SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant To Section 13 or 15(D)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 7, 2001
MERITAGE CORPORATION
(Exact name of registrant as specified in charter)
Maryland 1-9977 86-0611231
(State or Other Jurisdiction of (Commission (IRS Employer of
Incorporation) File Number) Identification No.)
6613 North Scottsdale Road
Suite 200
Scottsdale, Arizona 85250
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (877) 400-7888
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
REFERENCES TO "WE," "OUR" AND "US" IN THIS CURRENT REPORT ON FORM 8-K
REFER TO MERITAGE CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES.
On May 7, 2001, we entered into a definitive agreement to acquire
substantially all of the homebuilding and related assets of HC Builders, Inc.
and Hancock Communities, L.L.C. (collectively, "Hancock"), subject to customary
closing conditions. The estimated purchase price, based on Hancock's March 31,
2001 balance sheet, is approximately $67.8 million in cash payable at closing,
the assumption of trade payables, accrued liabilities, customer deposits and a
note, currently estimated to be $12.3 million in the aggregate, and an earn-out
payable over three years. A copy of the Master Transaction Agreement, dated as
of May 7, 2001, with exhibits, is filed as Exhibit 2.1 to this Current Report.
We have proposed to raise $150 million in senior notes through a
private placement to finance the acquisition and to repay some of our
existing indebtedness. The unaudited pro forma combined financial data set forth
in this Current Report assume that the debt offering will consist of notes in
the original principal amount of $150 million, bearing interest at 9.5% per
annum, and that we will use the proceeds as described above. However, any notes
we actually issue may be on different terms. In addition, we cannot assure you
that we will complete the debt offering. The notes have not been registered
under the Securities Act of 1933 or any applicable state securities laws and may
not be offered or sold in the United States absent registration or an applicable
exemption from registration requirements. This Current Report does not
constitute an offer to sell or the solicitation of an offer to buy the notes or
any other securities.
FORWARD LOOKING STATEMENTS
Certain of the matters discussed in this Current Report may constitute
forward-looking statements. In general, forward-looking statements can be
identified by use of words such as "expect," "believe," "estimate," "project,"
"forecast," "anticipate," "plan" and similar expressions. In this Current
Report, forward-looking statements address such matters as, but are not limited
to, our ability to consummate the Hancock acquisition and to complete our
planned debt offering, our ability to enter the entry-level and affordable
age-restricted adult communities markets through Hancock and at the times
projected, anticipated benefits of the Hancock acquisition, including our
ability to expand our demographic reach and product offerings, acquire
additional revenue and cash flow streams and acquire and retain Hancock's
management team, the anticipated purchase price of the Hancock acquisition, the
terms of the notes we are offering to finance the Hancock acquisition and to
repay some of our existing indebtedness, the accuracy of the assumptions and
adjustments in the pro forma combined financial information included in this
Current Report, as well as assumptions related to the foregoing. Forward-looking
statements express expectations of future events. All forward-looking statements
are inherently uncertain as they are based on various expectations and
assumptions concerning future events and they are subject to numerous known and
unknown risks and uncertainties which could cause actual events or results to
differ materially from those projected. Our past performance or past or present
economic conditions in our housing markets are not indicative of future
performance or conditions. Due to these inherent uncertainties, investors or
potential investors in our securities
2
are urged not to place undue reliance on forward-looking statements or on the
financial statements or pro forma financial statements included herein. In
addition, we undertake no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of anticipated or
unanticipated events or changes to projections over time. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements and that could affect our
business generally (including our combined business with Hancock if the
acquisition is consummated) include, but are not limited to, changes in national
and local economic and other conditions, such as employment levels, availability
of mortgage financing, interest rates, consumer confidence, and housing demand;
risks inherent in homebuilding activities, including delays in construction
schedules, cost overruns, changes in government regulation, increases in real
estate taxes and other local fees; changes in costs or availability of land,
materials, and labor; fluctuations in real estate values; the timing of home
closings and land sales; our ability to continue to acquire additional land or
options to acquire additional land on acceptable terms; a relative lack of
geographic diversification of our operations, especially when real estate
analysts are predicting that new home sales in certain markets may slow during
2001; our inability to obtain sufficient capital on terms acceptable to us to
fund our planned capital and other expenditures; changes in local, state and
federal rules and regulations governing real estate development and homebuilding
activities and environmental matters, including "no growth" or "slow growth"
initiatives, building permit allocation ordinances and building moratoriums;
expansion by us into new geographic or product markets in which we have little
or no operating experience; our inability to identify acquisition candidates
that will result in successful combinations; our failure to make acquisitions on
terms acceptable to us, or to successfully integrate acquired operations, such
as Hancock, into Meritage; and the loss of key employees of Meritage or any
acquired companies, including Steven J. Hilton and John R. Landon; as well as
those factors described in our Amended Report on Form 10-K for the year ended
December 31, 2000 under the captions "Factors That May Affect Our Future Results
and Financial Condition," "Special Note of Caution Regarding Forward-Looking
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in the notes to our financial statements.
In addition, the Hancock acquisition and our issuance of the notes are
subject to the following risks and uncertainties:
The integration of Hancock with our operations may present challenges.
The integration of Hancock into our operations following the
acquisition will involve a number of risks. In particular, the combined
companies may experience attrition among management and personnel. The
integration process could also disrupt the activities of our respective
businesses. The combination of the two companies will require, among other
things, coordination of management, administrative and other functions. Failure
to overcome these challenges or any other problems encountered in connection
with the acquisition of Hancock could cause our financial condition, results of
operations and competitive position to decline.
We may not achieve the anticipated benefits from the acquisition.
We believe that the acquisition will enhance our market position in
Arizona and expand our housing offerings. Our integration plan for the Hancock
acquisition assumes certain
3
synergies and other benefits. We cannot assure you that unforeseen factors will
not offset the intended benefits of the acquisition in whole or in part.
Our substantial level of indebtedness could adversely affect our
financial condition.
We will have substantial indebtedness after our note offering if it is
consummated. As of March 31, 2001, on a pro forma basis, we would have had
$191.2 million of indebtedness. In addition, subject to restrictions in the
indenture for the notes we are offering and our credit facilities, we may incur
additional indebtedness. The high level of our indebtedness could have important
consequences, including: limitations on our ability to obtain additional
financing; the requirement that we use a substantial portion of our cash flow
from operations to pay interest and principal on the notes and other
indebtedness; our operating with a higher level of indebtedness than some of our
competitors, which may put us at a competitive disadvantage; and our increased
vulnerability to economic downturns and adverse developments in our business.
We expect to obtain the money to pay our expenses and to pay the
principal and interest on the notes, our credit facilities and other debt from
cash flow from our operations. Our ability to meet our expenses thus depends on
our future performance, which will be affected by financial, business, economic
and other factors referenced above. We will not be able to control many of these
factors, such as economic conditions in the markets where we operate and
pressure from competitors. If we do not have enough money, we may be required to
refinance all or part of our existing debt, including the notes, sell assets or
borrow more money. We cannot guarantee that we will be able to do so on terms
acceptable to us, if at all. In addition, the terms of existing or future debt
agreements, including our credit facilities and the indenture, may restrict us
from pursuing any of these alternatives.
The indenture for the notes we are offering and our credit facilities
impose significant operating and financial restrictions, which may prevent us
from capitalizing on business opportunities and taking some corporate actions.
The indenture for the notes will and our credit facilities do impose
significant operating and financial restrictions on us. These restrictions will
limit the ability of us and our subsidiaries, among other things, to: incur
additional indebtedness or liens; pay dividends or make other distributions;
repurchase our stock; make investments; sell assets; enter into agreements
restricting our subsidiaries' ability to pay dividends; enter into transactions
with affiliates; and consolidate, merge or sell all or substantially all of our
assets.
In addition, we will be required to maintain specified financial
ratios. We cannot assure you that these covenants will not adversely affect our
ability to finance our future operations or capital needs or to pursue available
business opportunities. A breach of any of these covenants or our inability to
maintain the required financial ratios could result in a default in respect of
the related indebtedness. If a default occurs, the relevant lenders could elect
to declare the indebtedness, together with accrued interest and other fees, to
be immediately due and payable and, with respect to our existing credit
facilities, proceed against any collateral securing that indebtedness.
4
THE HANCOCK ACQUISITION
HANCOCK'S BUSINESS
Hancock designs, manufactures and markets a wide range of high-quality
homes in the Phoenix, Arizona area with a focus on serving the entry-level and
move-up single-family housing markets, and is currently developing affordable
age-restricted adult communities. We anticipate that we will introduce
affordable age-restricted adult communities, through Hancock, beginning in 2002.
Although Hancock Communities was formed in 1997, Greg Hancock, its
founder, has been active in the Phoenix, Arizona homebuilding market since the
1970's, both in owning his own companies and in working for other homebuilders,
including a publicly-held homebuilder. Hancock's home closings grew rapidly from
153 homes in 1997 to 1,354 homes in 1999. In 2000, home closings totaled 1,143
homes. For the quarter ended March 31, 2001, home closings were 69 compared to
248 for the quarter ended March 31, 2000. Hancock's 1999 closings reflected
rapid sales in the initial phases at certain of its subdivisions, particularly
for its entry-level homes, which depleted lot inventories available for sale in
2000 and the beginning of 2001. At March 31, 2001, Hancock had 15 communities
with 4,647 lots under its control on which homes could be built as compared to
1,049 lots at March 31, 2000. At March 31, 2001, backlog was 587 homes compared
to 581 homes at March 31, 2000. Hancock's homes are low- to medium-priced, with
base prices ranging from $72,000 to $324,000. For the twelve months ended
December 31, 2000, Hancock had revenue and EBITDA of $183.7 million and $16.9
million, respectively. The revenue and EBITDA for Hancock declined in 2000
compared to 1999, we believe, as a result of insufficient lot inventory. For the
quarter ended March 31, 2001, Hancock had revenue and EBITDA of $18.5 million
and $1.4 million, respectively.
5
The tables below contain operating and financial data for Hancock's
homebuilding activities for the year ended December 31, 2000 and the three month
period ended March 31, 2001.
Three Months
Year Ended Ended
December 31, 2000 March 31, 2001
----------------- --------------
(dollars in thousands)
HOME SALES REVENUE
Total
Dollars $ 183,651 $ 18,480
Homes closed ...... 1,143 69
Average sales price $ 160.7 $ 267.8
Move-up
Dollars ........... $ 100,417 $ 14,894
Homes closed ...... 328 46
Average sales price $ 306.1 $ 323.8
Entry-level
Dollars ........... $ 83,234 $ 3,586
Homes closed ...... 815 23
Average sales price $ 102.1 $ 155.9
SALES CONTRACTS
Total
Dollars ........... $ 165,459 $ 67,410
Homes ordered ..... 967 377
Average sales price $ 171.1 $ 178.8
Move-up
Dollars ........... $ 91,537 $ 35,645
Homes ordered ..... 281 113
Average sales price $ 325.8 $ 315.4
Entry-level
Dollars ........... $ 73,922 $ 31,765
Homes ordered ..... 686 264
Average sales price $ 107.8 $ 120.3
6
At December 31, At March 31,
2000 2001
----------- -----------
NET SALES BACKLOG
Total
Dollars ........... $ 53,247 $ 102,177
Homes in backlog .. 279 587
Average sales price $ 190.8 $ 174.1
Move-up
Dollars ........... $ 33,125 $ 53,876
Homes in backlog .. 103 170
Average sales price $ 321.6 $ 316.9
Entry-level
Dollars ........... $ 20,122 $ 48,301
Homes in backlog .. 176 417
Average sales price $ 114.3 $ 115.8
The following table presents information regarding Hancock's land owned
or land under contract or option by home type as of March 31, 2001:
Land Owned(1)
-----------------------------------------
Lots Under Lots Held For Lots Under Lots Held For
Finished Development Development Finished Development Development
Lots (estimated) (estimated) Lots (estimated) (estimated) Total
-------- ----------- ----------- -------- ----------- ----------- ----------
Move-up ...... 108 859 -- 150 213 -- 1,330
Entry-level .. 55 -- -- 362 -- -- 417
Age-restricted -- -- -- -- 900 2,000 2,900
----- ----- ----- ----- ----- ----- -----
Total ...... 163 859 -- 512 1,113 2,000 4,647
===== ===== ===== ===== ===== ===== =====
(1) Excludes lots with finished homes or homes under construction.
REASONS FOR THE ACQUISITION
We believe that Hancock complements our existing operations in Arizona
and offers the following strategic and operating benefits:
- Expand demographic reach and product offerings. The acquisition
provides us with an operating platform to expand our operations in
the move-up single-family housing markets, and to gain entry into
the entry-level and affordable age-restricted adult markets in
Arizona. Diversification of our demographic focus should also
increase our resilience to economic downturns and other adverse
conditions.
- Acquire an additional revenue and cash flow stream. Hancock enjoys a
reputation in the Phoenix homebuilding market for providing a well
designed home at a good value. Hancock's revenues were $183.7
million for the year ended December 31, 2000 and $167.9 million for
the twelve months ended March 31, 2001. Hancock achieved EBITDA of
$16.9 million for the year ended December 31, 2000 and $15.9
7
million for the twelve months ended March 31, 2001. Hancock
management, like our management, has maintained a strong focus on
earnings growth and conservative inventory management.
- Acquire experienced management team. Hancock has an experienced
management team with an average of 21 years of experience in the
homebuilding industry for its top five managers. We anticipate that
Hancock's management will work together with our managers to share
expertise in our respective entry-level and move-up homebuilding
operations, as well as Hancock's new affordable age-restricted adult
community development operations.
TERMS OF THE ACQUISITION
At closing, based on Hancock's March 31, 2001 balance sheet, we will
make an estimated $67.8 million cash payment toward the purchase price, and we
will assume approximately $12.3 million in various trade payables, accrued
liabilities, customer deposits and a note. In addition, we will grant to Greg
Hancock an earn-out payable over a three-year period to create an incentive for
Mr. Hancock to remain with us during that period. The earn-out payment will
equal 20% of the pre-tax net income of Hancock after a 10.5% charge on capital
during that period. Concurrently with the closing, Mr. Hancock will sign an
employment agreement, which includes a covenant not to compete.
The acquisition agreement contains customary representations,
warranties and covenants and consummation of the acquisition is subject to
customary closing conditions. We may seek indemnification only up to $3 million,
and then only for claims in excess of $100,000, in each case excluding claims
with respect to retained liabilities and certain other matters.
8
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS TO BE ACQUIRED
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Hancock Communities Limited Liability Company
HC Builders, Inc.
Phoenix, Arizona
We have audited the accompanying combined balance sheet of Hancock
Communities Limited Liability Company and HC Builders, Inc. (subsidiaries of
American West Homes, Inc.) as of December 31, 2000, and the related combined
statements of income, owners' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Hancock Communities
Limited Liability Company and HC Builders, Inc. as of December 31, 2000, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ MCGLADREY & PULLEN, LLP
Las Vegas, Nevada
March 29, 2001
9
HANCOCK COMMUNITIES LIMITED LIABILITY COMPANY
HC BUILDERS, INC.
COMBINED BALANCE SHEETS
March 31, 2001 and December 31, 2000
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents ............................ $ 4,052,958 $ 5,629,555
Receivables .......................................... 171,029 148,661
Inventories (Notes 2 and 4) .......................... 60,582,885 52,065,517
Property and equipment, net (Note 3) ................. 1,357,799 1,108,649
Deposits on real estate .............................. 8,798,840 7,751,660
Deferred tax asset (Note 5) .......................... 864,900 478,000
Other assets ......................................... 537,034 290,274
------------ ------------
$ 76,365,445 $ 67,472,316
============ ============
LIABILITIES AND OWNERS' EQUITY
Liabilities:
Accounts payable ................................... $ 3,656,697 $ 2,320,148
Accrued interest to related parties (Note 4) ....... 1,283,787 806,700
Other accrued expenses ............................. 2,810,760 4,308,053
Due to Exeter Holding Company Limited Liability
Company (Note 4) ................................. 2,752,940 2,781,140
Notes payable, related parties, unsecured (Note 4) . 1,890,000 1,890,000
Notes payable to American West Homes, Inc. (Note 4) 36,056,967 28,718,741
Income taxes payable ............................... 106,000 106,000
Customer deposits .................................. 2,575,052 1,897,870
------------ ------------
51,132,203 42,828,652
------------ ------------
Commitments and Contingencies (Note 7)
Owners' Equity:
Common stock, no par value; authorized 1,000,000
shares; issued and outstanding 1,000 shares ...... 1,000 1,000
Less subscriptions for 1,000 shares ................ (1,000) (1,000)
Accumulated deficit ................................ (2,445,091) (937,258)
Members' equity .................................... 27,678,333 25,580,922
------------ ------------
25,233,242 24,643,664
------------ ------------
$ 76,365,445 $ 67,472,316
============ ============
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
10
HANCOCK COMMUNITIES LIMITED LIABILITY COMPANY
HC BUILDERS, INC.
COMBINED STATEMENTS OF INCOME
Three Months Ended March 31, 2001 and Year Ended December 31, 2000
MARCH 31, DECEMBER 31,
2001 2000
------------- -------------
(UNAUDITED)
Sales of homes ........................................ $ 18,481,092 $ 183,651,506
Cost of sales (Note 7) ................................ 13,547,694 142,015,311
------------- -------------
GROSS PROFIT ..................................... 4,933,398 41,636,195
------------- -------------
Operating expenses:
Marketing ........................................... 1,299,712 8,709,211
Warranty ............................................ 224,328 1,776,671
Closing costs ....................................... 617,866 7,855,059
General and administrative (Note 7) ................. 2,049,818 11,228,276
------------- -------------
TOTAL OPERATING EXPENSES ......................... 4,191,724 29,569,217
------------- -------------
INCOME FROM OPERATIONS ........................... 741,674 12,066,978
------------- -------------
Other income (expense):
Interest income ..................................... 25,600 323,747
Interest expense (Notes 2 and 4) .................... (284,510) (620,791)
Other (Note 7) ...................................... 32,605 127,979
------------- -------------
(226,305) (169,065)
NET INCOME BEFORE INCOME TAX BENEFIT ............. 515,369 11,897,913
Income tax benefit (Note 5) ........................... 386,900 44,000
------------- -------------
NET INCOME ....................................... $ 902,269 $ 11,941,913
============= =============
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
11
HANCOCK COMMUNITIES LIMITED LIABILITY COMPANY
HC BUILDERS, INC.
COMBINED STATEMENTS OF OWNERS' EQUITY
Three Months Ended March 31, 2001 and Year Ended December 31, 2000
COMMON STOCK
------------
SUBSCRIPTIONS MEMBERS' ACCUMULATED
SHARES AMOUNT RECEIVABLE EQUITY DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 ...... 1,000 $ 1,000 $ (1,000) $ 14,782,001 $ (820,647) $ 13,961,354
Net income (loss) ............. -- -- -- 12,058,524 (116,611) 11,941,913
Deemed contribution for
bonuses .................... -- -- -- 2,639,126 -- 2,639,126
Distributions ................. -- -- -- (3,898,729) -- (3,898,729)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 ...... 1,000 1,000 (1,000) 25,580,922 (937,258) 24,643,664
Net income (loss) (unaudited) . -- -- -- 2,410,102 (1,507,833) 902,269
Deemed contribution for bonuses
(unaudited) ................ -- -- -- 106,592 -- 106,592
Distributions (unaudited) ..... -- -- -- (419,283) -- (419,283)
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2001
(unaudited) ................... 1,000 $ 1,000 $ (1,000) $ 27,678,333 $ (2,445,091) $ 25,233,242
============ ============ ============ ============ ============ ============
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
12
HANCOCK COMMUNITIES LIMITED LIABILITY COMPANY
HC BUILDERS, INC.
COMBINED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and Year Ended December 31, 2000
MARCH 31, DECEMBER 31,
2001 2000
------------- -------------
(UNAUDITED)
Cash Flows from Operating Activities
Cash received from customers ....................... $ 19,135,907 $ 183,529,239
Cash disbursed to subcontractors, suppliers and
employees ....................................... (25,906,285) (176,504,473)
Interest received .................................. 25,600 323,747
Interest paid, net of interest capitalized ......... (284,510) (620,791)
Other income received .............................. 32,605 127,979
------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES ................................... (6,996,683) 6,855,701
------------- -------------
Cash Flows from Investing Activities
Purchase of property and equipment ................. (423,477) (797,630)
Increase in deposits on real estate ................ (1,047,180) (1,239,160)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES ......... (1,470,657) (2,036,790)
------------- -------------
Cash Flows from Financing Activities
Borrowings under notes payable ..................... 17,054,976 99,161,893
Repayments on notes payable ........................ (9,716,750) (97,046,054)
Borrowings from related parties .................... -- 2,290,000
Payments on related party debt ..................... -- (400,000)
Due to (from) parent company, net (payments)
receipts ......................................... (28,200) 592,459
Distributions ...................................... (419,283) (3,898,729)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..... 6,890,743 699,569
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS .................................. (1,576,597) 5,518,480
Cash and Cash Equivalents, beginning ................. 5,629,555 111,075
------------- -------------
Cash and Cash Equivalents, ending .................... $ 4,052,958 $ 5,629,555
============= =============
Reconciliation of Net Income to Net Cash
(Used in) Provided by Operating Activities:
Net income ......................................... $ 902,269 $ 11,941,913
Loss on abandonment of lease (Note 7) .............. -- 276,145
Depreciation expense ............................... 174,327 577,067
Bonuses recorded by parent ......................... 106,592 2,639,126
Changes in assets and liabilities:
Increase (decrease) in receivables .............. (22,368) 725,053
(Increase) in inventories ....................... (8,517,368) (9,685,465)
(Increase) in other assets ...................... (246,760) (97,615)
(Increase) in deferred tax assets ............... (386,900) (150,000)
Increase in accounts payable and accrued expenses 316,343 1,370,797
Increase (decrease) in customer deposits ........ 677,182 (847,320)
Increase in taxes payable ....................... -- 106,000
------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES ................................... $ (6,996,683) $ 6,855,701
============= =============
Supplemental Disclosure of Noncash Investing and
Financing Activities Seller-financed purchase
of inventory (Note 4) .............................. $ -- $ 2,290,000
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
13
HANCOCK COMMUNITIES LIMITED LIABILITY COMPANY
HC BUILDERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Information with Respect to March 31, 2001 and the Three Months then Ended
is Unaudited
Note 1. Nature of Business and Summary of Significant Accounting Policies
Hancock Communities Limited Liability Company and HC Builders, Inc. (the
Companies) are primarily engaged in the development, construction and sale of
single-family homes in Phoenix, Arizona. Segment information is not presented
since all of the Companies' revenue is attributed to a single reportable
segment.
A summary of the Companies' significant accounting policies follows:
Basis of presentation
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
In management's opinion, the accompanying financial statements reflect all
material adjustments (consisting only of normal recurring accruals) necessary
for a fair statement of the results for the interim period presented. The
results for the interim period are not necessarily indicative of the results
which will be reported for the entire year.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, such as
the allocation of lot development costs and warranty costs, and disclosures of
contingent assets and liabilities at the date of the financial statement and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of combination
The combined financial statements include HC Builders, Inc., a wholly owned
subsidiary of Exeter Holding Company Limited Liability Company (Exeter) and
Hancock Communities Limited Liability Company, a 99% owned subsidiary of Exeter,
which is a 55% owned subsidiary of American West Homes, Inc. (American West).
Hancock Communities Limited Liability Company (Hancock) makes distributions
of cash to Exeter, a portion of which is then used to pay bonuses to certain key
employees of Hancock.
14
Accordingly, bonuses of $106,592 and $2,639,126 have been recorded as general
and administrative expense and as contributions from Exeter in the accompanying
financial statements for the three months ended March 31, 2001 (unaudited) and
the year ended December 31, 2000, respectively. In addition, Exeter owes
approximately $7,500,000 to American West Homes, Inc. which is not reflected in
these financial statements, but which may be satisfied only by distribution from
the Companies.
All material intercompany accounts and transactions are eliminated in
combination.
Balance sheet preparation
The operations of the Companies involve a variety of real estate
transactions and it is not possible to precisely measure the operating cycle of
the Companies. The combined balance sheets of the Companies have been prepared
on an unclassified basis in accordance with real estate industry practice.
Cash and cash equivalents
For purposes of the balance sheets and the statements of cash flows, the
Companies consider all cash accounts, none of which are subject to withdrawal
restrictions or penalties, commercial paper with original maturities less than
90 days and money market accounts to be cash equivalents. The Companies maintain
cash balances in excess of insured amounts at financial institutions.
Inventories
Inventories are carried at the lower of cost or fair value less estimated
disposal costs. During the three months ended March 31, 2001 (unaudited) and the
year ended December 31, 2000, no adjustments to reduce cost to fair value less
estimated disposal costs were required. Inventory costs include preacquisition
costs, property taxes, interest and insurance incurred during development and
construction as well as direct and indirect project costs. Capitalized costs
associated with an abandoned project are charged to expense when the project
abandonment occurs. The Companies allocate land, land improvements, acquisition
and carrying costs using the relative area method. Construction costs are
generally allocated using the specific identification method. Capitalized model
costs are maintained separately for each subdivision and are expensed on a per
unit basis as closings occur.
Property and equipment
Office equipment, furniture and leasehold improvements are stated at cost,
net of depreciation and amortization. Depreciation is computed primarily on the
straight-line method. Office equipment and furniture are primarily depreciated
over 5 years. Leasehold improvements are amortized over the shorter of the
estimated useful lives of the asset or the term of the lease.
15
Advertising expense
The Companies expense advertising as incurred. Advertising expense for the
three months ended March 31, 2001 and the year ended December 31, 2000 was
$484,301 (unaudited) and $1,583,451, respectively.
Revenue recognition
Revenue from home and property sales is recognized when a closing occurs,
which is when payment has been received and title, possession, and other
attributes of ownership have been transferred to the buyer and the Companies are
not obligated to perform significant activities after the sale. Payments
received from customers prior to closing are recorded as deposits.
Income taxes
Hancock, with the consent of its members, has elected to be taxed under
sections of the federal tax law, which provide that, in lieu of corporation
income taxes, the members separately account for the Company's items of income,
deduction, losses, and credits. Therefore, these statements do not include any
provision for corporation income taxes for Hancock. Also, no provision has been
made for any amounts which may be advanced or paid as dividends to the members
to assist in paying personal income taxes on the income of the Company. However,
such distributions are likely in the future.
Deferred taxes for HC Builders, Inc. are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Fair value of financial instruments
The carrying amounts of financial instruments including cash and cash
equivalents, receivables and accounts payable and accrued expenses approximate
fair value because of their short maturity.
The fair value of the related party notes payable and amounts due to Exeter
Holding Company Limited Liability Company at March 31, 2001 (unaudited) and
December 31, 2000 approximate their carrying values because of their short
maturities.
16
Note 2. Inventories
Inventories consisted of the following at:
MARCH 31, DECEMBER 31,
2001 2000
----------- -----------
(UNAUDITED)
Land under development ........ $27,175,904 $22,267,562
Finished lots ................. 8,720,005 11,977,925
Cost of construction and models 24,686,976 17,820,030
----------- -----------
$60,582,885 $52,065,517
=========== ===========
Interest capitalized and expensed is as follows:
MARCH 31, DECEMBER 31,
2001 2000
----------- -----------
(UNAUDITED)
Capitalized interest, beginning .. $ 666,718 $ 738,664
Interest capitalized ............. 758,362 3,762,167
Amortization to cost of home sales (416,182) (3,834,113)
----------- -----------
Capitalized interest, ending ..... $ 1,008,898 $ 666,718
=========== ===========
Total interest incurred .......... $ 1,042,872 $ 4,382,958
Interest capitalized ............. (758,362) (3,762,167)
----------- -----------
Interest expense ................. $ 284,510 $ 620,791
=========== ===========
Note 3. Property and Equipment
Property and equipment consisted of the following at:
MARCH 31, DECEMBER 31,
2001 2000
---------- -----------
(UNAUDITED)
Office equipment .............. $1,929,380 $1,953,267
Leasehold improvements ........ 296,847 --
Furniture and fixtures ........ 331,407 287,626
---------- ----------
2,557,634 2,240,893
Less: accumulated depreciation 1,199,835 1,132,244
---------- ----------
$1,357,799 $1,108,649
========== ==========
Note 4. Transactions with Related Parties
Notes payable, related parties
In September 2000, the Companies purchased land for $2,290,000 from parties
related to the minority member of Hancock. The purchase was financed with a
promissory note payable to the seller with a balance outstanding of $1,890,000
at March 31, 2001 (unaudited) and December 31, 2000. The note is due in annual
installments of $400,000 plus interest at 9% with remaining balance due November
2003. The note is secured by land. Interest incurred in connection with this
note was approximately $42,500 (unaudited) and $50,000 for the three months
ended March 31, 2001 and the year ending December 31, 2000, respectively.
The Companies have a demand note payable to American West with March 31,
2001 and December 31, 2000 balances of $31,168,470 (unaudited) and $24,581,130,
respectively. The note bears interest at 11% and is secured by land under
development and finished lots. The Companies also have unsecured notes payable
to American West with a total outstanding balance at March 31, 2001 and December
31, 2000 of $4,888,497 (unaudited) and $4,137,611,
17
respectively. These notes bear interest at 15%, and mature at various dates
through October 2001. Interest incurred in connection with these notes was
approximately $944,000 (unaudited) for the three months ended March 31, 2001 and
$4,168,000 for the year ended December 31, 2000.
Due to Exeter
The amount due to Exeter is unsecured, due on demand and bears interest at
8%. Interest for the three months ended March 31, 2001 and the year ended
December 31, 2000 in connection with this obligation was $56,200 (unaudited) and
$164,500, respectively.
Note 5. Income Taxes
For the three months ended March 31, 2001 and the year ended December 31,
2000, HC Builders, Inc. had a net loss of $992,175 (unaudited) and $116,611,
respectively.
The income tax benefit recorded as a result of continuing operations of HC
Builders, Inc. for the three months ended March 31, 2001 (unaudited) and the
year ended December 31, 2000 was as follows:
MARCH 31, DECEMBER 31,
2001 2000
--------- -----------
(UNAUDITED)
Current payable (benefit):
U.S. Federal ........... $ -- $ 84,200
State and local ........ -- 21,800
--------- ---------
-- 106,000
Deferred:
U.S. Federal ........... (282,100) (119,300)
State and local ........ (104,800) (30,700)
--------- ---------
(386,900) (150,000)
--------- ---------
$(386,900) $ (44,000)
========= =========
Deferred tax assets consist of the following components at March 31, 2001
and December 31, 2000.
MARCH 31, DECEMBER 31,
2001 2000
-------- -----------
(UNAUDITED)
Warranty reserve . $353,900 $478,000
Loss carryforwards 511,000 --
-------- --------
$864,900 $478,000
======== ========
Management believes it is more likely than not that future operating results
will generate sufficient taxable income to realize the deferred tax assets.
The provision for income taxes for the three months ended March 31, 2001 and
the year ended December 31, 2000 differs from the amount obtained by applying
the U.S. federal income tax rate to pretax income due to the following:
18
MARCH 31, DECEMBER 31,
2001 2000
--------- -----------
(UNAUDITED)
Computed "expected" tax expense .......... $ 180,400 $ 4,164,000
Income of LLC not subject to corporate tax (527,600) (4,205,000)
State taxes, net ......................... (51,600) (6,100)
Nondeductible expenses and other ......... 11,900 3,100
--------- -----------
Income tax benefit ....................... $(386,900) $ (44,000)
========= ===========
Note 6. Employee Benefit Plan
Hancock established a 401(k) Plan which covers all qualified employees.
Participants may elect to defer from 1% to 15% of their annual compensation up
to $10,500. Hancock, at its discretion, may make a matching contribution based
on the participant's deferral in a percentage set by Hancock prior to the end of
each plan year. There was no contribution for the three months ended March 31,
2001 (unaudited) and the year ended December 31, 2000.
Note 7. Commitments and Contingencies
In the normal course of business, the Companies enter into options to
purchase land for future developments and finished lots. At March 31, 2001
(unaudited) and December 31, 2000, the Companies have multiple outstanding
options that expire at various dates through November 2002.
The Companies are defendants in various lawsuits in the ordinary course of
business including alleged construction defects. In the opinion of management,
these matters are not expected to have a significant effect on the Companies'
financial position or results of operations.
HC Builders, Inc.'s federal income tax returns for the years ended December
31, 1998 and 1999 are currently being examined by the Internal Revenue Service.
The results of this examination cannot be determined at this time, but are not
expected to have a material affect on the Companies' financial statements.
The Companies lease facilities under noncancelable agreements which expire
through December 2006.
During the year ended December 31, 2000 the Companies entered into a new
facility lease agreement that is effective March 2001. The lease requires
monthly lease payments of approximately $34,000 through February 2006. A
$276,145 abandonment loss was recorded during the year ended December 31, 2000
representing the estimated cost of terminating the previous lease agreement.
The minimum rental commitment as of December 31, 2000 is as follows:
2001 ..... $ 811,346
2002 ..... 552,245
2003 ..... 454,459
2004 ..... 455,697
2005 ..... 456,935
Thereafter 76,190
----------
$2,806,872
==========
19
Total rent expense incurred during the three months ended March 31, 2001 and
the year ended December 31, 2000 was $277,010 (unaudited) and $864,599,
respectively.
(b) PRO FORMA FINANCIAL STATEMENTS.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give
effect to the following transactions as if they were consummated as of March 31,
2001 with respect to the unaudited pro forma combined balance sheet and on
January 1, 2000 with respect to the unaudited pro forma combined statements of
income:
- the acquisition of certain homebuilding and related assets of HC
Builders, Inc., and Hancock Communities, L.L.C.;
- the issuance of $150.0 million of notes for net offering proceeds of
$145.5 million; and
- repayment of an aggregate of $77.7 million of outstanding indebtedness.
The unaudited pro forma combined financial statements reflect the
purchase method of accounting for the Hancock acquisition. The Hancock
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 Hancock prior
to the acquisition. The unaudited pro forma combined financial statements
reflect preliminary adjustments made to combine Hancock with Meritage using the
purchase method of accounting. The actual adjustments will be made after the
closing 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 final purchase price allocation. The
unaudited pro forma combined financial statements are based upon available
information and assumptions that we believe are reasonable.
EBITDA represents earnings before interest expense, interest amortized
to cost of sales, income taxes, depreciation and amortization. EBITDA is
presented here because it is a widely accepted financial indicator used by
investors and analysts to analyze and compare companies on the basis of
operating performance. EBITDA as presented may not be comparable to similarly
titled measures reported by other companies because not all companies
necessarily calculate EBITDA in an identical manner and, therefore, is not
necessarily an accurate means of comparison between companies. EBITDA is not
intended to represent cash flows for the period or funds available for
management's discretionary use nor has it been presented as an alternative to
operating income or as an indicator of operating performance and it should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
EBITDA margin is calculated by dividing EBITDA by total sales revenue.
20
In addition, "interest incurred" is the amount of interest paid and
accrued (whether expensed or capitalized) during the period presented, including
debt-related fees and amortization of deferred financing costs.
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 Hancock 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:
(i) Meritage, included in its Amended Annual Report on Form 10-K
for the year ended December 31, 2000 and in its Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, and
(ii) the acquired Hancock entities, which are included in this
Current Report.
21
MERITAGE CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
at March 31, 2001
(dollars in thousands)
Historical
----------------------- Total Offering Acquisition Pro
Meritage Hancock Historical Adjustments Adjustments Forma
--------- --------- ---------- ----------- ------------- --------
ASSETS
Cash and cash equivalents . $ 6,359 $ 4,053 $ 10,412 $ 67,846(a) $ (71,899)(d) $ 6,359
Real estate under
development ............. 233,446 60,583 294,029 (3,409)(e) 290,620
Deposits on real estate
under option or contract 28,776 8,799 37,575 37,575
Other receivables ......... 2,673 171 2,844 2,844
Deferred tax assets ....... 526 865 1,391 (1,066)(e) 325
Goodwill .................. 17,408 -- 17,408 11,000 (e) 28,408
Property and equipment, net 5,016 1,357 6,373 6,373
Other assets .............. 1,244 537 1,781 4,202(b) 5,983
--------- --------- --------- -------- --------- --------
Total assets ........... $ 295,448 $ 76,365 $ 371,813 $ 72,048 $ (65,374) $378,487
========= ========= ========= ======== ========= ========
LIABILITIES
Accounts payable and
accrued expenses ........ $ 36,692 $ 7,857 $ 44,549 $ 817 (c) $ (1,331)(e) $ 44,035
Home sale deposits ........ 13,121 2,575 15,696 15,696
Notes offered hereby ...... 150,000 (a) 150,000
Notes payable:
Revolving credit
facilities ........... 98,911 36,057 134,968 (62,654)(a) (36,057)(e) 36,257
Existing senior notes .. 15,000 -- 15,000 (15,000)(a) --
Other debt ............. 3,017 4,643 7,660 (2,753)(e) 4,907
--------- --------- --------- -------- --------- --------
Total liabilities ...... 166,741 51,132 217,873 73,163 (40,141) 250,895
--------- --------- --------- -------- --------- --------
STOCKHOLDERS' EQUITY
Common stock .............. 59 59 59
Additional paid-in capital 102,745 102,745 102,745
Retained earnings ......... 36,919 25,233 62,152 (1,115)(c) (25,233)(f) 35,804
Treasury stock ............ (11,016) (11,016) (11,016)
--------- --------- --------- -------- --------- --------
Total stockholders'
equity ............... 128,707 25,233 153,940 (1,115) (25,233) 127,592
--------- --------- --------- -------- --------- --------
Total liabilities and
stockholders' equity . $ 295,448 $ 76,365 $ 371,813 $ 72,048 $ (65,374) $378,487
========= ========= ========= ======== ========= ========
MERITAGE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(dollars in thousands)
The Unaudited Pro Forma Combined Balance Sheet reflects the transactions as
if they had occurred on March 31, 2001.
(a) Reflects the issuance of the notes and application of proceeds
therefrom:
Issuance of the notes..................... $ 150,000
Expenses for the issuance of the notes.... (4,500)
Payoff of existing senior notes........... (15,000)
Paydown of other Meritage debt............ (62,654)
---------
Net cash proceeds......................... $ 67,846
=========
22
In the normal course of business we repay our credit facilities when we have
excess cash available. Certain covenants existing under our credit facilities
and loan agreements will require that a portion of the cash proceeds from this
offering be used to repay certain outstanding borrowings. In addition, we intend
to repay certain outstanding borrowings over and above these required payment
amounts because if we do not otherwise make such additional payments, a
violation of certain debt covenants under our credit facilities would occur.
(b) Reflects the following:
Expenses for issuance of the notes................... $ 4,500
Write-off of deferred bond costs relating
to existing senior notes to be retired.............. (298)
---------
$ 4,202
=========
(c) Reflects the following:
Write-off of deferred bond costs relating
to existing senior notes to be retired.............. $ (298)
Prepayment premium of existing senior notes to
be retired.......................................... (1,500)
Tax benefit from the above........................... 683
---------
$ (1,115)
=========
(d) Reflects the following:
Hancock purchase price............................... $ (67,846)
Hancock cash excluded from purchase price............ (4,053)
---------
(71,899)
=========
(e) The acquisition will be accounted for as a
purchase in accordance with Accounting
Principles Board Opinion No. 16 "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 Hancock................................... $ 67,846
Book value of net assets acquired.................... $ (25,233)
Net assets/liabilities of Hancock excluded or
eliminated at acquisition:
Revolving credit facilities.......................... (36,057)
Other debt........................................... (2,753)
Income tax payable................................... (106)
Cash................................................. 4,053
Accrued interest payable............................. (1,225)
Deferred tax assets.................................. 1,066
Real estate under development to be sold or land
banked prior to close.............................. $ 7,009
---------
Adjusted book value of net assets acquired........... (53,246)
---------
Increase in basis.................................... $ 14,600
=========
Allocation of increase in basis:
Goodwill............................................. $ 11,000
Increase in fair value of inventory.................. 3,600
---------
$ 14,600
=========
Adjustment to real estate under development:
Decrease in real estate under development to be
sold or land banked prior to close.................. $ (7,009)
Increase in fair value of inventory.................. 3,600
---------
$ (3,409)
=========
(f) Reflects the elimination of Hancock equity balances
pursuant to purchase accounting
23
MERITAGE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
Year Ended December 31, 2000
(dollars in thousands, except per share data)
Historical
------------------------- Total Pro Forma
Meritage Hancock Historical Adjustments Pro Forma
---------- ---------- ---------- ----------- ---------
Total sales revenue ................ $ 520,467 $ 183,651 $ 704,118 $ 704,118
Total cost of sales ................ (415,649) (142,015) (557,664) $ (1,300)(a) (558,964)
--------- --------- --------- --------- ---------
Gross profit ..................... 104,818 41,636 146,454 (1,300) 145,154
Selling, general and administrative
expenses ......................... (48,056) (29,738) (77,794) 2,225 (b) (75,569)
--------- --------- --------- --------- ---------
Earnings before income taxes ..... 56,762 11,898 68,660 925 69,585
Income taxes ....................... (21,000) 44 (20,956) (5,176)(c) (26,132)
--------- --------- --------- --------- ---------
Net earnings ..................... $ 35,762 $ 11,942 $ 47,704 $ (4,251) $ 43,453
========= ========= ========= ========= =========
Pro forma basic earnings per share . $ 8.40(d)
=========
Pro forma diluted earnings per share $ 7.60(d)
=========
Other pro forma combined financial data:
EBITDA............................ $ 88,917
=========
EBITDA margin..................... 12.63%
=========
Interest amortized to cost of sales
and interest expense............... $ 14,305
=========
Depreciation and amortization..... $ 5,027
=========
24
MERITAGE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
Three Month Period Ended March 31, 2001
(dollars in thousands, except per share data)
Historical
------------------------ Total Pro Forma
Meritage Hancock Historical Adjustments Pro Forma
---------- --------- ---------- ----------- ---------
Total sales revenue .................... $ 116,706 $ 18,481 $ 135,187 $ 135,187
Total cost of sales .................... (93,110) (13,548) (106,658) $ (236)(a) (106,894)
--------- -------- --------- --------- ---------
Gross profit ......................... 23,596 4,933 28,529 (236) 28,293
Selling, general and administrative
expenses ............................. (11,415) (4,418) (15,833) 133 (b) (15,700)
--------- -------- --------- --------- ---------
Earnings before income taxes ......... 12,181 515 12,696 (103) 12,593
Income taxes ........................... (4,792) 387 (4,405) (609)(c) (5,014)
--------- -------- --------- --------- ---------
Net earnings ......................... $ 7,389 $ 902 $ 8,291 $ (712) $ 7,579
========= ======== ========= ========= =========
Pro forma basic earnings per share ..... $ 1.48(d)
=========
Pro forma diluted earnings per share ... $ 1.31(d)
=========
Other pro forma combined financial data:
EBITDA................................ $ 16,403
=========
EBITDA margin......................... 12.13%
=========
Interest amortized to cost of sales
and interest expense................ $ 2,610
=========
Depreciation and amortization......... $ 1,200
=========
25
MERITAGE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
Twelve Month Period Ended March 31, 2001
(dollars in thousands, except per share data)
Historical
------------------------- Total Pro Forma
Meritage Hancock Historical Adjustments Pro Forma
---------- ---------- ---------- ----------- ---------
Total sales revenue .................... $ 544,763 $ 167,903 $ 712,666 $ 712,666
Total cost of sales .................... (433,122) (128,482) (561,604) $ (1,307)(a) (562,911)
--------- --------- --------- --------- ---------
Gross profit ......................... 111,641 39,421 151,062 (1,307) 149,755
Selling, general and administrative
expenses ............................. (50,221) (28,450) (78,671) 2,378 (b) (76,293)
--------- --------- --------- --------- ---------
Earnings before income taxes ......... 61,420 10,971 72,391 1,071 73,462
Income taxes ........................... (23,040) 257 (22,783) (5,093)(c) (27,876)
--------- --------- --------- --------- ---------
Net earnings ......................... $ 38,380 $ 11,228 $ 49,608 $ (4,022) $ 45,586
========= ========= ========= ========= =========
Pro forma basic earnings per share ..... $ 8.89(d)
=========
Pro forma diluted earnings per share ... $ 7.99(d)
=========
Other pro forma combined financial data:
EBITDA................................ $ 92,999
=========
EBITDA margin......................... 13.05%
=========
Interest amortized to cost of sales
and interest expense................ $ 14,396
=========
Depreciation and amortization......... $ 5,141
=========
Interest incurred..................... $ 16,995
=========
Ratio of EBITDA to interest incurred . 5.47x
=========
Ratio of total debt to EBITDA ........ 2.06x
=========
Ratio of net debt to EBITDA .......... 1.99x
=========
26
MERITAGE CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF EARNINGS
(dollars in thousands)
The Unaudited Pro Forma Combined Statements of Earnings for the twelve month
periods ended December 31, 2000 and March 31, 2001 and for the three month
period ended March 31, 2001 reflect the transactions as if they had occurred on
January 1, 2000.
Year Ended Three Months Twelve Months
December 31, Ended Ended
2000 March 31, 2001 March 31, 2001
------------ -------------- --------------
(a) Reflects the following:
Incremental amortization of capitalized
interest -- Meritage...................... $ (917) $(196) $ (957)
Incremental amortization of capitalized
interest -- Hancock....................... (383) (40) (350)
------- ----- -------
$(1,300) $(236) $(1,307)
======= ===== =======
(b) Reflects the following:
Reversal of distributions treated as
bonuses paid to key employees of Hancock
that will not be paid after acquisition... $ 2,639 $ 107 $ 2,639
Reversal of interest expense on retired
debt -- Meritage.......................... 8 1 7
Reversal of interest expense on retired
debt -- Hancock........................... 621 285 775
Reversal of amortization of bond costs
relating to existing senior notes to be
retired................................... 90 23 90
Amortization of goodwill on purchase of
Hancock................................... (683) (171) (683)
Amortization of financing costs relating
to the issuance of the notes.............. (450) (112) (450)
------- ----- -------
$ 2,225 $ 133 $ 2,378
======= ===== =======
(c) Reflects the following:
Net additional income tax provision as a
result of the above adjustments at an
effective tax rate of 38%................. $ (611) $ (26) $ (667)
Effect of applying Meritage's effective
tax rate of 38% on Hancock's earnings..... (4,565) (583) (4,426)
------- ----- -------
$(5,176) $(609) $(5,093)
======= ===== =======
(d) Assumes utilization of weighted average basic and diluted shares as
reported in Meritage Corporation's Annual Report on Form 10-K for the year
ended December 31, 2000, Form 10-Q for the quarter ended March 31, 2001 and
5,130,000 and 5,704,000 weighted average basic and diluted shares,
respectively, for the twelve months ended March 31, 2001.
27
(c) Exhibits.
Exhibit No. Description
- ----------- -----------
2.1 Master Transaction Agreement (with exhibits), dated May 7, 2001,
by and among Meritage Corporation, Hancock-MTH Builders, Inc.,
Hancock-MTH Communities, Inc., HC Builders, Inc. and Hancock
Communities, L.L.C.
23.1 Consent of McGladrey & Pullen, LLP
28
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, thereunto duly authorized.
MERITAGE CORPORATION
Date: May 9, 2001 /s/ Larry W. Seay
-----------------------------------
Larry W. Seay
Vice President of Finance and
Chief Financial Officer
29
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Master Transaction Agreement (with exhibits), dated May 7, 2001,
by and among Meritage Corporation, Hancock-MTH Builders, Inc.,
Hancock-MTH Communities, Inc., HC Builders, Inc. and Hancock
Communities, L.L.C.
23.1 Consent of McGladrey & Pullen, LLP