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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


Amendment No. 2 to

FORM 8-K/A

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

Date of report (Date of earliest event reported): July 12, 2002

MERITAGE CORPORATION


(Exact Name of Registrant as Specified in Charter)
         
Maryland   I-9977   86-0611231

 
 
(State or Other Jurisdiction of
Incorporation)
  (Commission
File Number)
  (IRS Employer
Identification No.)
         
8501 East Princess Drive, Suite 290, Scottsdale, Arizona

(Address of Principal Executive Offices)
  85255

(Zip Code)

(480) 609-3330


(Registrant’s telephone number, including area code)

Not applicable


(Former Name or Former Address, if Changed Since Last Report)



 


 

Item 2. ACQUISITION OR DISPOSITION OF ASSETS

         This Amendment No. 2 to Form 8-K/A (“Amendment No. 2”) amends the Current Report on Form 8-K dated July 12, 2002. On July 15, 2002, we filed a Form 8-K (the “Original Filing”) to report the acquisition of substantially all of the homebuilding and related assets of Hammonds Homes, Ltd., a Texas limited partnership, and Crystal City Land & Cattle, Ltd., a Texas limited partnership (collectively, “Hammonds Homes” or “Hammonds”). On September 11, 2002, we filed an amendment to the Form 8-K (“Amendment No. 1”) to include the financial statements of the business acquired, including unaudited pro forma combined financial statements giving effect to the acquisition of Hammonds. The unaudited pro forma combined statement of earnings for the year ended December 31, 2001 and the interim period ended June 30, 2002 contained in Item 7(b) of Amendment No. 1 inadvertently omitted the footnotes detailing the pro forma adjustments. We are filing this Amendment No. 2 to provide the omitted footnotes by amending and restating in its entirety the information contained in Item 7 of Amendment No. 1. No changes have been made to the financial statements of the business acquired contained in Item 7(a).

FORWARD LOOKING STATEMENTS

         Certain matters discussed in this current report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements.

         With respect to the Hammonds Homes acquisition, these uncertainties include: the risks that the businesses will not be integrated successfully; that Hammonds may not perform as well in the future as in previous years; that the market and financial synergies anticipated from the acquisition may not be fully realized or may take longer to realize than expected; that the acquisition will not be accretive to earnings within the time period estimated by us, or at all; that unanticipated expenses and liabilities may be incurred; and that the combined companies may lose key employees or suppliers.

         In addition, our business is also subject to a number of risks and uncertainties including: the strength and competitive pricing environment of the single-family housing market; changes in the availability and pricing of residential mortgages; changes in the availability and pricing of real estate in the markets in which we operate; our level of indebtedness; demand for and acceptance of our homes; the success of planned marketing and promotional campaigns; the success of our program to integrate existing operations with our planned new operations or those of past or future acquisitions; our ability to raise additional capital; our success in locating and negotiating favorably with other possible acquisition candidates; recent legislative or other initiatives that seek to restrain growth in new housing construction or similar measures; the economic impact of foreign hostilities or military action; general economic slowdowns; and other factors identified in documents filed by us with the Securities and Exchange Commission, including those set forth in Meritage’s Form 10-K Report for the year ended December 31, 2001 under the captions “Market for the Registrant’s Common Stock and Related Stockholder Matters—Factors that May Affect Future Stock Performance” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company—Factors that May Affect Our Future Results and Financial Condition” and in Exhibit 99.4 of Meritage’s Form 10-Q for the quarter ended June 30, 2002. As a result of these and other factors, Meritage’s stock and note prices may fluctuate dramatically.

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Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS

(a) Financial Statements of Business Acquired.

INDEX TO FINANCIAL STATEMENTS

HAMMONDS HOMES, LTD. AND SUBSIDIARIES

         
Independent Auditor’s Report
    3  
Consolidated Balance Sheets as of December 31, 2001 and 2000
    4  
Consolidated Statements of Income and Partners’ Capital for the years ended December 31, 2001, 2000 and 1999
    5  
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999
    6  
Notes to Consolidated Financial Statements
    7  

CRYSTAL CITY LAND AND CATTLE, LTD. AND SUBSIDIARIES

           
Independent Auditor’s Report
    13  
Consolidated Balance Sheet As of December 31, 2001
    14  
Consolidated Statement of Income and Partners’ Capital from August 23, 2001 (date of inception) to December 31, 2001
    15  
Consolidated Statement of Cash Flows from August 23, 2001 (date of inception) to December 31, 2001
    16  
Notes to Consolidated Financial Statements
    17  

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Independent Auditors’ Report

To the Partners
Hammonds Homes, Ltd.

We have audited the consolidated balance sheets of Hammonds Homes, Ltd. and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income and partners’ capital and cash flows for each of the years in the three year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 Hammonds Homes, Ltd. and Subsidiaries as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

 
                                                            /s/ Kolkhorst & Kolkhorst
 

Houston, Texas
March 25, 2002

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HAMMONDS HOMES, LTD. AND SUBSIDIARIES

Consolidated Balance Sheets

                   
      December 31
     
      2001   2000
     
 
Assets
               
Inventory
  $ 53,542,220     $ 59,327,921  
Cash and cash equivalents
    14,269,666       5,511,149  
Property and equipment
    1,791,843       1,682,158  
Land
    989,720       7,102,380  
Receivable from title and mortgage companies
    2,119,405       3,456,798  
Receivable from employees
    18,778       14,774  
Receivable from affiliates
    883,555        
Prepaid expenses and other assets
    2,114,850       1,289,821  
Investments in joint ventures
    735,122       576,886  
 
   
     
 
 
  $ 76,465,159     $ 78,961,887  
 
   
     
 
Liabilities and partners’ capital
               
Liabilities:
               
 
Construction loans payable
  $ 44,545,580     $ 46,861,779  
 
Development loans
    440,000       4,716,828  
 
Accounts payable and accrued liabilities
    10,904,288       12,018,368  
 
Accounts payable to related party
    636,409       1,593,176  
 
   
     
 
Total liabilities
    56,526,277       65,190,151  
 
   
     
 
Commitments and contingencies
               
Partners’ capital
    19,938,882       13,771,736  
 
   
     
 
 
  $ 76,465,159     $ 78,961,887  
 
   
     
 

See independent auditor’s report and accompanying notes to the financial statements.

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HAMMONDS HOMES, LTD. AND SUBSIDIARIES

Consolidated Statements of Income and Partners’ Capital

                               
                  Year ended December 31        
          2001   2000   1999
         
 
 
Revenue
                       
   
Sale of houses
  $ 179,808,377     $ 136,022,574     $ 108,068,747  
   
Sale of land and lots
    445,179       745,115       2,161,200  
 
   
     
     
 
 
    180,253,556       136,767,689       110,229,947  
   
Cost of houses sold
    (149,574,800 )     (115,711,708 )     (93,542,095 )
   
Cost of land and lots sold
    (47,777 )     (704,930 )     (2,046,751 )
 
   
     
     
 
 
    (149,622,577 )     (116,416,638 )     (95,588,846 )
   
Sale of houses gross profit
    30,233,577       20,310,866       14,526,652  
   
Sale of land and lots gross profit
    397,402       40,185       114,449  
 
   
     
     
 
 
Gross profit
    30,630,979       20,351,051       14,641,101  
 
Other income
    1,283,738       917,020       543,068  
 
   
     
     
 
 
    31,914,717       21,268,071       15,184,169  
 
   
     
     
 
 
Operating expenses
                       
     
Sales and marketing
    5,745,211       4,054,577       2,837,876  
     
General and administrative
    7,513,102       5,849,351       4,248,190  
     
Interest
    1,420,138       1,360,868       582,425  
 
   
     
     
 
 
    14,678,451       11,264,796       7,668,491  
 
   
     
     
 
Net income before state income taxes
    17,236,266       10,003,275       7,515,678  
Provision for state income taxes
                    201,000  
 
   
     
     
 
   
Net Income
    17,236,266       10,003,275       7,314,678  
Retained earnings-subsidiaries-beginning
                    4,831  
Partners Capital-beginning
    13,771,736       9,647,692       7,038,670  
Distributions
    (11,069,120 )     (5,879,231 )     (4,710,484 )
 
   
     
     
 
Partners’ capital
  $ 19,938,882     $ 13,771,736     $ 9,647,692  
 
   
     
     
 

See independent auditor’s report and accompanying notes to the financial statements.

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HAMMONDS HOMES, LTD. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

                           
              Year ended December 31        
      2001   2000   1999
     
 
 
Operating activities
                       
Net income
  $ 17,236,266     $ 10,003,275     $ 7,314,678  
Adjustments to reconcile net income to net cash used in operating activities:
                       
 
Depreciation and amortization
    1,014,885       735,285       507,309  
 
Changes in operating assets and liabilities:
                       
 
Inventory of houses and land
    7,789,517       (18,248,199 )     (11,222,350 )
 
Receivables from title and mortgage companies
    804,629       (2,607,153 )     175,895  
 
Receivables from employees
    (4,004 )     31,377       17,834  
 
Receivables from affiliates
    886,699              
 
Prepaid expenses and other assets
    (840,029 )     (114,680 )     (68,627 )
 
Investments in joint venture
    (158,236 )     (576,886 )      
 
Accounts payable and accrued liabilities
    (161,616 )     5,598,715       (1,187 )
 
Accounts payable to related party
    (956,767 )     995,000       (44,921 )
 
State income taxes payable
          (231,446 )     (50,715 )
 
   
     
     
 
Net cash provided by (used in) operating activities
    25,611,344       (4,414,712 )     (3,372,084 )
 
   
     
     
 
Investing activities
                       
Purchase of property and equipment
    (1,124,571 )     (1,363,979 )     (767,803 )
 
   
     
     
 
Net cash used in investing activities
    (1,124,571 )     (1,363,979 )     (767,803 )
 
   
     
     
 
Financing activities
                       
Proceeds from advances on construction and development loans
    41,265,783       108,650,655       81,955,153  
Principal payments on construction and development loans
    (45,924,919 )     (93,671,646 )     (72,844,392 )
Partners distributions
    (11,069,120 )     (5,879,231 )     (4,710,487 )
 
   
     
     
 
Net cash provided by (used in) financing activities
    (15,728,256 )     9,099,778       4,400,274  
 
   
     
     
 
Net increase in cash and cash equivalents
    8,758,517       3,321,087       260,387  
Cash and cash equivalents at beginning of year
     5,511,149        2,190,062       1,929,675  
 
   
     
     
 
Cash and cash equivalents at end of year
  $ 14,269,666     $  5,511,149     $ 2,190,062  
 
   
     
     
 
Supplemental disclosure of cash flow information
                       
Cash paid for:
                       
 
Interest
  $ 4,691,343     $ 4,970,843     $ 3,266,347  
 
Income taxes
  $     $     $ 251,714  

See independent auditor’s report and accompanying notes to the financial statements.

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HAMMONDS HOMES, LTD. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation — The consolidated financial statements include the accounts of Hammonds Homes, Ltd. (the Company), and its wholly-owned subsidiaries, R. H. Development Company, Inc., and R. H. Development/Park West CC, Inc. for the year ended December 31, 2000. All intercompany accounts and transactions have been eliminated in consolidation. R.H. Development Company, Inc. was incorporated in the State of Texas in 1997. R.H. Development/Park West CC, Inc., was incorporated in the State of Texas in 1999.

In August 2001, R.H. Development Company, Inc. and R.H. Development/Park West CC, Inc. were converted to limited partnerships. The net assets of these subsidiaries were distributed and contributed to the new partnerships. The new partnerships are controlled by the majority partner of Hammonds Homes, Ltd.

The 2001 financial statements of the company include the activity of its subsidiaries for the eight months through August 31, 2001. At December 31, 2001 the balance sheet of the company does not include any of the accounts of its former subsidiaries.

Organization — Hammonds Homes, Inc., incorporated in Texas in 1987, was wholly-owned by a single stockholder. During 1999, Hammonds Homes, Inc., converted to a Texas limited partnership, Hammonds Homes, Ltd. Hammonds Homes Ltd., continues to be engaged in the construction and sale of single family homes in Houston, Dallas, and Austin, Texas.

Critical Accounting Policies and Estimates — The preparation of the consolidated financial statements required management to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, management evaluates these estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that these estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates and assumptions under different future conditions.

The accounting policies that management deems most critical and involve the most difficult, subjective or complex judgments, include estimates of costs to complete individual developments, the ultimate recoverability (or impairment) of these costs, the likelihood of closing lots held under option or contract and the ability to estimate expenses and accruals, including legal and warranty reserves. Should management under or over estimate costs to complete individual projects, gross margins in a particular period could be misstated and the ultimate recoverability of costs related to a project from individual home sales may be uncertain. Furthermore, non-refundable deposits paid for land options or contracts may have no economic value to us if the land is not ultimately purchased. Finally, the inability to accurately estimate expenses or accruals could result in charges or income in the future results of operations related to activities or transactions in a preceding period.

- 7 -


 

HAMMONDS HOMES, LTD. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition — Revenue from sales of houses is recognized at the time of closing, when sufficient down payment has been received, any financing has been arranged, title, possession, and other attributes of ownership have been transferred to the buyer, and the Company is not obligated to perform additional significant activities related to the sale.

Estimated future warranty costs are charged to cost of sales in the period when the revenues from related home closings are recognized. These estimated warranty costs are approximately $500 per home.

Inventory — Real estate inventories include land acquisition costs, construction costs, and related indirect costs and expenditures. Interest on indebtedness and real estate taxes are capitalized until substantial completion of construction. Cost of sales is determined by lot with specific identification of land, direct construction and closing costs, and an allocation of indirect construction costs.

Property and Equipment — Property and equipment, consisting principally of model home furnishings, sales office fixtures, and computer equipment, are carried at cost and depreciated using the straight-line method over estimated useful lives ranging from two to five years.

Receivables From Title and Mortgage Companies — Receivables from title and mortgage companies consist of sales proceeds due from houses sold and closed but not yet funded.

Cash Equivalents — The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Use of Estimates — The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

- 8 -


 

HAMMONDS HOMES, LTD. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE B — INVENTORY

Inventory at December 31, 2001 and 2000 consists of the following:

                                   
      2001   2000
     
 
      # of Units   Amount   # of Units   Amount
     
 
 
 
Lots
    159     $ 5,875,995       170     $ 5,252,796  
Houses completed:
                                 
 
Under contract for sale
    23       3,211,314       28       3,648,690  
 
Unsold
    42       6,217,475       39       5,313,819  
 
Model homes
    36       5,059,353       41       6,315,023  
Houses under construction:
                               
 
Under contract for sale
    222       20,994,942       350       26,618,482  
 
Unsold
    131       12,183,141       167       12,179,111  
 
   
     
     
     
 
Total
    613     $ 53,542,220       795     $ 59,327,921  
 
   
     
     
     
 

A summary of interest for the years ended December 31, 2001 and 2000 is as follows:

                 
    2001   2000
   
 
Interest capitalized at beginning of year
  $ 1,518,213     $ 1,036,714  
Interest incurred
    4,691,343       4,970,843  
Interest expensed
    (1,420,138 )     (1,360,868 )
Interest included in cost of houses sold
    (3,685,215 )     (3,128,476 )
 
   
     
 
Interest capitalized at end of year
  $ 1,104,203     $ 1,518,213  
 
   
     
 

NOTE C — PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2001 and 2000 consist of the following:

                 
    2001   2000
   
 
Model home furnishings
  $ 4,065,719     $ 3,261,375  
Sales office fixtures
    1,132,514       933,462  
Computer equipment
    720,880       511,344  
Office furniture and other
    399,152       498,094  
Construction trailers
    70,202       70,202  
Leasehold improvements
    96,755       86,173  
 
   
     
 
 
    6,485,222       5,360,650  
Less accumulated depreciation and amortization
    (4,693,379 )     (3,678,492 )
 
   
     
 
 
  $ 1,791,843     $ 1,682,158  
 
   
     
 

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HAMMONDS HOMES, LTD. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE D — CONSTRUCTION AND DEVELOPMENT LOANS PAYABLE

Construction loans payable to financial institutions at December 31, 2001 and 2000 are collateralized by inventory. The construction loans are payable by Hammonds Homes, Ltd. R.H. Development Company, Inc. and R.H Development/Park West CC. Inc. have no liability for these loans. The interest on all loans is payable monthly and bears interest as follows:.

                 
    2001   2000
   
 
Interest rate
               
Prime rate
  $ 19,720,778     $ 15,101,784  
Prime rate plus .25%
    14,548,974       27,609,195  
Prime rate plus .75%
    2,258,529       3,885,222  
30-day Libor plus 2.90%
    7,871,799       265,578  
 
   
     
 
 
  $ 44,400,080     $ 46,861,779  
Unsecured note, prime plus .50%
    145,500        
 
   
     
 
 
  $ 44,545,580     $ 46,861,779  
 
   
     
 

The Company believes carrying amounts of its construction loans payable approximate their fair value.

Development loans payable to financial institutions at December 31, 2001 and 2000 are collateralized by land held for future development by the Company. The loans bear interest at prime at December 31, 2001 and prime to prime plus 3% at December 31, 2000. The loans will be repaid as lots are developed and sold. The development loans are payable by Hammonds Homes, Ltd., at December 31, 2001 and by R.H. Development Company, Inc. and R.H. Development/Park West CC, Inc. at December 31, 2000.

At December 31, 2001 and 2000, the Company had unused lines of credit, subject to the terms of the related loan documents, aggregating $65,678,957 and $16,939,598, respectively. These lines of credit are generally available for one year.

At the time of the initial loan draw for a house, the Company usually pays a loan fee for the individual loan amount. Construction loans are generally repaid as individual units are sold and closed. Construction loans mature within 6 to 12 months or, at the discretion of the lender, are extended.

Certain of the Company’s loan agreements require, among other things, that the Company maintain minimum net worth, limit distributions, and retain certain percentages of net income.

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HAMMONDS HOMES, LTD. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE E — FEDERAL AND STATE INCOME TAXES

The stockholder of the Company had elected under Subchapter S of the Internal Revenue Code to include the Company’s income in his own income for federal income tax purposes through 1998. As a result of the conversion of the Company to a limited partnership as described in Note A, the Partnership has elected, under Internal Revenue Service Regulations, to continue under Subchapter S of the Internal Revenue Code to include the Company’s income in the partners’ federal income tax return. As a result, the Company is not generally subject to federal income taxes.

The Company was subject to Texas state franchise taxes through August 1999. As a result of the conversion of the Company to a limited partnership, the Company will no longer be subject to a Texas franchise tax.

There are no significant temporary differences between income for financial reporting purposes and income calculated for income tax purposes.

NOTE F — COMMITMENTS AND CONTINGENCIES

The Company’s contingent liabilities include warranty obligations and disputes arising in the ordinary course of business, which management believes will not have a material adverse effect on the Company’s financial position.

In the ordinary course of business, the Company enters into lot option contracts. At December 31, 2001, the Company had nonrefundable deposits aggregating $1,836,462 for the purchase of lots relating to these contracts. The Company’s liability for nonperformance under these lot option contracts is limited to forfeiture of the deposits.

At December 31, 2001, future minimum payments under noncancelable operating leases are as follows:

           
December 31
       
 
2002
  $ 219,694  
 
2003
    70,133  
 
Thereafter
    -0-  
 
   
 
 
  $ 289,827  
 
   
 

Rental expense for the years ended December 31, 2001, 2000, and 1999 aggregated $264,731, $248,416, and $176,962, respectively.

- 11 -


 

HAMMONDS HOMES, LTD. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE G — RELATED PARTY TRANSACTIONS

During the year ending December 31, 2001, the Company purchased approximately $540,429 of lots from a company in which the majority partner of Hammonds Homes, Ltd. has a 50% interest.

Receivables from affiliates consist of amounts due to the Company from limited partnerships, described in Note A, that are controlled by the sole owner of the Company. Receivables for 2001 are $883,555 and are advances made to the Partnership for land development.

Accounts payable to related party consist of amounts due the partner of the Company. Related party payables for 2001 and 2000 are $636,409 and $1,593,176 respectively.

NOTE H — 401(k) PLAN

The Company has a 401(k) plan that covers all qualified employees. Contributions to the plan are at the discretion of the Board of Directors. There were no contributions made for 2001, 2000, or 1999.

NOTE I — JOINT VENTURES

The Company has invested in several joint ventures, which are accounted for using the equity method of accounting, that are in the business of land development, homebuilding and originating and selling residential mortgage loans. Income from these joint ventures for the years ended December 31, 2001, 2000, and 1999 aggregated $615,079, $330,034, and $242,176, respectively and is included in other income.

- 12 -


 

Independent Auditors’ Report

To the Partners
Crystal City Land & Cattle, Ltd.

We have audited the consolidated balance sheet of Crystal City Land & Cattle, Ltd. and Subsidiaries as of December 31, 2001, and the related consolidated statements of income and partners’ capital and cash flows from August 23, 2001 (date of inception) to December 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides 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 Crystal City Land & Cattle, Ltd. and Subsidiaries as of December 31, 2001, and the results of its operations and its cash flows from August 23, 2001 (date of inception) to December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

 
                                                            /s/ Kolkhorst & Kolkhorst
 

Houston, Texas
March 25, 2002

- 13 -


 

CRYSTAL CITY LAND AND CATTLE, LTD. AND SUBSIDIARIES

Consolidated Balance Sheet

December 31, 2001

           
Assets
       
Inventory
  $ 3,172,550  
Cash and cash equivalents
    1,134,279  
Deposits
    227,611  
Land and land development costs
    1,584,825  
Reimbursable costs
    350,000  
Other assets
    7,146  
 
   
 
 
  $ 6,476,411  
 
   
 
Liabilities and partners’ capital
       
Liabilities
   
 
Development loans
  $ 1,958,720  
 
Accounts payable and accrued liabilities
    735,480  
 
Due to affiliates
    883,555  
 
   
 
Total liabilities
    3,577,755  
 
   
 
Commitments and contingencies
       
Partners’ capital
    2,898,656  
 
   
 
 
  $ 6,476,411  
 
   
 

See independent auditor’s report and accompanying notes to the financial statements.

- 14 -


 

CRYSTAL CITY LAND & CATTLE, LTD. AND SUBSIDIARIES

Consolidated Statement of Income and Partners’ Capital

From August 23, 2001 (date of inception) to December 31, 2001

           
Revenue
       
 
Sale of land and lots
  $ 829,426  
 
Cost of land and lots sold
    (645,849 )
 
   
 
Gross profit
    183,577  
Other income
    512  
 
   
 
 
    184,089  
 
   
 
Operating expenses
       
 
Interest
    53,449  
 
General and administrative
    133,954  
 
   
 
 
    187,403  
 
   
 
 
Net income (loss)
    (3,314 )
Partners Capital-contributed
    2,901,970  
Distributions
     
 
   
 
Partners’ capital
  $ 2,898,656  
 
   
 

See independent auditor’s report and accompanying notes to the financial statements.

- 15 -


 

CRYSTAL CITY LAND & CATTLE, LTD. AND SUBSIDIARIES

Consolidated Statement of Cash Flows

From August 23, 2001 (date of inception) to December 31, 2001

               
Operating activities
       
Net income (loss)
  $ (3,314 )
Adjustments to reconcile net income to net cash used in operating activities:
       
   
Changes in operating assets and liabilities
       
     
Inventory and land and development costs
    (4,757,375 )
     
Deposits
    (227,611 )
     
Reimbursable costs
    (350,000 )
     
Other assets
    (7,146 )
     
Accounts payable and accrued liabilities
    1,619,035  
 
   
 
 
Net cash used in operating activities
    (3,726,411 )
 
   
 
Financing activities
       
Proceeds from advances on construction and development loans
    1,958,720  
Partners contributions
    2,901,970  
 
   
 
 
Net cash provided by financing activities
    4,860,690  
 
   
 
Net increase in cash and cash equivalents
    1,134,279  
Cash and cash equivalents at beginning of year
     
 
   
 
Cash and cash equivalents at end of year
  $ 1,134,279  
 
   
 
Supplemental disclosure of cash flow information
       
Cash paid for
       
 
Interest
  $ 338,902  

See independent auditor’s report and accompanying notes to the financial statements.

- 16 -


 

CRYSTAL CITY LAND & CATTLE, LTD. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation — The consolidated financial statements include the accounts of Crystal City Land & Cattle, Ltd. (the Company), and its subsidiaries, CCLC Development, LLC, R.H. Development/Park West CC, Ltd., R.H. Development Company, Ltd., Avery R. Development Ltd., Gleannloch Lot, Ltd., and Ashford Lot Development, Ltd. All intercompany accounts and transactions have been eliminated in consolidation. CCLC Development, LLC became a limited liability company in the State of Texas in 2001. R.H. Development Company, Ltd. became a partnership in the state of Texas September 1, 2001. R.H. Development/Park West CC Company, Ltd. became a partnership in the State of Texas September 1, 2001. Gleannloch Lot, Ltd. became a partnership in the State of Texas in 2001. Avery R. Development Ltd. became a partnership in the State of Texas in 2001. Ashford Lot Development, Ltd. became a partnership in the State of Texas in 2001.

Organization – Crystal City Land & Cattle, Ltd. became a limited partnership in Texas in 2001. The company is engaged in the business of real estate development in Houston, Dallas, and Austin, Texas.

Revenue Recognition — Revenue from sales of lots is recognized at the time of closing, when sufficient down payment has been received, any financing has been arranged, title, possession, and other attributes of ownership have been transferred to the buyer, and the Company is not obligated to perform additional significant activities related to the sale.

Inventory — Real estate inventories include land acquisition costs, construction costs, and related indirect costs and expenditures. Interest on indebtedness and real estate taxes are capitalized until substantial completion of development. Cost of sales is determined by lot with specific identification of land and closing costs.

Reimbursable Costs – Reimbursable costs consist of funds due the company for development costs incurred.

Cash Equivalents — The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Use of Estimates — The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

- 17 -


 

CRYSTAL CITY LAND & CATTLE, LTD. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE B – INVENTORY AND LAND AND LAND DEVELOPMENT COSTS

Inventory at December 31, 2001 consists of fully developed lots ready for sale. Land and land development costs at December 31, 2001 consists of land being developed and land being held for future development.

A summary of interest for the period ended December 31, 2001 is as follows:

         
Interest incurred
  $ 338,902  
Interest expensed
    (53,449 )
Interest included in cost of land and lots sold
    (281,506 )
 
   
 
Interest capitalized at end of year
  $ 3,947  
 
   
 

NOTE C — DEVELOPMENT LOANS PAYABLE

Development loans payable to financial institutions at December 31, 2001 are collateralized by land held for future development by the Company. The loans bear interest at 8%, prime plus .75%, and at prime plus 3% and is payable monthly. The loans will be repaid as lots are developed and sold. The development loans are payable by R.H. Development Company, Ltd., R.H Development/Park West CC, Ltd. and Ashford Lot Development, Ltd.

At December 31, 2001, the Company had unused lines of credit, subject to the terms of the related loan documents, aggregating $1,783,804. These lines of credit are generally available for one year.

Certain of the Company’s loan agreements require, among other things, that the Company maintain minimum net worth, limit distributions, and retain certain percentages of net income.

The Company believes carrying amounts of its development loans payable approximate their fair value.

NOTE D — FEDERAL AND STATE INCOME TAXES

Federal income taxes are not payable by, or provided for, the Partnership. All tax effects of the Partnership’s income or loss are passed through to the partners.

The Company is not subject to a Texas franchise tax.

There are no significant temporary differences between income for financial reporting purposes and income calculated for income tax purposes.

- 18 -


 

CRYSTAL CITY LAND & CATTLE, LTD. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

NOTE E — COMMITMENTS AND CONTINGENCIES

The Company’s contingent liabilities include obligations and disputes arising in the ordinary course of business which management believes will not have a material adverse effect on the Company’s financial position.

In the ordinary course of business, the Company enters into option contracts. At December 31, 2001, the Company had nonrefundable deposits aggregating $227,611 for the purchase of land relating to these contracts. The Company’s liability for nonperformance under these option contracts is limited to forfeiture of the deposits.

NOTE F — RELATED PARTY TRANSACTIONS

During the period ending December 31, 2001, $341,065 of lots were sold to an affiliated company, which is included in sales of land and lots.

In addition, the Company owes its affiliate company $883,555 for advances made to the Company for expenses relating to land development.

- 19 -


 

(b) Pro Forma Information.

EXPLANATORY NOTE

         The following unaudited pro forma financial statements are being amended and restated in their entirety to add the explanatory footnotes detailing the pro forma adjustments to the combined statements of earnings for the year ended December 31, 2001 and the interim period ended June 30, 2002.

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

         The following unaudited pro forma combined financial statements give effect to the acquisition of certain homebuilding and related assets of Hammonds Homes, Ltd. and subsidiaries (Hammonds) and Crystal City Land & Cattle, Ltd. and subsidiaries (Crystal City) as if it was consummated as of June 30, 2002 with respect to the unaudited pro forma combined balance sheet and on January 1, 2001 with respect to the unaudited pro forma combined statements of income.

         The unaudited pro forma combined financial statements reflect the purchase method of accounting for the Hammonds acquisition. The Hammonds acquisition will be accounted for as a purchase. Under the purchase method of accounting, the purchase price is allocated to assets acquired and liabilities assumed based on their estimated fair value at the time of the acquisition. Income of the combined company will not include income or loss of Hammonds prior to the effective date of the acquisition, which was July 1, 2002. The unaudited pro forma combined financial statements reflect preliminary adjustments made to combine Hammonds with Meritage using the purchase method of accounting. Final adjustments may be made and may differ from those reflected in the unaudited pro forma combined financial statements; however, we do not currently have reason to believe that they will materially differ from the purchase price allocation presented in these pro forma combined financial statements. The unaudited pro forma combined financial statements are based upon available information and assumptions that we believe are reasonable.

         The unaudited pro forma combined financial statements are for informational purposes only and are not necessarily indicative of the results of our future operations or the actual results that would have been achieved had the Hammonds acquisition and related transactions been consummated during the periods indicated. You should read the unaudited pro forma combined financial statements in conjunction with the consolidated historical financial statements of:

         (1)  Meritage, included in its Annual Report on Form 10-K for the year ended December 31, 2001, and in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, and

         (2)  the acquired Hammonds entities, which are included in this Current Report on Form 8-K/A.

- 20 -


 

Meritage Corporation
Unaudited Pro Forma Combined Consolidated Balance Sheet
June 30, 2002
(in thousands)

                                                       
          Historical                                
         
                               
            Consolidated                                    
            Hammonds   Total   Acquisition                
          Meritage   & Crystal City   Historical   Adjustments           Pro Forma
         
 
 
 
         
Assets
 
Cash and cash equivalents
  $ 14,481     $ 12,123     $ 26,604     $ (25,475 ) (a )       $ 1,129  
 
Real estate
    399,379       62,814       462,193                     462,193  
 
Deposits on real estate
    47,935       3,169       51,104                     51,104  
 
Other receivables
    6,992       4,848       11,840       (3,338 ) (c )         8,502  
 
Deferred tax assets
    4,419             4,419                     4,419  
 
Goodwill
    31,883             31,883       24,115   (c )         55,998  
 
Property and equipment, net
    9,928       2,420       12,348       (131 ) (c )         12,217  
 
Other assets
    11,156       702       11,858       (93 ) (c )         11,765  
 
   
     
     
     
             
 
     
Total assets
  $ 526,173     $ 86,076     $ 612,249     $ (4,922 )           $ 607,327  
 
   
     
     
     
             
 
Liabilities
 
Accounts payable and accrued expenses
  $ 64,556     $ 9,862     $ 74,418     $ (719 ) (c )       $ 73,699  
 
Home sale deposits
    18,510       2,011       20,521                       20,521  
 
Revolving credit facilities
          51,021       51,021       (51,021 ) (c )          
 
Additional borrowings on revolving credit facilities
                      70,000   (b )         70,000  
 
Senior notes
    155,000             155,000                     155,000  
 
Other debt
    1,286             1,286                     1,286  
 
   
     
     
     
             
 
   
Total liabilities
    239,352       62,894       302,246       18,260               320,506  
 
   
     
     
     
             
 
Stockholders’ equity
 
Common stock
    151             151                     151  
 
Additional paid-in capital
    196,117             196,117                     196,117  
 
Retained earnings
    101,776       23,182       124,958       (23,182 ) (d )         101,776  
 
Treasury stock
    (11,223 )           (11,223 )                   (11,223 )
 
   
     
     
     
             
 
   
Total stockholders’ equity
    286,821       23,182       310,003       (23,182 )             286,821  
 
   
     
     
     
             
 
     
Total liabilities and stockholders’ equity
  $ 526,173     $ 86,076     $ 612,249     $ (4,922 )           $ 607,327  
 
   
     
     
     
             
 

- 21 -


 

Meritage Corporation
Notes to Unaudited Pro Forma Combined Balance Sheet—June 30, 2002
(in thousands)

The Unaudited Pro Forma Combined Balance Sheet reflects the transaction as if it had occurred on June 30, 2002.

                                                   
  (a )  
Reflects the following:
       
       
Cash paid for acquisition of Hammonds and Crystal City
  $ (12,652 )
       
Cash paid for transaction costs
    (709 )
       
Hammonds and Crystal City cash excluded from purchase price
    (12,114 )
       
 
   
 
       
 
  $ (25,475 )
       
 
   
 
  (b )  
Reflects the following:
       
       
Borrowings on Meritage credit facility to finance acquisition
  $ (70,000 )
       
 
   
 
  (c )   The acquisition will be accounted for as a purchase in accordance with Statements of Financial Accounting Standards No. 141 “Business Combinations.” The purchase price is being allocated first to the tangible and identifiable intangible assets and liabilities based upon preliminary estimates of their fair market value, with the remainder allocated to goodwill:        
       
Payment to seller
    82,652  
       
Book value of net assets acquired
(23,182 )    
       
Net assets/liabilities excluded or eliminated at acquisition:
       
       
     Revolving credit facilities & other debt
(51,021 )  
       
     Receivable due from seller
3,338      
       
     Payable due to title company
(110 )    
       
     Cash
12,114      
       
     Payable due to seller
(609 )    
       
Adjusted book value of net assets acquired
    (59,470 )
       
 
   
 
       
Premium paid at closing
    23,182  
       
 
   
 
       
Additional adjustments and transaction costs:
       
       
     Writeoff of fixed assets acquired
    131  
       
     Bank fees and closing costs
    265  
       
     Professional fees
    532  
       
     Miscellaneous fees
    5  
       
 
   
 
       
Increase in basis (goodwill)
    24,115  
       
 
   
 
  (d )  
Reflects the elimination of Hammonds and Crystal City equity balances pursuant to purchase accounting
       

- 22 -


 

Meritage Corporation
Unaudited Pro Forma Combined Statement of Earnings
Twelve Months Ended December 31, 2001
(in thousands, except per share data)

                                                   
      Historical                                
     
                               
        Consolidated                                        
        Hammonds   Total   Pro Forma                
      Meritage   & Crystal City   Historical   Adjustments           Pro Forma
     
 
 
 
         
Home and land sales revenue
  $ 744,174     $ 182,026     $ 926,200                   $ 926,200  
Cost of home and land sales
    586,914       150,047       736,961       456 (a )           737,417  
 
   
     
     
     
             
 
 
Gross profit
    157,260       31,979       189,239       (456 )             188,783  
Selling, general and administrative expenses(1)
    73,924       14,865       88,789       849 (b )           89,638  
 
   
     
     
     
             
 
 
Earnings before income taxes and extraordinary items
    83,336       17,114       100,450       (1,305 )             99,145  
Income taxes
    32,444             32,444       6,155 (c )           38,599  
 
   
     
     
     
             
 
 
Earnings before extraordinary items
  $ 50,892     $ 17,114     $ 68,006       (7,460 )           $ 60,546  
 
   
     
     
     
             
 
Weighted average shares outstanding — basic (2)
                                            10,610  
 
                                           
 
Weighted average shares outstanding — diluted (2)
                                            11,776  
 
                                           
 
Pro forma basic earnings per share before extraordinary items
                                          $ 5.71  
 
                                           
 
Pro forma diluted earnings per share before extraordinary items
                                          $ 5.14  
 
                                           
 

(1)   We adopted the nonamortization of goodwill provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and other Intangible Assets,” on January 1, 2002. Thus, the pro forma combined statement of income for the twelve month period ended December 31, 2001 includes goodwill amortization expense.
 
(2)   The weighted average shares outstanding have been adjusted to reflect the 2-for-1 stock split effective April 26, 2002.

- 23 -


 

Meritage Corporation
Unaudited Pro Forma Combined Statement of Earnings
Six Months Ended June 30, 2002
(in thousands, except per share data)

                                                   
      Historical                                
     
                               
          Consolidated                                    
              Hammonds   Total   Pro Forma                
      Meritage   & Crystal City   Historical   Adjustments           Pro Forma
     
 
 
 
         
Home and land sales revenue
  $ 421,172     $ 79,171     $ 500,343                     $ 500,343  
Cost of home and land sales
    339,444       62,447       401,891       161 (a)           402,052  
 
   
     
     
     
             
 
 
Gross profit
    81,728       16,724       98,452       (161 )             98,291  
Selling, general and administrative expenses(1)
    42,879       11,959       54,838       (179 )(b)         54,659  
 
   
     
     
     
             
 
 
Earnings before income taxes
    38,849       4,765       43,614       18               43,632  
Income taxes
    15,345               15,345       1,889 (c)         17,234  
 
   
     
     
     
             
 
 
Net earnings
  $ 23,504     $ 4,765     $ 28,269     $ (1,871 )           $ 26,398  
 
   
     
     
     
             
 
Weighted average shares outstanding — basic (2)
                                            11,401  
 
                                           
 
Weighted average shares outstanding — diluted (2)
                                            12,232  
 
                                           
 
Pro forma basic earnings per share before extraordinary items
                                          $ 2.32  
 
                                           
 
Pro forma diluted earnings per share before extraordinary items
                                          $ 2.16  
 
                                           
 

(1)   In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill is no longer amortized but subject to transitional and annual impairment tests in accordance with SFAS No. 142. Thus, the pro forma combined statement of income for the six month period ended June 30, 2002 is exclusive of goodwill amortization expense.
 
(2)   The weighted average shares outstanding have been adjusted to reflect the 2-for-1 stock split effective April 26, 2002.

Meritage Corporation
Notes to Unaudited Pro Forma Combined Statement Earnings
(in thousands)

The Unaudited Pro Forma Combined Statement of Earnings for the twelve month periods ended December 31, 2001 and for the six month period ended June 30, 2002 reflects the transaction as if it had occurred on January 1, 2001.

                           
              Year Ended   Six Months
              December 31,   Ended
              2001   June 30, 2002
             
 
  (a )  
Reflects the following:
               
         
Incremental amortization of capitalized interest
  $ 456     $ 161  
       
 
   
     
 
  (b )  
Reflects the following:
               
         
Reversal of compensation paid to key employees of Hammonds
  $ (356 )   $ (179 )
         
Amortization of goodwill on purchase of Hammonds
    1,205        
       
 
   
     
 
       
 
  $ 849     $ (179 )
       
 
   
     
 
  (c )  
Reflects the following:
               
       
Net additional income tax provision as a result of the above adjustments
  $ (508 )   $ 7  
       
Effect of applying Meritage’s effective tax rate on Hammonds’s and Crystal City’s earnings
    6,663       1,882  
       
 
   
     
 
       
 
  $ 6,155     $ 1,889  
       
 
   
     
 

- 24 -


 

SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized this 12th day of June, 2003.

     
    MERITAGE CORPORATION
     
    /s/ Larry W. Seay
   
    By:   Larry W. Seay
         Chief Financial Officer, Vice President —
         Finance (Principal Financial Officer and
         Duly Authorized Officer)
     
    /s/ Vicki L. Biggs
   
    By:    Vicki L. Biggs
          (Chief Accounting Officer and Vice
          President — Corporate Controller)

- 25 -


 

EXHIBIT INDEX

         
Exhibit No.   Description

 
23.1   Consent of Kolkhorst & Kolkhorst   Previously filed.
99.1   Certificate of Steven J. Hilton, Co-Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Filed herewith
99.2   Certificate of John R. Landon, Co-Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Filed herewith
99.3   Certificate of Larry W. Seay, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Filed herewith

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