Filed Pursuant to Rule 424(B)(3)
File No. 333-15937
Prospectus
MERITAGE CORPORATION
71,684 WARRANTS
TO PURCHASE UP TO 86,520 SHARES OF COMMON STOCK
Meritage Corporation
6613 North Scottsdale Rd., Suite 200
Scottsdale, Arizona 85250
(480) 998-8700
We design, construct and sell single family homes ranging from entry-level to
semi-custom luxury homes in three large and growing Sunbelt states; Texas,
Arizona, and California. We have recently undergone significant growth and at
March 31, 2000, were actively selling homes in 46 communities. We pursue a
strategy of diversifying our product mix and the geographic scope of our
operations. The trading symbol for our common stock on the NYSE is "MTH." The
Warrants are not listed on any exchange or on NASDAQ and we do not expect any of
these Warrants to officially trade in any public market.
* Meritage Corporation was formerly known as Monterey Homes Corporation.
* The Warrants subject to this prospectus were acquired by certain holders as
a result of our December 1996 merger with Homeplex Mortgage Investments
Corporation.
* Specific terms of these Warrants are set forth in a warrant agreement and
certain provisions are highlighted in this prospectus.
* The total of all Warrants will amount to the ultimate purchase of up to
86,520 shares of Meritage common stock (subject to adjustment.)
* Each Warrant is exercisable for the purchase of 1.2069 shares of our common
stock at an exercise price of $4.0634 per warrant.
* The Warrants are offered by selling security holders only and we will not
receive any of the proceeds upon the sale or future exercise of these
Warrants.
* The Warrants are currently exercisable at any time from now until October
15, 2001, or earlier in certain events.
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This investment involves a high degree of risk. Before making an investment
in our securities, you should carefully consider certain risks described in
"Risk Factors" beginning on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
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June 30, 2000
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TABLE OF CONTENTS
Page
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ABOUT THIS PROSPECTUS..........................................................1
WHERE YOU CAN FIND MORE INFORMATION............................................2
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS...................3
PROSPECTUS SUMMARY.............................................................4
RISK FACTORS...................................................................6
USE OF PROCEEDS...............................................................10
THE MERGER BETWEEN HOMEPLEX AND MONTEREY......................................10
SELECTED FINANCIAL AND OPERATING DATA.........................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................12
BUSINESS OF MERITAGE..........................................................20
MANAGEMENT OF MERITAGE........................................................29
STOCK HELD BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT...........................34
CERTAIN TRANSACTIONS AND RELATIONSHIPS........................................36
DESCRIPTION OF CAPITAL STOCK..................................................36
PRICE OF WARRANTS AND COMMON STOCK; DIVIDEND POLICY...........................41
SELLING SECURITY HOLDERS......................................................42
PLAN OF DISTRIBUTION..........................................................43
LEGAL MATTERS.................................................................44
EXPERTS.......................................................................44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ..................................F-1
Prospective investors should rely only on information contained or referred
to in this prospectus. We have not authorized anyone, including any underwriter,
dealer or agent, to provide you with any information other than what is
contained in this prospectus. This prospectus is not an offer for any securities
other than those specifically referred to in this document. We are not making an
offer of these securities in any state where the offer is not permitted. The
information in this prospectus is complete and accurate as of its date.
ABOUT THIS PROSPECTUS
This prospectus relates to the offering from time to time by certain
holders (the "Selling Security Holders") of 71,684 warrants (the "Warrants") to
purchase up to 86,520 shares (the "Warrant Shares") of common stock, par value
$.01 per share, of Meritage Corporation, a Maryland corporation ("Meritage").
The Warrants were acquired by the Selling Security Holders in connection with
the merger, effective December 31, 1996, of the homebuilding operations of
various entities under the Monterey Homes name (collectively, "Monterey"), with
and into Homeplex Mortgage Investments Corporation, a Maryland corporation
("Homeplex"), with Homeplex surviving and changing its name to Monterey Homes
Corporation. See "The Merger between Homeplex and Monterey." On September 16,
1998, Monterey Homes Corporation changed its name to Meritage Corporation. Any
reference in this prospectus to "we," "our," or "Meritage" is meant to refer to
Meritage. The number of Warrant Shares obtainable upon exercise of the Warrants
is subject to increase or decrease under certain antidilution provisions. The
Warrants became exercisable on the effective date of the merger and will
continue to be exercisable at any time on or before to October 15, 2001, or
earlier upon the dissolution, liquidation or winding up of Meritage. Each
Warrant may be exercised for the purchase of 1.2069 shares of common stock at an
exercise price of $4.0634 per Warrant. See "The Merger between Homeplex and
Monterey - How the Merger Affected the Monterey Warrants" and "Description of
Capital Stock."
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The Warrants may be offered by the Selling Security Holders in transactions
in the over-the-counter market at prices obtainable at the time of sale or in
privately negotiated transactions at prices determined by negotiation. The
Selling Security Holders may effect such transactions by selling the Warrants to
or through securities broker-dealers, and those broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Security Holders or the purchasers of the Warrants for whom such
broker-dealers may act as agent or principal, or both (which compensation as to
a particular broker-dealer might be in excess of customary commissions).
Additionally, agents or dealers may acquire Warrants or interests in Warrants as
a pledgee and may later distribute the Warrants in that capacity. See "Selling
Security Holders" and "Plan of Distribution." The Selling Security Holders, the
brokers and dealers through whom sales of the Warrants are made and any agent or
dealer who distributes Warrants acquired as pledgee may be deemed "underwriters"
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), and any profits realized by them on the sale of the Warrants may be
considered to be underwriting compensation.
Meritage is not selling any of the Warrants and will not receive any of the
proceeds from the sale of the Warrants being offered by the Selling Security
Holders or from the exercise of any of the 71,684 Warrants. William W. Cleverly
and Steven J. Hilton (the "Monterey Stockholders") will receive proceeds of
$291,280 if all of the Warrants are exercised. See "Prospectus Summary" and "The
Merger between Homeplex and Monterey--How the Merger Affected the Monterey
Warrants." The cost of registering the Warrants is being borne by Meritage.
Our common stock is traded on the NYSE under the symbol "MTH." On May 1,
2000, the closing sale price for the common stock as reported by the NYSE was
$11.875 per share. See "Price of Common Stock; Dividend Policy." The Warrants
are not listed on any exchange or traded on any automated quotation system.
There is no market for the Warrants and no assurance can be given that a market
will develop. See "Risk Factors -- There is no Public Trading Market for the
Warrants and Investors May Lack Liquidity."
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission ("SEC")
post-effective amendment no. 4 to the registration statement on Form S-1
(together with all amendments and exhibits, the "registration statement") under
the Securities Act with respect to the securities offered by this prospectus.
This prospectus, which is a part of the registration statement, does not contain
all of the information in the registration statement because certain parts are
omitted in accordance with the rules and regulations of the SEC. For further
information with respect to us and the offering described in this prospectus,
reference is made to the entire registration statement.
We file annual, quarterly and current reports, proxy statements, and other
information with the SEC. The documents we have filed may be inspected and
copied at the SEC's public reference rooms at Room 1024, Judiciary Plaza, 450
Fifth Street N.W., Washington, D.C. 20549 and at the SEC's regional offices at
Seven World Trade Center, 13th Floor, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
these materials can be obtained from the SEC's Public Reference Section at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, and can also be
obtained electronically through the SEC's Electronic Data Gathering, Analysis
and Retrieval System at the SEC's internet web site (http://www.sec.gov). Our
common stock is listed on the NYSE and copies of the registration statement and
of our reports, proxy statements, and other information can also be inspected at
the offices of the NYSE at 20 Broad Street, 17th Floor, New York, New York
10005.
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SPECIAL NOTE OF CAUTION REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus, including those under the captions
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business of Meritage" may
constitute "forward-looking statements" within the meaning of federal securities
laws. Forward-looking statements are based on our management's beliefs,
assumptions, and expectations of our future economic performance, taking into
account the information currently available to them. These statements are not
statements of historical fact. Forward-looking statements involve many risks and
uncertainties that may cause our actual results, performance or financial
condition to be materially different from the expectations of future results,
performance or financial condition we express or imply in any forward-looking
statements. Some of the important factors that could cause our actual results,
performance or financial condition to differ materially from our expectations
are:
* The strength and competitive pricing environment of the single-family
housing market;
* Changes in the availability and pricing of residential mortgages,
including changes in interest rates;
* Changes in the availability and pricing of real estate in our markets;
* Changes in demand for our homes;
* Changes in the economy;
* The success of our marketing and promotional campaigns;
* Our ability to successfully integrate our operations with the
operations of any companies we may acquire;
* The degree, nature and intensity of competition with other
homebuilders; and
* Other factors described in this prospectus or the documents we file
with the SEC.
When used in our documents or other presentations, the words "anticipate,"
"believe," "estimate," "expect," "objective," "projection," "forecast," "goal"
or similar words may identify forward-looking statements. We qualify these
forward-looking statements entirely by the cautionary factors provided above and
elsewhere in this prospectus. Any forward-looking statements speak only as of
the date of this prospectus, and we do not intend to update or revise these
statements when changes occur after this date.
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PROSPECTUS SUMMARY
The following summary contains basic information about Meritage and this
offering. It may not contain all the information that is important to you. We
urge you to read the entire prospectus, including the risk factors and financial
statements, to find more detailed information.
OUR COMPANY
We design, build and sell single family homes in Texas, Arizona, and
California. We build move-up and semi-custom, luxury homes and operate in the
Dallas/Fort Worth, Austin and Houston, Texas, Phoenix and Tucson, Arizona, and
San Francisco and Sacramento, California metropolitan areas. We pursue a
strategy of diversifying our product mix and the geographic scope of our
operations.
We were originally formed as a real estate investment trust ("REIT") under
the name of Homeplex Mortgage Investments Corporation. Homeplex invested in
mortgage-related assets and selected real estate loans. On December 31, 1996, we
acquired, by merger between Homeplex and Monterey, the homebuilding operations
of various entities under the Monterey Homes name, which had been a homebuilder
in Arizona for over 10 years. We essentially discontinued our mortgage-related
operations to focus principally on the business of homebuilding and changed our
name to Monterey Homes Corporation. Following the merger, the management of
Monterey assumed effective management control of the combined entity.
As part of our strategy to diversify our homebuilding operations, on July
1, 1997, we combined with Legacy Homes, a group of entities with homebuilding
operations in Texas. Legacy, in business since 1987, designs, builds, and sells
entry-level and move-up homes. In connection with the acquisition, John R.
Landon, the founder and Chief Executive Officer of the Legacy Homes entities,
joined senior management and the Board of Directors of Meritage, and continues
to oversee the operations of Legacy Homes.
In July 1998, we acquired Sterling Communities and related companies, a
first and second-time move-up homebuilder in northern California. We have
continued Sterling's operations under the name Meritage Homes of Northern
California and operate primarily in the San Francisco Bay and Sacramento areas.
In connection with the acquisition, Steve Hafener, an officer and director of
Sterling, joined Meritage as Vice President and Division Manager of our northern
California operations.
In September 1998, we changed our corporate name to Meritage Corporation.
Monterey Homes is used as our primary brand name in Arizona, with the Meritage
Homes name being used for our newly established lower priced division in the
Phoenix area. Legacy Homes is the brand name for our homes in the Texas markets
and Meritage Homes of Northern California is our brand name in our northern
California markets.
We are a Maryland corporation with our headquarters in Scottsdale, Arizona.
Our principal executive offices are located at 6613 North Scottsdale Road, Suite
200, Scottsdale, Arizona 85250, and our telephone number is (480) 998-8700.
In connection with the merger between Homeplex and Monterey, we effected,
and all share information herein reflects, a one-for-three reverse stock split.
For additional information concerning our business, see "Business of
Meritage," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the financial statements (including the notes to the
financial statements) included at the back of this prospectus.
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THE OFFERING
Securities Offered......... 71,684 Warrants which will entitle the holders to
purchase a total of up to 86,520 shares of common
stock, subject to adjustment under certain
antidilution provisions.
Warrants Outstanding....... 71,684 Warrants are currently outstanding, all of
which are subject to this prospectus.
Common Stock
Outstanding................ As of May 1, 2000, 5,563,796 shares of our common
stock were outstanding.
Use of Proceeds............ We will not receive any proceeds from the sale of
the Warrants or from the exercise of the Warrants.
Upon the exercise of all of the Warrants, we will
remit the exercise price of $4.0634 per Warrant
(subject to adjustment), or total gross proceeds
of approximately $291,280 if all of the Warrants
are exercised, to Messrs. William W. Cleverly and
Steven J. Hilton. See "Use of Proceeds" and "The
Merger between Homeplex and Monterey."
DESCRIPTION OF WARRANTS
Expiration of Warrants..... October 15, 2001 or earlier upon the dissolution,
liquidation, or winding up of our operations (the
"Expiration Date").
Exercise................... Each Warrant entitles the holder to purchase
1.2069 shares of common stock for $4.0634 (subject
to adjustment). The Warrants may be exercised at
any time on or prior to the Expiration Date.
Adjustments................ The number of shares of common stock for which a
Warrant is exercisable and the purchase price
provided in the Warrant are subject to adjustment
from time to time upon certain events, including
certain issuances of our stock, options, or other
securities, liquidating distributions, and certain
subdivisions, combinations, and reclassifications
of our common stock. A Warrant does not entitle
the holder to receive any dividends paid on common
stock.
For additional information concerning the Warrants and the Warrant Shares,
see "Description of Capital Stock."
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RISK FACTORS
Our future operating results and financial condition depend on our ability
to successfully design, develop, construct and sell homes that satisfy dynamic
customer demand patterns. Inherent in this process are a number of factors that
we must successfully manage to achieve favorable future operating results and
financial condition. The value of our securities, including the Warrants and the
Warrant Shares, could be affected by these and other risk factors. Potential
risks and uncertainties that could affect our operating results and financial
condition and the value of our common stock and the Warrants include the factors
discussed below.
FACTORS RELATING TO FUTURE STOCK PERFORMANCE
In addition to the industry and business factors described below, other
factors may affect the value or future market prices of our common stock and the
Warrants, including the following:
THERE IS NO PUBLIC TRADING MARKET FOR THE WARRANTS AND INVESTORS MAY LACK
LIQUIDITY
We have not applied and do not intend to apply for the listing or admission
of the Warrants on any securities exchange or in the NASDAQ Stock Market. We
cannot assure you that any market for the Warrants will ever develop or that
holders will be able to readily transfer the Warrants.
OUR STOCK PRICE MAY BE VOLATILE
The market price of our common stock could be subject to significant
fluctuations in response to certain factors, such as variations in anticipated
or actual results of our operations or that of other home building companies,
changes in conditions affecting the general economy or the local economies where
our operations are located, widespread industry trends and securities analysts'
reports, as well as other factors unrelated to our actual operating results or
financial condition.
INDUSTRY AND BUSINESS FACTORS
We face certain industry related risks. While some may affect all industry
participants, we believe each should be understood before investing in our
securities. These industry risks include:
* market cycles;
* competition;
* interest rates and mortgage financing conditions;
* tax treatment;
* extent of geographic diversification; and
* extent of expansion opportunities.
These factors are described in more detail below.
ECONOMIC CYCLES AND CHANGING CONSUMER PREFERENCES MAY ADVERSELY AFFECT OUR
PERFORMANCE OR FINANCIAL CONDITION
The homebuilding industry is cyclical and is affected by numerous factors,
including general and local economic factors and consumer demand and demographic
trends. These factors dictate the strength of our markets and consequently can
impact our operating results and the value of our securities. There can be no
assurance that we will be able to compete successfully against other
homebuilders in our current markets in more competitive business environments.
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COMPETITION IS INTENSE IN THE HOMEBUILDING INDUSTRY AND MAY ADVERSELY IMPACT OUR
OPERATING RESULTS
The single-family residential housing industry is highly competitive.
Homebuilders vie for desirable properties, financing, raw materials, and skilled
labor. We compete for residential home sales with other developers and
individual resales of existing homes. Competitors include large home building
companies, some of which have greater financial resources than Meritage, and
smaller homebuilders, who may have lower operating costs. Competition is
expected to continue and become more intense, and there may be new entrants in
the markets in which we currently operate and in markets that we may enter in
the future.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND ADVERSELY AFFECT OUR STOCK
PRICE
We have historically experienced, and expect to continue to experience,
variability in home sales and net earnings on a quarterly basis. As a result of
this variability, our historical performance may not be a meaningful indication
of future results. Factors that contribute to this variability include:
* timing of home deliveries and land sales;
* our ability to continue to acquire land and options to acquire land on
acceptable terms;
* conditions of the real estate market, the general economy and the
local and regional economies where we operate;
* the cyclical nature of the homebuilding industry;
* costs or shortages of materials and labor; and
* delays in construction schedules due to strikes, adverse weather, acts
of God, the availability of subcontractors and governmental
restrictions.
INTEREST RATES AND MORTGAGE FINANCING CONDITIONS AFFECT THE DEMAND FOR OUR HOMES
AND COULD NEGATIVELY IMPACT OUR BUSINESS
We believe that many of our move-up and luxury home customers have been
less sensitive to interest rate fluctuation and mortgage financing requirements
than some other homebuyers. However, many purchasers of our homes finance their
acquisition through third-party lenders providing mortgage financing. In
general, housing demand is adversely affected by increases in interest rates,
housing costs, and the availability of mortgage financing. If mortgage interest
rates increase or financing conditions change, the ability of prospective buyers
to finance home purchases may consequently be adversely affected, and our home
sales, gross margins and net income may be adversely impacted. Such adverse
impact may be material to our operating results. Our homebuilding activities
depend upon the availability and costs of mortgage financing for buyers of homes
owned by potential customers as many of our customers, particularly move-up
buyers, need to sell their original homes in order to purchase one of ours. Any
limitations or restrictions on the availability of such financing could
adversely affect home sales.
INCOME TAX CHANGES REDUCING HOMEOWNER TAX BENEFITS COULD DECREASE DEMAND FOR OUR
HOMES AND ADVERSELY AFFECT OUR BUSINESS
Changes in federal income tax laws may also affect demand for new homes.
Various publicly discussed proposals propose to limit mortgage interest
deductions and eliminate or limit tax-free rollover treatment. Enactment of such
proposals may have an adverse effect on the homebuilding industry in general,
and on demand for our products in particular. No prediction can be made whether
any such proposals will be enacted and, if enacted, the particular form such
laws would take.
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OUR LACK OF GEOGRAPHIC DIVERSIFICATION MAKES US VULNERABLE TO LOCAL ECONOMIES
We operate in seven metropolitan areas in Arizona, Texas, and California.
Lack of geographic diversification could have an adverse impact on our
operations and the value of our securities if our homebuilding markets stagnate
or decline, for there may not be a balancing opportunity in a healthier market
in other geographic regions. While we may continue to expand geographically, we
nevertheless are exposed to the risk that our current markets may weaken and be
unable to support our expansion.
OUR SUCCESS MAY DEPEND ON OUR EXPANSION OPPORTUNITIES AND THE INABILITY TO
EXPAND MAY ADVERSELY AFFECT OUR BUSINESS
We expanded into the California market in 1998 and may continue to consider
growth in other areas of the country. The magnitude, timing, and nature of any
future expansion will depend on a number of factors, including:
* suitable acquisition candidates;
* the negotiation of acceptable terms;
* our financial capabilities; and
* general economic and business conditions.
New acquisitions may result in the incurrence of additional debt and/or
amortization of expenses related to goodwill and intangible assets. This
additional debt and/or amortization could adversely affect our profitability or
result in potentially dilutive issuances of our equity securities. Acquisitions
also involve numerous risks, including difficulties in the assimilation of the
acquired company's operations, the diversion of management's attention from
other business concerns, risks of entering markets in which we have had no or
only limited experience, and the potential loss of key employees of the acquired
company. There can be no assurance that we will be able to expand into new
markets on a profitable basis or that we can successfully manage our expansion
into California or any additional markets.
WE ARE DEPENDENT ON EXTERNAL FINANCING TO FUND OUR OPERATIONS
The homebuilding industry is capital intensive and requires significant
up-front expenditures to acquire land and begin development. Accordingly, we
incur substantial indebtedness to finance our homebuilding activities. At
December 31, 1999, our debt totaled approximately $85.9 million. We may be
required to seek additional capital in the form of equity or debt financing from
a variety of potential sources, including bank financing and securities
offerings. Also, lenders are increasingly requiring developers to invest
significant amounts of equity in a project both in connection with origination
of new loans as well as the extension of existing loans. If we cannot obtain
sufficient capital to fund our planned capital or other expenditures, new
projects may be delayed or abandoned, which could result in a reduction in home
sales and may adversely affect operating results. There is no assurance that
additional debt or equity financing will be available in the future or on
acceptable terms.
The terms and conditions of our current indebtedness limit the amount and
types of indebtedness that we can incur. We must comply with numerous operating
and financial maintenance covenants and there is no assurance that we will be
able to maintain compliance with these financial and other covenants. Failure to
comply with the covenants would result in default and resulting cross defaults
under our other indebtedness, and could result in an acceleration of all
indebtedness, which would have a material adverse affect on us.
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REAL ESTATE VALUE FLUCTUATIONS MAY ADVERSELY AFFECT OUR OPERATIONS AND FINANCIAL
CONDITION
The homebuilding industry is subject to significant volatility and
fluctuations in real estate values. This volatility has been evident in cyclical
real estate price changes which have occurred in Texas, Arizona, and California.
Although we believe that our projects are currently reflected on our balance
sheet at appropriate values, we may have to write-down some or all of our
projects if market conditions deteriorate. These write-downs may materially
adversely affect our operations and the value of our securities. In addition,
these write-downs could cause us to default on current debt obligations.
REGULATIONS AND ENVIRONMENTAL CONDITIONS MAY INCREASE OUR COSTS AND ADVERSELY
AFFECT OUR BUSINESS
We are subject to many local, state, and federal laws and regulations
governing certain developmental matters, as well as building and site design. We
are also subject to various fees and charges of governmental authorities
designed to defray the cost of providing certain governmental services and
improvements. We may become subject to additional costs and delays or may be
precluded entirely from developing communities due to building moratoriums,
"slow growth" or "no growth" initiatives, building permit ordinances, or similar
governmental regulations that could be implemented in the future. Because most
of our current land is entitled, construction moratoriums generally would only
adversely affect us due to health, safety, welfare or environmental concerns. We
must also obtain licenses, permits, and approvals from government agencies to
engage in certain activities, the granting or receipt of which are beyond our
control.
Meritage and its competitors are also subject to a variety of local, state,
and federal statutes, ordinances, rules, and regulations concerning the
protection of health and the environment. Environmental laws or permit
restrictions may result in project delays, may cause substantial compliance and
other costs, and may prohibit or severely restrict development in certain
environmentally sensitive regions or areas. Environmental regulations may also
have an adverse impact on the availability and price of certain raw materials,
such as lumber.
WE COULD LOSE A MEMBER OF OUR SENIOR MANAGEMENT TEAM, WHICH COULD NEGATIVELY
IMPACT OUR OPERATIONS
Our success is largely dependent on the continuing services of certain key
persons, including Steven J. Hilton and John R. Landon, and the ability to
attract new personnel required to continue our development. We have entered into
employment agreements with Messrs. Hilton and Landon. Loss of the services of
these two officers, or certain other key personnel, could have a material
adverse affect on our operations and the value of our securities.
WE ARE DEPENDENT ON SUBCONTRACTORS AND THE FAILURE TO SECURE SATISFACTORY
SUBCONTRACTORS COULD ADVERSELY AFFECT OUR BUSINESS
We act only as a general contractor in the design, development, and
construction of our communities. Virtually all architectural and construction
work is performed by subcontractors. As a consequence, we are dependent upon the
continued availability and satisfactory performance of unaffiliated third
parties. We may not be able to secure satisfactory subcontractors in the future.
Failure to secure satisfactory subcontractors would have a material adverse
affect on our operations.
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USE OF PROCEEDS
We will not receive any proceeds from the sale of the Warrants by the
Selling Security Holders or from the exercise of the Warrants. Upon exercise of
the Warrants, we will remit the exercise price of $4.0634 per Warrant, or the
aggregate gross proceeds of approximately $291,280 if all of the remaining
Warrants are exercised, to the Monterey Stockholders.
THE MERGER BETWEEN HOMEPLEX AND MONTEREY
We were initially formed to operate as a REIT, investing in mortgage
related assets and selected real estate loans. We suffered significant losses
several years ago and determined to try to acquire a homebuilder that could
utilize our cash balances and other assets, as well as maximize our status as a
publicly traded entity. On September 13, 1996, we entered into an Agreement and
Plan of Reorganization by and among Homeplex, Monterey, and the Monterey
Stockholders. On December 31, 1996, Homeplex and Monterey were merged. As a
result of the merger, our status as a REIT was terminated, our name was changed
to Monterey Homes Corporation and our NYSE ticker symbol was changed to MTH. In
addition, a one-for-three reverse stock split of our issued and outstanding
common stock was effected. The share information contained in this prospectus
reflects the one-for-three reverse stock split. Following the merger, our
principal activity has been homebuilding.
HOW THE MERGER AFFECTED THE MONTEREY WARRANTS
Before the merger, Monterey had issued and outstanding warrants to purchase
133,334 shares of its common stock (the "Monterey warrants") at an exercise
price of $18.75 per share. The Monterey warrants represented approximately 16.5%
of the fully diluted capitalization of Monterey (809,259 shares). On the
effective date of the merger, the Monterey warrants were converted into the
Warrants based on a formula that would allow the holders to purchase a number of
shares of Meritage common stock determined by multiplying 133,334 by the ratio
of (i) the total number of shares of Homeplex issued in the merger (1,228,726
shares) divided by (ii) 809,259 (the "Warrant Conversion Ratio"). The exercise
price of the Warrants was adjusted by dividing the exercise price of the
Monterey warrants immediately prior to the merger by the Warrant Conversion
Ratio. In addition, the exercise price of the Warrants was adjusted by a factor
designed to compensate for certain distributions made to the Monterey
Stockholders prior to the merger. Following completion of audited financials for
the year ended December 31, 1996, we established the number of Warrants as
212,398. Each Warrant was exercisable for the purchase of 1.2069 shares of
common stock at an exercise price of $4.0634 per Warrant, or 256,345 shares
(including 16.5% of the Contingent Stock discussed below), approximating 16.5%
of both the original shares of Homeplex issued in the merger (and the Contingent
Stock).
Although all of the shares of Homeplex that were issued in connection with
the merger were issued in the names of the Monterey Stockholders (who held all
of the outstanding common stock of Monterey prior to the merger), we initially
held approximately 16.5%, or 256,345 (including 16.5% of the Contingent Stock
discussed below) of the shares issued in the names of the Monterey Stockholders
for release to holders of Warrants upon their exercise, and we will remit the
exercise price paid upon such exercises to the Monterey Stockholders. Upon
expiration of unexercised Warrants, we will distribute the appropriate amount of
remaining merger shares to the Monterey Stockholders The Monterey Stockholders
are entitled to vote the shares issued in their names in the merger but
allocated to the warrants, prior to the time the warrants are exercised.
Including the shares allocated to the Warrants, Mr. Cleverly owns 708,934 shares
or 12.7% of the outstanding common stock of Meritage and Mr. Hilton owns 705,601
shares or 12.7% (as of May 1, 2000). If all of the warrants are exercised, Mr.
Cleverly would own 665,674 shares or 12.0% of our outstanding common stock and
Mr. Hilton would own 662,341 shares or 11.9% of our outstanding common stock (as
of May 1, 2000). These numbers exclude the Employment Options and the Contingent
Stock described below.
10
<PAGE>
In addition to the shares of Homeplex issued in the merger, 266,666 shares
of common stock were reserved for issuance, subject to certain contingencies
relating to our common stock average trading price thresholds following the
merger (the "Contingent Stock"). As of September 5, 1997, each of the common
stock trading thresholds had been achieved. Therefore, the Monterey Shareholders
were issued 88,888 Shares in January 1998 and January 1999, and 88,890 in
January 2000. The employment of Mr. Cleverly with Meritage was terminated
effective as of March 18, 1999; however, his termination was considered to be
without cause, and it was acknowledged that he was vested in and would be
entitled to his portion of the remaining Contingent Stock on the date such
shares are to be delivered to him. Mr. Cleverly remains a consultant to Meritage
and a member of its Board of Directors.
11
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table presents selected historical consolidated financial
data for each of the years in the five-year period ended December 31, 1999 and
for the three-month periods ending March 31, 2000 and 1999. The annual data for
1996 through 1999 are derived from our Consolidated Financial Statements audited
by KPMG LLP, independent auditors. The annual data for 1995 is derived from the
Consolidated Financial Statements audited by Ernst & Young LLP, independent
auditors. The data for the quarterly periods ended March 31, 2000 and 1999 are
unaudited and, in management's opinion, reflects all adjustments, consisting of
only normally recurring adjustments, necessary to fairly present our financial
position and results of operations for the periods presented. For additional
information, see the Consolidated Financial Statements included elsewhere in
this prospectus. The following table should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and the Results of
Operations. These historical results may not be indicative of future results.
<TABLE>
<CAPTION>
Historical Consolidated Financial Data
(dollars in thousands, except for per share data)
Three-Month Periods
Ended March 31,
Years Ended December 31, (unaudited)
--------------------------------------------------- -----------------
1999 1998(3) 1997(4) 1996 1995 2000 1999
---- ------- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Home and land sales revenue $ 341,786 $ 257,113 $ 149,630 N/A N/A $ 92,410 $ 51,386
Cost of home and land sales (277,287) (205,188) (124,594) (75,637) (41,357)
--------- --------- --------- -------- ---------
Gross profit 64,499 51,925 25,036 16,773 10,029
Earnings from mortgage assets and
other income 2,065 5,982 5,435 $ 2,244 $ 3,564 $ 532 $ 318
Interest expense (6) (461) (165) (238) (868) (2) (1)
Commissions and other sales costs and
general and administrative expenses (34,343) (24,925) (15,107) (1,684) (1,599) (9,781) (6,561)
Minority interest in net income of
consolidated joint ventures -- (2,021) -- -- -- -- --
--------- --------- --------- ------- ------- -------- ---------
Earnings before income taxes and
extraordinary loss 32,215 30,500 15,199 322 1,097 7,523 3,785
Income taxes(1) (13,270) (6,497) (962) (26) -- (2,752) (1,460)
Extraordinary loss(2) -- -- -- (149) -- -- --
--------- --------- --------- ------- ------- -------- ----------
Net earnings $ 18,945 $ 24,003 $ 14,237 $ 147 $ 1,097 $ 4,771 $ 2,325
========= ========= ========= ======= ======= ======== ==========
Earnings per diluted share before
effect of extraordinary loss $ 3.14 $ 3.92 $ 2.68 $ .09 $ .34 $ .82 $ .38
Extraordinary loss per diluted share -- -- -- (.05) -- -- --
--------- --------- --------- ------- ------- -------- ----------
Diluted earnings per share $ 3.14 $ 3.92 $ 2.68 $ .04 $ .34 $ .82 $ .38
========= ========= ========= ======= ======= ======== ==========
Cash dividends per share (1) N/A N/A N/A $ .06 $ .09 N/A N/A
1999 1998 1997 1996(5) 1995 2000 1999
--------- --------- --------- ------- ------- -------- ----------
BALANCE SHEET DATA:
Real estate under development $ 171,012 $ 104,759 $ 63,955 $35,991 -- $183,942 $ 171,012
Residual interests -- -- 1,422 3,909 $ 5,457 -- --
Total assets 226,559 152,250 96,633 72,821 27,816 236,024 226,559
Notes payable 85,937 37,205 22,892 30,542 7,819 100,078 85,937
Total liabilities 136,148 79,971 50,268 45,876 9,368 141,369 136,148
Stockholders' equity 90,411 72,279 46,365 26,945 18,448 94,655 90,411
</TABLE>
----------
(1) Due to the use of our net operating loss carryforward, we paid limited
income taxes during 1997 and 1998, until the NOL was fully utilized. During
1995 and 1996 we qualified and elected to be treated as a REIT under
federal tax laws and we were not subject to federal income tax on that
portion of our taxable income that was distributed to stockholders in or
with respect to that year.
(2) Reflects extraordinary loss from early extinguishment of long-term debt.
(3) Includes the accounts of Meritage Homes of Northern California from July 1,
1998, the acquisition date.
(4) Includes the accounts of Legacy Homes from July 1, 1997, the combination
date.
(5) Reflects the merger consummated on December 31, 1996.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
HOME SALES REVENUE
Home sales revenue is the product of the number of homes closed during the
period and the average sales price per home. Comparative first quarter 2000 and
1999 home sales revenue follow (dollars in thousands):
Quarter Ended
March 31, Dollar/unit Percentage
-------------------- Increase Increase
2000 1999 (Decrease) (Decrease)
-------- -------- -------- --------
Total
Dollars $ 91,653 $ 51,306 $ 40,347 79%
Homes closed 440 257 183 71%
Average sales price $ 208.3 $ 199.6 $ 8.7 4%
Texas
Dollars $ 49,430 $ 30,334 $ 19,096 63%
Homes closed 302 200 102 51%
Average sales price $ 163.7 $ 151.7 $ 12.0 8%
Arizona
Dollars $ 21,942 $ 19,628 $ 2,314 12%
Homes closed 79 53 26 49%
Average sales price $ 277.7 $ 370.3 $ (92.6) (25%)
California
Dollars $ 20,281 $ 1,344 $ 18,937 1,409%
Homes closed 59 4 55 1,375%
Average sales price $ 343.7 $ 336.0 $ 7.7 2%
The increase in total home sales revenue and number of homes closed in 2000
compared to 1999 results mainly from our strong market performances in Texas and
California. Also in 2000, we closed a higher percentage of homes in beginning
backlog than usual for our first quarters.
HOME SALES GROSS PROFIT
Gross profit is home sales revenue, net of housing cost of sales, which
include developed homesite costs, home 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 2000 and 1999 housing gross profit follows
(dollars in thousands):
Quarter Ended
March 31, Dollar/percentage Percentage
------------------ Increase Increase
2000 1999 (Decrease) (Decrease)
------- ------ ------ ------
Dollars $16,696 $9,984 $6,712 67%
Percent of home sales
revenue 18.2% 19.5% (1.3%) (7%)
13
<PAGE>
The dollar increase in gross profit for the three months ended March 31,
2000 over the prior year period is attributable to the increase in number of
homes closed. The gross profit margin decreased somewhat due to the increased
deliveries of our new lower-priced, lower margin Arizona products.
COMMISSIONS AND OTHER SALES COSTS
Commissions and other sales costs, such as advertising and sales office
expenses, were approximately $5.8 million, or 6.3% of home sales revenue in the
first quarter of 2000 compared to $3.4 million, or 6.6% of home sales revenue in
the first quarter of 1999. The slight decrease in these expenses as a percentage
of home sales revenue was caused by holding down increases in advertising and
other marketing costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately $4.0 million, or
4.3% of total revenue, in the first three months of 2000, as compared to
approximately $3.1 million, or 6.1% of revenue, in 1999, a decrease as a percent
of total revenue of 1.8%. The decrease in these amounts as a percentage of
revenue was caused by holding down increases in these costs, while expanding
home sales revenue. 1999 amounts include charges of approximately $600,000 (1.2%
of revenue) related to the employment agreement buyout of a former Managing
Director.
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.
INCOME TAXES
The increase in income tax expense to approximately $2,752,000 for the
quarter ended March 31, 2000 from $1,460,000 in the prior year was caused by
higher taxable income offset by a slightly lower effective tax rate
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 home
ordered. Comparative 2000 and 1999 sales contracts follow (dollars in
thousands):
Quarter Ended
March 31, Dollar/unit Percentage
-------------------- Increase Increase
2000 1999 (Decrease) (Decrease)
-------- -------- -------- --------
Total
Dollars $148,900 $103,738 $ 45,162 44%
Homes ordered 629 555 74 13%
Average sales price $ 236.7 $ 186.9 $ 49.8 27%
Texas
Dollars $ 60,920 $ 64,356 $ (3,436) (5)%
Homes ordered 355 431 (76) (18)%
Average sales price $ 171.6 $ 149.3 $ 22.3 15%
Arizona
Dollars $ 43,937 $ 30,992 $ 12,945 42%
Homes ordered 137 99 38 38%
Average sales price $ 320.7 $ 313.1 $ 7.7 2%
California
Dollars $ 44,043 $ 8,390 $ 35,653 425%
Homes ordered 137 25 112 448%
Average sales price $ 321.5 $ 335.6 $ (14.1) (4)%
14
<PAGE>
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 approximately 20% of gross sales. Total sales
contracts increased in 2000 compared to 1999 due mainly to the expansion into
California and continued economic strength in our operating markets.
NET SALES BACKLOG
Backlog represents net sales contracts that have not closed. Comparative
2000 and 1999 net sales backlog follows (dollars in thousands):
At March 31, Dollar/unit Percentage
-------------------- Increase Increase
2000 1999 (Decrease) (Decrease)
-------- -------- -------- --------
Total
Dollars $256,692 $197,725 $ 58,967 30%
Homes in backlog 1,074 987 87 9%
Average sales price $ 239.0 $ 200.3 $ 38.7 19%
Texas
Dollars $105,473 $111,199 $ (5,726) (5)%
Homes in backlog 619 734 (115) (16)%
Average sales price $ 170.4 $ 151.5 $ 18.9 12%
Arizona
Dollars $ 94,873 $ 77,743 $ 17,130 22%
Homes in backlog 274 227 47 21%
Average sales price $ 346.3 $ 342.5 $ 3.8 1%
California
Dollars $ 56,346 $ 8,783 $ 47,563 542%
Homes in backlog 181 26 155 596%
Average sales price $ 311.3 $ 337.8 $ (26.5) (8)%
Total dollar backlog at March 31, 2000 increased 30% over the 1999 amount
due to a corresponding increase in homes in backlog. The number of homes in
backlog at March 31, 2000 increased 9% 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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following provides information regarding the results of operations of
Meritage and its subsidiaries for the years ended December 31, 1999 and December
31, 1998. All material balances and transactions between Meritage and its
subsidiaries have been eliminated. Total results include those of the California
operations from July 1, 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.
15
<PAGE>
HOME SALES REVENUE
Home sales revenue is the product of the number of homes closed during the
period and the average sales price per home. Comparative 1999 and 1998 home
sales revenue follow (dollars in thousands):
Year Ended December 31, Dollar/unit Percentage
-------------------- Increase Increase
1999 1998 (Decrease) (Decrease)
-------- -------- -------- --------
TOTAL
Dollars.................. $334,007 $255,985 $ 78,022 31%
Homes closed............. 1,643 1,291 352 27%
Average sales price...... $ 203.3 $ 198.3 $ 5.0 3%
TEXAS
Dollars.................. $174,850 $130,860 $ 43,990 34%
Homes closed............. 1,135 932 203 22%
Average sales price...... $ 154.1 $ 140.4 $ 13.7 10%
ARIZONA
Dollars.................. $120,909 $105,942 $ 14,967 14%
Homes closed............. 400 317 83 26%
Average sales price...... $ 302.3 $ 334.2 $ (31.9) (10)%
CALIFORNIA
Dollars.................. $ 38,248 $ 19,183 $ 19,065 99%
Homes closed............. 108 42 66 157%
Average sales price...... $ 354.1 $ 456.7 $ (102.6) (23)%
The increase in revenue and number of homes closed in 1999 compared to 1998
resulted mainly from the inclusion of the California operations for the full
year and continued growth in our Texas and Arizona operations.
HOME SALES GROSS PROFIT
Gross profit equals home sales revenue, net of housing cost of sales, which
include developed lot costs, home construction costs, amortization of common
community costs (such as the cost of model complex and architectural, legal and
zoning costs), interest, sales tax, warranty, construction overhead and closing
costs. Comparative 1999 and 1998 home sales gross profit follows (dollars in
thousands):
Dollar/
Year Ended December 31, Percentage Percentage
-------------------- Increase Increase
1999 1998 (Decrease) (Decrease)
-------- -------- -------- --------
Dollars..................... $ 63,810 $ 51,576 $12,234 24%
Percent of home sales
revenue................... 19.1% 20.1% (1.0)% (5)%
The dollar increase in gross profit for the twelve months ended December
31, 1999 is attributable to the increase in number of homes closed due to the
inclusion of California operations for the full year, and continued growth in
our Texas and Arizona operations. The gross profit percentage decreased in 1999
due to somewhat lower profit margins in our Texas operations and a change in the
Arizona housing mix, reflecting a greater proportion of move-up home closings,
which typically have lower gross profit margins than our luxury homes.
EARNINGS FROM MORTGAGE ASSETS AND OTHER INCOME
All of our remaining mortgage securities were sold in 1998, causing the
1999 decrease in earnings from mortgage assets. Other income increased primarily
due to an increase in mortgage company income.
16
<PAGE>
COMMISSIONS AND OTHER SALES COSTS
Commissions and other sales costs, such as advertising and sales office
expenses, were approximately $19.2 million, or 5.8% of home sales revenue, in
1999, as compared to approximately $14.3 million, or 5.6% of home sales revenue
in 1998. A greater number of communities were operating in 1999 than in 1998,
which primarily caused the increase.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately $15.1 million, or
4.4% of total revenue in 1999, as compared to approximately $10.6 million, or
4.1% of total revenue in 1998. Operating costs associated with our geographic
expansions primarily caused this increase.
MINORITY INTEREST
The minority interest recorded in 1998 is due to our acquisition of
Sterling Communities, which included two 50% owned limited partnership interests
which Meritage controlled. We recorded the minority interest partners' share of
net income as an expense. The limited partnerships' operations were concluded in
the fourth quarter of 1998.
INCOME TAXES
The increase in income taxes to $13.3 million for the year ended December
31, 1999 from $6.5 million in the prior year resulted from an increase in
pre-tax income and a higher effective tax rate. The lower 1998 effective tax
rate was caused by utilization of our net operating loss carryforward. In future
periods we expect to have an effective tax rate approximating the statutory
federal and state tax rates.
SALES CONTRACTS
Sales contracts for any period represent the number of homes ordered by
customers (net of homes canceled) multiplied by the average sales price per home
ordered. Comparative 1999 and 1998 sales contracts follow (dollars in
thousands):
Year Ended December 31, Dollar/unit Percentage
-------------------- Increase Increase
1999 1998 (Decrease) (Decrease)
-------- -------- -------- --------
TOTAL
Dollars................... $388,158 $283,746 $104,412 37%
Homes ordered............. 1,840 1,466 374 26%
Average sales price....... $ 211.0 $ 193.6 $ 17.4 9%
TEXAS
Dollars................... $191,655 $166,020 $ 25,635 15%
Homes ordered............. 1,198 1,131 67 6%
Average sales price....... $ 160.0 $ 146.8 $ 13.2 9%
ARIZONA
Dollars................... $127,408 115,375 $ 12,033 10%
Homes ordered............. 436 329 107 33%
Average sales price....... $ 292.2 $ 350.7 $ (58.5) (17)%
CALIFORNIA
Dollars................... $ 69,095 $ 2,351 $ 66,744 *
Homes ordered............. 206 6 200 *
Average sales price....... $ 335.4 $ 391.8 $ (56.4) (14)%
----------
* Not meaningful
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 20% of gross sales. Total sales
contracts increased in 1999 compared to 1998 due to the expansion into
California, and continued growth in our Texas and Arizona operations.
17
<PAGE>
NET SALES BACKLOG
Backlog represents net sales contracts that have not closed. Comparative
1999 and 1998 net sales backlog follows (dollars in thousands):
At December 31, Dollar/unit Percentage
-------------------- Increase Increase
1999 1998 (Decrease) (Decrease)
-------- -------- -------- --------
TOTAL
Dollars................... $199,445 $145,294 $ 54,151 37%
Homes in backlog.......... 885 688 197 29%
Average sales price....... $ 225.4 $ 211.2 $ 14.2 7%
TEXAS
Dollars................... $ 93,983 $ 77,178 $ 16,805 22%
Homes in backlog.......... 566 503 63 13%
Average sales price $ 166.0 $ 153.4 $ 12.6 8%
ARIZONA
Dollars $ 72,878 $ 66,379 $ 6,499 10%
Homes in backlog.......... 216 180 36 20%
Average sales price....... $ 337.4 $ 368.8 $ (31.4) (9)%
CALIFORNIA
Dollars................... $ 32,584 $ 1,737 $ 30,847 *
Homes in backlog.......... 103 5 98 *
Average sales price....... $ 316.3 $ 347.4 $ (31.1) (9)%
----------
* Not meaningful
Total dollar backlog increased 37% over the prior year due to a
corresponding increase in homes in backlog. Homes in backlog have increased 29%
over the prior year due mainly to the increase in net orders caused by expansion
into California and continued growth in our Texas and Arizona operations. Our
backlog also increased somewhat due to extended construction times, which caused
longer periods between the time sales contracts were taken and home deliveries
were made.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total results for the comparison of the years ended December 31, 1998 and
1997 include those of the Texas operations from July 1, 1997 and of the
California operations from July 1, 1998. Texas 1997 results are pro forma in
that they are shown for the entire year, even though the Texas operations were
not acquired until July 1, 1997.
18
<PAGE>
HOME SALES REVENUE
Comparative 1998 and 1997 home sales revenue follow (dollars in thousands):
Year Ended December 31, Dollar/unit Percentage
-------------------- Increase Increase
1998 1997 (Decrease) (Decrease)
-------- -------- -------- --------
TOTAL
Dollars................... $255,985 $149,385 $106,600 71%
Homes closed.............. 1,291 644 647 100%
Average sales price....... $ 198.3 $ 232.0 $ (33.7) (15)%
TEXAS*
Dollars................... $130,860 $ 91,190 $ 39,670 44%
Homes closed.............. 932 633 299 47%
Average sales price....... $ 140.4 $ 144.1 $ (3.7) (3)%
ARIZONA
Dollars................... $105,942 $ 97,922 $ 8,020 8%
Homes closed.............. 317 284 33 12%
Average sales price....... $ 334.2 $ 344.8 $ (10.6) (3)%
CALIFORNIA
Dollars................... $ 19,183 ** ** **
Homes closed.............. 42 ** ** **
Average sales price....... $ 456.7 ** ** **
----------
* Full year 1997 Texas information includes pre-combination results and is for
comparative purposes only.
** Not meaningful
The increase in revenue and number of homes closed in 1998 compared to 1997
resulted mainly from the inclusion of the Texas operations for the full year.
The lower average sales price in 1997 is also due to sales in the Texas market,
where we focus on entry-level and move-up homes.
HOME SALES GROSS PROFIT
Comparative 1998 and 1997 home sales gross profit follows (dollars in
thousands):
Year Ended December 31, Dollar/
-------------------- Percentage Percentage
1998 1997 Increase Increase
-------- -------- -------- --------
Dollars..................... $ 51,576 $ 25,016 $ 26,560 106%
Percent of home sales
revenue................... 20.1% 16.7% 3.4% 20%
The dollar increase in gross profit for the twelve months ended December
31, 1998 is attributable to the increase in number of homes closed due to the
inclusion of Texas operations for the full year, along with increased closings
in highly profitable Arizona communities. The gross profit margin increased in
1998 due to generally higher margins in Texas, the addition of the California
operations in the last half of the year and an increase in sales of more
profitable custom options and upgrades with respect to Arizona home closings.
EARNINGS FROM MORTGAGE ASSETS AND OTHER INCOME
The increase in earnings from mortgage assets primarily is due to gains
from the sales of our remaining mortgage securities in 1998. These gains
exceeded 1997 gains from residual sales by approximately $2.1 million. The
increase was somewhat offset by decreased residual interest earned in 1998.
The 1998 increase in other income primarily is due to an increase in
interest income on cash accounts and overnight investments. Texas operations
were included for the full year in 1998, which also contributed to higher income
amounts.
19
<PAGE>
COMMISSIONS AND OTHER SALES COSTS
Commissions and other sales costs, such as advertising and sales office
expenses, were approximately $14.3 million, or 5.6% of home sales revenue, in
1998, as compared to approximately $8.3 million, also 5.6% of home sales
revenue, in 1997. Sales costs resulting from a greater number of operating
communities due to our expansions into Texas and California primarily caused the
dollar increase.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately $10.6 million, or
4.1% of total revenue in 1998, as compared to approximately $6.8 million, or 4.6
% of total revenue in 1997. Operating costs associated with our Texas and
California expansions, including the amortization of goodwill, primarily caused
the increase.
MINORITY INTEREST
The increase in minority interest in 1998 is due to our acquisition of
Sterling Communities, which included two 50% owned limited partnership interests
which Meritage controlled. We recorded the minority interest partners' share of
net income as an expense. The limited partnerships' operations were concluded in
the fourth quarter of 1998.
INCOME TAXES
The increase in income taxes to $6.5 million for the year ended December
31, 1998 from $962,000 in the prior year resulted from a significant increase in
pre-tax income and a higher effective tax rate. The lower 1997 effective tax
rate was caused by a larger reduction in the valuation allowance applicable to
deferred tax assets than occurred in 1998. In future periods we expect to have
an effective tax rate approximating the statutory federal and state tax rates.
SALES CONTRACTS
Comparative 1998 and 1997 sales contracts follow (dollars in thousands):
Year Ended December 31, Dollar/unit Percentage
-------------------- Increase Increase
1998 1997 (Decrease) (Decrease)
-------- -------- -------- --------
TOTAL
Dollars................... $283,746 $157,479 $126,267 80%
Homes ordered............. 1,466 693 773 112%
Average sales price....... $ 193.6 $ 227.2 $ (33.6) (15)%
TEXAS*
Dollars................... $166,020 $102,261 $ 63,759 62%
Homes ordered............. 1,131 740 391 53%
Average sales price....... $ 146.8 $ 138.2 $ 8.6 6%
ARIZONA
Dollars................... $115,375 $112,207 $ 3,168 3%
Homes ordered............. 329 332 (3) **
Average sales price....... $ 350.7 $ 338.0 $ 12.7 4%
CALIFORNIA
Dollars................... $ 2,351 ** ** **
Homes ordered............. 6 ** ** **
Average sales price....... $ 391.8 ** ** **
----------
* Full year 1997 Texas information includes pre-combination results and is for
comparative purposes only.
** Not meaningful
20
<PAGE>
Total sales contracts increased in 1998 compared to 1997 due to the
expansion into Texas and California, and the economic strength of all of our
operating markets.
NET SALES BACKLOG
Comparative 1998 and 1997 net sales backlog follows (dollars in thousands):
At December 31,
-------------------- Dollar/unit Percentage
1998 1997 Increase Increase
-------- -------- -------- --------
TOTAL
Dollars................... $145,294 $ 98,963 $ 46,331 47%
Homes in backlog.......... 688 472 216 46%
Average sales price....... $ 211.2 $ 209.7 $ 1.5 *
TEXAS
Dollars................... $ 77,178 $ 42,018 $ 35,160 84%
Homes in backlog.......... 503 304 199 65%
Average sales price....... $ 153.4 $ 138.2 $ 15.2 11%
ARIZONA
Dollars................... $ 66,379 $ 56,945 $ 9,434 17%
Homes in backlog.......... 180 168 12 7%
Average sales price....... $ 368.8 $ 339.0 $ 29.8 9%
CALIFORNIA
Dollars................... $ 1,737 * * *
Homes in backlog.......... 5 * * *
Average sales price....... $ 347.4 * * *
----------
* Not meaningful
Total dollar backlog increased 47% over the prior year due to a
corresponding increase in homes in backlog. Homes in backlog have increased 46%
over the prior year due mainly to the increase in net orders caused by expansion
into Texas and California.
Arizona and Texas backlogs have increased due to the number of sales orders
taken in 1998, along with slight industry-wide construction delays. These delays
caused more closings to be pushed into the following year than usual.
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.
Cash flow for each of our communities depends on the status of the
development cycle, and can differ substantially from reported earnings. Early
stages of development or expansion require significant cash outlays for land
acquisitions, plat and other approvals, and construction of model homes, roads,
certain utilities, general landscaping and other amenities. Because these costs
are capitalized, income reported for financial statement purposes during those
early stages may significantly exceed cash flow. Later, cash flow can
significantly exceed earnings reported for financial statement purposes, as cost
of sales includes charges for substantial amounts of previously expended costs.
21
<PAGE>
At March 31, 2000, we had short-term secured revolving construction loan
and acquisition and development facilities totaling $139.5 million, of which
approximately $85 million was outstanding. An additional $27.2 million of
unborrowed funds supported by approved collateral were available under our
credit facilities at that date. Borrowings under the credit facilities are
subject to our inventory collateral position and a number of other conditions,
including minimum net worth, debt to equity and debt coverage tests. We also
have $15 million outstanding in unsecured, senior subordinated notes due
September 15, 2005, which were issued in October 1998.
In May 1999, we announced a stock repurchase program in which our Board of
Directors approved the buyback of up to $6 million of outstanding Meritage
stock. This amount was increased to $10 million at the first quarter, 2000 board
meeting. As of March 31, 2000, 237,667 shares had been repurchased for an
aggregate price of approximately $2.5 million.
Management believes that the current borrowing capacity, cash on hand at
March 31, 2000 and anticipated cash flows from operations are sufficient to meet
liquidity needs for the foreseeable future. There is no assurance, however, that
future amounts available from our sources of liquidity will be sufficient to
meet future capital needs. The amount and types of indebtedness that we incur
may be limited by the terms of the indenture governing our senior subordinated
notes and credit agreements.
SEASONALITY
We historically have closed more homes in the second half of the fiscal
year than in the first half, due in part to the slightly seasonal nature of the
market for our semi-custom luxury and move-up products. Management expects this
seasonal trend to continue, though it may vary as operations continue to expand.
MARKET RISK DISCLOSURE
We do not trade in derivative financial instruments and at March 31,
2000 we 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.
22
<PAGE>
BUSINESS OF MERITAGE
OUR HISTORY
We design, construct, and sell single family homes ranging from entry-level
to semi-custom luxury in three large and growing Sunbelt states: Texas, Arizona,
and California. We have recently undergone significant growth. As of March 31,
1999, we were actively selling homes in 46 communities. We pursue a strategy of
diversifying our product mix and the geographic scope of our operations.
We were originally formed as a REIT under the name of Homeplex Mortgage
Investments Corporation. Homeplex invested in mortgage-related assets and
selected real estate loans. On December 31, 1996, we acquired by merger the
homebuilding operations of various entities under the Monterey Homes name.
Following the merger, we focused on the business of homebuilding and changed our
name to Monterey Homes Corporation. On July 1, 1997, as part of our strategy to
further diversify operations, we combined with Legacy Homes, a group of entities
with homebuilding operations in Texas ("Legacy"). Legacy has been in business
since 1987, and designs, builds, and sells entry-level and move-up homes. In
July 1998, we acquired Sterling Communities, a homebuilder in northern
California. In September 1998, with shareholder approval, Meritage became our
new corporate name. Operations continue in Texas under the Legacy Homes name, in
Arizona as Monterey Homes and Meritage Homes of Arizona, and in California as
Meritage Homes of Northern California.
BUSINESS STRATEGY
We seek to distinguish ourself from other production homebuilders and to
respond rapidly to changing market conditions through a business strategy
focusing on the following:
SUPERIOR DESIGN AND QUALITY
We believe that we maximize customer satisfaction by offering homes that
are built with quality materials and craftsmanship, exhibit distinctive design
features, and are situated in premium locations. We believe that we generally
offer higher caliber homes in their defined price range or category than those
built by our competitors.
PRODUCT BREADTH
We offer new homes to a wide variety of consumers. In Texas, we target
entry-level and move-up buyers, offering homes at prices that reflect the
production efficiencies of a high-volume tract builder. In Arizona, our focus is
on the luxury market, which is characterized by unique communities and
distinctive luxury homes, and the move-up homebuyers' market. Continued
expansion into the first and second-time move-up segments of the Arizona market
reflects our desire to increase our share of the overall housing market in the
Phoenix and Tucson metropolitan areas. In California, the focus is on quality
first and second-time move-up homes. This product breadth and geographical
diversity helps to reduce our exposure to variable economic cycles.
HIGHEST LEVEL OF SERVICE
We are committed to achieving the highest level of customer satisfaction as
an integral part of our competitive strategy. During the sales process, our
experienced sales personnel keep customers informed of their home's construction
process. After delivery, our customer care departments deal with any questions
or warranty matters a customer may have.
CONSERVATIVE LAND ACQUISITION POLICY
We seek to maximize our return on capital by practicing a conservative land
acquisition policy that minimizes risks associated with land investment. We
generally purchase land subject to complete entitlement, including zoning and
utility services, with a focus on development sites where we expect to have less
than a three-year lot inventory. Lots are often controlled on a non-recourse,
rolling option basis where we have the right, but not the obligation, to buy
lots at predetermined prices based on a takedown schedule which reflects
anticipated home closings. We generally do not speculate in raw land held for
investment.
23
<PAGE>
COST MANAGEMENT
Throughout our history, we have focused on controlling costs and minimizing
overhead, and consider this a key factor in maintaining profitability. Our
management seeks to reduce costs by:
* using subcontractors to carry out home construction and site
improvement on a fixed price basis;
* reducing interest carry by minimizing our inventory of unsold homes
and shortening the home construction cycle;
* obtaining favorable pricing from subcontractors through long-term
relationships and large volume jobs;
* minimizing overhead by centralizing certain administrative activities;
and
* maintaining management information systems to allow the monitoring of
homebuilding production, scheduling, and budgeting.
DECENTRALIZED OPERATING STRUCTURE WITH EXPERIENCED DIVISION MANAGERS
We rely upon the expertise of divisional managers, each of whom has
significant experience in their region's homebuilding market. Interaction
between our divisional managers and corporate management provides enhanced
operating results.
PENETRATION OF NEW MARKETS
Depending on market conditions, we may explore expansion opportunities in
other parts of the country, targeting market niches in areas where we perceive
an ability to exploit a competitive advantage. Expansion may take place through
strategic acquisitions of other existing homebuilders or through internal
growth.
MARKETS AND PRODUCTS
We operate in the Dallas/Fort Worth, Austin and Houston, Texas markets
using the Legacy Homes brand name, in the Phoenix and Tucson, Arizona markets as
Monterey Homes and Meritage Homes of Arizona and in the San Francisco Bay and
Sacramento, California markets as Meritage Homes of Northern California. We
believe that these areas represent attractive homebuilding markets with
opportunities for long-term growth. We also believe that our operations in
certain markets, such as Dallas/Fort Worth and Phoenix, are well established and
that we have developed a reputation for building distinctive quality homes
within the market segments served by these communities.
Our homes range from entry-level to semi-custom luxury, with base prices
ranging from $100,000 to $600,000. A summary of activity by market and product
type follows (dollars in thousands):
<TABLE>
<CAPTION>
Units in Dollar
Number of Average Backlog Value of Home Number of
Homes Closed Closing At Backlog At Sites Active
in 1999 Price Year End Year End Remaining(1) Sub-divisions
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Texas - Move-up 835 $ 162.6 381 $ 67,197 1,936 19
Texas - Entry-level 300 130.4 185 26,786 886 6
Arizona - Luxury 196 419.8 127 54,179 592 7
Arizona - Move-up 204 189.4 89 18,699 1,199 7
California - Move-up 108 354.1 103 32,584 880 7
-------- -------- -------- -------- -------- --------
Total Company 1,643 $ 203.3 885 $199,445 5,493 46
======== ======== ======== ======== ======== --------
</TABLE>
----------
(1) "Home Sites Remaining" is the number of homes that could be built both on
the remaining lots available for sale and land to be developed into lots as
estimated by management.
24
<PAGE>
LAND ACQUISITION AND DEVELOPMENT
We typically purchase land only after necessary entitlements have been
obtained so that development and construction may begin as market conditions
dictate. The term "entitlements" refers to development agreements, tentative
maps, or recorded plats, depending on the jurisdiction within which the land is
located. Entitlements generally give the developer the right to obtain building
permits upon compliance with conditions that are ordinarily within the
developer's control. Even though entitlements are usually obtained before land
is purchased, we are still required to secure a variety of other governmental
approvals and permits during development. The process of obtaining such
approvals and permits can substantially delay the development process. For this
reason, we may consider purchasing unentitled property in the future when we can
do so in a manner consistent with our business strategy.
We select land for development based upon a variety of factors, including:
* internal and external demographic and marketing studies;
* project suitability, which are generally developments with fewer than
150 lots;
* suitability for development within a one to three year time period
from the beginning of the development process to the delivery of the
last home;
* financial review as to the feasibility of the proposed project,
including projected profit margins, return on capital employed, and
the capital payback period;
* the ability to secure governmental approvals and entitlements;
* results of environmental and legal due diligence;
* proximity to local traffic corridors and amenities; and
* management's judgment as to the real estate market, economic trends,
and experience in a particular market.
We occasionally purchase larger properties consisting of 200 to 500 lots or
more if the situation presents an attractive profit potential and acceptable
risk limitations.
We acquire land through purchases and rolling option contracts. Purchases
are financed through traditional bank financing or through working capital.
Rolling options allow us to control lots and land through a third party who owns
or buys the property on which we plan to build homes. We enter into an option
contract with the third party to purchase finished lots as home construction
begins. The option contracts are generally non-recourse and require
non-refundable deposits of 2% to 10% of the sales price. We acquire a majority
of our land through rolling option contracts.
Once land is acquired, we generally begin development through contractual
agreements with subcontractors. These agreements include site planning and
engineering as well as constructing road, sewer, water, utilities, drainage,
recreation facilities and other refinements. We often build homes in master
planned communities with home sites that are adjacent to or near a major
amenity, like a golf course.
We develop a design and marketing concept for each project, which includes
determination of size, style, and price range of homes, street layout, size and
layout of individual lots, and the overall community design. The product line
offered in a particular project depends upon many factors, including the housing
generally available in the area, the needs of a particular market, and our lot
costs for the project.
We occasionally use partnerships or joint ventures to purchase and develop
land where these arrangements are necessary to acquire the property or appear to
be otherwise economically advantageous.
25
<PAGE>
The following table presents land owned or land under contract or option by
market as of December 31, 1999.
<TABLE>
<CAPTION>
Land Under Contract
Land Owned (1) or Option (1)
------------------------------ -----------------------------
Lots Under Lots Held for Lots Under
Finished Development Development Finished Development
Lots (Estimated) (Estimated) Lots (Estimated) Total
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
TEXAS:
Dallas/Ft. Worth Area 501 568 340 267 250 1,926
Austin Area 129 -- -- 110 604 843
Houston Area 156 -- -- -- 160 316
----- ----- ----- ----- ----- -----
Total Texas 786 568 340 377 1,014 3,085
----- ----- ----- ----- ----- -----
ARIZONA:
Phoenix Area 88 223 43 177 673 1,204
Tucson Area 58 -- -- 175 358 591
----- ----- ----- ----- ----- -----
Total Arizona 146 223 43 352 1,031 1,795
----- ----- ----- ----- ----- -----
CALIFORNIA:
Sacramento Area 1 -- -- 199 53 253
San Francisco Bay Area -- 19 -- 83 480 582
----- ----- ----- ----- ----- -----
Total California 1 19 -- 282 533 835
----- ----- ----- ----- ----- -----
TOTAL COMPANY 933 810 383 1,011 2,578 5,715
===== ===== ===== ===== ===== =====
</TABLE>
----------
(1) Excludes lots with finished homes or homes under construction
CONSTRUCTION
We are the general contractor for our projects and typically hire
subcontractors on a project-by-project or reasonable geographic proximity basis
to complete construction at a fixed price. We usually enter into agreements with
subcontractors and materials suppliers after receiving competitive bids on an
individual basis. Before formal bidding begins, we obtain information from
prospective subcontractors and suppliers in order to assess their financial
condition and ability to perform their agreements. We occasionally enter into
longer-term contracts with subcontractors and suppliers if our management can
obtain more favorable terms. Our project managers and field superintendents
coordinate and supervise the activities of subcontractors and suppliers, subject
the work to quality and cost controls, and assure compliance with zoning and
building codes.
We specify that quality durable materials be used in the construction of
our homes. We do not maintain significant inventories of construction materials
with the exception of work in process materials for homes under construction.
When possible, our management negotiates price and volume discounts with
manufacturers and suppliers on behalf of subcontractors to take advantage of our
production volume. Usually, access to our principal subcontracting trades,
materials, and supplies is readily available in each of our markets. Prices for
these goods and services may fluctuate due to various factors, including supply
and demand shortages that may be beyond our or our vendors' control. We believe
that our relations with suppliers and subcontractors are good.
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<PAGE>
We generally build and sell homes in clusters or phases within a project.
We believe this creates efficiencies in land development and construction and
improves customer satisfaction by reducing the number of vacant lots surrounding
a completed home. A typical Meritage home is completed within four to ten months
from the start of construction, depending upon the home's size and complexity.
Schedules may vary depending on the availability of labor, materials, supplies,
product type, location, and weather. We design our homes to promote efficient
use of space and materials and to minimize construction costs and time.
MARKETING AND SALES
We believe that we have established a reputation for developing high
quality homes. This reputation helps generate interest in each new project. We
also use advertising and other promotional activities, including magazine and
newspaper advertisements, brochures, direct mail, and the placement of
strategically located signs in the immediate areas of our developments.
We use furnished model homes as a tool in demonstrating the competitive
advantages of our home designs and features to prospective homebuyers. We
generally employ or contract with interior designers responsible for creating an
attractive model home for each product line within a project. We generally build
between one and four model homes for each active community, depending upon the
number of homes to be built in the project and the products to be offered. We
occasionally sell our model homes and lease them back from buyers who purchased
the homes for investment purposes or who do not intend to move in immediately. A
summary of model homes owned or leased at December 31, 1999 follows:
Model Homes Model Homes Monthly Lease Models Under
Owned Leased Back Amount Construction
------- ------- ------- -------
Texas 23 -- -- 3
Arizona 13 17 $41,600 10
California 20 1 3,500 --
------- ------- ------- -------
Total 56 18 $45,100 13
======= ======= ======= =======
Our homes are generally sold by full-time commissioned sales employees who
typically work from a sales office located in the model homes for each project.
Our goal is to ensure that the sales force has extensive knowledge of our
operating policies and housing products. To achieve this goal, sales personnel
are trained and attend periodic meetings to be updated on:
* sales techniques;
* competitive products in the area;
* financing availability;
* construction schedules;
* marketing and advertising plans;
* available product lines, and
* pricing, options, and warranties offered.
Sales personnel are licensed real estate agents where required by law.
Independent brokers also sell our homes and are usually paid a sales commission
on the base price of the home.
We occasionally offer various sales incentives, such as landscaping and
certain interior home improvements, to attract buyers. The use and type of
incentives depends largely on economic and competitive market conditions.
27
<PAGE>
BACKLOG
Most of our home sales are made under standard sales contracts signed
before construction of the home begins. The contracts require substantial cash
deposits and are usually subject to certain contingencies such as the buyer's
ability to qualify for financing. Homes covered by such sales contracts but not
yet closed are considered "backlog." We do not recognize revenue on homes in
backlog until sales are closed and ownership has been legally transferred to the
buyer. We sometimes build one or two homes per project before obtaining a sales
contract, though these homes are not included in backlog until a sales contract
is signed. We believe that we will deliver almost all homes in backlog at
December 31, 1999 to customers during 2000.
CUSTOMER FINANCING
We attempt to help qualified homebuyers who require financing to obtain
loans from mortgage lenders that offer a variety of financing options. We
provide mortgage-banking services to our customers in our Dallas/Ft. Worth
markets through a related mortgage lending company, Texas Home Mortgage
Corporation, which originates loans on behalf of third party lenders. In Tucson,
we provide mortgage services through MTH Mortgage Limited Partnership, a joint
venture with an independent mortgage banking company. We may pay a portion of
the closing costs and discount mortgage points to assist homebuyers with
financing. Since many homebuyers utilize long-term mortgage financing to
purchase a home, adverse economic conditions, increases in unemployment, and
high mortgage interest rates may deter or reduce the number of potential
homebuyers.
CUSTOMER RELATIONS AND QUALITY CONTROL
We believe that positive customer relations and an adherence to stringent
quality control standards are fundamental to our continued success. We believe
that our commitment to customer satisfaction and quality control have
significantly contributed to our reputation as a high quality builder.
A Meritage project manager or project superintendent, and a customer
relations representative generally oversee compliance with our quality control
standards for each development. These representatives allocate responsibility
to:
* oversee home construction;
* oversee subcontractor and supplier performance;
* review the progress of each home and conduct formal inspections as
specific stages of construction are completed; and
* regularly update buyers on the progress of their homes.
We generally provide a one-year limited warranty on workmanship and
building material with each home. Subcontractors usually provide an indemnity
and a certificate of insurance prior to receiving payments for their work. Thus,
claims relating to workmanship and materials are usually the primary
responsibility of the subcontractors. Reserves for future warranty costs are
established based on historical experience within each division or region and
are recorded when the homes are delivered. Reserves range from 3/10 of one per
cent to 3/4 of one percent of a home's sale price. To date, these reserves have
been sufficient to cover warranty repairs.
COMPETITION AND MARKET FACTORS
The development and sale of residential property is a highly competitive
industry. We compete for sales in each of our markets with national, regional,
and local developers and homebuilders, existing home resales, and to a lesser
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<PAGE>
extent, condominiums and available rental housing. Some competitor homebuilders
have significantly greater financial resources and/or lower costs than Meritage.
Competition among both small and large residential homebuilders is based on a
number of interrelated factors, including location, reputation, amenities,
design, quality and price. We believe that we compare favorably to other
homebuilders in the markets in which we operate due to our:
* experience within our geographic markets which allows us to develop
and offer new products;
* ability to reflect and adapt to changing market conditions;
* ability, from a capital and resource perspective, to respond to market
conditions;
* ability to exploit opportunities to acquire land on favorable terms;
and
* reputation for outstanding service and quality products.
The homebuilding industry is cyclical and is affected by consumer
confidence levels, job availability, prevalent economic conditions in general,
and interest rates. Other factors affecting the homebuilding industry and demand
for new homes are changes in costs associated with home ownership such as
increases in property taxes and energy costs, changes in consumer preferences,
demographic trends, availability of and changes in mortgage financing programs,
and the availability and cost of land and building materials. Any slowing in new
home sales would increase competition among homebuilders in these areas. There
is no assurance that we will be able to compete successfully against other
homebuilders in our current markets in a more competitive business environment
resulting from a slowdown in home sales or that such increased competition will
not have a material adverse affect on our business and operating results.
GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS
We purchase most of our land with entitlements, providing for zoning and
utility service to project sites and giving us the right to obtain building
permits. Construction may begin almost immediately upon compliance with
specified conditions, which generally are within our control. The time needed to
obtain such approvals and permits affects the carrying costs of the unimproved
property acquired for development and construction. The continued effectiveness
of permits already granted is subject to factors such as changes in policies,
rules and regulations, and their interpretation and application. To date, the
government approval processes discussed above have not had a material adverse
effect on our development activities, though there is no assurance that these
and other restrictions will not adversely affect future operations.
Because most of our land is entitled, construction moratoriums generally
would only adversely affect us if they arose from health, safety, and welfare
issues, such as insufficient water or sewage facilities. Local and state
governments have broad discretion regarding the imposition of development fees
for projects under their jurisdiction. These fees are normally established when
we receive recorded maps and building permits. As we expand, we may also become
increasingly subject to periodic delays or may be precluded entirely from
developing communities due to building moratoriums, "slow growth" initiatives or
building permit allocation ordinances which could be implemented in future
operating markets.
We are also subject to a variety of local, state, and federal statutes,
ordinances, rules and regulations concerning the protection of health and the
environment. In some markets, we are subject to environmentally sensitive land
ordinances which mandate open space areas with public elements in housing
developments, and prevent development on hillsides, wetlands and other protected
areas. We must also comply with flood plain restrictions, desert wash areas,
native plant regulations, endangered species acts and view restrictions. These
and similar laws may result in delays, cause substantial compliance and other
29
<PAGE>
costs, and prohibit or severely restrict development in certain environmentally
sensitive regions or areas. To date, compliance with such ordinances has not
materially affected our operations, though no assurance is given that such a
material adverse effect will not occur in the future.
We usually will condition our obligation to purchase property on, among
other things, an environmental review of the land. To date, we have not incurred
any unanticipated liabilities relating to the removal of unknown toxic wastes or
other environmental matters. However, there is no assurance that we will not
incur material liabilities relating to the removal of toxic wastes or other
environmental matters affecting land currently or previously owned.
BONDS AND OTHER OBLIGATIONS
We obtain letters of credit and performance, maintenance, and other bonds
in support of our related obligations with respect to the development of our
projects. The amount of these obligations outstanding at any time varies in
accordance with pending development activities. In the event the bonds or
letters are drawn upon, we would be obligated to reimburse the issuer of the
bond or letter of credit. At December 31, 1999 there were approximately $1.0
million of outstanding letters of credit and $16.3 million of performance bonds
for such purposes. We do not believe that any of these bonds or letters of
credit are likely to be drawn upon.
EMPLOYEES AND SUBCONTRACTORS
At December 31, 1999, we had 295 employees, including 68 in management and
administration, 101 in sales and marketing, and 126 in construction operations.
The employees are not unionized, and we believe that our employee relations are
good. We act solely as a general contractor and all construction operations are
conducted through project managers and field superintendents who manage third
party subcontractors. We use independent contractors for construction,
architectural and advertising services, and believe that our relations with
subcontractors and independent contractors are good.
NET OPERATING LOSS CARRYFORWARD
By December 31, 1999, our federal tax net operating loss (NOL) carryforward
was fully utilized. Income tax payment were reduced during the period the NOL
carryforward was available and during that time income tax payments consisted
primarily of state income taxes and federal alternative minimum tax.
STOCK REPURCHASE PROGRAM
In May 1999, we announced a Stock Repurchase Program in which our Board of
Directors approved the buyback of up to $6 million in Meritage common stock.
This amount was increased to $10 million, at the first quarter 2000 board
meeting. As of March 31, 2000, 237,667 shares had been repurchased for an
aggregate price of approximately $2.5 million.
MORTGAGE ASSETS ACQUIRED PRIOR TO MERGER
Prior to the merger with Homeplex, we acquired a number of mortgage assets,
consisting of mortgage interests (commonly known as "residuals") and mortgage
instruments. During 1998 and 1997, we sold the mortgage assets for a gain or
generated interest income from these assets prior to sale, of approximately $5.2
and $5.1 million, respectively.
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<PAGE>
FACILITIES
We lease the following office space:
Annual
City Square Footage Lease Rate Term Expiration
---- -------------- ---------- ---- ----------
Plano, Texas* 13,000 $179,500 5 years 5/15/02
Phoenix, Arizona 11,600 242,000 5 years 8/30/04
Tucson, Arizona 2,800 58,000 2 years 10/31/00
Walnut Creek, California 2,700 50,500 2 years 7/14/00
Austin, Texas 1,500 28,400 3 years 4/30/02
Fort Worth, Texas 1,400 18,200 3 years 6/30/02
Houston, Texas 900 9,500 1 year 7/1/00
----------
* Lease is with a company owned beneficially by one of our Co-Chairmen.
Management believes lease rates are competitive with rates for comparable
space in the area and lease terms are similar to those we could obtain in
an arm's length transaction.
We also lease 18 model homes at a total monthly lease amount of $45,100.
The leases are for terms ranging from three months to 36 months, with various
renewal options.
LEGAL PROCEEDINGS
We are involved in various routine legal proceedings incidental to our
business. Management believes that none of these legal proceedings, certain of
which are covered by insurance, will have a material adverse impact on our
financial statements taken as a whole.
31
<PAGE>
MANAGEMENT OF MERITAGE
DIRECTORS AND EXECUTIVE OFFICERS
Our Articles of Incorporation divide the board of directors into two
classes serving staggered two-year terms. Class I consists of three directors,
all of whom were re-elected at our 2000 Annual Meeting of Stockholders on May
10, 2000 and whose terms expire at the 2002 Annual Meeting of Stockholders(1).
Class II consists of three directors whose terms expire at the 2001 Annual
Meeting of Stockholders. Information concerning our directors and executive
officers is presented below.
Name Age Position with Meritage
---- --- ----------------------
John R. Landon 42 Co-Chairman and Co-Chief
Executive Officer, Class II
Director
Steven J. Hilton 38 Co-Chairman and Co-Chief
Executive Officer, Class I
Director
Larry W. Seay 44 Chief Financial Officer and
Vice President - Finance,
Secretary and Treasurer
Richard T. Morgan 44 Vice President
William W. Cleverly 43 Class I Director
Raymond Oppel(2) 42 Class I Director
Robert G. Sarver(2) 37 Class II Director
C. Timothy White 37 Class II Director
----------
(1) Alan D. Hamberlin, a Director since 1998, did not stand for re-election at
the 2000 Annual Meeting of Stockholders.
(2) Audit Committee Member.
JOHN R. LANDON has served as co-chairman and co-chief executive officer (or
co-managing director) since April 1998 and served as our chief operating officer
and co-chief executive officer from the July 1997 combination of Legacy Homes
and Meritage in July 1997 to April 1998. Mr. Landon founded Legacy Homes in 1987
and as its President, managed all aspects of its business. Mr. Landon is a
member of the National Association of Homebuilders and the Dallas Home and
Apartment Builders' Association.
STEVEN J. HILTON has served as co-chairman and co-chief executive officer
since April 1998, and served as our president and co-chief executive officer
from December 31, 1996 to April 1998. In 1985, Mr. Hilton co-founded Monterey,
which merged with Homeplex, our predecessor, and was its treasurer, secretary
and a director until December 31, 1996. Mr. Hilton is a member of the Central
Arizona Homebuilders' Association, the National Homebuilders' Association, the
National Board of Realtors and the Scottsdale Board of Realtors.
WILLIAM W. CLEVERLY has served as a director since December 31, 1996. He
served as co-chairmen and co-chief executive officer (or co-managing director)
from April 1998 to March 1999, and as chairman of the board and co-chief
executive officer from December 31, 1996 to April 1998. Mr. Cleverly co-founded
Monterey in 1985, and was its president and director until December 31, 1996.
Mr. Cleverly is the chief executive officer of Inca Capital, and a member of the
Central Arizona Homebuilders' Association and the National Homebuilders'
Association.
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<PAGE>
RICHARD T. MORGAN has served as vice president since April 1998 and also
has served as chief financial officer of our Texas Division since July 1997. Mr.
Morgan joined Legacy Homes in 1989 as controller and was appointed as Legacy's
chief financial officer in 1997.
RAYMOND OPPEL has served as a director since December 1997, and has been in
the construction, real estate, and retail industries for over 20 years. In 1982,
he co-founded and became chairman and chief executive officer of the Oppel
Jenkins Group, a regional homebuilder in Texas and New Mexico, which was sold to
the public homebuilder Kaufman & Broad, Inc. in 1995. Mr. Oppel served as
president of the Texas Panhandle Builder's Association and has been a licensed
real estate broker. Mr. Oppel is currently active as a private investor in real
estate development, banking, and a new automobile dealership.
ROBERT G. SARVER has served as a Director since December 1996, and has been
the chairman and chief executive officer of California Bank and Trust since
October 1998. From 1995 to 1998, he served as chairman of Grossmont Bank. Mr.
Sarver is currently a director of Skywest Airlines and Zion's Bancorporation, a
publicly held bank holding company. In 1990, Mr. Sarver co-founded and currently
serves as the executive director of Southwest Value Partners and Affiliates, a
real estate investment company. In 1984, Mr. Sarver founded National Bank of
Arizona, Inc. and was its President until its acquisition by Zion's
Bancorporation in 1994.
C. TIMOTHY WHITE has served as a Director since in December 1996, and
served as a director of Monterey from February 1995 until December 1996. Since
1989, Mr. White has been an attorney with the law firm of Tiffany & Bosco, P.A.
in Phoenix, Arizona, which provides legal services to Meritage.
LARRY W. SEAY has served as chief financial officer and vice
president-finance since December 31, 1996, and has also served as our secretary
and treasurer since January 1997. Mr. Seay was chief financial officer and vice
president-finance of Monterey Homes from April 1996 to December 31, 1996. From
1990 to 1996, Mr. Seay served as vice president/treasurer of UDC Homes, Inc., a
homebuilding company based in Phoenix, Arizona. In May 1995, UDC Homes, Inc.
filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and
emerged from reorganization proceedings in November 1995. Prior to 1990, Mr.
Seay is a certified public accountant and a member of the American Institute of
Certified Public Accountants.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee consists of Mr. Oppel and Mr. Sarver.
The Audit Committee makes recommendations to the Board concerning the selection
of independent auditors, reviews our financial statements and considers such
other matters in relation to the external audit of our financial affairs as may
be necessary or appropriate to facilitate accurate and timely financial
reporting.
OTHER COMMITTEES. We do not maintain a standing nominating committee or
other committee performing similar functions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. White is a shareholder of Tiffany & Bosco, P.A., a Phoenix, Arizona law
firm that provides legal services to Meritage. In 1999 Meritage paid Tiffany &
Bocso approximately $334,000 in legal fees.
DIRECTOR COMPENSATION
Directors who are not employees of Meritage received an annual retainer of
$12,000 in 1999, except for Mr. Cleverly. Mr. Cleverly was a Meritage employee
during the first part of 1999 and therefore received a retainer only for a
period he was not employed by us, which amounted to $8,000. Non-employee
directors are not additionally compensated for attending Board or Committee
meetings. In 1997 and 1999, non-employee directors were granted options to
acquire 5,000 shares of Meritage common stock as additional consideration for
their services. The options vest in equal 2,500 share increments on each of the
first two anniversary dates of the date of grant and have an exercise price
equal to the closing price of the common stock on the grant date.
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EXECUTIVE COMPENSATION
The following table summarizes the compensation we paid in 1999, 1998, and
1997 to our co-chief executive officers and other most highly compensated
executive officers
1999 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation Awards
--------------------------- ----------- All Other
Name and Principal Position Year Salary Bonus Options (#) Compensation
--------------------------- ---- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
John R. Landon - Co-Chairman and Co-Chief 1999 $375,000 $200,000 30,000 $26,004
Executive Officer 1998 210,000 200,000 -- 22,183
1997 200,000 200,000 166,667 11,700
Steven J. Hilton - Co-Chairman and Co-Chief 1999 375,000 200,000 30,000 33,212
Executive Officer 1998 210,000 200,000 -- 30,438
1997 200,000 200,000 -- 31,905
William W. Cleverly - Director* 1999 55,125 200,000 -- 8,764
1998 210,000 200,000 -- 35,108
1997 200,000 200,000 -- 31,905
Larry W. Seay - Chief Financial Officer, Vice 1999 150,000 95,937 20,000 12,611
President-Finance, Secretary and Treasurer 1998 120,726 90,000 -- 9,884
1997 113,750 85,000 12,500 6,575
Richard T. Morgan - Vice President 1999 110,833 60,000 10,000 1,237
1998 97,167 54,000 -- 1,272
1997 89,500 35,000 10,000 1,200
</TABLE>
----------
* For the fiscal years ended December 31, 1997 and 1998 Mr. Cleverly served
as a co-chief executive officer or co-managing director. He resigned as an
officer in March 1999 and his separation agreement is described herein
under the "Board of Director's Report on Executive Compensation."
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<PAGE>
1999 OPTION GRANTS
The following table lists stock options granted in 1999 to the officers
named in the Summary Compensation Table. The amounts shown as potential
realizable values rely on arbitrarily assumed share price appreciation rates
prescribed by the SEC over the seven-year term of the options. In assessing
those values, please note that the ultimate value of the options depends on
actual future share values and do not necessarily reflect management's
assessment of our future stock price performance. The potential realizable
values are not intended to indicate the value of the options.
Individual Grants
<TABLE>
<CAPTION>
Percentage of Potential Realizable Value at
Shares Total Options Assumed Annual Rates of Stock Price
Underlying Granted to Exercise or Appreciation for Option Term
Options Employees Base Price Expiration ----------------------------
Name Granted (#) in 1999 ($/Share) Date 0% 5% 10%
---- ----------- ------- --------- ------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
John R. Landon 30,000 11% $15.68 1/12/06 -- $131,135 $362,677
Steven J. Hilton 30,000 11% $15.68 1/12/06 -- 131,135 362,677
Larry W. Seay 20,000 8% $14.25 1/12/06 -- 116,024 270,384
Richard T. Morgan 15,000 6% $14.25 1/12/06 -- 87,018 202,788
</TABLE>
This table excludes options granted to Mr. Cleverly in 1999, which were
forfeited upon his resignation effective March 18, 1999.
AGGREGATED OPTION EXERCISES IN 1999 AND OPTION VALUES
AT END OF FISCAL YEAR 1999
The following table lists the number of shares acquired and the value
realized as a result of options exercised during 1999 for the listed officers.
The table contains values for "in the money" options, which are those with a
positive spread between the exercise price and the December 31, 1999 share price
of $10.875. The values are the difference between the year-end price per share
and the exercise price per share, multiplied by the number of applicable shares
in the money. These values have not been and may never be realized. The options
may never be exercised, and the value, if any, will depend on the share price on
the exercise date.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT FISCAL
ACQUIRED YEAR END (#) YEAR END ($)
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John R. Landon -- -- 102,111 94,556 $540,624 $396,878
Steven J. Hilton -- -- 172,667 24,000 937,502 --
William W. Cleverly -- -- 166,667 -- 937,502 --
Larry W. Seay 3,700 $24,994 7,000 21,500 10,510 21,020
Richard T. Morgan -- -- 7,000 18,000 9,500 14,250
</TABLE>
EMPLOYMENT AGREEMENTS
We have employment agreements with Steven J. Hilton and John R. Landon that
provide for terms through December 31, 2001 and June 30, 2001, respectively.
Both agreements provide for an initial base salary of $200,000 per year
(increasing by 5% of the prior year's base salary per year) and an annual bonus
based on a percentage of consolidated net income, as determined by the Board of
Directors. Mr. Hilton and Mr. Landon serve as our co-chairmen and co-chief
executive officers.
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<PAGE>
Under both agreements, if employment is terminated:
* voluntarily or for cause, or with respect to Mr. Landon, voluntarily
without good reason, we have no further obligation to pay the
officers' salary or bonus;
* without cause, or with respect to Mr. Landon, voluntarily for good
reason, we are obligated to pay the officer his then current base
salary through the term of his agreement;
* due to death or permanent disability, we are obligated to pay the
officer his then current salary for six months after termination, plus
a pro rated bonus.
"Cause" under both the Hilton and Landon agreements is defined to mean an
act or acts of dishonesty constituting a felony and resulting or intended to
result directly or indirectly in substantial personal gain or enrichment at our
expense. "Cause" under the Landon agreement also includes willful disregard of
the employee's primary duties to the Company. "Good Reason" under the Landon
agreement is defined to include:
* assignment of duties inconsistent with the scope of the duties
associated with Mr. Landon's titles or positions or which would
require Mr. Landon to relocate his principal residence outside the
Dallas/Fort Worth, Texas metropolitan area;
* termination of Mr. Landon for cause and it is determined that cause
did not exist; or
* our failure to make certain working capital arrangements available to
the Texas division.
Both agreements contain non-compete provisions over their terms that
restrict Mr. Hilton and Mr. Landon from:
* engaging in the homebuilding business and, with respect to Mr. Landon,
the mortgage brokerage or banking business;
* recruiting, hiring or discussing employment with any person who is, or
within the past six months was, a Meritage employee;
* soliciting any customer or supplier of Meritage for a competing
business or otherwise attempting to induce any customer or supplier to
discontinue its relationship with us; or
* except solely as a limited partner with no management or operating
responsibilities, engaging in the land banking or lot development
business.
The foregoing provisions shall not restrict:
* the ownership of less than 5% of a publicly-traded company; or
* if the employment of either Mr. Hilton or Mr. Landon is terminated
under his respective employment agreement, engaging in the custom
homebuilding business, or the production homebuilding business outside
a 100 mile radius of any Meritage project or outside Northern
California, or engaging in the land banking or lot development
business. The non-compete provisions survive the termination of the
Hilton agreement unless Mr. Hilton is terminated without cause. The
non-compete provisions under the Landon agreement survive termination
of that agreement unless Mr. Landon is terminated without cause or
resigns for good reason.
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<PAGE>
We also have an employment agreement with Larry W. Seay, our chief
financial officer, that provides for a term through January 1, 2001. Mr. Seay's
agreement is designed to provide for a base salary and an annual bonus based on
the achievement of specific performance objectives. Compensation is subject to
continuing employment and standard employment policies. During the terms of the
agreement, Mr. Seay agrees that he will not:
* engage in the business of providing any homebuilding products or
services where we do or propose to do business;
* solicit for employment anyone who works for or contracts with Meritage
for one year after the last date the employee is with the Company;
* solicit or take away any of our customers or disclose potential
customers to our competitors.
If Mr. Seay is terminated without cause, he will be entitled to receive:
* an amount equal to 50% of his base salary;
* 50% of his average bonus for the previous three fiscal years; and
* acceleration of his stock options as if he held them through the end
of the following fiscal year.
If Mr. Seay voluntarily terminates his employment within twelve months
following a change of control of the Company due to a demotion in position, he
will be entitled to receive:
* an amount equal to 100% of his base salary;
* 100% of his average bonus for the previous three fiscal years; and
* vesting in full of all his stock options.
CHANGE OF CONTROL ARRANGEMENTS
If Meritage undergoes a change of control that is required to be reported
on Form 8-K under securities laws before the third anniversary of the effective
date of his stock option agreement, the options granted to Mr. Landon under his
stock option agreement will vest in full and be immediately exercisable.
We also have senior executive severance agreements under which, upon
termination of employment within two years of a change of control, certain
executive officers, including Messrs. Hilton, Landon, Seay and Morgan, will
receive a cash payment equal to one or two times the highest annual compensation
paid during the two years prior to termination, and accelerated vesting under
our benefit and stock option plans.
STOCK OWNED BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table summarizes, as of May 1, 2000, the number and
percentage of outstanding shares of Meritage common stock beneficially owned by
the following:
* each person or group management knows to beneficially own more than 5%
of such stock;
* all Meritage directors;
* all executive officers named in the compensation summary under
"Executive Compensation" above; and
* all Meritage directors and executive officers as a group.
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<PAGE>
The address for our officers and directors is c/o Meritage Corporation,
6613 North Scottsdale Road, Suite 200, Scottsdale, Arizona 85250. The number of
shares includes, where applicable, shares of common stock owned of record by
such person's minor children and spouse and by other related individuals and
entities over whose shares of common stock such person has custody, voting
control, or the power of disposition.
<TABLE>
<CAPTION>
Percent of
Number of Right to Outstanding
Name of Beneficial Owner Shares Owned Acquire(1) Total Shares(1)
------------------------ --------- ------- --------- ---------
<S> <C> <C> <C> <C>
John R. Landon(2) 666,667 102,111 768,778 14.2%
Steven J. Hilton 705,601 172,667 878,268 16.0%
William W. Cleverly 708,934 166,667 875,601 15.9%
Robert G. Sarver(3) 170,700 7,500 178,200 3.8%
C. Timothy White 3,316 7,500 10,816 *
Ray Oppel 15,000 7,500 22,500 *
Larry W. Seay 3,700 7,000 10,700 *
Richard T. Morgan 3,500 7,000 10,500 *
All directors and executive officers
as a group (8 persons) 2,277,418 477,945 2,755,363 50.9%
Alan Hamberlin(4) 53,009 320,226 373,235 6.6%
Wellington Management Co., LLB
75 State Street, Boston, MA 02190 304,000(5) -- 304,000 5.7%
</TABLE>
----------
* Represents less than 1%.
(1) The percentages shown include the shares of common stock actually owned as
of May 1, 2000, and the shares which the person or group had the right to
acquire within 60 days of such date. In calculating the percentage of
ownership, all shares of common stock which the identified person had the
right to acquire within 60 days of May 1, 2000, upon exercise of options,
are deemed to be outstanding for the purpose of computing the percentage of
the shares owned by that person or group, but are not deemed to be
outstanding for the purpose of computing the percentage of the shares of
common stock owned by any other person.
(2) All 666,667 shares are owned with Eleanor Landon, spouse, as
tenants-in-common.
(3) Mr. Sarver beneficially owns 1,500 shares through his spouse and 500 shares
through a minor child.
(4) Mr. Hamberlin indirectly beneficially owns 12,633 shares through a
partnership.
(5) Based on Schedule 13G, filed with the SEC on February 9, 2000, Wellington
Management Company, LLP ("WMC") has shared voting power with respect to
268,000 shares and shared dispositive power with respect to 304,000 shares.
The shares to which the schedule 13G is filed by WMC, in its capacity as
investment advisor, are owned by clients of WMC who have the right to
receive or the power to direct the dividend from or proceeds of such
shares. The Schedule 13G also states that none of WMC's clients are known
to have such right or power with respect to more than 5% of our common
stock.
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<PAGE>
CERTAIN TRANSACTIONS AND RELATIONSHIPS
Since 1994, we have leased approximately 11,000 square feet of office space
in a Scottsdale, Arizona office building from a limited liability company owned
by Messrs. Hilton and Cleverly. This building was sold in February, 2000.
Since 1997, we have leased office space in Plano, Texas from Home Financial
Services, a Texas partnership owned by John and Eleanor Landon. The lease
expires May 15, 2002. Rents paid to the partnership were $176,773 in 1999,
$169,294 in 1998 and $81,588 in 1997. Management believes that the lease terms
are no less favorable than those that could be negotiated in an arm's length
transaction.
We paid legal fees to Tiffany & Bosco, P.A. of approximately $ 334,000 in
1999 and $321,000 in 1998. C. Timothy White, one of our directors, is a
shareholder of Tiffany and Bosco, P.A.
In 1999 we purchased 92 lots for development in Arizona from a business
controlled by the spouse of one of our directors. The total amount paid for the
lots was approximately $3,517,000, a price management believes is no less
favorable than we could have negotiated in an arm's length transaction.
In 1999 Mr. Landon personally purchased 27.25 acres of undeveloped land in
Allen, Texas, on our behalf. Mr. Landon sold the land to Meritage later in the
year at no gain. Our acquisition price of the property was $994,705.
In 1999 we entered into a $70 million borrowing agreement with Norwest Bank
and California Bank and Trust ("CBT"). This line of credit is due December 31,
2001, has interest payable monthly approximating prime or LIBOR plus 1.75%, and
is secured by first deeds of trust on real estate. Mr. Sarver, one of our
directors, is the chairman and chief executive officer of CBT. Management
believes the terms of the loan to be no less favorable than we could have
negotiated in an arms length transaction.
DESCRIPTION OF CAPITAL STOCK
The following summary contains certain information about our capital stock.
This section describes material provisions of, but does not purport to be
complete and is subject to, and qualified in its entirety by, our Articles of
Incorporation and By-laws and by the provisions of applicable law.
COMMON STOCK
We are authorized to issue up to 50,000,000 shares of common stock, $0.01
par value. As of May 1, 2000 there were 5,563,796 shares of common stock
outstanding, held of record by approximately 2,500 holders. Holders of our
common stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of our common stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared by the board of directors. Upon the
liquidation, dissolution or winding up of Meritage, the holders of common stock
of all debts and other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of our common stock have no preemptive
(other than as determined in the sole discretion of our board of directors),
subscription, redemption or conversion rights. The outstanding shares of our
common stock are, and the shares subject to Warrants will be, when issued and
39
<PAGE>
paid for, fully-paid and nonassessable. The rights, preferences, and privileges
of holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock which we may
issue in the future. We are not currently authorized to issue preferred stock
under our Articles of Incorporation.
Our Articles of Incorporation contain a provision allowing action to be
authorized by the affirmative vote of the holders of a majority of the total
number of shares of common stock outstanding and entitled to vote thereon
notwithstanding any provision of law requiring the authorization of the action
by a greater proportion than such a majority. This provision may allow
authorization of certain extraordinary transactions and amendment of our
Articles of Incorporation, including an amendment changing the terms or contract
rights of any of our outstanding common stock by classification,
reclassification, or otherwise, by the affirmative vote of the holders of a
majority of the shares of common stock outstanding. But for such provision,
under Maryland law, such extraordinary transactions and amendment of our
Articles of Incorporation, with certain limited exceptions, would require the
affirmative vote of the holders of two-thirds of the outstanding common stock
entitled to vote thereon. The common stock is also subject to significant
restrictions on transfer, as described below.
WARRANTS
The Warrants were issued in October 1994 and are governed by the Warrant
Agreement effective as of October 17, 1994 (the "Warrant Agreement") between us
and Norwest Bank Minnesota, N.A. (the "Warrant Agent"). Holders of Warrants are
referred to the Warrant Agreement which is included as an exhibit to the
Registration Statement for a complete statement of the terms of the Warrants.
The following summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Warrant Agreement.
Capitalized terms used in this description of the Warrants and not defined
herein have the meanings given to them in the Warrant Agreement.
Each Warrant entitles the holder to purchase one share of common stock for
$4.0634 per share (the "Purchase Price"), subject to adjustment as described
herein. Warrants currently entitle the holders thereof to acquire 86,520 shares
of common stock. The Warrants became exercisable on the effective date of the
merger between Homeplex and Monterey and will continue to be exercisable through
October 15, 2001 except as provided in the following sentence. In the event that
notice is given in accordance with the Warrant Agreement in connection with the
liquidation, dissolution, or winding up of Meritage, the right to exercise the
Warrants will expire at the close of business on the third full business day
before the date specified in such notice as the record date for determining
registered holders entitled to receive any distribution upon such liquidation,
dissolution, or winding up. We may not redeem the Warrants.
On the effective date of the merger between Homeplex and Monterey, the
Monterey warrants were converted into Warrants, and Meritage assumed all of the
rights and obligations of Monterey under the Warrant Agreement.
The Warrants may be exercised in whole or in part by surrendering at the
office of the Warrant Agent in Minneapolis, Minnesota, the Warrant Certificate
evidencing such Warrants, together with a subscription in the form set forth on
the reverse of the Warrant Certificate, duly executed and accompanied by payment
of the Purchase Price, in U.S. dollars, by tender of federal funds or a
certified or bank cashier's check, payable to the order of the Warrant Agent. As
soon as practicable after such exercise, we will cause to be issued and
delivered to the holder or upon his order, in such name or names as may be
directed by him, a certificate or certificates for the number of full shares of
common stock to which he is entitled. If fewer than all of the Warrants
evidenced by a Warrant Certificate are exercised, the Warrant Agent will deliver
to the exercising Warrant holder a new Warrant Certificate representing the
unexercised portion of the Warrant Certificate. Fractional shares will not be
issued upon exercise of a Warrant, and in lieu thereof, we will pay to the
holder an amount in cash equal to such fraction multiplied by the Current Market
Price Per Share, determined in accordance with the Warrant Agreement.
40
<PAGE>
The person in whose name the certificate is to be issued will be deemed to
have become the holder of record of the stock represented thereby on the date
when the Warrant Certificate with the subscription duly executed and completed
is surrendered and payment of the Purchase Price is made, unless the stock
transfer books of ours are closed on such date, in which case, such person will
be deemed the record holder of the shares at the close of business on the next
succeeding date on which the stock transfer books are opened.
No service charge will be made for registration of transfer or exchange of
any Warrant Certificate. We may require payment of a sum sufficient to cover any
stamp or other tax or governmental charge that may be imposed in connection with
any registration of transfer or exchange of Warrant Certificates.
Subject to certain conditions and limitations, the number of Warrant Shares
issuable upon the exercise of the Warrants and/or the Purchase Price are subject
to adjustment in certain events including: (i) the issuance of common stock
(including in certain cases the issuance in a public offering of any stock,
securities, obligation, option, or other right or warrant that may be converted
into, exchanged for, or satisfied in shares of common stock) for consideration
per share less than the Purchase Price prior to such issue, (ii) the declaration
of a dividend on common stock payable in common stock or the subdivision,
combination, or issuance of capital stock in connection with a reclassification
of common stock, (iii) any distribution of Meritage's assets upon or with
respect to its common stock as a liquidating or partial liquidating dividend,
and (iv) the issuance of stock, securities, rights, options, or warrants to all
holders of the common stock or in an integrated transaction where more than 99%
of such instruments or securities are acquired by persons who, prior to the
transaction, were Meritage security holders, entitling them to subscribe for or
purchase common stock or securities convertible into common stock at a price per
share less than the Current Market Price Per Share on the record date for the
issuance of such securities, instruments, or rights or the granting of such
securities, options, or warrants. The Current Market Price Per Share of our
common stock on any date is determined in reference to (i) the average of the
daily closing prices (or if no sale is made on any trading date, the average of
the closing bid and asked prices) for the thirty consecutive trading days
commencing thirty-five trading days before such date, if our common stock is
listed on an exchange, (ii) the average of the last reported sale price or
prices or the mean of the last reported bid and asked prices reported by the
NASDAQ, or if not so quoted on NASDAQ, as quoted on the National Quotations
Bureau, Inc., for the thirty consecutive trading days commencing thirty-five
days before such date, or (iii) if neither (i) or (ii) is applicable, the fair
market value of the common stock as determined in good faith by our Board of
Directors.
In the event that Meritage consolidates with, merges with or into, or sells
all or substantially all of its assets (for a consideration consisting primarily
of securities) to, another corporation, each Warrant thereafter shall entitle
the holder to receive upon exercise, the number of shares of common stock or
other securities or property which the holder would have received had the
Warrant been exercised immediately prior to the consolidation, merger, or sale
of assets.
In the event a bankruptcy or reorganization is commenced by or against
Meritage, a bankruptcy court may hold that unexercised Warrants are executory
contracts which may be subject to rejection by Meritage with approval of the
bankruptcy court. As a result, holders of the Warrants may not be entitled to
receive any consideration or may receive an amount less than they would be
entitled to if they had exercised their Warrants prior to the commencement of
any such bankruptcy or reorganization.
41
<PAGE>
The holders of unexercised Warrants are not entitled, by virtue of being
holders, to exercise any rights as stockholders of Meritage.
Subject to certain requirements, from time to time Meritage and the Warrant
Agent, without the consent of the holders of the Warrants, may amend or
supplement the Warrant Agreement for certain purposes, including curing
ambiguities, defects, inconsistencies, or manifest errors, provided that such
amendments and supplements are not prejudicial to the rights of the Warrant
holders as indicated by the general intent of the original language.
MARYLAND LAW AND CERTAIN CHARTER PROVISIONS
We are incorporated in Maryland and are subject to the provisions of the
Maryland General Corporations Law (the "MGCL"), certain of which provisions are
discussed herein.
BUSINESS COMBINATIONS. The MGCL prohibits certain "business combinations"
(including, in certain circumstances and subject to certain exceptions, a
merger, consolidation, share exchange, asset transfer, issuance of equity
securities, or reclassification of securities) between a Maryland corporation
and an Interested Stockholder or any affiliate of an Interested Stockholder.
Subject to certain qualifications, an "Interested Stockholder" is a person (a)
who beneficially owns 10% or more of the voting power of the corporation's
shares after the date on which the corporation had 100 or more beneficial owners
of its stock, or (b) is an affiliate or associate of the corporation and was the
beneficial owner of 10% or more of the voting power of the corporation's shares,
at any time within the two-year period immediately prior to the date in question
and after the date on which the corporation had 100 or more beneficial owners of
its stock. Unless an exemption applies, such business combinations are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Unless an exemption applies, any
business combination that is not so prohibited must be recommended by the board
of directors and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by outstanding voting shares of the corporation, and
(b) 66 2/3% of the votes entitled to be cast by the holders of voting shares
of the corporation, other than voting shares held by the Interested Stockholder,
or an affiliate or associate of the Interested Stockholder, with whom the
business combination is to be effected. The MGCL specifies a number of
situations in which the business combination restrictions described above would
not apply. For example, such restrictions would not apply to a business
combination with a particular Interested Shareholder that is approved or
exempted by the board of directors of a corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder. A Maryland corporation
also may adopt an amendment to its charter electing not to be subject to the
special voting requirements of the foregoing legislation. Any such amendment
would have to be approved by the affirmative vote of the same percentages and
groups of the outstanding shares of voting stock of the corporation as described
above for approval of a business combination. No such amendment to our charter
has been effected.
CONTROL SHARE ACQUISITIONS. The MGCL provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquiror or by officers or directors who are employees of the corporation.
"Control shares" are voting shares of stock which, if aggregated with all other
shares of stock previously acquired by such a person or which that person is
entitled to vote (other than by revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (a) 20% or more but less than 33 1/3%; (b) 33 1/3% or more but
less than a majority; or (c) a majority of all voting power. Control shares do
not include shares of stock an acquiring person is entitled to vote as a result
of having previously obtained stockholder approval. A control share acquisition
means, subject to certain exceptions, the acquisition of, ownership of, or the
power to direct the exercise of voting power with respect to, control shares.
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<PAGE>
A person who has made or proposed to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the Board of Directors to call a special meeting of
stockholders to be held within 50 days of demand therefor to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as permitted by the statute,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to voting
rights, as of the date of the last acquisition of control shares by the
acquiring person in a control share acquisition or if any meeting of
stockholders was held at which the rights of such shares were considered, as of
the date of such meeting. If voting rights for "control shares" are approved at
a stockholders' meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the stock as determined for purposes of such appraisal
rights may not be less than the highest price per share paid by the acquiring
person in the control share acquisition, and certain limitations and
restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a "control share acquisition."
The control share acquisition statute does not apply to stock acquired in a
merger, consolidation or stock exchange if the corporation is a party to the
transaction, or to acquisitions previously approved or excepted by a provision
in the charter or bylaws of the corporation. Neither our charter nor our Bylaws
have provisions exempting any control share acquisitions.
STOCK TRANSFER RESTRICTIONS
In connection with the merger with Homeplex, our Articles of Incorporation
were amended to, among other things, (i) change the name of Homeplex to
"Monterey Homes Corporation," (ii) reclassify and change each share of Homeplex
common stock issued and outstanding into one-third of a share of Meritage common
stock, (iii) amend and make the limitations on the transfer of common stock more
restrictive to preserve maximum use of our NOL Carryforward (see " Business of
Meritage--NOL Carryforward"), and (iv) provide for the Class I and Class II
Directors (see "Management of Meritage--Board of Directors" above).
As of December 31, 1999, our federal income tax net operating loss (NOL)
carryforward was fully utilized. As a result, the restrictions on stock transfer
in our articles of incorporation are no longer applicable.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS. Under the MGCL, a
corporation's articles may, with certain exceptions, include any provision
expanding or limiting the liability of its directors and officers to the
corporation or its stockholders for money damages, but may not include any
provision that restricts or limits the liability of its directors or officers to
the corporation or its stockholders to the extent that (i) it is proved that the
person actually received an improper benefit or profit in money, property, or
services for the amount of the benefit or profit in money, property, or services
actually received; or (ii) a judgment or other final adjudication adverse to the
person is entered in a proceeding based on a finding in the proceeding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. Our charter contains a provision limiting the personal liability of
officers and directors to Meritage and its stockholders for money damages to the
fullest extent permitted under Maryland law.
43
<PAGE>
In addition, with certain exceptions, the MGCL permits a corporation to
indemnify its present and former directors and officers, among others, against
liability incurred, unless it is established that (i) the act or omission of the
director or officer was material to the matter giving rise to the proceeding and
was committed in bad faith or was the result of active and deliberate
dishonesty, or (ii) the director or officer actually received an improper
personal benefit in money, property, or services, or (iii) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. Our charter provides that it will
indemnify (i) its directors to the full extent allowed under Maryland law, (ii)
its officers to the same extent it shall indemnify its directors, and (iii) its
officers who are not directors to such further extent as shall be authorized by
the board of directors and be consistent with law.
WARRANT AGENT, TRANSFER AGENT AND REGISTRAR
The warrant agent is Norwest Bank Minnesota, N.A. and its address is
Norwest Center, Sixth and Marquette, Minneapolis, Minnesota 55479-0069. The
transfer agent and registrar for our common stock is ChaseMellon Shareholder
Services, Overpeck Centre, 85 Challenger Road, Ridgefield Park, New Jersey
07660.
PRICE OF WARRANTS AND COMMON STOCK; DIVIDEND POLICY
NO ACTIVE TRADING MARKET FOR THE WARRANTS
There is no active trading market for the Warrants. We have not and do not
intend to apply for the listing of the Warrants on any national exchange or to
seek admission to the NASDAQ Stock Market for trading the Warrants.
PRICE OF COMMON STOCK
Our common stock is publicly traded on the NYSE under the ticker symbol
"MTH." The following table presents the high and low closing sales prices,
adjusted for stock splits, of the common stock, as reported by the NYSE.
HIGH LOW
--------- ---------
2000
First Quarter $11 3/8 $ 8 7/8
1999
Fourth Quarter $12 $ 9 15/16
Third Quarter $13 1/4 $10 11/16
Second Quarter $13 1/2 $10 15/16
First Quarter $15 11/16 $11
1998
Fourth Quarter $14 11/16 $ 9 11/16
Third Quarter $19 3/4 $12 1/16
Second Quarter $19 1/4 $15 5/8
First Quarter $19 15/16 $12 7/16
1997
Fourth Quarter $14 3/4 $11 3/16
Third Quarter $14 3/4 $ 8 1/2
Second Quarter $ 8 3/4 $ 4 3/8
First Quarter $ 7 1/4 $ 5 1/2
On May 1, 2000, the closing sales price of our common stock as reported by
the NYSE was $11.875 per share. At that date, there were approximately 280
stockholder accounts of our common stock. We believe that there are
approximately 2,500 beneficial owners of our common stock.
44
<PAGE>
DIVIDEND POLICY
We did not pay any cash dividends in 1998 or 1999, nor do we intend to do
so in the foreseeable future. We paid cash dividends per share of $.06 in 1996,
$.09 in 1995, and $.06 in 1994, representing distributions of taxable income
arising out of our former status as a REIT. Our loan and debt agreements contain
certain covenants that restrict the payment of dividends if the financial
condition, results of our operation, and capital requirements fail to meet
certain specified levels. Earnings will be retained to finance the growth of our
business. The future payment of cash dividends, if any, will depend upon our
financial condition, results of our operations, and capital requirements, as
well as other factors deemed relevant by the Board.
SELLING SECURITY HOLDERS
Selling Security Holders may sell their Warrants on a delayed or continuous
basis. The Registration Statement has been filed pursuant to Rule 415 under the
Securities Act to give Warrant holders the opportunity to sell their securities
in public transactions rather than pursuant to exemptions from the registration
and prospectus delivery requirements of the Securities Act.
The following table presents certain information as of May 1, 2000, with
respect to the number of Warrants held by each Selling Security Holder. To our
knowledge, none of the Selling Security Holders has had a material relationship
with us within the past three years other than as a result of the ownership of
the Warrants. The Selling Security Holders may offer all or some of their
Warrants pursuant to the offering contemplated by this prospectus at various
times. Therefore, we cannot give an estimate to the amount of Warrants that will
be held by the Selling Security Holders upon completion of such offering.
<TABLE>
<CAPTION>
Shares of Common Stock Into Which the
Warrants are Exercisable
-----------------------
Percent of
Common
Warrants Offered Stock
Owner Prior to This Offering for Sale Number Outstanding(1)
---------------------------- -------- -------- --------
<S> <C> <C> <C>
Bear Stearns Securities Corp. - Maverick
Capital LP 13,275 16,022 .29%
Bear Stearns Securities Corp. 5,310 6,410 0.12%
Perry Partners 53,100 64,088 1.15%
-------- -------- --------
Total 71,684 86,520 1.56%
</TABLE>
----------
(1) As of May 1, 2000, 5,563,796 shares of Meritage Common Stock were
outstanding.
45
<PAGE>
Information concerning the Selling Security Holders may change occasionally
and may be presented in supplements to this prospectus if required. The number
of Warrant Shares underlying the Warrants is subject to adjustment in certain
events (See "Description of the Warrants" above). Accordingly, the number of
Warrants offered may change.
PLAN OF DISTRIBUTION
The Selling Security Holders or their nominees or pledgees may sell or
distribute some or all of the Warrants from time to time through dealers,
brokers, or other agents or directly to one or more purchasers, including
pledgees in brokerage transactions, in a combination of such transactions or by
any other legally available means. Such transactions may be effected by the
Selling Security Holders at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at negotiated prices, or at
fixed prices, which may be changed. Brokers, dealers, or agents participating in
such transactions as agent may receive compensation in the form of discounts,
concessions, or commissions from the Selling Security Holders (and, if they act
as agent for the purchaser of such shares, from such purchaser). Such discounts,
concessions, or commissions as to a particular broker, dealer, or agent might be
in excess of those customary in the type of transaction involved. This
prospectus also may be used, with our consent, by donees of the Selling Security
Holders, or by other persons acquiring Warrants and who wish to offer and sell
such Warrants under circumstances requiring or making desirable its use. To the
extent required, we will file, during any period in which offers or sales are
being made, one or more supplements to this prospectus to set forth the names of
donees of the Selling Security Holders and any other material information with
respect to the plan of distribution not previously disclosed. In addition,
Warrants which qualify for sale pursuant to Section 4 of, or Rules 144 or 144A
under, the Securities Act may be sold under such provisions rather than pursuant
to this prospectus.
The Selling Security Holders and any such brokers, dealers, or agents that
participate in such distribution may be deemed to be "underwriters" within the
meaning of the Securities Act, and any discounts, commissions, or concessions
received by any such underwriters, brokers, dealers, or agents might be deemed
to be underwriting discounts and commissions under the Securities Act. Neither
we nor the Selling Security Holders can presently estimate the amount of such
compensation. We know of no existing arrangements between any Selling Security
Holder and any other Selling Security Holder, underwriter, broker, dealer, or
other agent relating to the sale or distribution of the shares of common stock.
The Selling Security Holders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including without
limitation Regulation M, which provisions may limit the timing of purchases and
sales of any of the shares of common stock by the Selling Security Holders. All
of the foregoing may affect the marketability of the common stock.
We will pay substantially all of the expenses incident to this offering of
the Warrants by the Selling Security Holders to the public other than
commissions and discounts of brokers, dealers, or agents. Each Selling Security
Holder may indemnify any broker, dealer, or agent that participates in
transactions involving sales of the Warrants against certain liabilities,
including liabilities arising under the Securities Act. We have agreed to
indemnify the Selling Security Holders against certain liabilities including
certain liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers, or persons controlling us, we have been informed that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
46
<PAGE>
LEGAL MATTERS
The validity of the issuance of the Warrants has been passed on for
Meritage by Venable, Baetjer & Howard, LLP, 1800 Mercantile Bank & Trust
Building, 2 Hopkins Plaza, Baltimore, Maryland 21201.
EXPERTS
The consolidated financial statements of Meritage as of December 31, 1999
and 1998 and for each of the years in the three-year period ended December 31,
1999, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
47
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MERITAGE CORPORATION
FOR THE PERIOD ENDED DECEMBER 31, 1999
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets.................................................F-3
Consolidated Statements of Earnings.........................................F-4
Consolidated Statements of Stockholders' Equity.............................F-5
Consolidated Statements of Cash Flows.......................................F-6
Notes to Consolidated Financial Statements..................................F-7
FOR THE PERIOD ENDED MARCH 31, 2000 (Unaudited)
Consolidated Balance Sheets ................................................F-18
Consolidated Statements of Earnings ........................................F-19
Consolidated Statements of Cash Flows ......................................F-20
Notes to Consolidated Financial Statements .................................F-21
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Meritage Corporation
We have audited the accompanying consolidated balance sheets of Meritage
Corporation and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion of these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly in all material respects, the financial position of Meritage
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Phoenix, Arizona
February 4, 2000
F-2
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------
1999 1998
------------- -------------
ASSETS
Cash and cash equivalents $ 13,422,016 $ 12,386,806
Real estate under development 171,012,405 104,758,530
Deposits on real estate under
option or contract 15,699,609 7,338,406
Other receivables 1,643,187 2,460,966
Deferred tax asset 698,634 6,935,000
Goodwill 18,741,625 14,640,712
Property and equipment, net 4,040,134 2,566,163
Other assets 1,301,286 1,163,737
------------- -------------
Total Assets $ 226,558,896 $ 152,250,320
============= =============
LIABILITIES
Accounts payable and
accrued liabilities $ 41,950,761 $ 34,068,178
Home sale deposits 8,261,000 8,587,245
Notes payable 85,936,601 37,204,845
Minority interest in
consolidated joint ventures -- 110,922
------------- -------------
Total Liabilities 136,148,362 79,971,190
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value
$.01 per share; 50,000,000
shares authorized; issued and
outstanding - 5,474,906 shares
at December 31, 1999, and 5,334,942
shares at December 31, 1998 54,749 53,349
Additional paid-in capital 100,406,745 99,319,669
Accumulated deficit (8,148,535) (27,093,888)
Less cost of shares held
in treasury (186,000 shares) (1,902,425) --
------------- -------------
Total Stockholders' Equity 90,410,534 72,279,130
------------- -------------
Total Liabilities and
Stockholders' Equity $ 226,558,896 $ 152,250,320
============= =============
See accompanying notes to consolidated financial statements
F-3
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
Home sales revenue $ 334,007,420 $ 255,984,499 $ 149,384,548
Land sales revenue 7,778,761 1,128,208 245,000
------------- ------------- -------------
341,786,181 257,112,707 149,629,548
Cost of home sales (270,197,356) (204,408,950) (124,368,782)
Cost of land sales (7,089,379) (778,457) (225,000)
------------- ------------- -------------
(277,286,735) (205,187,407) (124,593,782)
Home sales gross profit 63,810,064 51,575,549 25,015,766
Land sales gross profit 689,382 349,751 20,000
------------- ------------- -------------
64,499,446 51,925,300 25,035,766
Commissions and other sales
costs (19,243,248) (14,292,152) (8,294,028)
General and administrative
expense (15,099,457) (10,632,212) (6,812,171)
Interest expense (6,383) (461,475) (165,173)
Other income, net 2,064,399 750,950 346,271
Earnings from mortgage assets -- 5,230,549 5,088,693
Minority interest in net
income of consolidated
joint ventures -- (2,021,230) --
------------- ------------- -------------
Earnings before income taxes 32,214,757 30,499,730 15,199,358
Income taxes (13,269,404) (6,496,943) (961,916)
------------- ------------- -------------
Net earnings $ 18,945,353 $ 24,002,787 $ 14,237,442
============= ============= =============
Basic earnings per share $ 3.49 $ 4.51 $ 2.93
============= ============= =============
Diluted earnings per share $ 3.14 $ 3.92 $ 2.68
============= ============= =============
See accompanying notes to consolidated financial statements
F-4
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Number of Common Paid-in Accumulated Treasury
Shares Stock Capital Deficit Stock Total
------ ----- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 4,580,611 $ 45,806 $ 92,643,658 $(65,334,117) $ (410,283) $ 26,945,064
Net earnings -- -- -- 14,237,442 -- 14,237,442
Exercise of stock options 8,162 81 118,510 -- -- 118,591
Shares issued in connection with
the Legacy combination 666,667 6,667 3,393,335 -- -- 3,400,002
Stock option and contingent stock
compensation expense -- -- 1,664,081 -- -- 1,664,081
--------- -------- ------------ ------------ ----------- ------------
Balance at December 31, 1997 5,255,440 52,554 97,819,584 (51,096,675) (410,283) 46,365,180
Net earnings -- -- -- 24,002,787 -- 24,002,787
Exercise of stock options 43,660 437 513,135 -- -- 513,572
Contingent and warrant shares
issued 88,888 888 (888) -- -- --
Stock option and contingent stock
compensation expenses -- -- 1,397,591 -- -- 1,397,591
Retirement of treasury stock (53,046) (530) (409,753) -- 410,283 --
--------- -------- ------------ ------------ ----------- ------------
Balance at December 31, 1998 5,334,942 53,349 99,319,669 (27,093,888) -- 72,279,130
Net earnings -- -- -- 18,945,353 -- 18,945,353
Exercise of stock options 51,076 511 494,650 -- -- 495,161
Contingent shares issued 88,888 889 (889) -- -- --
Stock option and contingent stock
compensation expenses -- -- 593,315 -- -- 593,315
Purchase of treasury stock -- -- -- -- (1,902,425) (1,902,425)
--------- -------- ------------ ------------ ----------- ------------
Balance at December 31, 1999 5,474,906 $ 54,749 $100,406,745 $ (8,148,535) $(1,902,425) $ 90,410,534
========= ======== ============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 18,945,353 $ 24,002,787 $ 14,237,442
Adjustments to reconcile net earnings
to net depreciation and amortization 2,528,346 1,637,474 376,916
Minority interest in net income of
consolidated joint ventures -- 2,021,230 --
Deferred tax expense 6,236,366 4,969,000 --
Stock option compensation expense 593,315 1,397,591 1,664,081
Gain on sales of residual interests -- (5,180,046) (3,067,829)
Increase in real estate under development (66,253,875) (32,045,609) (10,575,738)
Increase in deposits on real estate under
option or contract (8,361,203) (3,577,986) (1,712,139)
(Increase) decrease in other receivables
and other assets 680,230 (1,775,151) 2,313,632
Increase in accounts payable and accrued
liabilities 9,570,526 4,375,102 2,974,442
Increase (decrease) in home sale deposits (326,245) 1,809,629 465,409
------------- ------------- ------------
Net cash provided by (used in) operating
activities (36,387,187) (2,365,979) 6,676,216
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in merger/acquisition -- 785,403 1,306,998
Cash paid for merger/acquisition (6,966,890) (9,744,607) (1,952,857)
Purchases of property and equipment (2,935,205) (1,568,642) (174,257)
Principal payments received on real
estate loans -- -- 2,124,544
Real estate loans funded -- -- (428,272)
Decrease in short term investments -- -- 4,696,495
Proceeds from sales of residual interest -- 6,600,000 5,500,000
------------- ------------- ------------
Net cash provided by (used in)
investing activities (9,902,095) (3,927,846) 11,072,651
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 273,824,450 174,445,708 67,900,899
Repayment of borrowings (225,092,694) (164,524,041) (92,896,553)
Purchase of treasury shares (1,902,425) -- --
Stock options exercised 495,161 513,572 118,591
Dividends paid -- -- (194,330)
------------- ------------- ------------
Net cash provided by (used in)
financing activities 47,324,492 10,435,239 (25,071,393)
------------- ------------- ------------
Net increase (decrease) in cash and
cash equivalents 1,035,210 4,141,414 (7,322,526)
Cash and cash equivalents at beginning
of year 12,386,806 8,245,392 15,567,918
------------- ------------- ------------
Cash and cash equivalents at end of year $ 13,422,016 $ 12,386,806 $ 8,245,392
============= ============= ============
Supplemental information:
Cash paid for interest $ 5,872,607 $ 3,996,771 $ 3,801,764
Cash paid for income taxes $ 5,422,500 $ 2,332,604 $ 49,871
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
BUSINESS. Meritage Corporation develops, constructs and sells new high quality,
single-family homes in the semi-custom luxury, move-up and entry-level markets.
We were formed in 1988 as a real estate investment trust ("REIT") that
invested in mortgage-related assets and real estate loans. On December 31, 1996,
the Company acquired by merger the homebuilding operations of various entities
operating under the Monterey Homes name, and has phased out the mortgage-related
operations. Monterey has been building homes in Arizona for over 14 years,
specializing in move-up and semi-custom luxury homes.
As part of our strategy to diversify operations, on July 1, 1997, we
combined with Legacy Homes, a group of entities with homebuilding operations in
Texas. Legacy has been in business since 1988, and designs, builds and sells
entry-level and move-up homes. On July 1, 1998 we acquired Sterling Communities,
now Meritage Homes of Northern California, which has homebuilding operations in
the San Francisco Bay and Sacramento metropolitan areas, and designs, builds and
sells move-up homes. In September 1998, with shareholder approval, Meritage
Corporation became the new corporate name.
BASIS OF PRESENTATION. 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. Results include the operations of Legacy from July 1, 1997 and of
Meritage Homes of Northern California from July 1, 1998.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS. We consider short-term investments with an initial
maturity of three months or less to be cash equivalents. Amounts in transit from
title companies for home closings of approximately $1,568,000 and $6,254,000 are
included in cash as of December 31, 1999 and 1998, respectively.
REAL ESTATE UNDER DEVELOPMENT. Amounts are carried at cost unless such costs
would not be recovered from the cash flows generated by future disposition. In
this case, amounts are carried at estimated fair value less disposal costs.
Costs capitalized include direct construction costs for homes, development
period interest and certain common costs that benefit the entire community.
Common costs are allocated on a community-by-community basis to residential lots
based on the number of lots to be built in the community, which approximates the
relative sales value method.
Deposits paid related to options and contracts to purchase land are capitalized
and classified as deposits on real estate under option or contract until the
related land is purchased. The deposits are then transferred to real estate
under development.
COST OF HOME SALES. Cost of sales includes land acquisition and development
costs, direct home construction costs, development period interest and closing
costs, and an allocation of common costs.
REVENUE RECOGNITION. Revenues and profits from sales of residential real estate
and related activities are recognized when closings have occurred and the buyer
has made a minimum down payment and other criteria for sale and profit
recognition are satisfied.
F-7
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PROPERTY AND EQUIPMENT. We state property and equipment at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, which range from three to seven years.
Accumulated depreciation was approximately $3,503,000 and $2,862,000 at December
31, 1999 and 1998, respectively. Maintenance and repair costs are expensed as
incurred.
GOODWILL. Goodwill represents the excess of purchase price over fair value of
net assets acquired and is being amortized on a straight-line basis over a
20-year period. Accumulated amortization was approximately $1,771,700 at
December 31, 1999 and $704,600 at December 31, 1998. Management periodically
evaluates the businesses to which the goodwill relates to insure the carrying
value of goodwill has not been impaired. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows using
a discount rate reflecting our average cost of funds. No goodwill impairment was
recorded in the accompanying statements of earnings.
RESIDUAL INTERESTS. Prior to year-end 1998, we owned residual interests in
collateralized mortgage obligations (CMOs) and in mortgage participation
certificates (MPCs) (collectively residual interests). We used the prospective
net level yield method, in which interest is recorded at cost and amortized over
the life of the related CMO or MPC issuance, to account for the residual
interests. All residual interests were sold in 1997 and 1998.
INCOME TAXES. We account for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in future years and are subsequently adjusted for changes in the
rates. The effect on deferred tax assets and liabilities of a change in tax
rates is a charge or credit to deferred tax expense in the period of enactment.
EARNINGS PER SHARE. Basic earnings per share are computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in our earnings. We adopted SFAS No. 128, "Earnings Per
Share" in 1997.
USE OF ESTIMATES. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions relating to amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of our short-term
financial instruments are reasonable approximations of fair value. Our notes
payable carry interest rates that are variable and/or comparable to current
market rates based on the nature of the loans, their terms and remaining
maturity, and therefore are stated at approximate fair value. Considerable
judgment is required in interpreting market data to develop estimates of fair
value. Accordingly, these fair value estimates are subjective and not
necessarily indicative of the amounts we would pay or receive in actual market
transactions.
F-8
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STOCK OPTION PLANS. We have elected to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion (APB) No. 25 as allowed by SFAS No. 123 "Accounting for Stock-Based
Compensation". As such, compensation expense would be recorded on the date of
the grant only if the market price of the stock underlying the grant was greater
than the exercise price. The pro forma disclosures that are required by SFAS No.
123 are presented in Note 6.
SEGMENT INFORMATION. The FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments for an Enterprise and Related Information"
in June 1997. FASB No. 131 establishes standards for the way that public
companies report selected information about operating segments in financial
reports issued to stockholders. We have adopted the provisions of FASB No. 131,
which caused no significant impact on our definitions of our operating segments
and related disclosures.
NOTE 3 - REAL ESTATE UNDER DEVELOPMENT AND CAPITALIZED INTEREST
The components of real estate under development at December 31 follow (in
thousands):
1999 1998
---- ----
Homes under contract, in production $ 71,987 $ 44,186
Finished lots and lots under development 63,610 43,508
Land held for development 3,618 3,050
Model homes and homes held for resale 31,797 14,015
-------- --------
$171,012 $104,759
======== ========
We capitalize certain interest costs during development and construction.
Capitalized interest is allocated to real estate under development and charged
to cost of home sales when the homes are delivered. Summaries of interest
capitalized and interest expensed follow (in thousands):
Year Ended December 31,
------------------------
1999 1998
---------- ----------
Beginning unamortized capitalized interest $ 1,982 $ 1,890
Interest capitalized 7,025 3,711
Amortized cost of home sales (5,036) (3,619)
---------- ----------
Ending unamortized capitalized interest $ 3,971 $ 1,982
========= =========
Interest incurred $ 7,031 $ 4,172
Interest capitalized (7,025) (3,711)
---------- ----------
Interest expense $ 6 $ 461
========= =========
F-9
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 - NOTES PAYABLE
Notes payable at December 31 consist of the following (in thousands):
1999 1998
------- -------
$70 million bank construction line of credit,
interest payable monthly approximating prime (8.5%
at December 31, 1999) or LIBOR (30 day LIBOR
5.832% at December 31, 1999), plus 1.75% payable
at December 31, 2001, secured by first deeds of
trust on real estate $37,411 $ 7,955
$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 real estate 26,104 10,925
$15 million unsecured bank revolving line of
credit, interest payable monthly at prime,
maturing on January 17, 2000 6,000 --
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 real estate 1,396 2,407
Senior unsecured notes, maturing September 15,
2005, annual interest of 9.1% payable quarterly,
principal payable in three equal installments on
September 15, 2003, 2004 and 2005 15,000 15,000
Other 26 918
------- -------
Total $85,937 $37,205
======= =======
The bank credit facilities and senior subordinated notes contain covenants
which require certain levels of tangible net worth, the maintenance of certain
minimum financial ratios, place limitations on the payment of dividends and
limit incurrence of indebtedness, asset dispositions and creations of liens,
among other items. As of December 31, 1999 and throughout the year, we were in
compliance with these covenants.
On October 2, 1998, we issued $15,000,000 in 9.1% Senior Unsecured Notes due
September 1, 2005 in a private placement to accredited investors under Section
4(2) of the Securities Act. Warburg Dillon Read and Dain Rauscher Wessels were
the underwriters of the issue and were paid a fee of 2.75% of the face amounts
of the notes. The notes were sold at par to four entities controlled by
Massachusetts Mutual Life Insurance Company. The proceeds of the issue were used
to pay down existing indebtedness.
F-10
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Scheduled maturities of notes payable as of December 31, 1999 follow (in
thousands):
Year Ended
December 31,
------------
2000 $33,526
2001 37,411
2002 --
2003 5,000
2004 5,000
Thereafter 5,000
-------
$85,937
=======
NOTE 5 - EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the years ended December 31, 1999, 1998 and 1997 follows.
(in thousands, except per share amounts):
1999 1998 1997
------- ------- -------
Net earnings $18,945 $24,003 $14,237
Basic EPS - Weighted average
shares outstanding 5,431 5,317 4,864
------- ------- -------
Basic earnings per share $ 3.49 $ 4.51 $ 2.93
======= ======= =======
Basic EPS - Weighted average
shares outstanding 5,431 5,317 4,864
Effect of dilutive securities:
Contingent shares and warrants 89 158 114
Stock options 512 641 330
------- ------- -------
Dilutive EPS - Weighted average
shares outstanding 6,032 6,116 5,308
------- ------- -------
Diluted earnings per share $ 3.14 $ 3.92 $ 2.68
======= ======= =======
Antidilutive stock options not
included in diluted EPS 279 59 4
======= ======= =======
NOTE 6 - STOCK OPTIONS AND CONTINGENT STOCK
Our Board of Directors administers our stock option plans. The plans
provide for stock option grants to key personnel and directors, and provide a
means of performance-based compensation in order to attract and retain qualified
employees.
F-11
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
We apply APB Opinion No. 25 and related interpretations in accounting for
our plans. Under APB 25, if the exercise price of the Company's stock options is
equal to the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
Had compensation cost for these plans been determined consistent with SFAS
123, our net earnings and earnings per share would have been reduced to the
following pro forma amounts (in thousands, except for per share amounts):
1999 1998 1997
---- ---- ----
Net earnings As reported $18,945 $24,003 $14,237
Pro forma 18,472 23,573 13,892
Basic earnings per share As reported 3.49 4.51 2.93
Pro forma 3.40 4.43 2.86
Diluted earnings per share As reported 3.14 3.92 2.68
Pro forma 3.06 3.85 2.62
The per share weighted average fair values of stock options granted during
1999, 1998 and 1997 were $7.81, $9.91 and $4.58, respectively, on the dates of
grant using the Black-Scholes pricing model based on the following weighted
average assumptions:
1999 1998 1997
---- ---- ----
Expected dividend yield 0% .5% 1.2%
Risk-free interest rate 4.76% 5.75% 6.00%
Expected volatility 52% 51% 43%
Expected life (in years) 6 7 5
THE MERITAGE PLAN
Our shareholders approved a new stock option plan at our 1997 Annual
Meeting. The plan authorizes grants of incentive stock options and non-qualified
stock options to our executives, directors, employees and consultants. A total
of 225,000 shares of Meritage common stock were reserved for issuance upon
exercise of stock options granted under this plan, with an additional 250,000
shares added to the reserve by vote of the shareholders at our 1998 Annual
Meeting. The options vest over periods from two to five years, are based on
continued employment, and expire five to ten years after the date of grant.
THE PRIOR PLAN
The 1988 Homeplex Mortgage Investments Corporation Stock Option Plan (the
prior plan) was in effect at the time of the merger. No new grants have been
issued under this plan since the merger, and 62,726 option shares were
outstanding under this plan at December 31, 1999. Accounts payable and accrued
liabilities in the accompanying 1999 and 1998 balance sheets include
approximately $253,200 and $524,800, respectively, related to options granted
under the prior plan. This liability will remain on the consolidated balance
sheets until the options are exercised, canceled or expire.
F-12
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OTHER OPTIONS
In connection with the merger and Legacy combination, Mssrs. Hilton, Landon
and Cleverly each received 166,667 non-qualified stock options that vest over
three years. The exercise price of the options is $5.25 per share, which was
negotiated at the time of the transactions. Mr. Hilton's and Mr. Cleverly's
options expire in December 2002 and Mr. Landon's expire in June 2003.
A current member of our board of directors who served as our president and
chairman prior to the merger holds 250,000 non-qualified stock options. The
options were granted in exchange for the director forgoing his annual salary and
bonus, and were approved by shareholders at the 1996 Annual Meeting. These
options are fully vested, have an exercise price of $ 4.50 per share and expire
on December 21, 2000.
SUMMARY OF STOCK OPTION ACTIVITY:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- -------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- ------ ---------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 1,028,302 $ 6.25 1,041,480 $ 5.86 732,975 $ 5.78
Options granted 264,500 14.74 57,500 16.54 150,000 7.16
Merger/combination options granted -- -- -- -- 166,667 5.25
Options exercised (51,076) 7.08 (43,660) 10.04 (8,162) 9.36
Options canceled (68,500) 14.39 (27,018) 7.22 -- --
---------- ------ --------- ----- --------- -----
Options outstanding at end of year 1,173,226 $ 7.65 1,028,302 $ 6.25 1,041,480 $ 5.86
========== ====== ========= ====== ========= ======
Options exercisable at end of year 801,669 613,579 515,090
Price range of options exercised $5.62-$11.25 $4.50-$11.25 $4.37-$6.38
Price range of options outstanding $4.50-$17.63 $4.50-$17.63 $3.62-$13.32
Total shares reserved at December 31 1,386,583 1,525,547 1,383,146
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1999 WERE:
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted Weighted
Weighted Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Options Contractual Life Price Options Price
------------------------ ------- ---------------- ----- ------- -----
$ 4.50 - $ 6.38 815,944 2.6 years $ 5.02 724,387 $ 4.98
$ 8.50 - $12.50 97,066 4.3 9.88 63,566 10.42
$13.37 - $17.63 260,216 6.0 15.06 13,716 16.33
--------- --------- -------- ------- ------
1,173,226 3.5 years $ 7.65 801,669 $ 5.61
========= ========= ======== ======= ======
</TABLE>
F-13
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONTINGENT SHARES
In connection with the merger, 266,666 shares of contingent stock were
reserved for equal issuance to Mr. Hilton and Mr. Cleverly on the first, second
and third anniversaries of the transaction. The requirements for the release of
the contingent stock were met and Mr. Hilton and Mr. Cleverly were each issued
44,444 shares of common stock subsequent to the first, second and third
anniversaries of the merger.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
We are involved in legal proceedings and claims that arise in the ordinary
course of business. Management believes the amount of ultimate liability with
respect to these actions will not materially affect our financial statements
taken as a whole.
Also in the normal course of business, we provide standby letters of credit
and performance bonds issued to third parties to secure performance under
various contracts. At December 31, 1999 outstanding letters of credit were $1.0
million and performance bonds were $16.3 million.
We lease office facilities, model homes and equipment under various
operating lease agreements. Approximate future minimum lease payments for
noncancellable operating leases as of December 31, 1999 are as follows:
Year Ending
December 31
-----------
2000 $1,111,498
2001 768,987
2002 381,560
2003 291,882
2004 and thereafter --
----------
$2,553,927
==========
Rental expense was approximately $1,113,000 in 1999, $1,074,900 in 1998,
and $1,185,400 in 1997. Included in these amounts are $415,000 in 1999, $380,000
in 1998 and $274,000 in 1997 related to office facilities leased from companies
owned beneficially either by one of our Co-Chairmen or by a Co-Chairman and a
Director.
NOTE 8 - MERGERS/COMBINATIONS/ACQUISITIONS
LEGACY HOMES
On May 29, 1997 we signed a definitive agreement to acquire the
homebuilding and related mortgage service business of Legacy Homes, Ltd. and its
affiliates. The transaction was effective on July 1, 1997. Legacy Homes has been
building entry-level and move-up homes in Texas since 1988 and is headquartered
in the Dallas/Fort Worth metropolitan area.
Consideration consisted of approximately $1.5 million in cash, 666,667
shares of Meritage common stock valued at $3.4 million and $370,000 of
transaction costs. 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 $1.5 million was
recorded, which is being amortized over 20 years. Provisions also were made to
pay additional consideration not to exceed $15 million, based on our earnings.
Additional consideration was approximately $5.2 million in 1999, $7.0 million in
1998 and $2.8 million in 1997, and was paid subsequent to each year-end. These
amounts are recorded as goodwill and are being be amortized over 20 years.
F-14
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STERLING COMMUNITIES
On June 15, 1998, we 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. Operations of the Sterling Entities
continue 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 our California division and will be expensed as earned.
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the Legacy combination and Sterling
acquisition had occurred at January 1, 1997, with pro forma adjustments together
with related income tax effects. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations that would actually have occurred had the combination been in effect
on the date indicated (in thousands except per share data).
Years Ended December 31,
------------------------
(Unaudited)
1998 1997
---- ----
Home sales revenue $274,754 $ 220,852
Net earnings $ 24,949 $ 19,835
Basic earnings per share $ 4.69 $ 3.82
Diluted earnings per share $ 4.08 $ 3.49
NOTE 9 - INCOME TAXES
Components of income tax expense are (in thousands):
1999 1998 1997
---- ---- ----
Current taxes:
Federal $ 5,748 $ 561 $222
State 1,285 967 740
------- ------ ----
7,033 1,528 962
------- ------ ----
Deferred taxes:
Federal 6,121 4,587 --
State 115 382 --
------- ------ ----
6,236 4,969 --
------- ------ ----
Total $13,269 $6,497 $962
======= ====== ====
F-15
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred tax assets and liabilities have been recognized in the
consolidated balance sheets due to the following temporary differences and
carryforwards (in thousands):
12/31/99 12/31/98
-------- --------
Net operating loss carryforward $ -- $ 4,360
Warranty reserve 311 67
Real estate and fixed asset basis differences 374 509
Stock options 282 --
Deductible merger/acquisition costs -- 1,163
Alternative minimum tax credit -- 782
Sale/leaseback gain deferred 154 --
Other 102 54
------- ----------
1,223 6,935
Deductible merger/acquisition costs (524) --
------- ----------
Net deferred tax asset $ 699 $ 6,935
======= ==========
Management believes it is more likely than not that the net deferred tax
asset will be realized.
RECONCILIATION OF EFFECTIVE INCOME TAX EXPENSE:
Income taxes differ for the years ended December 31, 1999, 1998 and 1997
from the amounts computed using the federal statutory income tax rate as a
result of the following (in thousands):
1999 1998 1997
-------- -------- -------
Expected taxes at current federal
statutory income tax rate $ 10,953 $ 10,678 $ 5,320
State income taxes 890 967 740
Utilization of NOL -- (5,709) (5,320)
Alternative minimum tax -- 561 222
Non-deductible merger/acquisition costs 1,565 -- --
Other (139) -- --
-------- -------- -------
Income tax expense $ 13,269 $ 6,497 $ 962
======== ======== =======
F-16
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 - SELECTED QUARTERLY FINANCIAL DATA SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
Home Sales Basic Earnings Diluted Earnings
Revenue Net Earnings Per Share Per Share
------- ------------ --------- ---------
(in thousands, except per share amounts)
1999 - THREE MONTHS ENDED:
<S> <C> <C> <C> <C>
March 31 $ 51,306 $2,325 $ .43 $ .38
June 30 76,647 4,541 .83 .75
September 30 76,786 4,027 .74 .67
December 31 129,268 8,052 1.50 1.37
1998 - THREE MONTHS ENDED:
March 31 $ 36,513 $5,452 $1.03 $ .90
June 30 55,608 6,696 1.26 1.10
September 30 68,417 4,268 .80 .70
December 31 95,446 7,587 1.42 1.28
</TABLE>
NOTE 11 - SEGMENT INFORMATION
We classify our operations into three primary geographic segments: Texas,
Arizona and California. These segments generate revenues through the sales of
homes to external customers. We are not dependent on any one major customer.
Operational information relating to the different business segments
follows. Information has been included for the Texas operations from July 1,
1997, the combination date, and for the California operations from July 1, 1998,
the acquisition date. 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.
(in thousands )
------------------------------------
1999 1998 1997
--------- -------- --------
HOME SALES REVENUE:
Texas $ 174,850 $130,860 $ 51,463
Arizona 120,909 105,942 97,922
California 38,248 19,183 --
--------- -------- --------
Total $ 334,007 $255,985 $149,385
========= ======== ========
EBIT:
Texas $ 22,652 $ 18,300 $ 7,059
Arizona 14,515 12,918 9,744
California 4,185 1,858 --
Corporate and other (4,094) 1,504 350
--------- -------- --------
Total $ 37,258 $ 34,580 $ 17,153
========= ======== ========
38
<PAGE>
AMORTIZATION OF CAPITALIZED INTEREST:
Texas $ 1,758 $ 1,143 $ 392
Arizona 2,777 2,410 1,397
California 501 66 --
--------- -------- --------
Total $ 5,036 $ 3,619 $ 1,789
========= ======== ========
ASSETS AT YEAR END:
Texas $ 97,832 $ 64,448 $ 32,702
Arizona 77,195 58,758 47,867
California 43,773 12,321 --
Corporate and other 7,759 16,723 16,065
--------- -------- --------
Total $ 226,559 $152,250 $ 96,634
========= ======== ========
F-17
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2000 1999
------------- -------------
ASSETS
Cash and cash equivalents $ 5,384,805 $ 13,422,016
Real estate under development 183,941,966 171,012,405
Deposits on real estate under
option or contract 18,412,244 15,699,609
Other receivables 3,462,987 1,643,187
Deferred tax asset 717,436 698,634
Goodwill 18,474,847 18,741,625
Property and equipment, net 4,088,618 4,040,134
Other assets 1,541,579 1,301,286
------------- -------------
Total Assets $ 236,024,482 $ 226,558,896
============= =============
LIABILITIES
Accounts payable and accrued liabilities $ 31,189,845 $ 41,950,761
Home sale deposits 10,101,617 8,261,000
Notes payable 100,077,727 85,936,601
------------- -------------
Total Liabilities 141,369,189 136,148,362
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share;
50,000,000 shares authorized; issued
and outstanding - 5,563,796 shares at
March 31, 2000, and 5,474,906 shares
at December 31, 1999 55,638 54,749
Additional paid-in capital 100,464,215 100,406,745
Accumulated deficit (3,377,652) (8,148,535)
Less cost of shares held in treasury
(237,667 shares) (2,486,908) (1,902,425)
------------- -------------
Total Stockholders' Equity 94,655,293 90,410,534
------------- -------------
Total Liabilities and Stockholders' Equity $ 236,024,482 $ 226,558,896
============= =============
See accompanying notes to consolidated financial statements
F-18
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended March 31,
------------------------------
2000 1999
------------ ------------
Home sales revenue $ 91,652,660 $ 51,306,197
Land sales revenue 757,511 79,900
------------ ------------
92,410,171 51,386,097
Cost of home sales (74,956,349) (41,322,288)
Cost of land sales (681,205) (34,500)
------------ ------------
(75,637,554) (41,356,788)
Home sales gross profit 16,696,311 9,983,909
Land sales gross profit 76,306 45,400
------------ ------------
16,772,617 10,029,309
Commissions and other sales costs (5,778,560) (3,415,817)
General and administrative expense (4,001,961) (3,146,047)
Interest expense (1,522) (835)
Other income, net 532,271 318,432
------------ ------------
Earnings before income taxes 7,522,845 3,785,042
Income taxes (2,751,962) (1,460,000)
------------ ------------
Net earnings $ 4,770,883 $ 2,325,042
============ ============
Basic earnings per share $ .90 $ .43
============ ============
Diluted earnings per share $ .82 $ .38
============ ============
See accompanying notes to consolidated financial statements
F-19
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 4,770,883 $ 2,325,042
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 694,065 458,978
(Increase) decrease in deferred tax asset (18,802) 1,214,000
Stock option compensation expense 58,359 148,329
Increase in real estate under development (12,929,561) (23,685,192)
Increase in deposits on real estate under
option or contract (2,712,635) (2,225,055)
(Increase) decrease in other receivables
and other assets (2,060,093) 598,500
Decrease in accounts payable and accrued
liabilities (5,602,910) (5,695,430)
Increase in home sale deposits 1,840,617 2,822,855
------------ ------------
Net cash used in operating activities (15,960,077) (24,037,973)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for merger/acquisition (5,158,006) (6,966,890)
Purchases of property and equipment (475,771) (749,857)
------------ ------------
Net cash used in investing activities (5,633,777) (7,716,747)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 97,251,332 66,203,003
Repayment of borrowings (83,110,206) (39,464,652)
Purchase of treasury shares (584,483) --
Stock options exercised -- 11,240
------------ ------------
Net cash provided by financing activities 13,556,643 26,749,591
------------ ------------
Net decrease in cash and cash equivalents (8,037,211) (5,005,129)
Cash and cash equivalents at beginning of period 13,422,016 12,386,806
------------ ------------
Cash and cash equivalents at end of period $ 5,384,805 $ 7,381,677
============ ============
See accompanying notes to consolidated financial statements
F-20
<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. We operate in the
Dallas/Fort Worth, Austin and Houston, Texas markets as Legacy Homes, in the
Phoenix and Tucson, Arizona metropolitan markets under the Monterey Homes and
Meritage Homes of Arizona brand names, and in the San Francisco Bay and
Sacramento, California markets as Meritage Homes of Northern California.
BASIS OF PRESENTATION. Our consolidated financial statements include the
accounts of Meritage Corporation and our subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation and certain prior period
amounts have been reclassified to be consistent with current financial statement
presentation. In the opinion of management, the 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):
March 31, December 31,
2000 1999
--------- ---------
Homes under contract, in production $ 82,131 $ 71,987
Finished homesites and homesites under
development 68,725 63,610
Model homes and homes held for resale 29,468 31,797
Land held for development 3,618 3,618
--------- ---------
$ 183,942 $ 171,012
========= =========
We capitalize certain interest costs incurred during development and
construction. Capitalized interest is allocated to real estate under development
and charged to cost of sales when the property is delivered. Summaries of
interest capitalized and interest expensed follow (in thousands):
March 31,
-------------------
2000 1999
------- -------
Beginning unamortized capitalized interest $ 3,971 $ 1,982
Interest capitalized 1,868 1,089
Amortized in cost of home and land sales (1,565) (811)
------- -------
Ending unamortized capitalized interest $ 4,274 $ 2,260
======= =======
Interest incurred $ 1,870 $ 1,090
Interest capitalized (1,868) (1,089)
------- -------
Interest expense $ 2 $ 1
======= =======
F-21
<PAGE>
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,
2000 1999
--------- ---------
$70 million bank revolving construction line of
credit, interest payable monthly approximating
prime (9.0% at March 31, 2000) or LIBOR (30 day
LIBOR 6.1% at March 31, 2000), plus 1.75% payable
December 31, 2001, secured by first deeds of
trust on real estate $ 55,141 $ 37,411
$65 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 within the line or July 31, 2000, secured
by first deeds of trust on real estate 28,285 26,104
$15 million unsecured bank revolving line of
credit, interest payable monthly at prime,
matured January 17, 2000 -- 6,000
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
real estate 1,628 1,396
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 23 26
--------- ---------
Total $ 100,077 $ 85,937
========= =========
F-22
<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 months ended March 31, 2000 and 1999 follows
(in thousands, except per share amounts):
2000 1999
------ ------
Net earnings $4,771 $2,325
Basic EPS - Weighted average shares outstanding 5,287 5,425
------ ------
Basic earnings per share $ .90 $ .43
====== ======
Basic EPS - Weighted average shares outstanding 5,287 5,425
Effect of dilutive securities:
Contingent shares and warrants 73 71
Stock options 458 563
------ ------
Dilutive EPS - Weighted average shares outstanding 5,818 6,059
------ ------
Diluted earnings per share $ .82 $ .38
====== ======
Antidilutive stock options not included in diluted EPS 280 282
====== ======
NOTE 5 - INCOME TAXES
Components of income tax expense at March 31 are (in thousands):
2000 1999
------- -------
Current taxes:
Federal $ 2,419 $ 83
State 352 163
------- -------
2,771 246
------- -------
Deferred taxes:
Federal (17) 1,213
State (2) 1
------- -------
(19) 1,214
------- -------
Total $ 2,752 $ 1,460
======= =======
F-23
<PAGE>
MERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 6 - SEGMENT INFORMATION
We classify our operations into three primary geographic segments: Texas,
Arizona and California. These segments generate 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. Certain information has not been included by segment due to the
immateriality of the amount to the segment or in total. We evaluate segment
performance based on several factors, of which the primary financial measure is
earnings before interest and taxes (EBIT). The accounting policies of the
business segments are the same as those described in Notes 1 and 2. There are no
significant transactions between segments.
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
(in thousands)
HOME SALES REVENUE:
Texas $ 49,430 $ 30,334
Arizona 21,942 19,628
California 20,281 1,344
-------- --------
Total $ 91,653 $ 51,306
======== ========
EBIT:
Texas $ 7,010 $ 3,735
Arizona 995 1,890
California 2,311 (422)
Corporate and other (1,227) (606)
-------- --------
Total $ 9,089 $ 4,597
======== ========
AMORTIZATION OF CAPITALIZED INTEREST:
Texas $ 635 $ 300
Arizona 578 503
California 352 8
-------- --------
Total $ 1,565 $ 811
======== ========
At March 31,
----------------------------
ASSETS: 2000 1999
-------- --------
Texas $ 99,725 $ 97,832
Arizona 85,040 77,195
California 48,737 43,773
Corporate 2,522 7,759
-------- --------
Total $236,024 $226,559
======== ========
F-24
