Edgar Filing: MERITAGE CORP

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

Amendment No. 3 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. 3 to Form 8-K/A (“Amendment No. 3”) 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.

On June 12, 2003, we filed an amendment to the Form 8-K (“Amendment No. 2”) to provide footnote information which had been inadvertently omitted from the unaudited pro forma combined statement of earnings for the year ended December 31, 2001 and the interim period ended June 30, 2002.

We are filing this Amendment No. 3 to provide:



	•		The unaudited interim financial statements for Hammonds Homes, Ltd. and Crystal City Land & Cattle, Ltd. for the six months ended June 30, 2002.


	•		The updated pro forma combined statement of earnings for the twelve months ended December 31, 2002.

	No changes have been made to the audited financial statements of the business acquired which are 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, 2002 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—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 March 31, 2003. 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

EXPLANATORY NOTE

The following financial statements of business acquired are being amended and restated in their entirety to provide (i) the unaudited interim financial statements of Hammonds Homes, Ltd. for the six months ended June 30, 2002 and (ii) the unaudited financial statements of Crystal City Land & Cattle, Ltd. for the six months ended June 30, 2002.

No changes have been made to the audited financial statements contained herein.

(a) Financial Statements of Business Acquired.

INDEX TO FINANCIAL STATEMENTS

HAMMONDS HOMES, LTD. AND SUBSIDIARIES


Audited Historical Financial Statements




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






Audited Historical Financial Statements




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

HAMMONDS HOMES, LTD. AND SUBSIDIARIES AND
CRYSTAL CITY LAND & CATTLE, LTD. AND SUBSIDIARIES






Unaudited Interim Financial Statements




Balance Sheet as of June 30, 2002				20




Statements of Income for the six months ended June 30, 2002 and 2001				21




Statements of Cash Flows for the six months ended June 30, 2002 and 2001				22




Notes to Unaudited Interim Financial Statements				23

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS






Unaudited Pro Forma Financial Statements
Unaudited Pro Forma Combined Consolidated Balance Sheet at June 30, 2002				30




Notes to Unaudited Pro Forma Combined Balance Sheet				31




Unaudited Pro Forma Combined Statement of Earnings Twelve Months Ended December 31, 2001				32




Unaudited Pro Forma Combined Statement of Earnings Six Months Ended June 30, 2002				33




Unaudited Pro Forma Combined Statement of Earnings Twelve Months Ended December 31, 2002				33




Notes to Unaudited Pro Forma Combined Statement of Earnings				33

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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.

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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

- 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 -

HAMMONDS HOMES, LTD. AND SUBSIDIARIES
AND CRYSTAL CITY LAND & CATTLE, LTD. AND SUBSIDIARIES

Combined Balance Sheets
(dollars in thousands)



	At June 30, 2002									At December 31, 2001


	Hammonds		Crystal City		Intercompany Eliminations			Combined Hammonds & Crystal City		Hammonds		Crystal City		Intercompany Eliminations			Combined Hammonds & Crystal City

	(Unaudited)
Assets




Inventory	$	59,897	$	2,917	$			$	62,814	$	54,532	$	4,757	$			$	59,289




Cash and cash equivalents		10,053		2,070					12,123		14,270		1,134					15,404




Deposits on real estate		2,941		228					3,169		—		228					228




Other receivables		5,178		1,043		(1,373	)		4,848		3,021		350		(884	)		2,487




Property and Equipment		2,420							2,420		1,792							1,792




Other assets		702							702		2,850		7					2,857

	$	81,191	$	6,258	$	(1,373	)	$	86,076	$	76,465	$	6,476	$	(884	)	$	82,057

Liabilities




Accounts payable and accrued expenses	$	9,330	$	1,905	$	(1,373	)	$	9,862	$	10,904	$	1,619	$	(884	)	$	11,639




Home sale deposits		2,011							2,011		—							—




Revolving credit facilities		49,960		1,061					51,021		44,986		1,959					46,945




Other liabilities		—		—					—		636							636

Total liabilities		61,301		2,966		(1,373	)		62,894		56,526		3,578		(884	)		59,220

Partners’ capital		19,890		3,292					23,182		19,939		2,898					22,837

	$	81,191	$	6,258	$	(1,373	)	$	86,076	$	76,465	$	6,476	$	(884	)	$	82,057

See accompanying notes to financial statements.

- 20 -

HAMMONDS HOMES, LTD. AND SUBSIDIARIES
AND CRYSTAL CITY LAND & CATTLE, LTD. AND SUBSIDIARIES

Unaudited Combined Statements of Income
Six Month Period Ended June 30, 2002 and 2001



		Six Months Ended June 30,

		2002									2001(1)

									Combined		Combined
						Intercompany			Hammonds		Hammonds
		Hammonds		Crystal City		Eliminations			& Crystal City		& Crystal City

Revenue




	Home and land sales revenue	$	79,015	$	3,043	$	(2,887	)	$	79,171	$	84,959




	Cost of home and land sales		62,708		2,115		(2,376	)		62,447		68,461

Gross profit			16,307		928		(511	)		16,724		16,498




Selling, general and administrative			11,425		534					11,959		8,733

	Net income	$	4,882	$	394	$	(511	)	$	4,765	$	7,765

(1) Crystal City was consolidated with Hammonds until August 2001.

See accompanying notes to financial statements.

- 21 -

HAMMONDS HOMES LTD. AND SUBSIDIARIES AND
CRYSTAL CITY LAND & CATTLE, LTD. AND SUBSIDIARIES

Unaudited Combined Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001

(Dollars in thousands)


	Six Months Ended June 30,

	2002												2001(1)

	Hammonds			Crystal City			Intercompany Eliminations			Combined Hammonds & Crystal City
Cash flows from operating activities:
Net Income	$	4,892		$	394		$	(511	)	$	4,765		$	7,794
Adjustment to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		94			—						94			74
Decrease (increase) in real estate		(5,365	)		1,840						(3,525	)		2,252
Increase in option deposits		(2,941	)		—						(2,941	)		(1,522	)
(Increase) decrease in other receivables		(2,157	)		(693	)		489			(2,361	)		1,377
Decrease in other assets		2,148									2,155			1,196
Increase in buyer deposits		2,011			—						2,011			—
Increase (decrease) in accounts payable and accrued liabilities		(2,210	)		286			(489	)		(2,413	)		(3,431	)

Net cash provided by (used in) operating activities		(3,538	)		1,834			(511	)		(2,215	)		7,740

Cash flows from investing activities:
Purchases of property and equipment		(722	)		—						(722	)		(90	)
Partners’ distributions		(4,420	)		—						(4,420	)		(4,886	)
Investments in joint ventures		—			—						—			25

Net cash used in investing activities		(5,142	)		—						(5,142	)		(4,951	)

Cash flows from financing activities:
Borrowings, net		4,974			(898	)					4,076			1,392

Net cash used in financing activities		4,974			(898	)					4,076			1,392

Net increase (decrease) in cash and cash equivalents		(3,706	)		936			(511	)		(3,281	)		4,181
Cash and cash equivalents at beginning of period		14,270			1,134						15,404			5,511

Cash and cash equivalents at end of period	$	10,564		$	2,070		$	(511	)	$	12,123		$	9,692

(1)

Crystal City was consolidated with Hammonds until August 2001.

See accompanying notes to financial statements.

- 22 -

HAMMONDS HOMES, LTD. AND CRYSTAL CITY LAND & CATTLE, LTD.

Notes to Interim Financial Statements
(Unaudited)

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The interim financial statements include the combined accounts of Hammonds Homes, Ltd. and Crystal City Land & Cattle, Ltd. (together, the “Company”) and their subsidiaries. All intercompany accounts and transactions have been eliminated.

Effective July 1, 2002, Meritage Corporation acquired substantially all of the homebuilding assets of Hammonds Homes, Ltd. and Crystal City Land & Cattle, Ltd. Meritage Corporation is filing the accompanying interim financial statements on Form 8-K for purposes of providing information about its acquisition of the Company’s business. Accordingly, the interim financial statements combine the accounts of Hammonds Homes, Ltd. and Crystal City Land & Cattle, Ltd.

The accompanying interim financial statements have been prepared in accordance with generally accepted accounting principles generally accepted in the United States. The unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations for the periods presented. The results of operations for any interim period are not necessarily indicative of results to be expected for a full fiscal year or for any future periods.

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

Critical Accounting Policies and Estimates — The preparation of the interim financial statements required management to make a number of estimates and assumptions that affect the reported amounts and disclosures in the interim 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.

- 23 -

HAMMONDS HOMES, LTD. AND CRYSTAL CITY LAND & CATTLE, LTD.

Notes to Interim Financial Statements
(Unaudited)

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 development or 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.

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.

- 24 -

HAMMONDS HOMES, LTD. AND CRYSTAL CITY LAND & CATTLE, LTD.

Notes to Interim Financial Statements
(Unaudited)

NOTE B — INVENTORY

Inventory at June 30, 2002 and December 31, 2001 consists of the following (dollars in thousands):


		June 30, 2002				December 31, 2001

		# of Units		Amount		# of Units		Amount

Lots and land			169	$	8,623		241	$	11,623




Houses completed:




	Under contract for sale		18		2,831		23		3,211




	Unsold		28		5,054		42		6,218




	Model homes		36		212		36		5,059




Houses under construction:




	Under contract for sale		324		29,449		222		20,995




	Unsold		188		16,645		131		12,183

Total			763	$	62,814		695	$	59,289

A summary of interest for the six months ended June 30, 2002 and 2001 is as follows (in thousands):


	2002			2001

Interest capitalized at beginning of period	$	1,104		$	1,518




Interest incurred		1,988			2,711




Interest expensed		(480	)		(909	)




Interest included in cost of houses sold		(1,251	)		(1,925	)

Interest capitalized at end of period	$	1,361		$	1,395

NOTE C — PROPERTY AND EQUIPMENT

Property and equipment at June 30, 2002 and December 31, 2001 consists of the following (in thousands):


	June 30, 2002			December 31, 2001

Model home furnishings	$	5,071		$	4,066




Sales office fixtures		1,288			1,132




Computer equipment		700			721




Office furniture and other		240			399




Construction trailers		—			70




Leasehold improvements		103			97

		7,402			6,485




Less accumulated depreciation and amortization		(4,982	)		(4,693	)

	$	2,420		$	1,792

-25-

HAMMONDS HOMES, LTD. AND SUBSIDIARIES

Notes to Interim Financial Statements
(Unaudited)

NOTE D — CONSTRUCTION AND DEVELOPMENT LOANS PAYABLE

Construction loans payable to financial institutions at June 30, 2002 and December 31, 2001 are collateralized by inventory. The interest on all loans is payable monthly and bears interest as follows (dollars in thousands):


	June 30, 2002		December 31, 2001


Interest rate:




Prime rate	$	32,455	$	19,721




Prime rate plus .25%		11,371		14,549




Prime rate plus .50%		—		146




Prime rate plus .75%		866		2,259




30-day Libor plus .75%		—		9,271




30-day Libor plus 2.90%		5,875		—




Prime rate plus 3.0%		454		799




8%		—		200

	$	51,021	$	46,945

Development loans payable to financial institutions are collateralized by land held for future development by the Company. The loans bear interest at rates varying from prime to prime + 3.0%. The loans are scheduled to be repaid as lots are developed and sold.

- 26 -

HAMMONDS HOMES, LTD. AND CRYSTAL CITY LAND & CATTLE, LTD.

Notes to Interim Financial Statements
(Unaudited)

NOTE E — FEDERAL AND STATE INCOME TAXES

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

NOTE F — COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company enters into lot option contracts. At June 30, 2002, the Company had nonrefundable deposits aggregating approximately $2.8 million 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.

-27-

HAMMONDS HOMES, LTD. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

NOTE G — 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 six months ended June 30, 2002 and 2001 aggregated $275,964 and $187,107, respectively and is included in other income.

- 28 -

(b) Pro Forma Information.

EXPLANATORY NOTE

The following unaudited pro forma financial statements are being amended and restated in their entirety to updated the pro forma combined statement of earnings for the twelve months ended December 31, 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 was 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 does 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 adjustments made to combine Hammonds with Meritage using the purchase method of accounting. 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, 2002, and in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, and

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

- 29 -

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

- 30 -

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

- 31 -

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.

- 32 -

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
Unaudited Pro Forma Combined Statement of Earnings
Twelve Month Period Ended December 31, 2002
(dollars in thousands, except per share data)


		Historical

				Consolidated
				Hammonds		Total		Pro Forma
		Meritage		& Crystal City		Historical		Adjustments			Pro Forma

Home and land sales revenue		$	1,119,817	$	79,171	$	1,198,988				$	1,198,988




Cost of home and land sales			904,921		62,447		967,368		161	^(a)		967,529

	Gross profit		214,896		16,724		231,620		(161	)		231,459




Selling, general and administrative expenses(1)			101,352		11,959		113,311		(179	)^(b)		113,132

	Earnings before income taxes		113,544		4,765		118,309		18			118,327




Income taxes			43,607				43,607		1,837	^(c)		45,444

	Net earnings	$	69,937	$	4,765	$	74,702	$	(1,819	)	$	72,883

Weighted average shares outstanding — basic (2)												12,405

Weighted average shares outstanding — diluted (2)												13,171

Pro forma basic earnings per share											$	5.88

Pro forma diluted earnings per share											$	5.53

(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 twelve month period ended December 31, 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, 2002 and 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			Year Ended
				December 31,			Ended			December 31,
				2001			June 30, 2002			2002

^(a	⁾	Reflects the following:




			Incremental amortization of capitalized interest	$	456		$	161		$	161

^(b	⁾	Reflects the following:




			Reversal of compensation paid to key employees of Hammonds	$	(356	)	$	(179	)	$	(179	)




			Amortization of goodwill on purchase of Hammonds		1,205			—			—

				$	849		$	(179	)	$	(179	)

^(c	⁾	Reflects the following:




		Net additional income tax provision as a result of the above adjustments		$	(508	)	$	7		$	7




Effect of applying Meritage’s effective tax rate on Hammonds’s and Crystal City’s earnings					6,663			1,882			1,830

				$	6,155		$	1,889		$	1,837

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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 2nd day of July, 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 Vice President — Corporate Controller (Chief Accounting Officer)

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EXHIBIT INDEX


Exhibit No.	Description

23.1	Consent of Kolkhorst & Kolkhorst	Previously filed.

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