,768,846) (27,093,888)
------------ ------------
Total Stockholders' Equity 74,763,741 72,279,130
------------ ------------
Total Liabilities and Stockholders' Equity $176,801,843 $152,250,320
============ ============
See accompanying notes to consolidated financial statements
3
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MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLDIATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------
1999 1998
------------ ------------
Home sales revenue $ 51,306,197 $ 36,513,344
Cost of home sales (41,322,288) (29,625,935)
------------ ------------
Gross profit 9,983,909 6,887,409
Commissions and other sales costs (3,415,817) (2,340,485)
General and administrative expense (3,146,047) (1,908,458)
Interest expense (835) (80,315)
Other income, net 363,832 39,788
Residual interest and real estate loan
interest income -- 3,203,759
------------ ------------
Earnings before income taxes 3,785,042 5,801,698
Income taxes (1,460,000) (350,000)
------------ ------------
Net earnings $ 2,325,042 $ 5,451,698
============ ============
Basic earnings per share $ .43 $ 1.03
============ ============
Diluted earnings per share $ .38 $ .90
============ ============
See accompanying notes to consolidated financial statements
4
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MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,325,042 $ 5,451,698
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 458,978 264,691
Deferred tax expense 1,214,000 --
Stock option compensation expense 148,329 345,442
Gain on sales of residual interests -- (3,156,610)
Increase in real estate under development (23,685,192) (8,323,751)
Increase in deposits on real estate under
option or contract (2,225,055) (1,845,105)
(Increase) decrease in other receivables
and other assets 598,500 (272,611)
Decrease in accounts payable and accrued
liabilities (12,662,320) (10,488,721)
Increase in home sale deposits 2,822,855 3,361,273
------------ ------------
Net cash used in operating activities (31,004,863) (14,663,694)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (749,857) (113,114)
Proceeds from sales of residual interest -- 4,550,000
------------ ------------
Net cash provided by (used in) investing
activities (749,857) 4,436,886
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 66,203,003 25,082,125
Repayment of borrowings (39,464,652) (17,725,879)
Stock options exercised 11,240 296,366
------------ ------------
Net cash provided by financing activities 26,749,591 7,652,612
------------ ------------
Net decrease in cash and cash equivalents (5,005,129) (2,574,196)
Cash and cash equivalents at beginning of period 12,386,806 8,245,392
------------ ------------
Cash and cash equivalents at end of period $ 7,381,677 $ 5,671,196
============ ============
See accompanying notes to consolidated financial statements
5
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MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Meritage Corporation ("Meritage" or the "Company") develops, constructs and
sells new high-quality, single family homes in the semi-custom luxury, move-up
and entry-level markets. The Company operates in the Phoenix and Tucson, Arizona
metropolitan markets under the Monterey Homes and Meritage Homes of Arizona
brand names, in the Dallas/Fort Worth, Austin and Houston, Texas markets as
Legacy Homes and in the San Francisco Bay and Sacramento, California markets as
Meritage Homes of Northern California. Meritage has recently undergone
significant growth and is pursuing a strategy of expanding the geographic scope
of its 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. March 31, 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 the Company's 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):
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
Homes under contract, in production $ 60,654 $ 44,186
Finished lots and lots under development 52,837 46,558
Model homes and homes held for resale 14,953 14,015
-------- --------
$128,444 $104,759
======== ========
Meritage capitalizes 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):
MARCH 31,
-------------------------
1999 1998
------- -------
Beginning unamortized capitalized interest $ 1,982 $ 1,890
Interest capitalized 1,089 628
Amortized in cost of home sales (811) (444)
------- -------
Ending unamortized capitalized interest $ 2,260 $ 2,074
======= =======
Interest incurred $ 1,090 $ 708
Interest capitalized (1,089) (628)
------- -------
Interest expense $ 1 $ 80
======= =======
6
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MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3 - NOTES PAYABLE
Notes payable consist of the following (in thousands):
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
$50 million bank construction line of credit,
interest payable monthly approximating prime
(7.75% at March 31, 1999) or LIBOR (30 day LIBOR
4.9% at March 31, 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 $18,061 $4,641
$70 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, 1999, secured by first
deeds of trust on homes 22,957 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 4,335 3,314
Other acquisition and development credit
facilities 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 2,676 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 914 918
------- -------
Total $63,943 $37,205
======= =======
7
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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 months ended March 31, 1999 and 1998 follows
(in thousands, except per share amounts):
1999 1998
------ ------
Net earnings $2,325 $5,452
Basic EPS - Weighted average shares outstanding 5,425 5,306
------ ------
Basic earnings per share $ .43 $ 1.03
====== ======
Basic EPS - Weighted average shares outstanding 5,425 5,306
Effect of dilutive securities:
Contingent shares and warrants 71 131
Stock options 563 641
------ ------
Dilutive EPS - Weighted average shares outstanding 6,059 6,078
------ ------
Diluted earnings per share $ .38 $ .90
====== ======
Antidilutive stock options not included in diluted EPS 282 10
====== ======
NOTE 5 -STERLING COMMUNITIES ACQUISITION
On June 15, 1998, Meritage signed a definitive agreement with Sterling
Communities, S.H. Capital, Inc., Sterling Financial Investments, Inc., Steve
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. The Company is 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.
Meritage used the purchase method of accounting and the purchase price was
allocated among the Company's 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 6 - INCOME TAXES
Components of income tax expense are (in thousands):
1999 1998
---- ----
Current taxes:
Federal $ 83 $ 89
State 163 261
------ ----
246 250
------ ----
Deferred taxes:
Federal 1,213 --
State 1 --
------ ----
1,214 --
------ ----
Total $1,460 $350
====== ====
Carryforwards
At March 31, 1999, Meritage had a federal net operating loss carryforward
of approximately $8.5 million. The carryforward will expire beginning in 2007.
NOTE 7 - SEGMENT INFORMATION
Meritage classifies its operations into three primary geographic segments:
Arizona, Texas and California. These segments generate revenues through the sale
of homes to external customers. Meritage is not dependent on any one major
customer.
Operational information relating to the different business segments
follows. March 31, 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. Meritage evaluates 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.
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- -------
(in thousands)
HOME SALES REVENUE:
Texas $ 30,334 $22,676
Arizona 19,628 13,837
California 1,344 --
-------- -------
Total $ 51,306 $36,513
======== =======
EBIT:
Texas $ 3,735 $ 3,012
Arizona 1,890 906
California (422) --
Corporate and other (606) 2,408
-------- -------
Total $ 4,597 $ 6,326
======== =======
AMORTIZATION OF CAPITALIZED INTEREST:
Texas $ 300 $ 198
Arizona 503 246
California 8 --
-------- -------
Total $ 811 $ 444
======== =======
9
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AT MARCH 31, AT DECEMBER 31,
1999 1998
---- ----
ASSETS:
Texas $ 81,342 $ 64,448
Arizona 65,133 58,758
California 21,608 12,321
Corporate 8,719 16,723
-------- --------
Total $176,802 $152,250
======== ========
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 1993, 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
Meritage's 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
Meritage's 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 the Company's 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 quarters ended
March 31, 1999 and March 31, 1998. All material balances and transactions
between Meritage and its subsidiaries have been eliminated. In management's
opinion, the data reflects all adjustments, consisting of only normal recurring
adjustments, necessary to fairly present the Company's financial position and
results of operations for the periods presented. Comparative information for
March 31, 1998 has not been included for the California operations, which were
acquired in July, 1998.
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):
10
<PAGE>
QUARTERS ENDED
MARCH 31, DOLLAR/UNIT PERCENTAGE
1999 1998 INCREASE INCREASE
---- ---- -------- --------
TOTAL
Dollars $51,306 $36,513 $14,793 41%
Units closed 257 205 52 25%
Average sales price $ 199.6 $ 178.1 $ 21.5 12%
TEXAS
Dollars $30,334 $22,676 $ 7,658 34%
Units closed 200 160 40 25%
Average sales price $ 151.7 $ 141.7 $ 10.0 7%
ARIZONA
Dollars $19,628 $13,837 $ 5,791 42%
Units closed 53 45 8 18%
Average sales price $ 370.3 $ 307.5 $ 62.8 20%
CALIFORNIA
Dollars $ 1,344 N/A N/A N/A
Units closed 4 N/A N/A N/A
Average sales price $ 336.0 N/A N/A N/A
The increase in revenues and number of units closed in 1999 compared to
1998 resulted mainly from Meritage's strong market performance in Texas and
Arizona, the addition of the California operations and an increase in closings
of homes in higher priced communities, especially in Arizona.
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):
QUARTERS ENDED
MARCH 31, DOLLAR/PERCENTAGE PERCENTAGE
1999 1998 INCREASE INCREASE
---- ---- -------- --------
Dollars $9,984 $6,887 $3,079 45%
Percent of housing revenues 19.5% 18.9% .6% 3%
The dollar increase in gross profit for the three months ended March 31,
1999 over the prior year period 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.
COMMISSIONS AND OTHER SALES COSTS
The increase in commissions and other sales costs in the first quarter of
1999 compared to the first quarter of 1998 is based on higher sales volume.
Comparative 1999 and 1998 commissions and other sales costs follows (dollars in
thousands):
11
<PAGE>
QUARTERS ENDED
MARCH 31, DOLLAR/PERCENTAGE PERCENTAGE
1999 1998 INCREASE INCREASE
---- ---- -------- --------
Dollars $3,415 $2,340 $1,075 46%
Percent of housing revenues 6.7% 6.4% .3% 5%
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately $3.1 million (6.1%
of revenue) in the first three months of 1999, as compared to approximately $1.9
million (5.2% of revenue in 1998, an increase of 63%. 1999 amounts include
charges of approximately $600,000 (1.2% of revenue) related to the employment
agreement buyout of a former Managing Director. Operating costs in 1999 are also
higher due to expenses from the expansion into California and increased
amortization of goodwill.
OTHER INCOME
The increase in other income primarily is due to management fees paid to
the California division by unconsolidated parties and an increase in revenue
from the mortgage operations in Texas.
RESIDUAL INTEREST AND REAL ESTATE LOAN INTEREST INCOME
In the first quarter of 1998, mortgage securities were sold for a gain of
approximately $3.2 million. The remainder of the mortgage security portfolio was
sold during the second quarter of 1998. There will be no residual interest or
real estate loan interest income in 1999.
INCOME TAXES
The increase in income taxes to $1,460,000 for the quarter ended March 31,
1999 from $350,000 in the prior year 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 the prior year. In future periods
Meritage expects to have an effective tax rate approximating the statutory
federal and state tax rates as its NOL carryforward is utilized 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):
QUARTERS ENDED DOLLAR/UNIT PERCENTAGE
MARCH 31, INCREASE INCREASE
1999 1998 (DECREASE) (DECREASE)
---- ---- ---------- ----------
TOTAL
Dollars $103,738 $85,973 $ 17,765 21%
Sales contracts 555 505 50 10%
Average sales price $ 186.9 $ 170.2 $ 16.7 10%
TEXAS
Dollars $ 64,356 $58,760 $ 5,596 10%
Units ordered 431 425 6 1%
Average sales price $ 149.3 $ 138.3 $ 11.0 8%
ARIZONA
Dollars $ 30,992 $27,213 $ 3,779 14%
Units ordered 99 80 19 24%
Average sales price $ 313.1 $ 340.2 $ (27.1) (8)%
CALIFORNIA
Dollars $ 8,390 N/A N/A N/A
Units ordered 25 N/A N/A N/A
Average sales price $ 335.6 N/A N/A N/A
12
<PAGE>
Meritage does not include sales contingent upon the sale of a customer's
existing home as a sales contract until the contingency is removed.
Historically, Meritage has 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 the
Company's operating markets.
NET SALES BACKLOG
Backlog represents net sales contracts that have not closed. Comparative
1999 and 1998 net sales backlog follows (dollars in thousands):
QUARTERS ENDED DOLLAR/UNIT PERCENTAGE
MARCH 31, INCREASE INCREASE
1999 1998 (DECREASE) (DECREASE)
---- ---- ---------- ----------
Total
Dollars $197,725 $148,435 $ 49,290 33%
Units in backlog 987 772 215 28%
Average sales price $ 200.3 $ 192.3 $ 8.0 4%
Texas
Dollars $111,199 $ 78,114 $ 33,085 42%
Units in backlog 734 569 165 29%
Average sales price $ 151.5 $ 137.3 $ 14.2 10%
Arizona
Dollars $ 77,743 $ 70,231 $ 7,512 11%
Units in backlog 227 203 24 12%
Average sales price $ 342.5 $ 346.0 $ (3.5) 1%
California
Dollars $ 8,783 N/A N/A N/A
Units in backlog 26 N/A N/A N/A
Average sales price $ 337.8 N/A N/A N/A
Total dollar backlog at March 31, 1999 increased 33% over the prior 1998
period due to a corresponding increase in units in backlog. Units in backlog at
March 31, 1999 increased 28% 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 Meritage operates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of working capital are land purchases, lot
development and home construction. Meritage uses a combination of borrowings and
funds generated by operations to meet its working capital requirements.
At March 31, 1999 Meritage had short-term secured revolving construction
loan facilities totaling $120 million and had $24.5 million in acquisition and
development facilities, of which approximately $41.0 and $7.9 million were
outstanding, respectively. An additional $9.4 million of unborrowed funds
supported by approved collateral were available under its credit facilities at
that date. Meritage also has $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
March 31, 1999 and anticipated cash flows from operations are sufficient to meet
liquidity needs for the foreseeable future. There is no assurance, however, that
future amounts available from the Company's sources of liquidity will be
sufficient to meet future capital needs. The amount and types of indebtedness
that Meritage incurs may be limited by the terms of the indenture governing its
senior subordinated notes and the credit agreements.
13
<PAGE>
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. Meritage could be
impacted by failures of its own business systems as well as those of its
suppliers and business partners, and is in the process of implementing its Y2K
compliance program that consists of business systems identification, testing and
remediation, assessments of critical suppliers, and contingency planning.
The compliance program's first component is the identification of
Meritage's 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 the Company's business systems that are not Y2K compliant.
Meritage has converted to new versions of substantially all of its homebuilding
database systems, which has reduced the scope of the compliance program. The
Company believes the replacement or remediation of the remaining systems will be
complete by June 1, 1999.
Meritage has identified critical suppliers and business partners ("key
business partners") and is 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. The Company is not currently aware of any business
relationships with key business partners that it believes will likely result in
a significant disruption of its business. However, a Y2K failure could occur and
have an adverse impact on the Company. Management currently believes its
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.
Concurrent with the remediation and evaluation of its business systems and
those of its key business partners, Meritage is developing contingency plans to
decrease the risks that could occur in the event of a Y2K related business
disruption. Contingency plans may 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 the Company's business systems will cost an
estimated $160,000. These costs are to be expensed in the period incurred and
funded through cash flows from operations. Expenses to date have approximated
$120,000. The financial impact is not expected to be material to the Company's
financial position or results of operations.
The scheduled completion dates and costs associated with the various
components of the Y2K compliance program described above are estimated and are
subject to change.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Meritage does not trade in derivative financial instruments and at March
31, 1999 had no significant derivative financial instruments. Meritage does have
other financial instruments in the form of notes payable and senior debt, which
are at fixed interest rates. Meritage's 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 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 of 1995 Filed herewith
Safe Harbor Compliance Statement for
Forward-Looking Statements
(b) REPORTS ON FORM 8-K
A current report on Form 8-K, dated March 23, 1999 was filed with
the Securities and Exchange Commission which related to William W.
Cleverly's resignation as a Managing Director. Mr. Cleverly continues to
serve as a director of the Company.
15
<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 14th
day of May 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
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 7,381,677
<SECURITIES> 0
<RECEIVABLES> 2,255,924
<ALLOWANCES> 0
<INVENTORY> 128,443,722
<CURRENT-ASSETS> 148,541,063
<PP&E> 5,509,839
<DEPRECIATION> 2,386,018
<TOTAL-ASSETS> 176,801,843
<CURRENT-LIABILITIES> 37,950,139
<BONDS> 63,943,196
0
0
<COMMON> 54,258
<OTHER-SE> 74,709,483
<TOTAL-LIABILITY-AND-EQUITY> 176,801,843
<SALES> 51,306,197
<TOTAL-REVENUES> 51,306,197
<CGS> 41,322,288
<TOTAL-COSTS> 3,415,817
<OTHER-EXPENSES> 2,782,215
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 835
<INCOME-PRETAX> 3,785,042
<INCOME-TAX> 1,460,000
<INCOME-CONTINUING> 2,325,042
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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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, such as Northern California; (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, such
as Northern California, 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.
