SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM  10-K

 

ý       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2003

 

OR

 

o       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                

 

Commission File Number 1-9977

 

 

(Exact Name of Registrant as specified in its charter)

 

 

(480) 609-3330

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.01 par value            New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:   NONE

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý       No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ý No o

 

The aggregate market value of common stock held by non-affiliates of the registrant (9,965,938 shares) as of June 30, 2003, was $490,922,106, based on the closing sales price per share as reported by the New York Stock Exchange on such date.  The aggregate market value of common stock held by non-affiliates of the registrant (10,635,091 shares) as of March 5, 2004, was $833,259,380, based on the closing sales price per share as reported by the New York Stock Exchange on such date.  For purposes of these computations, all executive officers and directors of the registrant have been deemed to be affiliates.

 

The number of shares outstanding of the registrant’s common stock on March 5, 2004 was 13,252,767.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions from the registrant’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2004 have been incorporated by reference into Part III, Items 10, 11, 12, 13 and 14.

 

 

MERITAGE CORPORATION

FORM 10-K

TABLE OF CONTENTS

 

PART I
	Item 1.	Business
	Item 2.	Properties
	Item 3.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders
PART II
	Item 5.	Market For the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
	Item 6.	Selected Financial Data
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
	Item 8.	Financial Statements and Supplementary Data
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
	Item 9A.	Controls and Procedures
PART III
	Item 10.	Directors and Executive Officers of the Registrant
	Item 11.	Executive Compensation
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13.	Certain Relationships and Related Transactions
	Item 14.	Principal Accountant Fees and Services
PART IV
	Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES

 

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PART I

 

Item 1.  Business

 

The Company

 

Meritage Corporation is a leading designer and builder of single-family homes in the rapidly growing Sunbelt states of Texas, Arizona, California and Nevada, based on the number of homes closed.  We focus on providing a broad range of first-time, move-up, active adult and luxury homes to our targeted customer base.  We have operated in Arizona since 1985, in Texas since 1987 and in Northern California since 1989.  We expanded our presence in Texas with the July 2002 acquisition of Hammonds Homes (Hammonds), a builder that focuses on the move-up market in the Houston, Dallas/Ft. Worth and Austin areas.  We entered the Las Vegas, Nevada market in October 2002 with our acquisition of Perma-Bilt Homes (Perma-Bilt), another move-up builder.  In addition, we entered the Inland Empire market of Southern California in January 2004 with our acquisition of Citation Homes of Southern California.

 

We operate in Texas as Legacy Homes, Monterey Homes and Hammonds Homes, in Arizona as Monterey Homes, Meritage Homes and Hancock Communities, in Northern California as Meritage Homes, in Southern California as Citation Homes of Southern California and in Nevada as Perma-Bilt Homes.  We classify the four states in which we operate as our principal business segments.  Financial information for these reportable segments can be found in our consolidated financial statements included in Item 8 of this report, as presented in Note 11 – Operating and Reporting Segments.  At December 31, 2003, we were actively selling homes in 123 communities, with base prices ranging from $98,000 to $730,000.

 

Available Information; Corporate Governance

 

Information about our company and communities is provided on our Internet website at www.meritagehomes.com.  Our periodic and current reports and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available, at no cost, on our website as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission (“SEC”).  The information on our website is not considered part of this annual report on Form 10-K.

 

Meritage operates within a comprehensive plan of corporate governance for the purpose of defining responsibilities and setting high standards for ethical conduct.  Our Board of Directors has established an audit committee, executive compensation committee and nominating/governance committee.  The charters of each of these committees are included on our website.  In addition, we have included on our website our Code of Ethics and our Corporate Governance Principles and Practices.  We will make our committee charters, Code of Ethics and Corporate Governance Principles and Practices available in print to any stockholder who requests it.  You may request a copy of this information, at no cost, by calling us or by writing to us at our principal executive offices in Arizona at the following address:  Meritage Corporation, 8501 East Princess Drive, Suite 290, Scottsdale, Arizona 85255, Attention:  Investor Relations.  Our telephone number is (480) 609-3330.

 

Competitive Strengths

 

We believe Meritage Corporation possesses the following competitive strengths:

 

Conservative inventory management. We seek to minimize land and inventory risk in order to optimize our use of capital and maintain moderate leverage ratios.  We accomplish this by:

 

•                  generally purchasing land subject to complete entitlements, including zoning and utility services;

•                  developing smaller parcels, generally projects that can be completed within a three-year period;

•                  controlling approximately 84% of our land inventory through rolling options with initial deposit requirements typically between 1% and 15% of the land price;

 

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•                  managing housing inventory by pre-selling and obtaining substantial customer deposits on our homes prior to starting construction;

•                  limiting unsold home construction; and

•                  minimizing home construction cycles.

 

Disciplined financial management. We believe that our disciplined financial management policies enable us to achieve above-average returns on assets compared to our competitors in the homebuilding industry and maintain reasonable leverage ratios.  Our rigorous investment requirements for our new communities, both through internal growth and acquisition, enable us to deploy capital efficiently and to generate strong cash flows to fund the acquisition of additional land or homebuilding operations.

 

Strong margins. Our focus on achieving high margins results in greater profitability during strong economic periods and also enables us to realize lower break-even points and higher pricing flexibility during slower economic periods.  In addition to maintaining low overhead costs, we actively manage construction costs and pricing and marketing strategies in order to maximize margins.  We seek to optimize our mix of available housing upgrades and customization features to offer the highest value to customers at the lowest cost.  Within our pricing structure we provide our sales and marketing professionals with the autonomy and flexibility to respond rapidly to changing market dynamics by customizing our sales programs and customer incentives.

 

Experienced management team with significant equity ownership. Members of our senior management team have extensive experience in the homebuilding industry as well as in each of the local markets that we serve. Our co-chief executive officers and senior executives average over 18 years of homebuilding experience and each has delivered successful results through varying homebuilding cycles.  In addition, at December 31, 2003, our co-chief executive officers together beneficially owned approximately 18% of our outstanding common stock.

 

Product breadth. We believe that our product breadth and geographic diversity enhance our growth potential and help to reduce exposure to economic cycles.  In Arizona, we serve the first-time, move-up, and the active adult markets. We also build within the Arizona luxury market, and since 2002, in the Texas and California luxury markets, which are characterized by unique communities and distinctive luxury homes.  In Texas we mainly target the first and second-time move-up markets, and in California and Nevada, we focus primarily on move-up homes.

 

Business Strategy

 

We seek to distinguish ourselves from other production homebuilders through business strategies focused on the following:

 

Focus on high growth markets. Our housing markets are located in four rapidly growing Sunbelt states;  Texas, Arizona, California and Nevada.  These areas are generally characterized by high job growth and in-migration trends, creating strong demand for new housing, and we believe they represent attractive homebuilding markets with opportunities for long-term growth. We believe our operations in these markets are well established and that we have developed a reputation for building distinctive quality homes within our markets.

 

Expand into new and within existing markets.  We continuously evaluate expansion opportunities through strategic acquisitions of other homebuilders and internal growth through expansion of our product offering in existing markets or start-up operations in new geographic markets.  In pursuing expansion, we explore markets with demographic and other growth characteristics similar to our current markets and seek the acquisition of entities with operating policies, cash flow and earnings-focused philosophies similar to ours.

 

In the past six years we have successfully completed six acquisitions (including our January 2004 acquisition of Citation Homes of Southern California), enabling us to substantially increase our revenue and earnings, expand our geographic footprint, increase our market share in existing markets and add new product lines, such as active adult housing for the Arizona retirement market.

 

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Maintain low cost structure. Throughout our history, we have focused on minimizing construction costs and overhead, and we believe this attention is a key factor in maintaining high margins and profitability.  We reduce costs by:

 

•                  using subcontractors for home construction and site improvement on a fixed-price basis;

•                  obtaining favorable pricing from subcontractors through long-term relationships and high volume;

•                  reducing interest carry by minimizing our inventory of unsold or speculative homes and minimizing the home construction cycle;

•                  generally beginning construction on a home once it is under contract, we have received a satisfactory earnest money deposit and the buyer has obtained preliminary approval for a mortgage loan;

•                  minimizing overhead by centralizing certain administrative activities; and

•                  monitoring homebuilding production, scheduling and budgeting through management information systems.

 

Superior design, quality and customer service. We believe 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 compared to those built by our competitors.  In addition, we are committed to achieving the highest level of customer satisfaction as an integral part of our competitive strategy.  As part of the sales process, our experienced sales personnel continually inform customers of their home’s construction progress.  After delivery, our customer care departments respond to homebuyers’ questions and warranty matters.

 

Products

 

Our homes range from first-time purchases to semi-custom luxury, with base prices ranging from $98,000 to $730,000.  A summary of activity by state and product type as of and for the year ended December 31, 2003, follows (dollars in thousands):

 

		Number of Homes Closed		Average Closing Price			Homes in Backlog		Dollar Value of Backlog			Home Sites Remaining(1)		Number of Active Communities
Texas - First-time		6		$	147		8		$	1,124		181		—
Texas - Move-up		2,767		200			1,092		231,946			11,525		71
Texas – Luxury		55		443			19		8,349			174		2
Arizona – Active Adult		233		197			145		28,896			6,310		8
Arizona - First-time		150		125			91		11,283			1,560		2
Arizona - Move-up		1,028		267			526		142,171			4,322		19
Arizona – Luxury		104		737			70		56,009			327		5
California - Move-up		355		377			257		99,208			2,550		10
California – Luxury		380		528			148		78,147			999		4
Nevada - Move-up		564		238			224		53,638			2,564		2
Total Company		5,642		$	259		2,580		$	710,771		30,512		123

 

(1)                                  “Home Sites Remaining” is the estimated number of homes that could be built both on the remaining lots available for sale and land expected to be developed into lots.

 

Land Acquisition and Development

 

We typically acquire land only after necessary entitlements have been obtained so that development or 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

 

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process of obtaining such approvals and permits can substantially delay the development process.  For this reason, we may consider, on a limited basis, purchasing unentitled property in the future when we can do so in a manner consistent with our business strategy.  Although historically we have generally developed parcels ranging from 100 to 300 lots, in order to achieve and maintain an adequate inventory of lots, we are beginning to purchase larger parcels, in some cases with joint venture partners.

 

We select land for development based upon a variety of factors, including:

 

•                  extensive internal and external demographic and marketing studies;

•                  project suitability, which generally means developments with fewer than 300 lots;

•                  suitability for development generally within a one to four-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, returns 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 and economic trends, and our experience in particular markets.

 

We acquire land through purchases and rolling option contracts. Purchases are generally financed through our revolving credit facility or working capital.  Acquiring our land through rolling option contracts allows us to control lots and land through third parties who own or buy properties on which we plan to build homes.  We enter into option contracts to purchase finished lots at a certain price during a specified period of time from these third parties as home construction begins.  These contracts are generally non-recourse and typically require the payment of non-refundable deposits of 1% to 15% of the sales price.  At December 31, 2003, we had approximately $106.8 million in cash deposits and $17.5 million in letters of credit deposits on real estate under option or contract.  The total value of land under option at that time was approximately $1.1 billion.  Additional information relating to our lots and land under option is presented in Note 3 – Variable Interest Entities and Consolidated Real Estate Not Owned in the accompanying consolidated financial statements.

 

Once we acquire land, we generally initiate development through contractual agreements with subcontractors.  These activities 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 along or near a major amenity, such as a golf course.

 

We develop a design and marketing concept for each project, which includes the determination of size, style and price range of homes.  For these projects, we also determine street layout, individual lot size and layout, and overall community design.  The product line offered in each 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; though we are sometimes able to use standardized design plans for a product line.

 

To a limited extent, we may use joint ventures to purchase and develop land where such arrangements are necessary to acquire the property or appear to be otherwise economically advantageous.  At December 31, 2003, we were involved in five joint ventures related exclusively to land acquisition or development, which are accounted for using the equity method of accounting.  Our investment in these entities was approximately $22.7 million at the end of 2003.

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